Head of UG's School of Business not sanguine about 'up front' cash from oil and gas industry

28th March, 2018 0 comments

“While the front-loading of contracts and the securing of large contracts might be politically popular it might prove to be economically disastrous, University of Guyana Business Professor Leyland Lucas has said in an article that seeks, in part, to respond to the popular argument touting the virtue of so-called front-loading, that is, the drawing down of significant cash amounts of as yet unearned income from the oil and gas industry.

Lucas, who is serving as Visiting Professor at UG’s School of Entrepreneurship and Business Innovation (SEBI) says in his article that there could be pitfalls associated with the popular “up-front” or front-loading argument that has been steadily gaining traction among ordinary Guyanese.

While alluding to what he says is “an interesting argument to the effect that Guyana would be better off “receiving a sizeable bonus rather than waiting for later disbursements through royalties”, Professor Lucas argues that such an option is not without its potential dangers and pitfalls. He argues that while the “numbers”  being touted in the front-loading argument “vary from the well-reasoned to the pie-in-the-sky estimates,” there is need to examine the domestic realities.

“We are a nation with various needs from education to infrastructure. To address those needs we will require a significant influx of financial resources…..however, if that influx is not regulated it will cause inflationary pressures” which pressures, he argues, will not only precipitate “massive inflationary pressures” that are likely to further damage the country’s economy but lead to a further decline in living standards.

Whilst the announcement by Exxon Mobil of the discovery of oil, offshore Guyana, just under three years ago has triggered expectations of a swift and miraculous economic transformation amongst the uninitiated Lucas cautioned that a massive influx of cash does not speedily correct the errors of previous decades. “Engineers, scientists, agricultural experts and doctors are not created overnight. It takes years of training to acquire these skills. If the nation is to acquire these skills then it must be done over time.”

An alluding to the volatility of the global oil market, Professor Lucas raised the question as to where the resources will come from “when an engineer needs specialized training in five years but the bottom has fallen out of the oil sector.”

And in concluding his position on front-loading Professor Lucas contended that “a massive unregulated inflow of cash through a significant bonus may entice policy makers to undertake massive investment projects which the economy cannot embrace with its limited skills inventory. Instead, a gradual inflow of expenditure might prove more beneficial to the nation in the long run.”

In his article the Guyanese academic also weighs in on the subject of the controversy that has arisen over the Exxon Mobil contract including the call in some quarters for a re-negotiation of the agreement.  Lucas argues that the controversy associated with the current contract cannot ignore the fact that a contract previously existed. How do we renegotiate this contract?…Moves and counter-moves will only make sense if one party has something that is vital to the other and can force the latter to respond to the actions of the former. In this case we have a product that the world wants but does not need. Any moves by our negotiators can be easily ignored. Consequently, it makes no sense to renegotiate a contract from a position of weakness…We do not own the wells, we do not have the skills necessary to exploit them and we do not have the technology to provide the value-added products. In fact, truth be told, at this stage we are struggling to meet Local Content requirements. One cannot renegotiate a contract from a position of future possibilities, but must do so within the current context. So any conversations of renegotiation will take place from a position of weakness rather than one of strength,” Lucas declared.

Article adapted from: https://www.stabroeknews.com/2018/business/03/23/head-of-ugs-school-of-business-not-sanguine-about-up-front-cash-from-oil-and-gas-industry/

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