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If we were to find oil and gas...

BRUCE GOLDING

Sunday, April 15, 2018

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One cannot help being more hopeful, even if not yet excited, about our quest to find oil and gas in Jamaica based on recent developments. The search, which started way back in 1955 off the coast of Negril, has continued sporadically and we have had our fair share of hopes raised and hopes dashed.

What is different this time is the finding, with the assistance of our local fishermen, of a live oil seep last year and the recent decision by Tullow Oil PLC, in partnership with United Oil & Gas — both British companies — to conduct 3D seismic surveys and analysis in the Walton Bank area of our south coast. They will be utilising the considerable amount of 2D data acquired in past years. These activities are not cheap and they are conducting them at their own expense. Coincidental with these developments is the reported discovery of onshore oil traces in Trelawny.

Our hopes could well be dashed again, but the prospects seem to be moving from possible to probable. Improved technology is also in our favour in identifying deposits. Tullow Oil has had an impressive record of discoveries in the drillings it has undertaken, after careful evaluation, particularly in Africa.

It is wise not to count our chickens before they hatch, but it is even wiser to start thinking about what we would do with the chickens if they do hatch. The discovery of oil or gas could be the biggest game changer in Jamaica's economic history. Our annual oil import bill is in excess of US$1 billion. In 2008 when oil prices reached the record level of US$147 per barrel, it was in excess of US$2.7 billion. If Jamaica were to become not only self-sufficient in oil or gas but a net exporter, the impact on the economy would be awesome.

However, we need to be deliberate, strategic and forward-thinking as we savour the possibilities of becoming an oil- or gas-producing country. There is an abundance of evidence and a wealth of literature on how newly found oil and gas revenues, if not carefully managed, can have a devastating effect on economies. The economic difficulties being experienced in Venezuela and Trinidad & Tobago tell us that the volatility of energy prices and the hazard of an economy becoming overly dependent on the energy sector must not be ignored. Saudi Arabia, one of the world's largest oil producers, is now running fiscal deficits of more than seven per cent, even after drawing down 27 per cent of its hefty reserves.

It is what has been called the “resource curse” which refers to the economic dislocation that can result from a new dominant and volatile natural resource sector. It also speaks to the tendency toward fiscal profligacy that governments find it hard to resist when mega revenues begin to flow and the corrosive effect of corruption —the opportunities for which are greatly enhanced by the abundance of resources and complex transactional arrangements. The upheavals in Brazil and other Latin American countries are a stark reminder. Increase in income disparity and poverty often result.

For example, in Nigeria, in spite of its oil wealth, the number of people living below the poverty line has doubled from 34 to 67 per cent in the last 25 years. In Venezuela, with the largest reserves in the world, oil accounts for 90 per cent of its export earnings and 40 per cent of its fiscal revenues. It is currently running fiscal deficits close to 20 per cent and inflation rates in the hundreds of per cent. It is suffering severe food shortages and thousands of people are fleeing the country in search of refuge elsewhere.

In the last nine years, the economy of Trinidad & Tobago has declined by nine per cent due to the fall in energy prices; in the previous nine years, it had grown by 99 per cent at an annual average rate of almost eight per cent. The country is now experiencing a shortage of foreign exchange since so much of its foreign exchange earnings come from its energy sector. Although having significant potential to do so, because of its energy endowment it has never bothered to develop a strong tourist industry as another economic engine — its tourist arrivals are about one-tenth of Jamaica's.

Its agriculture sector accounts for only one-half of one per cent of its economy, and it is forced to import almost all the food it consumes and what it requires as inputs for its agro-processing industry. Its manufacturing sector, even with the benefit of subsidised energy, is now in decline because the energy-driven slowdown in the economy has dampened consumer purchasing power.

In the last three years, Guyana has confirmed discoveries of over two billion barrels of oil and expects to start production next year. It has already set about developing a policy framework for the management of this new sector, seeking to secure the gains and avoid the hazards. Time will tell how successful it is.

Initiating a discussion about the possibilities and pitfalls of discovering oil and gas in Jamaica is not premature. We have travelled this road before with our bauxite industry. In the last 40 years we have exported more than 430 million tons of bauxite in the form of processed alumina or raw ore, AND received US$12.5 billion in net foreign exchange earnings and US$3.5 billion in government revenues.

I would be hard-pressed to identify specific long-term development investments to which these revenues were applied and which would enable the economy to absorb the shock when we have mined the last ton of bauxite deposits or even when the metals market goes into its cyclical tailspins. Nor did we achieve a great deal in integrating the bauxite and alumina industry with the rest of the economy to maximise its benefits.

It is still early days. Much will depend on the success of the exploration effort and, if it succeeds, the costs of production, the behaviour of the market, the terms of the production-sharing arrangements, and the extent to which we can ring-fence the related transactions to keep out corruption. There are capacity challenges that have to be addressed, including the training of workers to take advantage of the employment opportunities in this new industry. There are environmental issues that have to be taken onboard to minimise its effects on our marine life, especially given the proximity of the Pedro Bank fisheries to the offshore target location.

If we are fortunate to find oil or gas, what do we do with this new-found wealth? Some priorities come to mind:

• First, a stabilisation/reserve fund, protected by legislation from fiscal capture, that would help us to mitigate the impact on the economy of any steep fall in oil prices and assist us to recover from natural disasters.

• Second, paying down the national debt — with priority given to the most expensive and earliest maturing loans in order to provide much-needed fiscal space to deal with pressing social needs.

• Third, the transformation of our education and training system to create a talented, productive and knowledge-based workforce, not by simply pumping more money into the existing pipeline, but targeted to improving outcomes and providing enhanced opportunities for those students who strive and are deprived of high achievement because they are yoked to the mediocrity and underperformance of their cohort.

• Fourth, increasing investment in research and innovation which is so important in enabling us to achieve global competitiveness. Jamaica currently spends a quarter of one per cent of its gross domestic product in this area compared with the global average of 2.2 per cent.

So, while we cannot yet count our chickens, it makes sense to start thinking about where we will put them if they do hatch, lest they roam around, mess up the place and disappear.

— Bruce Golding is a former Prime Minister of Jamaica

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