12. Guyana Oil Boom – Sovereign Wealth Fund (SWF).
SWF fund needed to build public confidence – V.150817
July 18, 2017 - www.kaieteurnews.com
1. International Monetary Fund and Guyana – www.kaieteurnews.com
2.1 How much money would Guyana get from ExxonMobil’s offshore oil production &
2.2 Guyana urgently needs to set up a Sovereign Wealth Fund &
2.3 Nature and purpose of SWF &
2.4 Size of SWF’s – Marcel Chin-A-Lien, 29 July, 2017
3. Guyana to reform oil laws and gain wealth fund with Commonwealth support – 2 May 2017 – the commonwealth.org
1) International Monetary Fund helping Guyana
Re: re-blogged from: www.kaieteurnews.com
The International Monetary Fund (IMF), in its 2017 report on Guyana’s economy said that the establishment of a Sovereign Wealth Fund (SWF) is important for the building of confidence in the public and in financial markets.
The body noted that the authorities in Guyana have made it a priority to put in place a credible framework for the management of future hydrocarbon revenues. But this framework is yet to be finalized.
IMF said that the framework will contribute toward resolving potential uncertainties regarding how oil revenues would be spent and how they could affect macroeconomic developments. “Once the draft SWF law, and the resource management framework embodied in it, are finalized, it will contribute to building confidence in the general public and financial markets”
IMF said that in order to ensure that the operation of the SWF is consistent with the macro-fiscal objectives, the SWF law should be linked to a fiscal responsibility law. Further, the international body said that all hydrocarbon revenues and any public spending related to these revenues should be channeled through the state budget.
The report noted, “As the SWF investment activities will have direct domestic macroeconomic implications, these activities can be usefully coordinated with relevant authorities such as the owner (Ministry of Finance) and the Bank of Guyana through regular meetings (e.g., quarterly). That can help ensure consistency with the overall macroeconomic policies.”
IMF also said that the building up of assets in a SWF and its investment strategy should be seen in the broader context of Sovereign Asset and Liability Management (SALM) framework. Related aspect for indebted resource-rich countries is striking the right balance between debt repayments and the building up of SWF assets for stabilization purposes.
Hydrocarbon revenues can be used to reduce the stock of government foreign debt to sustainable levels. The exact target for debt reduction would be guided by the FRL. The appropriate level of the stabilization fund should be evaluated in a SALM framework; taking account of interest rate levels and the size of the public debt.”
A SWF is a government-owned investment fund. It has been set up by many countries with oil wealth, and there are several models to choose from.
While the policy to govern the establishment of SWF was to be delivered since last year, the public continues to keep watch for when government will actually make good on its promise.
From all indications, the holdup is not with the Ministry of Natural Resources. Kaieteur News understands that the Bill is in the hands of Minister of Finance, Winston Jordan, and has been with him for some time now.
Minister of Natural Resources, Raphael Trotman, spoke confidently in the National Assembly that the policy would have been delivered to the House in 2016 for discussion and debate. This was as he made his contributions to the 2017 Budget debate.
Last year ended without the policy being taken to the House, and to make matters worse, the second quarter of 2017 is finished and the policy is still to reach Cabinet where it must go before reaching the House.
Trotman has told Kaieteur News that the draft policy was completed by his Ministry and is now with the Ministry of Finance. He refused to be specific as to how long the draft has been with Minister Jordan, but noted that his (Trotman’s) Ministry met its deadline.
Sources at the Ministry of Finance confirmed that the document has been there since January.
Trotman told Kaieteur News that he is confident about the quality of the draft policy, which benefitted from the expertise of the Commonwealth Secretariat, the Guyana Geology and Mines Commission, the Private Sector and the very Ministry that is now doing the review.
Trotman said that when the Ministry of Finance is finished with its review, the Bill will go to Cabinet for approval, then for public consultation, before reaching the National Assembly.
“There is no intention to rush the Bill. We are some years away from production, so there will be consultation, but the point is we have a Bill which the Ministry of Finance is amending,” said Trotman.
In an address to the National Assembly, Trotman had said that it is important that the extractive industries that fuel Guyana’s growth today “also provide for our children tomorrow.”
He told the House that the Sovereign Wealth Fund will enable the government to “protect the economy from the volatile nature of natural resource revenues, help grow and modernize the sustainable non-extractive sectors of the economy, and further enhance the capacity of our people”.
Trotman outlined the considerations for the three sub-funds within the Sovereign Wealth Fund – the Stabilization Fund, Infrastructure and Social Development Fund and Citizens Participation Fund.
He said that the government has already begun seeking advice and guidance on developing such a Fund from the School of Public Policy – University of Calgary and the Commonwealth Secretariat, both of which are equipped with strong expertise on extractive resource governance.
Trotman told the House that the creation of a long overdue sovereign wealth fund will demonstrate to Guyanese and the world at large that hydrocarbon development, and by extension all other extractive industries, can be catalysts for a green economy.
2) Comment Marcel Chin-A-Lien:
2.1 How much money would Guyana get from ExxonMobil’s offshore oil production ?
Assuming that the ExxonMobil PPL contains the same articles as the PPL with CGX.
This is a simple estimate of the monies involved. But it gives a fair idea of what everyone wants to know.
Precise data can be obtained by making a full economic analysis.
A gross oil production volume of 1,5 billion barrels, average production of 160 million/day during 13 years, oil price US$ 50 / barrel, Capex-Opex 11 billion US$, initial production in 2020:
Total oil revenue would be some 75 US$ billion.
Total profit oil is 68 billion US$.
Guyana Government profit share is some 36 billion US$. This amount would be received in the period 2020 – 2033.
Payout is successful in about 4 years.
The economics of the Liza – Payara – Snoek giant fields development is thus highly profitable, with an IRR exceeding 100%.
Marcel Chin-A-Lien – Advisor Petroleum Exploration & Production, Business-Commercial-Policy Development, PSC’s
2.2 Guyana urgently needs to set up a Sovereign Wealth Fund (SWF).
Similar to for example Norway (GPF,1990; 922 US$ Billion), United Arab Emirates, Abu Dhabi (ADIA, 1976:828 US$ Billion), Kuwait (KIA, 1953; 524 US$ Billion).
Also Suriname has to start thinking seriously about the structure, details, ins and outs of a possible SWF. To be fully prepared, just in case, for the expected offshore oil boom. To become Oil-Curse-Proof and Dutch-Disease-Proof. Soon??
Oil rich countries that have not set up a transparent SWF have all been severely affected by the Oil Curse.
A most tragic example is oil-rich Venezuela. Its oil age began in the early 20th century. The big gusher in 1922, the Barroso No. 2 well in Cabimas, spewed as much crude as the famed Spindletop well in east Texas two decades before.
In 2013 and 2015 Venezuela had the highest misery index score:
(Global Misery Index – Hanke, John H. “Measuring Misery around the World”. The CATO Institute. Retrieved 30 April 2014;
“Amid Rationing, Venezuela Takes The Misery Crown”. Investors Business Daily. Retrieved 1 September 2014;
Venezuela: the country that should have been so rich but ended up this poor. www.independent.co.uk, Matt O’Brien, 19 May 2016; Saraiva, A Catarina; Jamrisko, Michelle; Fonseca Tartar, Andre – 2 March 2015.
“The 15 Most Miserable Economies in the World”. Bloomberg. Retrieved 4 March 2015).
Info from Internet, Wikipedia, books, etc. etc.etc.
A sovereign wealth fund (SWF) is a state-owned investment fund that invests in real and financial assets such as stocks, bonds, real estate, precious metals, or in alternative investments such as private equity fund or hedge funds. Sovereign wealth funds invest globally. Most SWFs are funded by revenues from commodity exports or from foreign-exchange reserves held by the central bank. By historic convention, the United States’ Social Security Trust Fund, with $2.8 trillion of assets in 2014, is not considered a sovereign wealth fund.
Some sovereign wealth funds may be held by a central bank, which accumulates the funds in the course of its management of a nation’s banking system; this type of fund is usually of major economic and fiscal importance. Other sovereign wealth funds are simply the state savings that are invested by various entities for the purposes of investment return, and that may not have a significant role in fiscal management.
The accumulated funds may have their origin in, or may represent, foreign currency deposits, gold, special drawing rights(SDRs) and International Monetary Fund (IMF) reserve positions held by central banks and monetary authorities, along with other national assets such as pension investments, oil funds, or other industrial and financial holdings. These are assets of the sovereign nations that are typically held in domestic and different reserve currencies (such as the dollar, euro, pound, and yen). Such investment management entities may be set up as official investment companies, state pension funds, or sovereign funds, among others.
There have been attempts to distinguish funds held by sovereign entities from foreign-exchange reserves held by central banks. Sovereign wealth funds can be characterized as maximizing long-term return, with foreign exchange reserves serving short-term “currency stabilization”, and liquidity management.
Many central banks in recent years possess reserves massively in excess of needs for liquidity or foreign exchange management. Moreover, it is widely believed most have diversified hugely into assets other than short-term, highly liquid monetary ones, though almost no data is publicly available to back up this assertion. Some central banks have even begun buying equities, or derivatives of differing ilk (even if fairly safe ones, like overnight interest rate swaps).
2.3 Nature and purpose of SWF
SWFs are typically created when governments have budgetary surpluses and have little or no international debt. It is not always possible or desirable to hold this excess liquidity as money or to channel it into immediate consumption. This is especially the case when a nation depends on raw material exports like oil, copper or diamonds. In such countries, the main reason for creating a SWF is because of the properties of resource revenue: high volatility of resource prices, unpredictability of extraction, and exhaustibility of resources.
There are two types of funds: saving funds and stabilization funds. Stabilization SWFs are created to reduce the volatility of government revenues, to counter the boom-bust cycles’ adverse effect on government spending and the national economy. Savings SWFs build up savings for future generations.
Governments may be able to spend the money immediately, but risk causing the economy to overheat, e.g., in Hugo Chávez‘s Venezuela or Shah-era Iran. In such circumstances, saving the money to spend during a period of low inflation is often desirable.
Other reasons for creating SWFs may be economic, or strategic, such as war chests for uncertain times. For example, the Kuwait Investment Authority during the Gulf War managed excess reserves above the level needed for currency reserves (although many central banks do that now).
The Korea Investment Corporation has since been similarly managed. Sovereign wealth funds invest in all types of companies and assets, including startups like Xiaomi and renewable energy companies like Bloom Energy.
2.4 Size of SWFs
Assets under management of SWFs increased for the fifth year running in 2013 to a record $5.78 trillion. There was an additional $7.2 trillion held in other sovereign investment vehicles, such as pension reserve funds, development funds and state-owned corporations’ funds and $8.1 trillion in other official foreign exchange reserves. Taken together, governments of SWFs, largely those in emerging economies, have access to a pool of funds totalling $20 trillion. Some of these funds could in future be channelled towards funding development of infrastructure for which there is global demand.
Countries with SWFs funded by oil and gas exports, primarily oil and gas exports, totalled $4.29 trillion as of the end of 2014. Non-oil and gas SWFs totalled $2.82 trillion. Non-commodity SWFs are typically funded by transfer of assets from official foreign exchange reserves, and in some cases from government budget surpluses and privatisation revenue. Asian countries account for the bulk of such funds.
An important point to note is the SWF-to-Foreign Reserve Exchange Ratio, which shows the proportion a government has invested in investments relative to currency reserves. According to the SWF Institute, most oil-producing nations in the Persian Gulf have a higher SWF-to-Foreign Exchange Ratio — for example, the Qatar Investment Authority (5.89 times) compared to the China Investment Corporation (0.12 times) — reflecting a more aggressive stance to seek higher returns
3) Guyana to reform oil laws and gain wealth fund with Commonwealth support – 2 May 2017
Re-blogged from: thecommonwealth.org/newsroom
“The inputs of partners like the Commonwealth are critical to the success of this country and its people” – Guyana’s Minister of Natural Resources
New oil discoveries off the coast of Guyana mean the country is poised to become a major new petroleum producer in the coming years.
One well drilled in October 2016 has been described by Exxon Mobil as “confirming a world-class resource discovery in excess of 1 billion oil-equivalent barrels”. The find could earn the small South American nation, with a population of about 800,000, multiple billions of dollars in tax revenues.
Guyana’s Minister of Natural Resources, Raphael Trotman, has confirmed the government intends to table new legislation before Parliament with the goal of moving to oil production in 2020.
The Commonwealth Secretariat has been advising the Ministry of Natural Resources since 2013 on the legislative and institutional reforms required to regulate Guyana’s emerging oil and gas industry.
Mr Trotman said: “The Ministry of Natural Resources has been especially fortunate to engage with the Commonwealth for the development of many of its policies, which are now coming of age as the country enters a new phase of development with the advent of its oil and gas industry.”
A new Sovereign Wealth Fund – a state-owned fund which will reinvest oil and gas revenues – and a new Petroleum Commission, a regulatory agency, are centrepieces of the proposed legal and institutional framework.
The Secretariat’s legal and economic experts have advised on draft legislation for the Sovereign Wealth Fund, a draft National Upstream Oil and Gas Policy, and a revision of Guyana’s Petroleum Exploration and Production Act and Regulations.
The reforms will ensure oil revenues benefit ordinary people in Guyana, through job creation and investments in public services and infrastructure
The Commonwealth Secretariat’s oceans and natural resources team has been working “assiduously” with the Ministry, said Mr Trotman. “This level of commitment has been the hallmark of the relationship developed with the Commonwealth team, and is highly valued,” he said.
Daniel Wilde, Economic Adviser on Natural Resources at the Secretariat, said the recent discoveries mean that Guyana is on a path to becoming a significant oil producer. “We are assisting the government ensure that this oil wealth is wisely managed and contributes to sustainable economic development.
“This involves advising the government on how to transparently and effectively regulate the upstream oil industry and helping to establish a Sovereign Wealth Fund. This fund should ensure that oil revenues do not lead to a loss of economic competiveness and that future generations fairly benefit from today’s oil wealth.”
Minister Trotman continued: “Guyana has enjoyed decades of tremendous history and close co-operation with the Commonwealth as a member of the community and partner in development. The Commonwealth’s support for Guyana must be lauded, particularly for the impact made on governance, youth development, environmental stewardship and natural resources management.”
“We, at the Ministry and Government of Guyana, wish to extend sincerest thanks to the Commonwealth team for its unwavering and invaluable support as Guyana transitions from potential to prosperity. The inputs of partners like the Commonwealth are critical to the success of this country and its people. We look forward to continued advancement of our partnership.”
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