Oil exploration in the contested Essequibo area between Guyana and Venezuela has exacerbated a long-running territorial dispute between the countries that is likely to intensify ahead of parliamentary elections in Venezuela in December 2015. Venezuela’s past harassment of oil vessels in the contested area and its unilateral declaration of a maritime exclusion zone over much of Guyana’s territorial waters underscores the vulnerability of international oil companies (IOCs) to disruption. There is no clear path toward permanently resolving the dispute, threatening plans for further drilling by IOCs offshore Guyana from late 2015.
The dispute over the undeveloped but resource-rich Essequibo area has been ongoing for more than century, but has escalated intermittently, typically in relation to tensions over natural resources. An 1899 Paris arbitration tribunal demarcated the current internationally recognised boundaries, but in the 1960s Caracas rejected the decision and revived its claims over the 170,000 sq km Essequibo area and surrounding waters. Guyana’s award of mining concessions for bauxite and gold in the region have been contested by Venezuela, underscoring sensitivities related to the region’s vast mineral potential.
Offshore oil exploration granted by Guyana since 1999 has also provoked bilateral tensions. ExxonMobil announced in May that it had begun drilling in the contested Stabroek Block on a license awarded by authorities in Guyana despite a direct warning from Venezuela’s foreign ministry. Venezuela has historically sought to pressure both Guyana and oil firms not to explore in the contested area with some success. In 2000, Caracas announced oil companies Century and Exxon had agreed, under pressure from Venezuelan officials, to halt their operations in the disputed Essequibo area pending a resolution of the dispute. However recent discoveries in neighbouring waters and analogous finds off the coast of West Africa have increased interest in Guyana’s waters, resulting in a modest but notable increase in exploration activity that has worsened bilateral tensions on both sides.
According to a 2000 report from the US Geological Survey, the offshore Guyana-Suriname basin could hold some 13 bn barrels of oil and 32 tn cubic feet of gas. Growing recognition of the region’s potential has encouraged a more assertive stance by impoverished Guyana, which sought and received support from the 15-member Caribbean trade bloc Caricom for its claim of sovereignty over Essequibo in July and has repeatedly warned Venezuela not to interfere with exploration. Exxon’s announcement in July that its earlier discovery from the Liza-1 well in the Stabroek Block could hold as much as 700 mn bn barrels of crude, worth roughly USD 40 bn at current prices or some 12 times Guyana’s current GDP, will likely only harden the position of governments in Georgetown and Caracas, both of whom are under pressure from depressed global commodity prices.
Risks to operators
The escalation of the territorial row over 2015 has exposed IOCs operating in offshore Guyana to an increasing risk of disruption. In response to drilling by Exxon, Caracas issued a decree in May that unilaterally asserted Venezuela’s sovereignty over the waters off the entire Essequibo coast up to the eastern bank of the Essequibo River. Although this was later rescinded, in July the government created a 321-km offshore defence area covering most of Guyana’s exclusive economic zone, including the contested Stabroek Block.
The decree justifies action by the Venezuelan armed forces to defend the zone, increasing the risk that seismic vessels and drillships operating in the area will be subject to harassment and intimidation. In October 2013, Venezuela’s navy briefly detained a ship contracted by US-based Anadarko Petroleum that was working in the Roraima license in Guyana’s territorial waters. Should Venezuela’s navy again attempt to disrupt offshore activity in Guyana, drilling planned by CGX in the Corentyne block and a consortium of Repsol, Tullow and RWE in the Kanuku license from Q415 could be delayed, potentially exposing operators to significant unplanned costs. Exxon’s ongoing arbitration claim against Venezuela over the nationalisation of its assets in the country in 2007 highlights long-standing tensions between Western IOCs and Caracas, which has targeted the domestic assets and operations of foreign firms regularly over the past decade. As such, Caracas could attempt legal action against the firms in domestic courts, potentially threatening, for example, Repsol’s stakes in the Carabobo heavy oil project and Perla gas field.
The legal and political uncertainty stemming from Venezuela’s claims could temporarily damage the prospects for Guyana’s nascent oil sector. There is no clear path toward a resolution of the dispute and despite Georgetown’s threats to bring the case before the International Court of Justice, Guyana has yet to formally do so. Both Caracas and Georgetown have reportedly requested the UN intervene as a mediator but, underscoring worsening bilateral ties that will complicate negotiations, Venezuela recalled its ambassador and announced plans to halt imports of rice from Guyana by the end of the year. Venezuela has purchased around 40 percent of Guyana’s rice supply in recent years and local producers warned of significant economic disruption should imports be halted. Officials in Guyana also confirmed they were evaluating their options amid concerns Caracas could halt supplies of crude provided under generous terms as part of Venezuela’s Petrocaribe programme. The economic anxiety underscored the vulnerability of Guyana’s underdeveloped USD 3.2 bn economy to the political dispute with Venezuela, which comparatively has a GDP of USD 510 bn according to 2014 data from the World Bank. Regardless of whether the parties agree to outside assistance in resolving the border issue, the process itself is likely to be a protracted one. This prolonged uncertainty amid continued tensions could see IOCs shift their investments away from Guyana, particularly in the context of pressure to control costs in response to weak global oil prices.
Tensions to worsen ahead of December elections
Domestic political pressures in Caracas have been a key motivator of the country’s aggressive reaction to exploration, and these pressures are likely to intensify ahead of parliamentary elections in Venezuela scheduled for 6 December. Under late President Hugo Chavez, Caracas had moderated its tough stance on Essequibo with economic and political outreach to Georgetown. However with current polling suggesting President Nicolas Maduro’s ruling PSUV party is at risk of losing its majority in parliament amid a domestic economic crisis, the government has adopted an increasingly belligerent stance. In an attempt to use nationalism to mobilise supporters, the Venezuelan government could harass exploration vessels, threaten IOCs directly or attempt to disrupt Guyana’s economy in an attempt to stave off defeat at the polls. Although support for Venezuela’s claims over Essequibo includes both pro- and anti-government politicians, domestic issues such as the faltering economy are likely to be prioritised in the event of an opposition victory. Therefore a victory by the main opposition coalition MUD is likely to reduce Maduro’s ability to escalate the row with Guyana further.
Additional flashpoints to monitor over next 12 months include:
IOCs and oil field services companies active in Guyana, particularly the Essequibo region, should continue to monitor political relations between the two countries as well as signs of increased Venezuelan naval activity around the contested waters. Further exploration or appraisal drilling by Exxon to firm up the scale of its discovery on the Stabroek block or the commencement of planned drilling later in 2015 by other IOCs will remain a flashpoint for further tensions. Any reports of harassment of vessels operating in Guyanese claimed waters would signal a heightened threat to the oil and gas sector ahead of planned drilling over 2015 and could potentially see operators again experience naval intervention. Crew on board drilling ships and support vessels should be trained in incident response in the event of naval hostilities. Although the dispute does not show signs of imminent escalation, considering the longevity of drilling and future production campaigns, operators should review force majeure procedures in contracts and identify avenues for legal recourse in the event of suspension of activities.