Should Guyana Wait or Renegotiate? The Obsolescing Bargain Theory and Petroleum Contract Stability in an Era of Transition Risk

1. Introduction

Few contracts have attracted as much controversy in Guyana as the 2016 Production Sharing Agreement (PSA) governing the Stabroek Block which was concluded as Guyana began its transformation into an oil-producing state. However, the agreement has since faced sustained criticism over its fiscal terms and the share of petroleum revenues accruing to the country. Yet, despite repeated calls for renegotiation, the Guyanese Government has held firm, invoking the sanctity of contracts and the need to protect investor confidence. In a recent interview, President Irfaan Ali again acknowledged that the agreement was “more in the interests” of the company, while insisting that “the sanctity of contract is there” (Al Jazeera, 2026).

This presents the debate as a choice between pacta sunt servanda and a greater national share of petroleum wealth. Yet long-term extractive contracts often outlast the bargaining conditions that produced them. The classical Obsolescing Bargain Theory (OBT) explains how those conditions shift. However, transition risk complicates this familiar logic. What if Guyana gains bargaining power just as the opportunity to convert its oil into wealth begins to narrow? This article argues that Guyana broadly confirms the classical obsolescing bargain, but that transition risk may shorten the time available to secure a greater share of petroleum revenue.

This article examines Guyana’s 2016 Production Sharing Agreement through the lens of the OBT, arguing that although Guyana’s growing bargaining power strengthens the case for renegotiation, climate-related transition risks may limit the time available to secure more favourable terms, making consensual renegotiation an important option for balancing national interests, investor confidence and long-term contractual stability.

2. Understanding the Obsolescing Bargain Theory: Why Bargaining Power Shifts Over Time

Petroleum exploration carries considerable financial risk requiring significant capital, technology and managerial expertise without any guarantee of a commercially viable discovery. That risk shapes negotiations. States with favourable geology, lower development costs and lower political risk can generally demand tougher fiscal terms, while those presenting greater uncertainty may have to offer more to attract investment (Silvana Tordo, 2007).

Guyana’s position in 2016 must be understood against this background. ExxonMobil had announced the Liza discovery only the year before, production had not started, and Guyana was still a new petroleum jurisdiction with little experience regulating an industry that would soon reshape its economy (AP, 2026). The full scale of Stabroek also remained largely uncertain with allegations that the resulting agreement was unusually generous to the consortium led by ExxonMobil’s Guyanese subsidiary, Esso. The PSA allows up to 75 per cent of production to be used for cost recovery before the remaining profit oil is divided equally. Guyana receives a 2 per cent royalty, while the agreement also lacks project-level ring-fencing, allowing revenues from producing projects to support costs elsewhere within the block (Tom Sanzillo, 2022).

Scholars suggest that favourable fiscal terms may initially compensate investors for uncertainty but appear excessively generous after major discoveries (John Paterson, 2018). Guyana’s 2016 agreement followed the Liza discovery, although uncertainty remained over Stabroek’s scale. That context helps explain the bargain, although it does not establish that its terms were necessary. The difficulty is that petroleum contracts may endure for decades while the bargaining conditions that produced them do not.

This shift lies at the heart of the Obsolescing Bargain Theory. At the beginning of the relationship, the investor often enjoys greater leverage because it controls the capital, technology and know-how necessary to turn resources into revenue. Over time, that advantage may be reversed. Once capital is sunk and infrastructure is fixed in the host state, the investment cannot easily be moved elsewhere. Geological uncertainty falls, the state acquires greater knowledge and capacity, and its dependence on the investor diminishes (Paul Stevens et al (2013); Saviour P Ng’ambi, (2016). What begins as an investor-favourable bargain can therefore become progressively less appealing to the host state, creating pressure for renegotiation or a greater share of resource rents. The effect is particularly pronounced in petroleum because of high sunk costs, asset specificity and oil’s political and strategic importance (Kraemer & Tulder (2009); Ekim Arbatli (2018).

Guyana broadly fits this pattern: Stabroek has become a large-scale producing asset, billions are tied to immovable infrastructure, and geological and commercial uncertainty has diminished. The bargaining conditions underlying the 2016 agreement have changed (Reuters, 2026).

3. Greater Bargaining Power, but No Renegotiation

If Guyana’s bargaining position has strengthened so markedly, why has the 2016 PSA remained untouched? President Ali invokes national credibility. In his Al Jazeera interview, he insisted that “as a responsible government, you can’t just come and tear away an agreement”, arguing that Guyana must work within the contract’s protections.

That does not mean the incentive identified by OBT has disappeared. Once bargaining power shifts, the host state has stronger reasons to seek a greater share of the resource rents. Renegotiation is only one route. Governments may also use taxation, regulation, increased state participation or, in more extreme cases, expropriation. What modern investment agreements, stabilisation clauses and investor-state arbitration change is not the existence of that incentive, but the legal and financial cost of acting on it unilaterally. Sauvant and Wells therefore stress the importance of designing flexible contracts from the outset, precisely because of the tensions created by the obsolescing bargain. Governments can no longer assume that an initially poor bargain can simply be corrected later without consequence. Their warning is blunt: “promises are no longer prologues”.

Guyana has therefore chosen restraint rather than confrontation. Instead of reopening Stabroek, it has sought to use its stronger position prospectively. Its newer PSA terms lower the cost-recovery ceiling from 75 to 65 per cent, raise the royalty from 2 to 10 per cent and introduce a 10 per cent corporate income tax, while retaining the 50/50 profit split (Department of Public Information, Guyana, 2026). Ali describes the new framework as “more balanced” while still welcoming future investment (Al Jazeera, 2026).

Guyana has adopted a long-term strategy, improving credibility, honouring the existing agreement, strengthening state capacity and negotiating better terms for future projects. The harder question is whether a late petroleum producer can afford to defer potential gains from renegotiating its existing contract.

4. Transition Risk: When Time Starts Working Against the Host State

The long game only works if there is enough time to play it. For Guyana, transition risk makes that increasingly uncertain. For emerging oil producers, the concern is beyond the prospect of the continuing availability of oil in commercial quantity or declining demand. It is that the future value of oil has become increasingly uncertain. Decarbonisation has already weakened the long-term prospects of countries with undeveloped resources. Development banks have curtailed petroleum financing, while international oil companies increasingly favour “advantaged barrels” that are cheaper, lower-emission and quicker to bring to market (Valérie Marcel et al, 2023). New producers are therefore entering the petroleum market just as financing tightens and the future size of the market becomes harder to predict.

For Guyana, petroleum revenues are unusually large relative to its small economy and population, making their transformative potential exceptional among emerging producers. Yet this opportunity also creates dependence with E3G estimating that petroleum accounts for around 82 per cent of exports. Therefore, how much wealth Guyana captures, and for how long, is central to its economic future.

Further, E3G’s Oil EndGame simulation explored producer responses to rapid, disorderly and slower transitions between 2028 and 2040 (E3G, 2026). Across the exercises, demand uncertainty pushed participants towards near-term revenue maximisation, higher output and securing buyers. Separately, E3G characterises Guyana’s rapid development as an explicit strategy to monetise reserves while demand remains robust. Transition risk may therefore shorten the window for exploiting the stronger bargaining position described by OBT, increasing the cost of delay.

That urgency has encouraged governments and oil companies to fast-track production to secure revenues while the window is still open. But speed can come at a cost. In Guyana, oil projects can be brought onstream faster than the infrastructure needed to manage associated gas, raising concerns over flaring and other environmental safeguards. Transition risk may therefore accelerate the commercial timetable while creating potential ecological hazards.

This introduces a tension not entirely captured by that classical OBT formulation. Traditionally, time strengthens the host state: investment becomes sunk, uncertainty falls and bargaining power shifts. Transition risk, however, may shorten the period in which that stronger position can be exploited. Lower or more volatile demand, tighter climate policy, reduced access to finance and the possibility of stranded reserves can all reduce the rents available from petroleum (Grantham Institute, 2022; Carbon Tracker Initiative, 2026). Estimates suggest that petroleum revenues in Guyana and several other emerging producers could fall substantially short of expectations over the next two decades. For projects expected to be in operation for several decades, a twenty year horizon is a short timeline (Valérie Marcel et al, 2023).

5. Can Guyana and Emerging Producers Still Afford the Long Game?

President Ali himself points to Qatar as evidence that patience can pay. He described Qatar’s relationship with Western oil companies as “constructive” and “progressive”, noting the role played by ExxonMobil in the country’s energy development (Al Jazeera, 2026, 16.31 – 16:54). In many respects, however, Qatar and the wider Middle Eastern experience illustrate important features of the classical obsolescing bargain.

The early concession system heavily favoured foreign oil companies, which controlled production, pricing and much of the resulting rent. Over time, that balance shifted. Producer states developed greater institutional capacity, infrastructure became sunk, oil revenues increased and governments became less dependent on foreign companies. By the 1970s, OPEC states had secured far greater control over production and pricing, often through national oil companies and, in some cases, nationalisation (George Joffé et al, 2009).[1] Vivoda (2011) similarly shows how periods of high prices and large available rents strengthened producer governments and enabled them to renegotiate earlier bargains on more favourable terms. The process was neither smooth nor linear, but it unfolded over decades.

That is precisely the difficulty with using Qatar as a model for Guyana. The Gulf producers had time to accumulate capacity, absorb technology and wait to leverage their bargaining power. Guyana has entered the oil market when the market has already matured. Accepting an unfavourable bargain today in anticipation of a better one tomorrow assumes that tomorrow’s petroleum opportunity will still be there.

Another version of the long game can be seen next door in Suriname, itself a new oil producer. Staatsolie CEO Annand Jagesar’s “last man standing” strategy aims to keep the country among the lowest-cost and lowest-emission producers even over a fifty-year transition (FT, 2026). This is long term strategy based on uncertain future demand. Waiting may improve the bargain only if there is still a bargain to improve.

6. Renegotiation in a Narrowing Window

Just as transition risk may be shortening Guyana’s petroleum horizon, the economics of Stabroek appear to have shifted in its favour. In July 2026, ExxonMobil confirmed that the consortium had recovered approximately US$55 billion, around two years earlier than expected. As cost recovery fell, Guyana’s share of production rose to almost 40 per cent. The existing PSA is therefore already yielding a greater share of production to Guyana without renegotiation.

But that increase is neither fixed nor the result of better contractual terms. The 75 per cent cost-recovery ceiling remains, and the absence of project-level ring-fencing allows costs from new Stabroek developments to be recovered against existing production, potentially reducing Guyana’s share again. More than US$60 billion has already been committed across seven sanctioned projects (Vivoda, 2011). What has changed is the economic context of the bargain as much of the initial investment has been recovered, enormous capital is sunk, geological uncertainty has fallen and production is firmly established.

Beyond sunk investment, petroleum bargaining power also depends on profitability, oil prices, competition, investment alternatives and reserves’ strategic value (Tsvetana Paraskova, 2026). Disruption around Hormuz and the Red Sea has increased the attraction of Atlantic oil that can reach major markets without transiting these chokepoints, with market analysis identifying Guyana as a beneficiary. Temporary geopolitical instability should not determine the fate of a contract intended to last decades. But it reinforces Guyana’s current leverage while potentially hastening its exercise. Indeed, E3G argues that the Hormuz disruption is encouraging importers to accelerate electrification and reduce oil dependence.

The political dimension matters too. Renegotiation was an explicit issue in Guyana’s 2025 election campaign. The AFC pledged to reopen the 2016 PSA, while APNU also proposed talks with ExxonMobil on renegotiation (Stabroek News, 2025). At the same time, civil-society groups continued to criticise the agreement and call for a larger national share of the petroleum benefits. Resource nationalism need not mean nationalisation; it can also take the form of taxation, regulatory intervention or other measures that alter the economic balance of the investment (Arbatli, 2018). For ExxonMobil, that matters commercially. A company investing billions in Guyana has an interest not only in the legal protection of its contract, but also in ensuring that the relationship remains politically sustainable over time.

These interests may converge as the same sunk investment that strengthens Guyana’s bargaining position also gives ExxonMobil a greater reason to preserve the viability of its Guyanese operations. Paterson and Tordo emphasise that states and investors share an interest in maintaining workable long-term relationships. Renegotiation need not be a zero-sum exercise. ExxonMobil would surrender some contractual advantages but could gain greater political legitimacy and stability around an investment for which much of the initial expenditure has already been recovered. Choi and Triantis similarly show that changes in bargaining power can support welfare-improving contractual adjustments, while Al Faruque stresses that consensual adaptation can preserve contractual equilibrium as circumstances change (Choi & Triantis, 2012).

Contractual stability does not require immobility. Daniel et al (2010, 419) reported that more than thirty countries had revised petroleum contracts or fiscal regimes since 1999, sometimes despite stability clauses. The manner of change matters as unilateral intervention risks legal and political conflict, while consensual renegotiation can preserve the relationship. Any renegotiation should also be transparent. If public distrust is part of the problem, another negotiation behind closed doors would do little to solve it. Legitimate commercial confidentiality can be protected without excluding meaningful public scrutiny. Sustainable development concerns not only how petroleum wealth is divided, but also how citizens are involved in the decisions surrounding it.

6. Conclusion

Guyana’s experience illustrates both the relevance and the limitations of OBT. As petroleum production has expanded, geological uncertainty has diminished and substantial investments have become embedded in the country, Guyana’s bargaining position has strengthened. Yet, unlike earlier petroleum-producing states that benefited from decades of relatively sustained oil demand, Guyana faces an increasingly uncertain future shaped by the global energy transition. Although time may strengthen its bargaining power, it may also reduce the economic benefits available from exercising that power.

The greater threat to stability may not be wholly based on renegotiation but in expecting a contested agreement to remain unchanged despite shifting economic conditions. OBT explains Guyana’s increasing bargaining leverage while transition risk explains why the opportunity to exercise that power may be limited. Used wisely and transparently, that leverage could advance Guyana’s sustainable development ambitions while offering its exploration and production partners a more resilient bargain. Ultimately, the question is not simply whether Guyana should honour or renegotiate its agreements, but how it can respond to changing economic and environmental circumstances while protecting its long-term interests.