A contextual financial analysis of the gas-to-shore project (Part 4)

Guyana’s natural gas potential
According to ExxonMobil’s public announcements, Liza Phase 1 alone contains 30 – 50 million cubic feet of excess natural gas. More recently, it was reported that ExxonMobil can deliver to shore more than 50 million cubic feet of gas per day. The report noted that “around 20% of the oil discovered in the Stabroek block is associated with gas, estimated to be in the order of more than 9.6 trillion cubic feet”.

Financial and Economic Analysis
For the purpose of this analysis the author’s estimated cost for the gas-to-shore project is US$1.1 billion. In this scenario, it is assumed that Exxon would finance 72%, or US$600 million to US$800 million (the estimated cost to for the gas pipe infrastructure), and the Government would finance the remaining 28%, or US$300 to US$400 million (the estimated cost for the onshore infrastructure). The analysis also assumes that the natural gas will be used for electricity generation and liquified petroleum gas (LPG) which is used in households for cooking.

Key Underlying financial Assumptions
* The estimated investment cost for the gas-to-shore project for the purpose of this analysis is US$1.1 billion.
* Energy Demand forecasted up to 2019, according to GPL’s official demand forecast numbers, is just under 1 million megawatts of power at an annual growth rate of 5%. Hence, this forecast is hinged upon organic growth at that time.
* Given the country’s development trajectory under the current regime, with massive infrastructural projects and the objective to reduce energy cost by 50% or more, energy demand forecasted in scenarios two and three took these factors into consideration. As such, the gas-to-shore project is estimated to be operationalised by the end of 2023. Therefore, the demand forecast is reasonably projected to grow by 10% annually post 2023 in scenario two, and 15% annually post 2023 in scenario three.
* In scenario one, which is the organic scenario, energy demand is estimated to reach 1.5 million megawatts by the end of the decade. In scenario two, at 10% annual growth rate, energy demand is estimated to reach almost 2 million megawatts of power by the end of the decade; and in scenario three, energy demand is estimated to reach over 2.6 million megawatts of power by end of 2030.
* In the above scenarios, energy demand is expected to be driven by heavy industrial and commercial activities, owing to lower energy cost as well as increase in the number of households (50,000 – 60,000 new households). Lower energy cost would also encourage increased consumption at the household level; for example, households will move to have more airconditioned units installed, and other electrical appliances and more modern amenities.
* With respect to the financial forecasts, the current average cost per kwh is US$0.25 cents or US$250 for one megawatt of power (Note: Residential rate is approximately US$0.35 cents, Residential – US$0.19 – US$0.23, Commercial – US$0.27 – US$0.28 cents). Therefore, if the objective is to reduce energy cost by 50%, the cost per megawatt will be US$125 or US$0.13 cents per kwh. To draw some comparison, the average cost per kwh in the U.S is US$0.10 cents, and in Trinidad & Tobago, the average cost per kwh is US$0.05 cents.
* Using US$125 per megawatt for the analysis, which represents a 50% reduction in energy cost, and assuming that operating cost for the gas-to-shore plant is 40% of revenue, in scenario one, with 1 million megawatts of power plus revenue from LPG for household use, the net operating profit will amount to US$87 million. The assumption to derive the revenue from LPG takes into consideration the current price for a 10lb cylinder of LPG, which is US$16 (GY$3,600), and is likely to be reduced by 50% or to GY$1500. So, with an average household of 250,000 consuming on average of 12 X 10lb cylinders of LPG per year (the equivalent that is).
* In scenario two, it is estimated that annual energy demand will reach over 1.3 million MWh of power – thereby resulting in net operating profit of US$114 million.
* In scenario three, the estimated annual demand for energy is over 2 million MWh of power – thereby resulting in a net operating profit of US$180 million.
* In the investment appraisal, using the net operating cash flows from the financial forecast in scenarios one and two – the Net Present Value (NPV) of the initial investment of US$400 million is US$8.8 million with a discount factor of 10% – which can be recovered within four years. In the second investment appraisal scenario, which uses the net operating cash flow from scenario one only (the lowest case) – the NPV is US$25.6 million, and can be recovered within 7 years.
Both of these investment appraisal scenarios revealed that the project is in essence a financially viable project. Given the findings of this analysis as well, there is scope to lower the energy cost by more than 50%, which is the ultimate objective; while the project can still be profitable even if operating costs are higher at 50%. (Note: operating cost is estimated to be 40% in all the scenarios for this analysis).
To be continued…
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About the Author:
JC. Bhagwandin is the Chief Financial Advisor/Analyst of JB Consultancy & Associates, and lecturer at Texila American University. The views expressed are exclusively his own, and do not necessarily represent those of this newspaper or the institutions he represents. For comments, send to [email protected]