A contextual financial analysis of the gas-to-shore project (Part 5)

Financing Model/Option
In the absence of the actual investment cost for the project, the analysis assumes that the investment cost to bring gas to shore is US$1.1 billion. It is also assumed that ExxonMobil and its partners would be financing the gas pipe infrastructure, which is about 72% of the total cost, and Government would finance the remaining 28%. This, however, does not mean that the Government would have to solely finance 28% or 30% of the cost. One has to consider the fact that, because of Guyana’s development trajectory, and now political stability to some extent, and its geopolitical importance, the financing model can take many forms aimed at reducing the financing risks by pursing an optimum financing model. Due to these factors, it is now easier to mobilise resources and raise financing from a variety of sources and instruments than it was 15 years ago, when Guyana was not the centre of global interest, as it is now. It is because of these developments that investors’ confidence, both local and foreign, is at its highest since the last two decades.
As an example, the financing model for the project can very well be one in which there is a Public-Private Partnership (PPP) model wherein a consortium of investors can be put together and/or where a publicly traded company can be established to attract investors from anywhere in the region, locally, the diaspora, and even global investors. Given the nature and technicalities of the project, though, a project financing model can be explored wherein a Special Purpose Vehicle (SPV) can be established to raise financing for the project. In this arrangement, the Government can retain some amount of equity together with financing through other debt and equity instruments from the Private Sector, foreign investors, and the local, regional or international capital markets. If the Government opts to hold 15% equity, for example, and the remaining 35% of the financing cost is raised through other instruments from private investors and the local capital market, then the Government’s share would amount to only US$60 million or GY$13 billion, which would have virtually less than 1% impact on the national debt.
Hence, with the above illustrations, there is a variety of financing models that can be explored to finance the project, which can even result in the Government having to finance just about 15%. And this would work out to just about US$60 million, hypothetically, if such models as described herein are explored, they effectively minimise the financing risks. The sum of US$60 million represents 20% of the average national debt service figure, which is approximately US$300 million. This, in turn, would translate to almost zero impact on public debt at its current level. Therefore, the view by some proponents that this project would lead to a debt trap simply has no merit.
It should be noted that this is only the financing aspect of the project, to lend some sense of reason on the affordability. Clearly, if the onshore facility would cost US$400 million or even US$500 million, the country has reasonable affordability capacity.

Oil revenue projections – Liza 1
Liza phase 1, in the below illustration, for example, using an average price per barrel of US$45 at an annual production capacity of 43.8 million barrels of crude, the investment cost of US$4.3 billion would be recovered within 3 years using the payback method. With the Net Present Value (NPV) investment appraisal method and a discount rate of 10%, the investment could be recovered within 4 years. As such, from the Liza 1 alone, Guyana can earn over US$2 billion (GY$430 billion/GY$86 billion annually) in the first five years, and up to US$6 billion (GY$1.3 trillion/GY$129 billion annually) within ten years – taking the post-recovery period into the equation. In other words, Guyana’s projected earnings from the Liza 1 development alone, over the first decade, is equivalent to 120% of current GDP; 3.5 times current level of total public debt, and 5 times Government’s revenue using 2019 figures. The highest cost is usually the development cost, and therefore, when the development cost is recovered, the operating expense is minimal, since the infrastructure to extract the crude is already in place.
To substantiate this view with reasonable certainty, a perusal of Exxon’s 2018 Annual Report confirmed that total operating cost was just about 27% of total revenue. As such, in the post-recovery period, profit share would be greater. Assuming, for example, that operating cost would be 30% of total revenue, then effectively there will be 70% of revenue for profit share, of which 50% is Guyana’s share.
Consequently, Guyana’s profit share can be as much as 35% post-recovery period + 2% royalty, resulting in a total take of 37%; up from 14.5% during the recovery period in the first three to four years for Liza Phase 1 development alone. Then there is Liza Phase 2 and many other FPSOs and development fields that would become operational over the decade.
To be continued…

About the Author: JC. Bhagwandin is the Chief Financial Advisor/Analyst of JB Consultancy & Associates, and is a lecturer at Texila American University. The views expressed are exclusively his own, and do not necessarily represent those of this newspaper and the institutions he represents. For comments, send to [email protected]