Govt owns infrastructure in arrangement for gas-to-energy project (Pt 1)

Dear Editor,
Let me establish and reinforce at the outset that all of the details on the gas-to-energy project will be laid in the National Assembly at the appropriate time as I have mentioned in my previous letters. The Government of Guyana (GoG) is financing the onshore facilities, and notably, in the 2022 budget the sum of $20 billion was allocated for this project which was subject to parliamentary approval. The loans that the Government is seeking from the US Exim Bank will also have to be laid in the National Assembly for approval. It is only the financing of the gas pipeline which Exxon has agreed to finance from cost oil that does not require pre-approval from the National Assembly at this time, but at the appropriate time when all of the associated agreements and negotiations are finalised–these will be laid in the National Assembly.
Reference is made to Economic Advisor to the Leader of the Opposition, Elson Low’s letter to the editor published on January 13, 2023.
The impetus my interlocutor’s contention has to do with the financing of the gas pipeline from cost oil, wherein his contention is that the GoG is circumventing the financing of the project from parliamentary oversight. This is not the case as I have contended herein and in my previous writings. Nevertheless, it is appropriate for me to highlight a classic, real and legitimate example of such a situation where the parliamentary approval process for the expenditure of public monies was circumvented by the Opposition when they were in Government during the period of 2015-2020. In this regard, I am referring to the overdraft balances on the Government Deposit Accounts at the Bank of Guyana that amounted to a whopping $147 billion or US$703 million dollars. Ironically, this is a typical example of an illegal practice perpetrated by the previous Government because the FMAA Act is clear on how overdraft balances are to be treated. The FMAA Act, Section 60 (2) states that “the Minister shall repay in full all advances in the form of an overdraft on an official bank account on or before the end of the fiscal year during which that overdraft was drawn.” Evidently, this was never done by the former Minister, and, noting that under the incumbent Government in its previous term in Government, these deposit accounts had surplus balances to the tune of $60 billion at one point. May I point out that this is verifiable if one were to peruse the Bank of Guyana Statistical Abstracts.
The author reinforced his view that “in order for Guyana to own the gas pipeline it must seek funding from the National Assembly, much the same as it would seek funding to build a road”. This assertion is suggestive that he is stuck in a conventional era that no longer exists. Historically, there were not many options in terms innovative and sophisticated ways in which to legitimately de-risk projects – aimed at enhancing the attractiveness of the project from an investment perspective, and to ensure the project’s viability.
With this in mind, in designing the financing structure of a complex large-scale project such as the gas-to-energy project, the project complexity and scale sometimes necessitate the need for some degree of financial sophistication and innovation with the primary objective to minimise the project financing risk; thereby increasing the long-term viability of the project. Notwithstanding, it should be noted, too, that this can be done in a legitimate manner wherein transparency and accountability are not compromised. To this end, in the case of the gas-to-energy project, as I have contended in my previous letters and this letter, accountability and transparency have not and will not be compromised.
For argument’s sake, let’s examine the implication of my opponent’s proposition that the gas pipeline funding should be sought from the Parliament. In so doing, he is effectively contending that the GoG should undertake 100 per cent of the financing risks associated with the project such that the GoG should raise 100 per cent of the financing from the national treasury. So, to understand the gravity of the financing risk Low is proposing and by extension the parliamentary Opposition – for the GoG to undertake – we need to understand the funding structure of the project.
There are two large components of the project: (1) the gas pipeline infrastructure which accounts for about 65 per cent of the total cost using the higher end of the estimates (US$1.3B) and (2) the onshore infrastructure (the gas plants) together with its support infrastructure which account for the remaining 35 per cent of the total estimated cost. Using the high range estimates, the total estimated cost for this entire project is about US$2 billion. Thus, if the GoG decided to adopt the Opposition’s proposal in terms of the funding structure, then the project will simply not be feasible and would become a recipe for bankruptcy of the country.
The size of the project in terms of the investment represents 25 per cent of GDP (2021); just over 2/3 of the 2022 national budget; almost all of the money (100 per cent) in the Natural Resource Fund (NRF) that Guyana has earned from profit oil and royalty thus far; and represents 1.43 times or 143 per cent of the total external debt (2021). Hence, even if the GoG inject 50 per cent from the national treasury which is US$1 billion and 50 per cent in debt financing, another US$1 billion, the debt-to GDP ratio would jump from less than 30 per cent to 50 per cent, the external debt-to-GDP ratio will jump from 16 per cent to about 30 per cent. This is not sustainable and financially prudent from a macroeconomic perspective. The GoG cannot and should not inject 100 per cent of the oil resources fund into one major project. More so, in this financing scenario, if the project fails, the State will still be burdened with the debt repayment, and in terms of the other 50 per cent presumably from the treasury, will amount to a massive loss to the national treasury.
Now, let’s contrast the Opposition’s proposed financing model to the actual financing model that the GoG is pursuing. In this scenario, the GoG is only raising 35 per cent of the financing through a combination of debt and equity from the national treasury for the project. The remaining 65 per cent is financed from cost oil by ExxonMobil which means, in the worst-case scenario if the project fails, 65 per cent of the cost will be sunk cost under the petroleum operations which is recoverable from cost oil; that is, whether the project fails or succeed. But the good thing for the GoG is that if the project fails, it will not be burdened with repaying any debt for the gas pipe nor would it be a loss to the national treasury.
Additionally, the financing model that the GoG has put together with the agreement of ExxonMobil serves to meet two major objectives in the best interest of the people of Guyana and the country at large – that is, (1) effectively minimizing the project financing risk as explained earlier and (2) successfully bargaining for more resources from the oil companies to be deployed in Guyana for the country’s economic benefit. In this respect, by virtue of this arrangement, the gas-to-energy project is a transformational energy project aimed at reducing energy cost by at least 50 per cent which, in turn, will drive a more competitive business environment especially for the manufacturing sector and industrial activities, and translate to more disposable income at the household level.
Another important point to note is that the ownership of the gas pipe by the GoG though it is being built and financed by ExxonMobil is another huge win for Guyana. By so doing, it does not only further de-risk the project but imagine if ExxonMobil had retained the ownership of the gas pipe, then obviously the GoG would have incurred an additional cost payable to ExxonMobil to pipe the gas to shore. This would have been an additional cost to the treasury that the GoG has effectively saved taxpayers from incurring. Fortunately to the Government’s credit, this is not the case. Rather, the Government will be getting the gas virtually for free simply because the Government owns the infrastructure in the current arrangement.

Yours faithfully,
Joel Bhagwandin