Response to JC Bhagwandin

Dear Editor,
The Institute for Energy Economics and Financial Analysis (IEEFA) has been closely following Guyana’s offshore oil and gas development. Our most recent analysis is publicly available, and can be viewed here and elsewhere.
We found that oil revenues will not cover Guyana’s annual budget deficits, new spending proposals, or contributions to a Sovereign Wealth Trust Fund. Our analysis concludes that failing markets and weak revenues during the first five years of the contract are unlikely to provide anything beyond a small benefit for Guyana.
One commentator, Joel Bhagwandin, has correctly pointed out that oil revenue will initially not cover Guyana’s debt service.
IEEFA concludes that beyond five years, Guyana is likely to continue to experience a weak revenue flow. The revenue outlook is dim because the markets are faltering as diminished demand leads to low prices and earnings.
Guyana’s revenue will remain low because the contract with the oil companies requires operating and development costs to be paid back to its foreign partners before the country begins to collect the robust revenues that have been promised. After five years, ExxonMobil and its partners will be owed US$20B, which would be taken out of future oil revenue. Valerie Marcel, a Chatham House Fellow, appears to agree with this negative outlook for the oil and gas industry. The contract is basically ‘frontloaded’ in ExxonMobil’s favour. It creates a significant financial risk for Guyana, since there is no guarantee that there will ever be robust oil revenues.
It is not a good idea to gamble Guyana’s financial future on a declining global market.
IEEFA has also concluded that having ExxonMobil as a partner can be more of a cause for concern than a guarantor of profits. The company has lost hundreds of billions in shareholder value over the last decade, its revenues are down, and it is no longer part of the Dow Jones Industrial Average stock index. The oil and gas industry has been in last place in the stock market for four of the last five years. The industry is declining, and ExxonMobil is stumbling right along with it.
Joel Bhagwandin points out that there is insufficient information in the public domain about the possibility of tapping natural gas reserves to support a new electricity system for Guyana. I agree. However, there is sufficient information on Guyana’s natural gas reserves, energy needs, financial position, and prior experience to be concerned about plans to rely on natural gas.
The proposed gas-to-shore project is a recipe for financial bankruptcy because piling on additional natural gas obligations stacked upon oil contract obligations — not to mention Guyana’s existing debt — is too much, given the weak outlook for the oil and gas market. If Guyana goes forward with the natural gas project, it would effectively be using its meagre oil revenues not to fund existing debt, close deficits, pay for new needs, or build a sovereign wealth fund, but to pay back obligations on new natural gas infrastructure investments. In other words, Guyana’s borrowing would make it poorer, not richer.
The public needs a natural gas proposal that is complete; an integrated energy plan showing how all the pieces fit together; a business plan for ensuring electricity rates remain economically competitive and affordable for residential needs; and a fiscal road map spelling out how much Guyana must invest to truly reap any benefits, how natural gas reserves will be extracted, and how the public will be protected financially and environmentally. Most of this information is not available for the current oil contract.
As the renewable energy sector continues to make rapid technological and financial progress, a thorough comparison between renewable energy and natural gas investment should be explored before making a decision that relies so heavily on natural gas. We look forward to this information being made available to analysts and ordinary ratepayers alike.

Tom Sanzillo
IEEFA’s director
of financial analysis