Mar 23, 2021 News
Kaieteur News – Democracy does not begin and end with elections. In every liberal democracy, taxpayers have the right to be part of every level of governance. They have the right to demand their government provide clear justification for their plans. This is because, with every transaction a government makes, it is either spending the people’s money or building up debt on the people’s backs. The case is no different when it comes to the heavily touted gas-to-shore project.
Guyana is not even aware of what it will cost to develop this behemoth of a project. Yet, Vice President, Dr. Bharrat Jagdeo, has personally decided that it is not important for Guyana to conduct an independent study of the financial viability of this project. Whether Guyana will allow the People’s Progressive Party/Civic (PPP/C) to saddle its back with a project likely to cost US$1B, on the hunch of one man, remains to be seen.
Kaieteur News will show how one West African country’s failure to comprehensively study its intended gas-to-shore project resulted in massive gains for energy companies, but hundreds of millions in annual losses for its taxpayers.
The Republic of Ghana was blessed with massive gas reserves – the Sankofa gas field. In determining what to do with it, Ghana must have seen the decision as a no-brainer. With a population of over 25 million people at the time, the then government figured it needed to bring gas to shore to lift millions out of poverty and revolutionize its energy sector.
In support of the Sankofa gas project, the World Bank said Ghana “has suffered macroeconomic shocks in recent years – partly due to challenges being faced by the country’s power sector. A combination of water shortages for hydropower, erratic gas supplies from external sources, and delays in the development of domestic gas resources and new power plants have led to frequent power outages that have affected the poor the most.”
The project could not have come at a better time, so Ghana was eager to deliver a mega-project to help those who were below the poverty line.
Ghana’s then Finance Minister, Seth Terkper, had said the project would help shape the country’s energy sector for the next 20 years.
“This project is an essential element of the drive towards consolidating our middle income status, and will help secure our natural gas resources for a more affordable and reliable power supply,” Terkper had stated. “This will help boost economic activity and generate more jobs for Ghanaians.”
Does this sound familiar? Here’s what happened next.
An independent policy centre called Institute of the Americas pointed out in a report last year that, after suffering frequent power outages, Ghana was able to use the Sankofa project to reduce power costs, lower emissions and make electricity services more reliable. According to the World Bank, since the startup of the project, Sankofa resulted in the provision of power to 1.6 million households, decreased oil imports by 12 million barrels a year, and reduced carbon emission by 1.6 million metric tons.
However, there were adverse effects, which have rendered Ghana’s energy sector unsustainable.
Ghana signed a long-term take-or-pay Power Purchase Agreement (PPA) with gas and power suppliers, through which it would have to pay for a significant portion of the produced gas from the field, no matter the demand, Kathryn Hillis, the author of the report, wrote.
“In an environment of frequent power outages where a large portion of the population lacks access to electricity, this seemed like an ideal arrangement,” the Institute of the Americas report stated. However, the market is now severely oversupplied, with the government paying hundreds of million annually for unused power.
As a result of the take-or-pay provision, Ghana was billed US$250M for unused gas in 2019. To put this into perspective, the Petroleum Commission of Ghana said in a July report that Ghana’s Petroleum Holding Fund (PHF) received US$925 million in oil revenues. That means Ghana’s bill for its unused gas amounted to more than a quarter of the revenue it got from petroleum in that year.
Ghanaians are also reported as arguing that the tariffs in the Power Purchase Agreement are not competitive, causing the government to overpay for power.
Recognizing that the energy sector is not financially sustainable, the current administration responded by creating the Energy Sector Recovery Programme (ESRP) to identify the policies and actions needed to recover the sector financially. The programme would have to scramble to find uses for all the extra gas and work on ensuring fairer agreements in the future.
Part of the programme involved having Cenpower, a major power company in Ghana, switch its primary fuel consumption from light crude to natural gas. Hillis said that Ghana will need to do a lot more to find off take sources for the gas, because the company’s switch is nowhere near enough.
The Institute said that Ghana is in this situation because it did not sufficiently study the project. Ghana failed to properly assess its energy demand, and is now up to its neck in annual losses.
Institute of the Americas is not the first institution to have spoken out about the Ghana project.
The Bretton Woods Project, a UK based non-governmental organization, was formed to challenge the work of the World Bank and the International Monetary Fund (IMF) on development, usually in the areas of the environment, human rights and democratic governance.
It said that Ghana’s offshore gas is rapidly becoming a fiscal burden amidst the country’s debt crisis, and that this raises questions about the role of the World Bank in the country’s gas development.
It said that the public-private partnership (PPP) for the project is backed by a total of US$1.2 billion in World Bank guarantees and debt financing.
As early as 2015, Ghana Civil Society Organizations (CSOs), like the African Centre for Energy Policy, criticized the contract’s terms as unfavourable.
The Bank has noted the considerable criticism in the media for the development, and the perception that the petroleum companies supported by the bank were just exploiting the resources for their own benefit.
The bank said that part of the economic benefits of the development project will not be realised immediately.
Bretton Woods also pointed out in a 2017 article that over 150 CSOs have called on the World Bank and the IMF to stop their aggressive support for PPPs because the CSOs have recognized significant risks where these projects are concerned.
Bretton Woods said that PPPs have potential serious negative consequences, such as their fiscal impact through the creation of legal obligations for governments to make payments only if particular events occur, such as the take-or-pay provision in Ghana’s Sankofa contract.
The CSOs made their call in a manifesto, which called for “those concerned with justice, equality, sustainability and human rights” to instead push for publicly funded, democratically controlled, accountable public services.
The Guyana Situation
ExxonMobil has made 18 commercial hydrocarbon discoveries since 2015, amounting to nine billion oil-equivalent barrels. About 20 percent of that is natural gas. Deciding what to do with it is a big decision. The PPP/C has decided to bring it to shore.
The former A Partnership for National Unity + Alliance For Change (APNU+AFC) administration had wanted to do the same. However, it was voted out of office last year after lording over the negotiation of a disgraced Production Sharing Agreement (PSA) with ExxonMobil. It had also failed to audit billions of US dollars in recoverable costs, and operated secretively despite numerous calls for it to be forthcoming with information. All of that shows that the former David Granger administration did not set the bar very high when it comes to management of the petroleum sector.
Yet, the current administration rode into office with the gas-to-shore project as one of its major manifesto promises. And because there is a general election every five years, there is tremendous pressure to deliver a mega-project, which would revolutionize the lives of all Guyanese before the next election. The gas-to-shore project appears to be the PPP/C’s choice for that mega-project, since Guyana has had electricity woes for decades.
“Due to the country’s poor electrical infrastructure and vulnerable energy supply, Guyanese people experience an average of 31 days of power outages per year despite recent efforts to improve reliability.”
This is what the Institute of the Americas had to say about Guyana’s electricity woes.It continued, “In the hinterland, the interior region of the country outside the coastal area, there is little to no access to the electricity grid. To compound the problem, energy demand in Guyana is only forecast to increase in coming years. Future required generation capacity is estimated to double by 2035, without accounting for the power needs of oil production. The high cost and unreliability of electricity has slowed economic development and private sector investment in the country.”
Dr. Jagdeo aims to revolutionize the energy sector. During a February press conference, the Vice President told reporters that four studies would be conducted on the intended project: namely a geotechnical study, a geophysical study, a light detecting and ranging (LIDAR) study, and an environmental impact study.
This, the VP had revealed, while noting that there have been adverse comments in the press that the government may be rushing forward without ensuring the project’s feasibility. Of concern to some transparency advocates is the fact that the government is relying on ExxonMobil to conduct those studies, instead of contracting independent firms to conduct the studies on the government’s behalf.
Yet, the study most advocated for in the press was not mentioned – one to ensure that the project would be financially viable.
Dr. Jagdeo has grown irritable with critics who are calling on the government to show how this project will work. There are concerns that if Guyana is not careful, the project may end up making Guyana’s energy sector financially unsustainable. The Vice President appears to hold the view that a financial viability study is unnecessary.
“The financial aspect is a no-brainer,” he said, during a Globespan appearance, days ago. “Any sensible person with a modicum of sense, a tiny brain, even a residual brain, would understand that.”
“If you are generating power at $12 or $13 per kilowatt hour with the current price of fossil fuel…if you can supply power at $7 or $8 per kilowatt hour,” Dr. Jagdeo said, “a mad man would make the decision to do so and that is what this opportunity offers…to cut the cost of generation by 50 percent from its current level.”
“What else do you need,” he asked, adding, “If you can get power at half the price at which you are generating? That would allow us to cut the cost that you sell it at so it is a no-brainer. You just have to think it through for a couple of minutes.”
The Vice President expects Guyana to trust cursory internal calculations, in lieu of an independent financial study. But already, there are signs the project may not work for the country.
In December last, Former Minister of Public Infrastructure, David Patterson, had appeared on Kaieteur Radio, where he admitted that in 2018, ExxonMobil offered to bring 30 million cubic feet of gas to shore per day, to meet Guyana’s energy needs. However, that amount is more than Guyana needs. The former Minister said that the government had asked the World Bank for assistance with studies for the project.
Patterson said that they were close to an arrangement, including discussions about which party would own the pipeline, and the cost per cubic metre the government would be meant to pay. He said that Exxon wanted to quickly recoup its expenditures made on the construction of the pipeline.
The former Minister said that “obviously” Guyana would not be able to utilize all of the gas. Hence, discussions included a “take or pay” provision, which would oblige the government to take the gas or pay a specified amount.
After Patterson revealed that ExxonMobil offered the former government more gas than Guyana needs, the numbers went even higher. ExxonMobil country manager, Alistair Routledge, in January said that it could deliver about 50 million cubic feet of gas per day – 20 million cubic feet of gas more than the daily volume it offered APNU+AFC.
Routledge said, “… we’ve identified and are certain that we can deliver the kind of volumes that are needed to support a gas-powered plant.”
This is exactly what Ghana faced.Patterson said that the project is a viable one because Guyana’s electricity needs have been growing seven percent per annum since 2015, and because of its struggle with power outages due to a poor state power grid and power generation capacity.Does this sound familiar?
Kaieteur News has shown that the gas-to-shore project would be just another cash cow for ExxonMobil and its partner, Hess and CNOOC. According to preliminary reports that were done by the previous administration on the feasibility of bringing gas to shore from the Liza Phase One Project, it was noted that an offshore pipeline is estimated to cost between US$165 million and US$270 million to build, depending on the size and landing site location. As for the onshore compression and separation of the Liquefied Petroleum Gas, this is estimated to cost between US$43 million and US$114 million. Finally, distributing the natural gas to the various electricity generation locations is estimated to cost between US$95 million and US$127 million depending on the landing site selected.
During a February press conference, the Vice President had given a crude estimate of four years for the repayment of the development cost for the proposed gas-to-shore project. He said that the crude estimate for the cost of the project is between US$500 million and 800 million, depending on the design, pipeline size and surveys. But he is not sure. The VP said the cost would ultimately be defined when the government goes out to tender – “That’s the only time we will actually know the actual cost of it.”
How does one determine that the financial viability of a project is a “no-brainer” when he does not even know what it costs?
Guyana is expected to handle the costs for the infrastructure of onshore facilities while ExxonMobil would take care of the offshore aspect of the project, but all costs based on the terms of the Stabroek Block PSA would be recoverable in the end. Guyana would also have to pay ExxonMobil for the transportation of the gas, but that price is still being worked out between the oil giant and the PPP/C Government. Specifically in October last year, the government had said that it is negotiating the price for the gas that would fire a 300MW power plant. It has said too that its appointed task force on the matter “will decide whether we will do a private/public partnership (PPP) or build, own, operate and transfer arrangement, or whether government will fund it totally.” Once the price is settled, ExxonMobil will not only be able to recover all costs incurred on realizing the project, but it will have another cash cow on its hands.
Last year, International Lawyer, Melinda Janki; Guyana’s former Auditor General, Anand Goolsarran; and co-founder of the Oil & Gas Governance Network, Darshanand Khusial; challenged World Bank President, David Malpass, in a joint letter to press his team on its support for Guyana’s gas-to-shore project.
The World Bank is being challenged to prove that Guyana’s gas-to-shore project will not fall to the same fate as Ghana’s project. That request for a justification was made months ago, but there has been no response.
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