Gas to Energy and our approach to Economic Growth

Mar 29, 2023 Letters

Dear Editor,

The proposed gas to energy project for 300MW per day will cover electricity consumption of 12% to 6% of the population in the long term, if the reported average consumption for Guyana and the US are used to establish the future consumption range (Source U.S. Energy Information Administration). However, this contradicts the current installed capacity noted in the U.S.

Department of Energy report on Guyana from August 2020. Using those figures instead shows that our installed capacity will almost double as a result of the gas to energy project, with the caveat that it will be for only 25 years. The 25 year time limit being a significant downside to the investment. Per the 50% cost reduction assumption stated on Hess.com, the resulting cost per kWh will be on par with that of the U.S. if the current average cost of electricity in Guyana is used as the reference.

Based on the figures shared in the press, the resulting cost to finance the project was surprisingly generous. The reported numbers resulted in a discount rate that is below Exxon’s weighted average cost of capital and there also appears to be no discount rate associated with the government’s portion of the cost of the project. Although this may seem generous, it also causes the project to appear more financially attractive than it should be, which also raises the question as to whether the cost associated with the project has been inflated. However, according to Statista.com and the U.S. Energy Information Administration, the cost of the project is within the range for the cost to construct a gas to energy project with the pipeline cost excluded. The pipeline cost was however higher than the average, but this appears to have had been compensated for in the lower discount rate, which is not a normal business practice. Auditing of the pipeline project cost will be necessary to ensure minimal cost overruns.

That leaves the additional focus on the generous discount rate. Given that the rate of borrowing from the Bank of Guyana is at 5% (source: take-profit.org) and the WACC for Exxon is at approximately 8% (source: valueinvesting.io) at the lower end of the spectrum, the resulting additional cost of the project would skyrocket and significantly reduce its attractiveness with a resulting payback period that brings into question the feasibility of the project based on earnings and savings from the sale of electricity. Even if we were to disregard the overcompensation in the discount rate for the project and take only the total future cost as stated in the press, and then assume that the electricity generated would be bought at today’s rates or that consumers would save 100% on their electricity costs associated with this project, the payback period is clearly unacceptable if this project is to eventually pay for itself. The 25 year useful life of the project is surpassed. In other words the project never pays for itself. However, given the historical economic philosophy of the government, this project is better viewed as a social program to generate lower cost electricity for our citizens, and an opportunity to reduce the electricity shortage.

The question then becomes, is this the direction that we prefer to take, and is there a better alternative use for the funds associated with this project that could generate additional income for the Nation, which can then be used to increase the earnings of our citizens. Many would argue that such an approach would add more value to the economy and foster increased sustainable economic development for Guyana, and be of more benefit to our Citizens. Guyanese could also use the funds gained from the increased economic activity to purchase solar energy for their homes and gain further energy independence. Others could argue the contrary, which is that the reduced energy costs would provide an opportunity for businesses to become more competitive, especially if a manufacturing or industrial park is developed in the area around the gas to energy plant.

This becomes even more important to the overall gas to energy strategy when we consider that the impact is stronger when industry can capitalize on the lower cost, which would be on par with the US. Industry will be able to generate additional jobs and income faster than the average household by producing lower cost products to meet overseas demand.

Alternatively, after further consideration, it would be better to take the funds being allocated for the gas to energy project and invest it into projects that will earn income at or above the Bank of Guyana rate of 5%. As for the gas, a better approach may be to sell the gas and / or convert it to a value added product. The idea of its use as a fertilizer should not be quickly dismissed, but recent spikes in the cost of natural gas has made this option less attractive.

Another alternative to consider would be to use the $2B to invest in a solar farm to support the demand for electricity. This option does have a much longer lifecycle and is less expensive. At the current upper range of the average cost for such a project we would be able to add 2000MW instead of a temporary 300MW. Think about that for a moment. Adding 2000MW of solar electricity capacity would surpass current demand and meet future demand in a sustainable and affordable manner.

In addition, funds from the revenue streams mentioned, if pursued, can then be used to subsidize the cost of electricity for a period beyond the 25-year project life of the gas to energy project. As more oil and gas is discovered, more funds from gas will come online. When combined with the additional solar component of the power grid, the impact will be above the current needs of the population who would gain limited benefit from the temporary 300MW gas to energy project. Which would you prefer, 300MW of energy from gas that is temporary or 2000MW of energy from the sun at the same price to tax payers? The answer is clear. Therefore, it makes better long term economic sense to use the funds allocated for the gas to energy project to install renewable solar energy.

The current administration should take a closer look into how we maximize the economic value that can be generated from the use of the $2B in the energy sector. In lieu of doing so, our limited funds may not be used in the most effective manner. Maximizing the economic value of the investment should be the primary objective.

Best regards,

Mr. Jamil Changlee

Chairman 

The Cooperative Republicans of Guyana

• Economic, gas-to-energy, Growth, Guyana, Mr. Jamil Changlee