For­mu­lat­ing De­ci­sion Rule 2: A state-owned oil re­fin­ery

Stabroek News Sunday - - REGIONAL NEWS -

In­tro­duc­tion

Last Sun­day’s col­umn (Septem­ber 3) marked one year of un­in­ter­rupted weekly ar­ti­cles ad­dress­ing the topic: ‘Guyana in the com­ing time of its oil and gas in­dus­try, circa 2020’. A longer se­ries on Guyana’s ex­trac­tive sec­tor has been on­go­ing since De­cem­ber 27, 2015. The topic cur­rently be­ing ad­dressed: whether Guyana should es­tab­lish a lo­cal oil re­fin­ery, is the penul­ti­mate one in the se­ries.

Th­ese col­umns aim at fos­ter­ing a crit­i­cal mass of ed­u­cated/in­formed Guyanese on the topic. They do not pro­mote any sale of ser­vices, silent agen­das, self-ad­ver­tise­ment, or other hid­den wares. My con­vic­tion is sim­ply that, Guyana’s best de­fence go­ing forward with the in­dus­try de­pends on its in­clu­sive­ness, nim­ble­ness, in­no­va­tion and cre­ativ­ity. In truth, there is a hu­mungous va­ri­ety of global ex­pe­ri­ences from which to draw lessons; in­deed more than six decades of trial and er­ror, as well as re­source bless­ings and curses. There is noth­ing novel to this ob­ser­va­tion.

De­ci­sion Rules

De­ci­sion Rule 1 (rec­om­mended in last week’s col­umn), will be added to, in ref­er­ence to state in­vest­ment in a lo­cal oil re­fin­ery. How­ever, be­fore pro­ceed­ing with that topic let me first add fur­ther com­ment on cir­cu­lat­ing pro­pos­als for es­tab­lish­ing pri­vately owned mod­u­lar mini-oil re­finer­ies.

In Jan­uary this year, the African Busi­ness Round­table had pushed back against the Coun­try Man­ager of Exxon’s Esso Ex­plo­ration and Pro­duc­tion Guyana Lim­ited, for claim­ing the build­ing of an oil re­fin­ery in Guyana “would not make busi­ness sense”, be­cause of scale, global com­pe­ti­tion, and ef­fi­ciency con­cerns. The Round­table re­sponded by ad­vo­cat­ing the cause of small mod­u­lar re­finer­ies: “in the range of 7,500 to 10,000 bar­rels per day, de­signed to un­der­write Guyana’s in­dus­trial ad­vance and have mul­ti­plier ef­fects on sus­tain­able de­vel­op­ment”. The Round­table boldly as­serted that: “say­ing no to a re­fin­ery is say­ing no to lo­cal con­tent.”

I will in­di­cate, in skele­tal form, two pri­vate sec­tor pro­pos­als along th­ese lines. One is the Guyana En­ergy Self Re­liance Ini­tia­tive (GESRI), led by the In­tel­lec­tual Dy­nam­ics Cor­po­ra­tion (IDC) Group of com­pa­nies and its part­ner, Re­fin­ery Equip­ment of Texas. Their pro­posal aims at es­tab­lish­ing to­tal ca­pac­ity of 7,500 bar­rels of oil per day (BPD), based on three mod­u­lar re­finer­ies rang­ing in size from 1,500 to 3,000 BPD. The pro­jected in­stal­la­tion and com­mis­sion­ing time­line for the three com­plexes is short, just 24 months.

The es­ti­mated ini­tial pro­ject cost is US$145 mil­lion, with the “re­fin­ery and sup­port in­fra­struc­ture” ac­count­ing for 68 per cent, and “in­stal­la­tion and com­mis­sion­ing”, to­gether with “ad­min­is­tra­tion and man­age­ment” the re­main­ing 32 per cent. The pro­posed fi­nanc­ing of this cap­i­tal out­lay is: 1) pri­vate eq­uity and 2) struc­tured agency fi­nanc­ing. The lat­ter, how­ever, has not been am­pli­fied in the pro­posal, which does of­fer none­the­less “to sell re­fined fuel prod­ucts at re­duced rates” (30 per cent be­low cur­rent do­mes­tic rates).

The three mod­u­lar mini-re­finer­ies are planned for Re­gions 3, 4 and 6.

G$100 per share

Asim­i­lar sized pro­posal for a 6,000 BPD re­fin­ery was made by the Prime En­ergy group, back in 2011, be­fore the Liza 1 find. This is pro­moted as a G$100 per share scheme, which makes it far more pop­ulist ori­ented than the GESRI pro­posal. Cap­i­tal cost is es­ti­mated at US$100-200 mil­lion; a wide range. This pro­ject is lo­cated at Lin­den, in Re­gion 10, for­mer home of Guyana’s baux­ite in­dus­try and an in­dus­trial area des­per­ate for the re­vival of its ex­trac­tive in­dus­try lead­er­ship sta­tus. Prime En­ergy is part­nered with CHEMEX and Kuai En­ergy Sys­tems, in­ter­na­tional de­vel­op­ers and sup­pli­ers of oil and gas mod­u­lar re­finer­ies.

Both th­ese pri­vate re­finer­ies have lim­ited ca­pac­ity, ca­pa­bil­ity and com­plex­ity. Thus Prime En­ergy speaks of a ca­pa­bil­ity to pro­duce gaso­line, diesel, asphalt, naph­tha, kerosene, diesel 2 and heavy Fuel Oil 6, but is plan­ning to pro­duce the first three, ini­tially.

The de­ci­sion rule gov­ern­ing th­ese pri­vate pro­pos­als was given last week. Sig­nif­i­cantly, nei­ther pro­posal has made an ex­plicit call for out-of-the-or­di­nary gov­ern­ment/state sup­port, while they both part­ner Guyana (res­i­dent and di­as­pora) cap­i­tal with for­eign pri­vate in­vestors.

State-owned re­fin­ery

Th­ese com­ments on pri­vate pro­pos­als for mod­u­lar mini-oil re­finer­ies arise in the con­text of the prob­lem­atic: should the Guyana state es­tab­lish a lo­cal re­fin­ery? Typ­i­cally, such a re­fin­ery’s scale would be in the or­der 100,000 + BPD, with the ca­pac­ity/com­plex­ity/ca­pa­bil­ity of the re­fin­ery ex­ceed­ing that of pro­posed mod­u­lar mini-oil re­finer­ies. In­deed, Exxon’s stand (re­jected by the Round­table), had en­vis­aged a lo­cal re­fin­ery with a ca­pac­ity of around that amount. Exxon’s Coun­try Man­ager had de­clared “the pro­jected pro­duc­tion of about 100,000 bar­rels per day” as the base out­put of a state-owned lo­cal re­fin­ery would be un­prof­itable. He went on to urge that an even larger re­fin­ery was nec­es­sary, in or­der to reap economies of scale at lev­els pre­vail­ing in the hemi­sphere.

It is likely that such sen­ti­ments were be­hind the Min­istry of Nat­u­ral Re­sources’ re­quest for a fea­si­bil­ity study on a gov­ern­ment es­tab­lished lo­cal oil re­fin­ery. This task was given to Pe­dro Haas, Di­rec­tor of Ad­vi­sory Ser­vices, Hartree Part­ners. I have not seen the terms of ref­er­ence for this study, but did find a Pow­erPoint pre­sen­ta­tion of the talk on the topic by Mr Haas, on May 17, 2017. As read­ers would be aware, a Pow­erPoint pre­sen­ta­tion is, at best, the skele­tal frame of a de­liv­ered talk. It would be most un­fair, there­fore, for me, or in­deed for any­one, to crit­i­cize the doc­u­ment for not de­lin­eat­ing what the reader per­son­ally wants, as against what its author has been in­structed to un­der­take. On the con­tent of this in­struc­tion, I have no in­for­ma­tion.

How­ever, it is well rec­og­nized that a state­spon­sored fea­si­bil­ity/cost ben­e­fit anal­y­sis should be aimed at an­a­lyz­ing the vi­a­bil­ity of the idea, in or­der to de­ter­mine whether to pro­ceed or not. This is a cru­cial step, in the as­sess­ment of the fea­si­bil­ity of a state-owned oil re­fin­ery. In prac­tice, there are sev­eral re­quired di­men­sions to all such as­sess­ments, in­clud­ing fi­nan­cial, com­mer­cial and eco­nomic. And for a state pro­ject the eco­nomic di­men­sion is key, as it im­plies us­ing eco­nomic val­ues along with com­mer­cial mar­ket ones, par­tic­u­larly where, as in Guyana, pre­vail­ing com­pet­i­tive mar­kets do not en­sure that do­mes­tic/in­ter­na­tional mar­ket prices/costs and their do­mes­tic eco­nomic coun­ter­parts (prices and costs) are broadly equiv­a­lent.

The study, as re­ported in the Pow­erPoint pre­sen­ta­tion, does not at­tempt to clar­ify such con­cerns. In­stead, the author is very clear, the strate­gic ques­tion he seeks to an­swer is: “Given Guyana’s de­mand for fu­els, and its oil and gas pro­duc­tion prospects, what are the eco­nom­ics of in­vest­ing in do­mes­tic re­fin­ing as­sets?”

Con­clu­sion

Be­cause of the num­ber of read­ers who have asked me to walk them through the “fea­si­bil­ity re­port,” I shall at­tempt this task, be­gin­ning next week, as I pro­ceed to for­mu­late De­ci­sion Rule 2.

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