Evaluating the gas to shore proposal in the 2021 National Budget - Part 6

Introduction

As indicated last week, today’s column starts with referencing the five studies on Guyana’s energy mix, which were undertaken on behalf of the previous government. Reports on these studies were submitted in the main during the period, 2017-2019. The fifth lifted study was formally completed in April of this year. The Authorities have declared they intend to use these studies going forward. Indeed they express some astonishment that the previous government had not implemented their recommendations. In the interest of full disclosure, I was appointed by the IADB and the previous government separately to Technical Committees appointed to monitor, review and evaluate the consultancy reporting requirements of three of these studies. However, everything I report in my columns are available in public records.

The five studies are 1) An Update of the 2014 IADB Study on Guyana’s Power System Generation and Transmission, in light of regional initiatives, the commercial discovery of oil and gas, and the sustainable development thrust, and the preference for renewable energy. This consultancy was executed by A.S Brugman through the IADB, 2017. 2) A desk study consultancy also executed in 2017 by Energy Narrative on the Options, costs, economics, impacts, and key considerations of transporting and utilizing offshore natural gas for electricity generation. 3) A consultancy executed by Energy Narrative to update the desk study mentioned above in order to determine the overall feasibility of the gas to shore project. 4) In 2019 K & M Advisors provided a Gas to Power feasibility study for the IADB. And finally, a study originating from neither the Government of Guyana, GoG, nor the IADB, entitled, Japan Cooperation Guyana Oil and Gas Master Plan Report, Japan Cooperation Center Petroleum/ Chiyoda Corporation, Final Report 2021

The approach

Going forward, I propose to treat with this proposal under three broad headings; namely, the location of the natural gas plant; the methodology required in moving from proposal to certified project(s); and today’s challenges facing natural gas as a source of primary energy supply.

Power Plant Location

If one considers the location of the gas to shore proposal as advanced in the 2021 National Budget carefully, it is observed to have two distinct facets. One of these, responds to the obvious query: should the natural gas plant be located offshore Guyana, at the site of gas extraction, and then power transmitted onshore to the site of the demand for power? Or, should the plant be located onshore at the demand site and then the natural gas is transported there, via risers and pipelines to the natural gas plant.

There are claims that the first choice offers flexibility and scale up options. Prefeasibility studies indicate there is no significant cost/price of delivery differences. These require final cost benefit evaluation before arriving at a final decision. However, pending this I strongly support the choice to locate the plant onshore for the developmental reasons discussed in the following section.

The second dimension to the locational concern is the choice of Wales as the specific site for the natural gas plant. This is more controversial and I shall address it after the next section.

The enclave economy challenge

Three years ago, I had identified the enclave economy threat as one of ten immense development challenges the authorities will have to navigate going forward. I believe this threat drives the case for location of the project onshore. Let me therefore recap the issues.

Guyana’s economic dependence on the vicissitudes of export income derived from foreign owned extractive industries sales in world markets has shaped its economic growth & development; foreign exchange earnings & tax revenues; employment & livelihoods; as well as, its environmental & biodiversity sustainability. Over time, like other small, poor, open extractive industries-dependent economies enclave economy characteristics features have dominated. Thus, the dominant foreign companies import a humungous share of the goods, services, technology, equipment and critical staff they need. Structurally, this limits spillovers to the domestic non-extractive sectors, thereby restricting the potential for domestic growth in agriculture, manufacturing and services.

Guyana’s oil and gas sector complicates these relations; mainly because of its capital intensity, acute dependence on cutting edge technology, and dependence on highly trained operatives. Strong measures are constantly required to stimulate spillovers and linkages to other sectors. As I indicated earlier, spontaneous evolution cannot overcome the threats that limit spillovers and linkages to domestic activities. Bearing this in mind there is clearly a strategic development preference for locating such a massive investment project onshore. Offshore it could accentuate the enclave characteristics of Guyana’s emerging petroleum sector.

Further, in an economy as small as Guyana’s, the relation identified here usually results in an economic system where what is produced is not significantly consumed domestically (either directly or indirectly). The country imports its needs for both direct and indirect consumption, along with the investment goods and services it requires. Here the enclave economy is distinguished by the peculiar fact of its not being integrated into the remainder of the domestic economy. Nevertheless, it remains closely integrated into the rest of the world. This outcome “crowds out” most, if not all other domestic sectors, because the enclave commands the best locally available skills, as well as the best educated, and trained population, because of the higher wages it can afford to pay.

The Wales location

In recommending location of the power plant at Wales the authorities have advanced three rationales and a list of 22 evaluation criteria they applied. Due to space limitations these evaluation criteria will be revealed in the next column. However, the three rationales advanced are 1) Exxon, who is responsible for upfront financing of the project, had performed a thorough evaluation of 20 potential sites 2) Wales was found to be the most suitable, and further 3) Wales was selected due to low risk of flooding, low cost of suitable land, relatively low population density, greater constructability and overall better economics

Conclusion

Next week I’ll begin by indicating the evaluation criteria used and then go on to discuss further the gas to shore proposal.