In one of my recent weekly podcasts titled “JB & Salim”, a relatively new program started by this author which is a weekly conversation on Guyana’s economic development and macrofinance issues, a presentation was made on a cost benefit analysis of the proposed gas-to-shore project. In this presentation, I attempted to quantify what might be the net benefit or cost of such a project both on a macro and micro level.
The reason for doing this, is because all the proponents who have vehemently criticized and labeled the project a “white elephant” in the making thus far, have not considered, or care to consider whether the project will yield any positive impact on the overall economy and translate, ultimately to tangible benefits for every Guyanese.
In the presentation, I was careful to clarify that the cost used in the analysis does not consider several other cost elements such as the cost for the onshore infrastructure and the cost for piping the gas to shore. Of note, the cost for piping the gas to shore which will be a recurring cost after the project is operationalized will be part of the operating cost and not part of the development cost.
My intention in so doing was to quantify to some degree what the net benefits of this project could bring about for every Guyanese, for the business sector and the country at large. As such, a cost benefit analysis is NOT to be confused with that of a cash flow projection of the project.
Importantly, in order for the project to be considered feasible, it should be both financially and economically viable.
There is a clear distinction between financial viability and economic viability, wherein, financial viability concerns the profitability of a project, the return on investment and that there is a sustained flow of business or cash flow that is profitable in the long term. Conversely, economic viability concerns the economic impact of a particular investment or economic activity, upon the entire economy. For example, in the case of the gas-to-shore project, the following economic benefits can be obtained, and this is not an exhaustive list of benefits:
* Savings in fuel import bill,
* Contribution to tax,
* Payroll/income at the household level (microeconomic impact)
* Savings in household expense on electricity expense, thus more disposable income for other purposes
* Savings in operating and production cost for firms, thus freeing up more cash flow / liquidity for investment in other areas;
* Savings in energy cost by at least 50 per cent, will drive and become more attractive for investments across all sectors especially in manufacturing, by virtue of it aiding greater national competitiveness, etc.
With that said, a certain media house publisher completely misrepresented my cost benefit analysis on the gas-to-shore project which was carried in the Guyana Chronicle, inter alia, misrepresenting the conclusion of the analysis as the profitability of the project. In the referenced analysis, the net benefit based on the assumptions used in the analysis worked out to US$3 billion or G$653 billion over a five years’ period. For absolute clarity, this figure is not the profit that will be generated from the gas to shore plant (s). So, how did I arrive at this figure? Here is a simple explanation broken down for the layman’s comprehension:
While it is true that the estimated US$1.3 billion cost does not include the cost for the onshore infrastructure, even if the full cost of the project by the time this project is finalized works out to US$2 billion, the project will still yield a positive net benefit over the life of the project. The life of the project is an estimated 25 years, the development cost of let’s say US$2 billion for the full project will be a onetime cost and not a recurring cost, the only cost that will be recurring is the operating cost to keep the gas plant and pipeline up and running (which would be lower than the development cost).
Now, let’s look at a simplistic calculation based on some reasonable, realistic and pragmatic assumptions of the cost benefit analysis considering the economic benefits of the project alone exclusive of the profit/loss to be generated.
I have previously identified the following macro and micro benefits to be derived from the implementation of the gas-to-shore project – that is, a minimum target to reduce energy cost by 50 per cent:
1) Savings on fuel import bill which is currently US$630 million, conservatively, the country can save 25 per cent or more of this sum annually: 25 per cent X 630m = 157m (per year) X 25 years = US$3,935 million;
2) Savings in household electricity expense, assuming an average cost of $20K per household, 50 per cent of this would work out to $10k X 300K households = $3 billion in annual savings for every household X 25 years = G$75 billion or US$349 million.
In my original cost benefit analysis there were seven areas that were quantified which are not included in the above demonstration: these include,
1) the savings that could be derived in public debt if Guyana had to borrow the required capital for the pipeline infrastructure and a quantification of the interest on that loan amounting to US$115m + capital of US$1.3 billion,
2) savings in production and operating cost for the manufacturing and wider business sector, amounting to US$1.4 billion over five years,
3) the level of increased domestic and foreign investment that a more competitive environment owing to cheaper energy, will promote, a reasonable assumption of US$2.3 billion over five years, which is in line with recent historic trends.
Summary Computation/Net Benefits over the Life of the Project
Net Benefit (Present Value) = US$349m + US$3,935m = US$4.284b + US$3.816b (Sum of Nos. 1-3 above) = US$8.1b/G$1.742 Trillion – (US$2 billion development Cost): Net Benefit = US$6.1b/G$1.3 trillion over 25 years (adjusted for projected inflation @ 2% X 25 years = 50 per cent) = US$3.0b/G$656b.
The net benefit based on these relatively conservative assumptions and calculation over the life of the project at 25 years, has a present value (PV) of US$3 billion/G$656 billion, representing 1.5 times the estimated development cost and 37.5 per cent of (2022 GDP).
Examples of Misleading and Incorrect Financial Assessment on oil and gas subject matters by a certain media house:
1. On May 15, 2022, it was reported in a certain section of the media that “Guyana set to produce US$61 Trillion in oil from four projects”. In the said article, it was reported that the four projects will produce some 2.6 billion barrels of oil over 20 years. Using a price of US$112 per barrel X 2.6 barrels = US$291.2 billion and NOT US$61 Trillion as was incorrectly reported.
2. Another example of misleading / incorrect financial assessment by the same media house in an article published August 1, 2021, it was reported that Norway’s 44” gas pipeline cost US$3.8 million/mile while Guyana’s 12” is set to cost US$4.7 million/mile. An important fact that was completely ignored, perhaps deliberately from this particular “so called comparative analysis” is that Norway’s gas pipe was built almost 20 years ago. And therefore, it is imprudent to compare the cost per mile to build a gas pipe 20 years ago to present day because the time value factor of money would have to be discounted–that is, inflation.
i) Hence, adjusting this analysis for inflation over 20 years, cumulative inflation in the U.S amounted to 56.25 per cent. This means, US$1 dollar 20 years ago depreciated by 56 per cent during this period, or in other words, is worthless today by 56 per cent (loss of value or purchasing power). With this in mind, the cost per/mile for Norway’s gas pipe that was built 20 years ago would work out to US$6.03 million/mile in today’s money.
ii) Comparing this, now that it is adjusted for inflation to derive what the true cost would be in today’s money or the present value should Norway have to build that gas pipe in 2022-23, it turned out to be US$1.33 million more expensive than the cost per mile for Guyana’s gas pipe.
Taken together, I would be happy to engage any sane, level headed person in a debate or discussion on these matters.
This is quite understandable, however, because the business and financial model of a newspaper/media enterprise are not at all sophisticated in any way. It’s a very straight forward, and simple business model, that carries very low risks wherein the revenue streams are very sustainable and straightforward for this type of enterprise on the back of a low operating cost.
Also, unlike the oil and gas industry which is extremely dynamic and complex, the business model of a media house entity is not exposed to any kind of external volatilities and therefore, easier to manage, and very profitable.
About the Author
Corporate Finance Advisory & SphereX Analytics
The author is a Financial & Economic Analyst who has been providing insights and analyses on Guyana’s economic development, macrofinance issues and public policy for the past 5+ years. The views, thoughts and opinions expressed in this article belong solely to the author.