Contextual financial analysis of the onshore gas project (Part 4)

Guyana’s natural gas potential
According to ExxonMobil’s public announcements, Liza’s Phase 1 alone contains 30 – 50 million cubic feet of excess natural gas. More recently, it has been reported that ExxonMobil can deliver more than 50 million cubic feet of gas a day. The report noted that “about 20% of the oil found in the Stabroek block is gas related, estimated to be around 96 trillion cubic feet”.

Financial and Economic Analysis
For the purposes of this analysis the author cost estimate for the onshore gas project is US $ 1.1 billion. In this scenario, it is assumed that Exxon would fund 72%, or US $ 600 million to US $ 800 million (estimated cost to gas pipeline infrastructure), and the Government would fund the 28% remaining, or US $ 300 to US $ 400 million (estimated cost for onshore infrastructure). The analysis also assumes that the natural gas will be used to generate electricity and liquefied petroleum gas (LPG) used in households for cooking.

Key underlying financial assumptions
* Investment cost for the onshore gas project for the purposes of this analysis is estimated at US $ 1.1 billion.
* The projected energy demand up to 2019, according to GPL’s official demand forecast numbers, is just under 1 million megawatts of power at a 5% annual growth rate. Therefore, this forecast depends on organic growth at that time.
* Given the country’s development trajectory under the current regime, with massive infrastructure projects and the objective to reduce energy cost by 50% or more, the projected energy demand in scenarios two and three had taken these factors into account. As such, it is estimated that the onshore gas project will be implemented by the end of 2023. Therefore, the demand forecast is reasonably predicted to grow 10% annually after 2023 in scenario two, and 15% year 2023 in scenario three.
* In scenario one, the organic scenario, energy demand is estimated to reach 1.5 million megawatts by the end of the decade. In scenario two, at an annual growth rate of 10%, energy demand is estimated to reach almost 2 million megawatts of power by the end of the decade; and in scenario three, energy demand is estimated to reach over 2.6 million megawatts of power by the end of 2030.
* In the above scenarios, energy demand is expected to be driven by heavy industrial and commercial activities, due to lower energy costs as well as increased household numbers (50,000 – 60,000 new households). A lower cost of energy would also encourage greater consumption at the household level; for example, homes will move to have more air-conditioning units installed, and other electrical equipment and more modern amenities.
* In terms of financial forecasts, the current average cost per kwh is US $ 0.25 cents or US $ 250 for one megawatt of power (Note: Residential rate is approximately US $ 0.35 cents, Residential – US $ 0.19 – US $ 0.23 , Commercial – US $ 0.27 – US $ 0.28 cents). So, if the objective is to reduce the cost of energy by 50%, the cost per megawatt will be US $ 125 or US $ 0.13 cents per kwh. To draw some comparison, the average cost per kwh in the US is US $ 0.10 cents, while in Trinidad and Tobago, the average cost per kwh is US $ 0.05 cents.
* Using US $ 125 per megawatt for the analysis, which represents a 50% reduction in the cost of energy, assuming that the operating cost of the onshore gas plant is 40% of revenue, in scenario one, with 1 million megawatts of power and more revenue from LPG for home use, net operating profit will be US $ 87 million. The assumption to derive the revenue from LPG takes into account the current price for a 10 lbs cylinder of LPG, US $ 16 (GY $ 3,600), and is likely to be reduced by 50% or to GY $ 1500 So, with an average household of 250,000 consuming 12 cylinders 12 X 10 lbs of LPG per year (the equivalent).
* In scenario two, annual energy demand is estimated to reach over 1.3 million MWh of power – thereby yielding a net operating profit of US $ 114 million.
* In scenario three, annual energy demand is estimated to be over 2 million MWh of power – thereby resulting in a net operating profit of US $ 180 million.
* In the investment appraisal, using the net operating cash flow from the financial forecast in scenarios one and two – Net Present Value (NPV) of the initial investment of US $ 400 million is US $ 8.8 million with a discount factor of 10% – which can be restored within four years. In the second investment appraisal scenario, which uses the net operating cash flow from scenario one (the lower case) – the NPV is US $ 25.6 million, and can be recovered within 7 years.
Both of these investment appraisal scenarios revealed that the project was essentially a financially viable project. Given the findings of this analysis also, there is scope to reduce the energy cost by more than 50%, which is the ultimate objective; while the project can be profitable even if the operating costs are higher at 50%. (Note: the operating cost is estimated to be 40% in all scenarios for this analysis).
To be continued…
———————————————————————————————————————————————

About the Author:
JC. Bhagwandin is the Chief Financial Adviser / Analyst of JB Consultancy & Associates, and a lecturer at Texila American University. The views expressed are his own, and do not necessarily represent the views of this newspaper or the organizations it represents. For comments, please send to [email protected]