Funding / Option Model
In the absence of the true investment cost of the project, the analysis assumes that the investment cost to bring gas to shore is US $ 1.1 billion. It is also assumed that ExxonMobil and its partners would fund the gas pipeline infrastructure, which is about 72% of the total cost, and the remaining 28% would be funded by the Government. However, this does not mean that the Government would have to fund only 28% or 30% of the cost. Consideration must be given to the fact that, given Guyana’s development trajectory, and to some extent political stability, and its geopolitical importance, the funding model can take many forms aimed at minimizing funding risks by pursuing the optimal funding model. Because of these factors, it is now easier to mobilize resources and raise funds from a variety of sources and instruments than it was 15 years ago, when Guyana was not the center of global interest, as it is now. Because of these developments investor confidence, both local and foreign, has been at its highest for the past two decades.
For example, the funding model for the project may be one where there is a Public Private Partnership (PPP) model where a consortium of investors can be formed and / or a publicly traded company established to attract investors from anywhere in the region , locally, the diaspora, and even global investors. However, given the nature and technical nature of the project, a project funding model can be explored whereby a Special Purpose Vehicle (SPV) can be set up to raise funding for the project. In this arrangement, the Government may retain some equity as well as financing through debt and other equity instruments from the Private Sector, foreign investors, and the local, regional or international capital markets. If the Government chooses to hold 15% equity, for example, and the remaining 35% of the financing cost is raised through other instruments by private investors and the local capital market, then only US $ The Government share would be 60 million or GY $ 13. billion, which would have almost less than 1% impact on the national debt.
So, with the pictures above, there are a variety of funding models that can be explored to fund the project, which can even result in the Government having to fund only about 15%. And this would work out to nearly US $ 60 million, theoretically, if such models as described here are explored, they effectively reduce the funding risks. The amount of US $ 60 million represents 20% of the national debt service average figure, which is around US $ 300 million. This, in turn, would translate into an almost zero impact on public debt at its current level. Therefore, the view of some proposers that this project would result in a debt trap does not have any merit.
It should be noted that this is just the financing aspect of the project, to give the affordability some sense of reason. Clearly, if the onshore facility were to cost US $ 400 million or even US $ 500 million, the country has reasonable affordability capacity.
Oil revenue projections – Liza 1
Step 1 Liza, pictured below, for example, using an average price of a barrel of US $ 45 at an annual production capacity of 43.8 million barrels of raw, the cost of investing US $ 4.3 billion would be recovered within 3 years using the repayment method. . With the Net Present Value (NPV) investment appraisal method and a 10% discount rate, the investment could be recovered within 4 years. As such, from the Liza 1 alone, Guyana can earn over US $ 2 billion (GY $ 430 billion / GY $ 86 billion annually) in the first five years, and up to US $ 6 billion (GY $ 1.3 trillion / GY $ 129 billion annually) within ten years – taking the post-recovery period into the equation. That is, Guyana’s projected gains from the development of Liza 1 alone, over the first decade, equates to 120% of current GDP; 3.5 times the current level of total public debt, and 5 times Government revenue using 2019 figures. The highest cost is usually the development cost, so when the development cost is recovered, the operational cost is small right, because the infrastructure to extract the crude is already in place.
To confirm this view with reasonable certainty, an examination of the Exxon 2018 Annual Report confirmed that total operating cost is approximately 27% of total revenue. As such, in the post-recovery period, the profit share would be greater. Assuming, for example, that operating cost would be 30% of total revenue, then effectively 70% of revenue will be for profit share, of which 50% will be Guyana share.
As a result, Guyana’s profit share can be as much as 35% in the post-recovery period + 2% royalty, resulting in a total of 37%; up from 14.5% during the recovery period in the first three to four years for the Liza Phase 1 development only. Then there’s Liza Phase 2 and many other FPSOs and areas of development that would become operational over the decade.
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 and the organizations it represents. For comments, please send to [email protected]
