Dear Editor, The Institute for Energy Economics and Financial Analysis (IEEFA) has been closely following Guyana’s offshore oil and gas development. Our latest analysis is publicly available, and can be found here and elsewhere. We found that oil revenues will not cover Guyana’s annual budget deficits, new spending proposals, or contributions to the Sovereign Wealth Trust Fund. Our analysis concludes that failing markets and weak revenues in the first five years of the contract are unlikely to provide anything beyond a small benefit to Guyana. One commentator, Joel Bhagwandin, has rightly pointed out that Guyana’s debt service will not initially be covered by oil revenues. IEEFA concludes that, beyond five years, Guyana is likely to continue to experience a weak revenue stream. The revenue outlook is low because markets are failing as reduced demand leads to low prices and earnings. Guyana’s revenues will remain low because the contract with the oil companies requires operating and development costs to be paid back to its foreign partners before the country begins to collect the solid revenue promised. After five years, ExxonMobil and its partners will be owed US $ 20B, which would be taken out of future oil revenues. Chatham House Fellow Valerie Marcel seems to agree with this negative outlook for the oil and gas industry. Essentially, the contract is ‘uploaded’ in favor of ExxonMobil. It poses a significant financial risk to Guyana, as there is no guarantee that oil revenues will ever be robust. It is not a good idea to gamble Guyana’s financial future on a declining global market. IEEFA has also concluded that having ExxonMobil as a partner can be more of a concern than a profit guarantor. The company has lost hundreds of billions in shareholder value over the past decade, reduced its revenues, and is no longer part of the Dow Jones Industrial Average stock index. The oil and gas industry has been in last place in the stock market for four of the last five years. The industry is in decline, and ExxonMobil is tripping along with it. Joel Bhagwandin points out that there is not enough information in the public domain about the possibility of tapping natural gas reserves to support a new electricity system for Guyana. I agree. However, there is enough information on Guyana’s natural gas reserves, energy needs, financial situation, and past experience to worry about plans to rely on natural gas. The proposed gas-on-shore project is a recipe for financial bankruptcy because piling on additional natural gas obligations piled up on oil contract obligations – not to mention Guyana’s current debt – is too much, given the outlook weak for the oil and gas market. If Guyana goes ahead with the natural gas project, it would effectively use its scarce oil revenues not to finance existing debt, close deficits, pay for new needs, or build a sovereign wealth fund, but to cover obligations on natural gas infrastructure new. investments. In other words, borrowing Guyana would make it poorer, not richer. The complete public needs to be offered natural gas; integrated energy plan showing how all the pieces fit together; a business plan for ensuring that electricity rates remain economically competitive and affordable for residential needs; and a fiscal road map setting out how much Guyana must invest to reap any benefits, how natural gas reserves will be extracted, and how the public will be financially and environmentally protected. Most of this information is not available for the current oil contract. As the renewable energy sector continues to make rapid technological and financial progress, a thorough comparison between renewable energy and natural gas investment should be explored before making a decision that relies so much on natural gas. We look forward to making this information available to analysts and ordinary tax payers alike.
Correctly, Tom Sanzillo Director of IEEFA financial analysis