In last week’s column I sought to recall, for the benefit of readers, several key observations and conclusions that were drawn from my earlier review of refinery economics in order to support Decision Rule 2. This rule posits that in the present circumstances, there is no overall economic justification for proceeding with a state-owned, controlled and operated oil refinery in Guyana. This followed on the results of the Pedro Haas commissioned desk-review feasibility study on behalf of the Ministry of Natural Resources (MoNR). Today’s column wraps up last week’s presentation. Specifically, it responds to several queries I have received concerning Decision Rule 2. After today’s responses, I shall engage other arguments, especially those regarding the claim that a state-owned oil refinery must be constructed in order to serve as the leading edge of government’s drive to maximize potential downstream value-added, consequent to Guyana’s significant oil and natural gas finds. When undertaking this next task, I shall similarly draw upon my earlier reviews (March 26, 2017 – May 17, 2017) of the literature on local content requirements (LCRs), in the oil and natural gas sector.
Queries I – II
At the last count, readers have made five pointed queries. And these will be addressed today in random order. First, I was asked about the likelihood of the Pedro Haas’ Study being made public. Regrettably, I do not have the answer to this. Privately, I have been desperately hoping that this would have been done by now, given the wide circulation of the Power Point presentation made in May this year.
On the Oil Now Website (May 19), it is reported that the Georgetown Chamber of Commerce and Industry, had asked the MoNR’s Minister, Raphael Trotman, to provide it with the model used by the consultant (Pedro Haas) which as they have declared, “led him to conclude that setting up a refinery in Guyana is not feasible”. The Oil Now Report went on to state: “business representatives remain adamant that setting up an oil refinery is pivotal, if the country is to realize the true benefits of being a major oil producer” . My position, however, is that if the private sector is indeed deeply convinced about the feasibility of the venture, it should take advantage of this and not leave it to the state. In other words, they should put their money, and not that of taxpayers behind their conviction. I truly believe that this is what a private sector aiming to take the mantle of economic leadership should be doing routinely!
The second query I have had, asks whether the feasibility study can be considered as a business plan for government’s construction of a state-owned refinery. To repeat, I have not seen the Haas feasibility study. Nevertheless, I wish to advise readers, they should appreciate there is a significant difference between a feasibility study and a business plan, even though they may appear similar to some of them. Haas’s feasibility study has investigated whether to proceed or not with a state-owned oil refinery. In other words it has assessed the viability of the option of a state owned, controlled and operated oil refinery. However, a business plan is only prepared after the profitability of the business venture investigated seems likely. The feasibility study precedes the business plan. In reality what the business plan does, is to actualize the means for converting the investigated venture (through a feasibility study), into an operational reality. A feasibility study is, therefore, certainly not the same as a business plan.
Queries III – IV
The third query I have received, concerns the Haas Study’s result pertaining to the maximum debt leverage ratio, obtained for the proposed 100,000 barrels/day refinery. For most business ventures, investors would combine their own equity and outside borrowings (debt) to finance their operations. The leverage ratio speaks to this mixture. Too much debt, similar to, too little debt, is central to the attractiveness or not of a business venture. This is the case, simply because in the right proportion debt does help to promote profitability.
Investopedia reports that generally oil and natural gas operations are, as we have already noted, highly capital intensive. They point out however, that despite this: “most carry relatively small amounts of debt”. Histori-cally, debt/equity ratios in gas and oil have clustered around 0.3 to 0.5, right up to the Great Recession (2007-2008). After that, it has risen; and post-2014, the ratio has clustered around 0.4 to 0.8. The Haas Study calculates a maximum debt leverage ratio of 15% for the Base case, and 18% and 13% respectively, for the two sensitivity analysis scenarios indicated earlier.
The fourth query basically asks if I had knowledge of the mix of refined products output considered by Haas. I do not. Each refinery, depending on its complexity (as we have discussed at some length previously), would have its own capability for producing refined products. The best I can offer is to refer readers to published data on the average output from a barrel of oil for Canadian Liquids pipelines, as published in Statistics Canada. Schedule 1 indicates these data:
Clearly gasoline (43 per cent) and diesel (24 per cent) dominate. However, when considering these figures readers should be advised that Canadian refineries do not only use Canadian crude. They import crude as well, even though Canada as we all know, remains a net exporter of crude. This circumstance might well also apply to a state-owned refinery, given a projected capacity of 100,000 barrels/day.
Last, and by no means least, I was queried by several readers on the role of a state-owned refinery based on local crude, as a long-term development strategy. I shall respond to this query after my review of a state-owned refinery as a product of Guyana’s LCR strategy. This review begins next week.