Cheap gas power can be real breakthrough but confirming studies imperative – Floyd Haynes

Floyd Haynes
Floyd Haynes

If Guyana can get the approximate US seven cents per KWH projected for electricity from the gas-to-shore project, it should grasp the opportunity as this could be the catalyst for broad economic development but the suppositions must be underpinned by robust studies, financial analyst Floyd Haynes says.

As the debate on the estimated $US500M -US$800M planned project continues, Haynes argues that natural gas at half the cost of Guyana’s current Heavy Fuel Oil rate cannot only reduce environmental pollution significantly but the benefits derived would serve as spin-offs  and will also provide a boost for other developmental areas. 

“The cost using HFO (Heavy Fuel Oil) is [US] 14 cents, using gas it’s [US] 7 cents. This cost includes Operations and Maintenance as well as Capital costs. When you control for these two costs, meaning you take those two numbers out, you find the current cost would be somewhere around [US]  10.7 cents for Heavy Fuel Oil and [3.4 cents] using  natural gas,” Haynes told Stabroek News in an interview.

“While the ultimate goal is to move towards renewables, we are not there yet and we have to work with what we have. In terms of what we have, this is much cleaner than what we currently have…I think from a pure economic analysis, it is a viable project, if we can pull it off at those numbers,”he added.

The United States-based Guyanese business professor explained that the costs quoted are constant from his assessment of what Guyana currently pays for HFO and global natural gas prices. “I have compared them to other numbers based on industry standards. Just looking at pure numbers and doing an analysis, it seems accurate for the project,” he said.

The founder and President of Haynes Incorporated, a Washington-based accounting and management consulting firm that provides high level financial and accounting support to clients such as the United States Department of State and the United States Agency for International Development, Haynes, said that he wants to make clear that his posture is from a mere financial perspective and that he fully supports all environmental and social studies on the project.

A detailed financial study, he believes, would also have to be done and he supports that they be made public and that the public is kept abreast throughout the process.

ExxonMobil has told this newspaper that it was working to amend the development plan for the Liza-1 well area and in that amended development plan the company will move to have further discussions on commercial matters surrounding the associated gas from oil extraction, which it said will ultimately determine the sales arrangements and infrastructural responsibilities of both sides.

Observers have said that the public should pay keen attention to how the PPP/C government will handle those amendments and how they will negotiate for the project.

Haynes said that once the cost is reduced the country would see additional exports of its goods.

“If you are going to produce manufactured goods, you would look at your cost input; labour costs, material supply… etcetera.

What you will find is that of all those costs, energy is probably the most expensive part of it. If you reduce your energy cost, you are essentially reducing your cost input, which effectively reduces the final plan for that.

If you can reduce the price for your product, it means you can sell at a more competitive price and can be much more profitable so that energy drives the cost of production which in turn drives exports,” he asserted.

“There is a direct link between the cost of energy and the economic development and from that standpoint I welcome any activity that will significantly reduce the cost of energy. There is no dispute in the reduction of cost. That is the economic argument. From a pure economic standpoint anytime you can reduce the cost of energy, you will ultimately be reducing the cost of production which makes your local goods and services more competitive,” he added.

EIA

Underscoring that an Environmental Impact Assessment (EIA) and other critical studies will be undertaken before the project get greenlighted, Vice President Bharrat Jagdeo has said that financial estimates for the venture were pegged at between US$500 million and US$800 million “depending on the size of the pipeline, the geotechnical surveys… all of that. Then when we go out to tender – that is the time we will know the actual cost of it.”

He was firmer on the expected benefits in terms of the cost of power, saying that it could range from some US6 cents per kilowatt hour (kWh) to US3 cents.

“That means if we can, when we build the power plant, get the capital payments down to about another 3 cents or so,” he said, while noting that if it is government owned, the cost would be even less, if the capital expenses aren’t amortized.

“We are talking about US5 or 6 cents per kWh. Now we are selling at US30cents per kWh… You are looking at a significant reduction in energy cost. Huge! We are working through the numbers and the project is still in the preparatory stage. We are just doing studies so these are just estimates now but this is the magnitude of the studies,” he added.

Given the current estimates, Jagdeo said that government feels that the investment is “very, very feasible” but would wait for the analysis and studies. “The benefits are enormous. It is a no-brainer to even suggest [otherwise],” he emphasized.

Both Jagdeo and President Irfaan Ali have said that the ultimate goal of the PPP/C is to have renewables as the main form of energy for this country but that since natural gas is readily available and could result in a cost of at least half of what this country currently pays, it would be prudent to pursue that while simultaneously working on plans for the adoption of renewables in the long term.

While natural gas will significantly reduce emissions compared to current heavy fuels used here, Chatham House fellow Dr Valérie Marcel has said that Guyana needs to carefully study its future energy mix plan, taking into focus both the economic and environmental impacts.

The project head of the New Petroleum Group, and whose experience includes advising governments on petroleum sector policy and governance, reasons that studies may show that the mix could vary from region to region, given its vast geographical makeup.

“In considering the option of bringing gas to shore, Guyana will need to study the economics carefully (will the gas be affordable to Guyanese utilities?), as well as any associated environmental impacts,” the Energy, Environment and Resources Programme fellow told the Sunday Stabroek recently. “And in doing so, it should compare those costs and benefits with those associated with renewables. It is really important to consider all the tradeoffs before deciding the right energy mix. The needs may also vary by region. While Georgetown is on a grid, the hinterland would benefit from renewables, which don’t require a grid,” she explained.

Dr Marcel, who visited Guyana in March 2018 for an oil and gas forum and has followed developments here, also posits that natural gas “could be valuable to Guyana’s energy mix to bring it to shore to generate electricity, as a complement to the buildup of renewable energy in the country”.

“The gas-fired power would reduce emissions associated with the current practice of burning fuel,” she stated.

Multi-pronged

For Haynes, the cost for the project itself is multi-pronged and all facets are important and should be assessed before going ahead.

“The cost is one aspect you have to look at the savings and returns. Jobs, increased manufacturing activities several areas to quantify then look at the returns. Cost is only an issue if the returns don’t cover that and you have to do a present-value analysis to determine that.

Asked if he believed in Guyana’s case the returns will far surpass the cost, he replied, “I think so. When you look at it in totality the returns will be the cost savings in energy, you also have to look at the multiplier effect of the investment, the jobs to be created, the economic growth that would come out of that which is crucial. When you add all the benefit would tend to outweigh” the negatives, he said.

He said that key to the project would be the “holding up” of cost for the natural gas compared to HFOs and the public should be vigilant to see if there will be variations at any time. 

“If those numbers projected to slash the cost of energy by half hold up. The project is still underway, additional studies are still being done and the public can hold the government to those numbers and if it is true it can hold up. At this point it is just projection. 

“We should demand the transparency on what is being projected. What the public should be vigilant about is holding the government to those numbers, because the cost savings is a crucial part of the viability of the project.

The numbers of what it is currently looks like, shows that it would be cutting the cost of energy significantly.

“I would constantly be asking for updates. I would be demanding transparency throughout the project. [I would ask] are those numbers still the same? You cannot wait until the project is done; you have to assess on a continuous basis,” he added.

Positing that sometimes people want an immediate transformation and “tend to look for a magic bullet”, Haynes said that he does not believe this country should be forced to choose either natural gas or renewables alone at this time, since government can pursue both energy forms. 

“The goal should be a move towards renewables but we have to work with what we have. I would argue natural gas is what we have. I don’t think you have to choose one over the other. You can work exploiting whatever economic benefit [from natural gas] until such time we can move to renewables, if the numbers stand up,” he said.