Private investors approach would drive up cost – 2019 IDB Report

Jul 21, 2021 News

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US$900M gas-to-shore project…

Kaieteur News – A report conducted two years ago into the feasibility of the construction of a gas-to-shore energy project in Guyana, had recommended that the cheaper financing option for such a project would be for the State owned Guyana Power and Light Inc. (GPL) as against the costlier option of private investors.
At least, this is according to a report that was commissioned for the Provision of Consultancy Services for the Gas-to-Power Feasibility Assessment in Guyana by K&M Advisors.

The report was commissioned by the Inter-American Development Bank, which said in the report’s executive summary, it is assisting the Government of Guyana to develop a strategy for the optimal use of indigenous gas sources for power production.
That report was completed in 2019.
In the final report, it was explained that in considering the financing options for the project K&M considered two methods.
It was explained that the first method is to pursue a GPL corporate financing, such as a long-term balance sheet financing through corporate loans or bonds and the second method, is to pursue a non or limited recourse financing such as “Project Finance” through private investors.
According to K&M in its report, corporate financing is frequently used for projects owned by government owned utilities around the world.
“Under this method of financing, GPL would have ownership and control of the Project and would select an EPC Contractor to design, procure, and construct the Project and potentially operate the Project during its useful life.”
It was noted that “under this approach, GPL will be fully exposed to the Project’s development, construction, and operation risks, while the Project’s capital cost will be reduced due to elimination of a material portion of the ‘Owner’s soft and miscellaneous costs’ shown in the previous section.”
The report said too, that among the advantages is that the corporate debt holders would have recourse to the assets of GPL as the corporate borrower.
In contrast however, it was noted that to secure Project Financing through private investors, the Project would require an experienced and proven independent power producer (IPP) as sponsor establishing a special purpose vehicle (SPV) to be the borrower.
According to K&M, “as compared to a corporate loan transaction, a Project Financing will typically require, among other things, a more detailed due diligence review, a more comprehensive risk mitigation plan, a contract structure and contract provisions which optimally allocate risk among the project participants, and a robust security package to provide quick and easy access to a project’s assets to protect the lenders interests.”
It was noted that “with this financing option GPL would need to select a qualified IPP to be responsible for the development, financing, design, procurement, construction and operation of the Project during a pre-determined period (usually 20 to 25 years) and purchase capacity and energy generated by the Project under a long term Power Purchase Agreement (PPA).”
It was iterated that “under this approach, most of the Project development and the entire project construction and operation risk will be assumed by the IPP, but the Project’s capital cost will likely be higher than for a Corporate Financing.”
This publication recently reported that despite no detailed financial or other studies being completed, the Government of Guyana says it has finalised the Wales Development Zone (WDZ) as the termination point for the pipeline from the Liza Area in the Stabroek Block, offshore Guyana and as such, is seeking private investors or a consortium to be part of the project.
This is according to an Expression of Interest (EOI) advertised by the Ministry of Natural Resources, which said in the invitation that it is calling for Joint participation in the proposed gas-to-shore project with the Government and Esso Exploration and Production Guyana Limited (EEPGL)—ExxonMobil Guyana.
According to the advertised EOI, the Government and EEPGL are looking for partners “in designing or utilising the outputs from an NGL (Natural Gas Liquids) / LPG (Liquefied Petroleum Gas) facility and related facilities.”
This includes, according to the Ministry, design, construction, and financing of a power plant fuelled by Natural gas, where the power will be delivered into the Guyana Power and Light’s (GPL) distribution grid. This is in addition to industries that can utilise Natural gas for, “Natural gas driven developments and growth.”
According to the invitation, interested parties can bid to take part in any of the elements individually or collectively. It was noted however, any submission for the first and third aspects of the project, namely design and utilisation of gas or the industrial park, “must demonstrate the nexus between the projects as detailed.”
According to the administration, WDZ will be the location for the termination of the gas-pipeline measuring over 225 km from the Liza Area.
Additionally, it will involve the establishment of a gas-processing plant (GPP) and a Natural gas liquids facility (NGL) capable of producing at least 4,000 bbl./day, including the fractionation of liquefied petroleum gas (LPG).
The private partners will also be expected to take part in the operations of the establishment of a power plant to generate 150 MW, with an additional 150 MW as a second phase in addition to the establishment of an industrial park comprising industries that can utilise gas, steam and/or electricity.

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