All contracts must have room for renegotiation to avoid debt traps

Feb 09, 2023 News

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Gas-to-Energy Projects…

– If deals not made public, ask Govt. why? – Int’l Group urges

Kaieteur News – For countries blessed with significant natural gas reserves, capturing those resources for use via gas-to-energy projects are often times, an obvious option for consideration. But the manner in which contracts governing these projects are framed can have dire economic consequences.

Drawing on the experiences of other nations, the Natural Resource Governance Institute (NRGI) has produced a framework to help nations and their citizens ask critical questions that would lead to the right decisions for these multi-billion dollar ventures.

NRGI has been regarded for decades as an independent, non-profit organization that supports informed, inclusive decision-making about natural resources and the energy transition. It has provided advice to Guyana on several occasions on how it ought to prudently develop its oil and gas resources in the Stabroek Block.

NRGI’s framework, published in September 2022, cautions that betting big on gas comes with serious risks and tradeoffs, especially as the world moves away from fossil fuels. It said, “Hasty, ill-informed decisions today could carry hidden costs for a country’s development prospects, energy costs and security, and climate, especially if it ends up locked into a dirty, outdated and high-priced domestic energy system.”

NRGI noted that often times, fuel supply and transport deals for gas projects are subject to very little public scrutiny; terms frequently are not publicly available.

It said, “Governments may not have the bargaining power or favorable investment environments needed to avoid all contract terms that risk lock-in. But interested stakeholders should ask whether the public utilities, ministries or other bodies handling the negotiations are doing all they can to minimize the risks.” In light of this, it said citizens must ask if contracts for gas projects are armed with a renegotiation clause for the transportation of gas. NRGI reasoned that this ensures the government has enough leverage to adjust deals when necessary and avoid being trapped into taking or paying for gas, no matter the circumstance. This word of advice is premised on the case of Ghana. The African state was gripped by crippling debt after it was forced to take gas and pay for it even though it didn’t need it.

Given these risks, NRGI said nations with gas ambitions must structure arrangements that balance risks fairly. In terms of contract language, it said the government can for example; negotiate to pay lower prices for the power or gas it doesn’t take.

It also said contract terms should be made public. If they aren’t, NRGI said citizens must ask why not.

Below is list of other key questions NRGI said citizens can ask to better understand their country’s level of preparedness for the risks that lie ahead.

1. Are the government’s supply and demand projections for gas and electricity credible?
2. Do the plans use modeling or scenario-based analysis to show how the role of gas in the electricity mix will change over time?
3. Do the plans set dates for decommissioning or retiring gas plants?
4. Who supports and opposes the plans, and why?
5. When and why were the plans announced? For instance, were they developed after a process of study and consultation, or rolled out quickly around a major political event like a scandal, economic crisis, or election?
6. Do the plans clearly articulate why gas is the best fuel for electricity generation—e.g., due to cost, ability to meet rising demand? Or do they start with the premise that the country has reserves and they should be harnessed for power generation?
7. Is the technology more likely to help or hinder a shift to renewables?
8. Are there plans to update or repair the grid? How much will these cost, who will pay, and what is the status?
9. Does the supply chain include state-owned companies with deep technical, commercial or political problems?
10. Has anyone modeled the project’s emissions? What were the results?
11. Do the emissions figures for the project include methane leaks across its supply chain? How high would the leaks be?
12. Could the project end up flaring gas? NOTE: If the government gets the project’s supply and demand estimates wrong, or the project starts producing gas before customers are ready to use it, its operators might have to flare gas while they are waiting.

GUYANA’S GAS AMBITION

Guyanese authorities have said the nation’s first gas-to-energy project is scheduled to come on stream by 2024. It will transport natural gas from the Liza field in the Stabroek Block to the Wales Development Zone, where two main onshore plants are to be built.

US-based partnership CH4/Lindsayca won the contract to construct the 300 megawatts (MW) combined cycle power plant and natural gas liquids (NGL) facility. It is doing so at a cost of US$898 million.

As for the construction of the pipeline for which ExxonMobil is responsible, this is expected to cost upward of US$1.3 billion. The current estimate for the project is more than US$2B.

Engineers India Limited will supervise the Engineering, Procurement and Construction (EPC) of the onshore plant facility. It is expected to hire another form to operate the project.

Citizens in various quarters continue to question the government about the economic and environmental soundness of the project. Unsatisfied with the administration’s response, the political opposition recently approached parliament to have all documents laid for scrutiny.

The Opposition said it remains unconvinced that the project is being done in the nation’s interests when key documents are yet to be made public.

Government has maintained that it is leaning on key experts from around the world to execute the project. It has, up to press time, not responded to the Opposition’s request for contract disclosure nor has it issued a formal response.

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• contracts, Debt, Natural Resource Governance Institute (NRGI), renegotiation, traps

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