An absurd mischaracterization

Sep 22, 2024 Features / Columnists, Peeping Tom

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Kaieteur News – The notion that the construction of the gas-to-shore pipeline constitutes an encumbrance on the Natural Resources Fund (NRF) or a form of borrowing against future revenues is, at best, erroneous. To equate the legitimate costs associated with a nationally strategic infrastructure project—costs clearly stipulated as recoverable under the Production Sharing Agreement (PSA)—with the reckless gambling of future resources is a misunderstanding.

Let’s dissect this distortion in the spirit of clarity, for the truth rarely needs the armor of rhetorical deflection. First, let us untangle the basic principle of borrowing against future earnings, a concept as old as commerce itself.

When an individual takes a loan—whether for a house, a car, or any other investment—the lending institution demands evidence of the borrower’s capacity to repay. This capacity is derived from future earnings, plain and simple. Such arrangements form the backbone of modern financial systems. They allow for growth, ownership, and economic development. It is not the borrowing itself that poses risk, but rather the borrower’s failure to manage their debt within their means. No one calls this an encumbrance on future salaries, nor does anyone confuse this with pledging future salaries as collateral in a manner that limits the individual’s future financial options.

This basic economic principle applies not just to individuals but to nation-states. Governments frequently take loans or advance capital on projects based on the projection of future revenues, and they do so because these projects are expected to yield dividends that far exceed the initial cost. When managed properly, such investments fuel economic growth, enhance public welfare, and improve a nation’s standing in global trade. This is not some radical theory—it is how roads are built and how hospitals are funded.

The contention that the gas-to-shore pipeline encumbers the Natural Resources Fund, is grounded in an misunderstanding of the mechanisms at play. The NRF exists as a financial reservoir, accruing funds from royalties and profit-sharing derived from Guyana’s oil wealth. It is, in essence, a safeguard against future volatility in oil revenues, an insurance policy for the country’s fiscal health. It is also a source for future investment by the government, investments which has to be approved by the National Assembly.

There is a distinct legal and operational separation between this Fund and the cost recoverable provisions of the PSA. The PSA makes it abundantly clear that development costs—such as those incurred for the gas-to-shore project—are to be recovered by the contractor from the proceeds of oil production.

Critics of the project would have you believe that every dollar spent on this infrastructure somehow drags down the future earnings of the NRF, as if the cost is siphoned directly from the Fund’s coffers. This is simply not the case. The monies in the NRF are untouched by the project’s development costs. In fact, nothing enters the NRF until after the cost recovery mechanisms of the PSA have played out. Only after contractors have been reimbursed for approved expenditures do royalties and profits flow into the NRF.

It is essential to note that the PSA, in black and white, includes provisions for recoverable costs associated with development plans outside the production area. This includes third-party infrastructure and onshore processing facilities, such as the gas-to-shore pipeline. The relevant section of the agreement explicitly states: “All costs incurred by the Contractor [oil companies] outside of the Production Area which are associated with an approved Development Plan for an export gas project, including costs associated with third-party infrastructure or construction of onshore processing facilities shall be considered as Recoverable Contract Costs.”

This isn’t murky legalese. It’s clear, unambiguous language. The cost of the pipeline falls squarely within the purview of recoverable expenses and is a legitimate use of oil revenues under the PSA.

But what of the suggestion that such costs amount to borrowing from the Fund, or worse, borrowing against future revenues from the Fund? Again, this is an absurd mischaracterization. The NRF is not being pledged as collateral for any loan. It remains entirely separate from the PSA’s cost recovery mechanisms. This is no different from any other capital-intensive project in the energy sector.

Governments and contractors make initial investments, knowing full well that these expenditures will be recouped from future profits. This is standard practice, not some arcane financial alchemy. To assert that this equates to borrowing against the NRF is like claiming that when you take out a mortgage, you’ve encumbered your future salary in perpetuity. Such logic betrays a fundamental misunderstanding of how financial planning, and indeed nation-building, works. In this context, the idea that the pipeline “encumbers” the Natural Resources Fund or constitutes borrowing against future revenues from the Fund is, in my humble estimation, erroneous.

There may be legitimate grounds to oppose the gas-to-shore project, including concerns over its potentially prohibitive costs, especially given the controversy over a feasibility study specific to the project. Critics also question whether the project will indeed deliver the promised reduction in energy costs, and there are concerns safety and environmental risks associated with relying on a non-renewable energy source. However, the claim that this project constitutes an encumbrance on the Natural Resources Fund (NRF) lacks merit, as the PSA’s cost recovery mechanism ensures that such costs are addressed without directly tapping into or pledging future revenues from the NRF.

(The views expressed in this article are those of the author and do not necessarily reflect the opinions of this newspaper.)

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• constitutes, encumbrance, Natural Resources Fund, Peeping Tom, pipeline

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