Dear Editor,
I am writing in reference to a letter published the Stabroek News on March 23, 2023, with the caption, “Vreed-en-Hoop shore base, funded with Guyana’s oil revenues makes it a private, public partnership”.
I must disclose that I worked on the preliminary development plan for this project back in early 2021. Also, later that year, I was involved in the preparation of the commercial and technical proposals for another company in response to the request for proposal (RFP) ExxonMobil Guyana had advertised for the provision of the very shorebase services. Hence, I am very familiar with the economic and financial model of shore base development.
With this in mind, I can say with absolute certainty that the Vreed-en-Hoop shore base is not a public private partnership (PPP) arrangement of any sort.
The financing model of the project includes equity financing injected by the project sponsors/owners as well as debt financing which was raised outside of the local capital market owing to the scope and scale of the project. In other words, because it is one of the largest industrial development projects in Guyana―to the tune of some US$300 million/GY$ 63 billion, it is beyond the financial wherewithal of the local banking sector for a number of reasons which include factors such as concentration risks, regulatory constraints that imposes group borrowers limit which is tied to the capital structure of the banks; and the fact that this single project which is just part of the entire development―represents about 1/3 of the banking sector’s total liquid assets as of December 2021.
Moreover, one would recall that not so long ago GYSBI’s―loan financing request through the private sector arm of a multilateral lending institution was vetoed. This was because globally, some institutions have endorsed the global climate change targets wherein some of these institutions are no longer providing finance for the oil and gas industry. Consequently, financing for new oil and gas related development would become difficult and more costly to raise―simply because the financing will have to be sourced most obviously from sources outside of the U.S capital market.
Coming back to the financing model of the Vreed-en-Hoop shorebase development, the funding for the project that ExxonMobil has committed―is not a grant or an injection of equity capital. It is actually an advance rental payment to utilize the facility (all of which is not paid upfront). Payments are made to the developers provided that certain criteria have been met and milestones have been achieved.
This was a pre-requisite model for various reasons as alluded to earlier which also serves―importantly to de-risk the project so that the investors can raise the debt financing at a cheaper cost and help to make it more attractive and feasible for both the lenders and investors. It was also necessary given the scale of the project and the fact that the developers have to complete the facility by a certain timeline to service the Yellowtail development and other future offshore developments in the pipeline.
Of importance to note, the impact of inadequate facilities/infrastructure to accommodate the work in the oil and gas sector is a loss of local content within this emerging sector. Without this important infrastructure, much of the storage facilities are carried out in other countries such as Trinidad and Tobago. These services can be carried out in Guyana, with the local economy benefitting from employment, duties and taxes, ancillary goods and services and capacity-building. Guyana will continue to lose out under the current arrangement, unless increased emphasis is placed on the development of this facility that capture these benefits in-country and direct them into the development of the Guyanese people.
Beyond simply capturing more local benefits from the oil and gas sector, the development of such a facility will also accelerate the transfer of knowledge, capacity and technology needed for Guyana to take a greater role in the development of its own petroleum resources. Much of the storage of marine spares and supplies needed for the sector are slated to be carried out in other countries until the country can demonstrate that it can develop the capacity to adequately service the industry. This project is therefore a win-win for all, inter alia, working towards the sustained development of Guyana’s petroleum industry, and for the benefit of the country and its people.
Finally, the spin-off effects on the wider economy will necessitate growing demand for health care services, insurance, accommodation, financial services, tourism, accounting and taxation services, other professional services, food, beverages, hospitality, transportation, logistics, and brokerage services, and across all the other sectors and sub-sectors; and thousands of direct and indirect employment opportunities.
Yours sincerely,
Joel Bhagwandin
Financial, Economic and Public Policy Analyst
