Gas to Power and Implications for Economic Diversification in Guyana

MEDIA ADVISORY: 

Guyana Business Journal & Caribbean Policy Consortium release a new study, Gas to Power & Implications for Economic Diversification in Guyana, by Dr. Justin Ram, CEO of Justin Ram Advisory & Former Chief Economist of the Caribbean Development Bank.

Panelists:

Dr. Justin Ram, Justin Ram Advisory Services, Former Director of Economics at the Caribbean Development Bank

Roger Kranenburg, Eversource Energy

Dr. Lorraine Sobers, University of the West Indies

Dr. Terrence Blackman, Medgar Evers College at the City University of New York, Guyana Business Journal (Moderator)

Dr. David Lewis, Caribbean Policy Consortium & Manchester Trade Ltd. Inc. (Moderator)

Key Quotes:

• “The benefits far outweigh the downsides. The benefits of having a stable, reliable electric grid can really transform Guyana.” – Dr. Terrence Blackman

• “There is no reason, why in the next 5-10 years, Guyana does not develop the most modern, technologically advanced utility in, not only the Caribbean, but globally speaking.” – David Lewis

• “Natural gas can support and complement the process of changing the energy mix to renewable and sustainable sources. It is important to see natural gas as the bridge to renewables and Guyana’s Low Carbon Development Strategy.” – Dr. Justin Ram

• “The use of natural gas for power generation, we really have the opportunity to have broad based benefits being enjoyed throughout the economy.” Dr. Justin Ram

• “I see huge benefits to this, Guyana should get going on the project. The biggest pitfall that I can see is inaction. The near term benefits are so immense.” – Roger Kranenburg

• “The technological risk is very low, these things are already very well understood and are being done all over the world.” – Roger Kranenburg

• “Guyana is an incredible carbon sink. There is great value in being able to say that Guyana’s products are net zero or carbon neutral.” – Dr. Lorraine Sobers

• “Bringing gas to shore is definitely exciting. It’s a part of the energy mix and it’s a fair energy mix for Guyana in addition to hydro and solar. It’s much cleaner than what we have in place right now.” – Dr. Lorraine Sobers

Executive Summary:

Guyana discovered offshore oil reservoirs in 2015, and the first barrel of oil was produced in December 2019. Guyana’s new oil sector will transform the structure of the economy, including boosting Guyana’s export earnings. Guyana has been here before with the exploitation of its other natural resources, but this has nottranslated into significant benefits for the people of Guyana. This time could be different, with Guyana’s GDP per capita expected to increase from US$6,953 per capita in 2020 to US$15,153 per capita in 2023, and the country could become the world’s largest oil producer in per capita terms by 2030. However, if the benefits are to be equitably distributed, significant investment in human capital and physical infrastructure is required, including within the hinterland and rural areas.

Guyana’s plan to improve the reliability of its electricity and lower the cost of electricity through a gas-to-power project could be a critical pillar that ensures that the benefits of natural resource exploitation are broad-based this time around. The gas-to-power project has two phases:

1. A minimum of 50 million standard cubic feet of gas per day will be transported via the offshore to onshore pipeline by 2024, with a maximum capacity of 130 million cubic feet. The expectation is that the associated gas from this phase 1 will be utilized for power generation. 
2. The second phase will start after phase one, with gas production expected to take the supply to 2040.

Although Guyana is following an overall low carbon development plan, the gas to power project can be an essential bridge to a low carbon future, since natural gas replaces more polluting hydrocarbons such as diesel and heavy fuel oil, while the country invests in and develops its renewable energy potential in hydropower, wind power, ocean power, and solar power.

The gas to power project could alleviate many worrying statistics that plague Guyana’s electricity supply. These include the most power outages in the Caribbean (8 per month compared to 2 per month in Suriname), duration of outages (3.4 hours compared to 1.8 in Jamaica), and an estimated 1.6% of sale losses due to power outages compared to 0.3% in Suriname. Gas to power could reduce the cost of electricity from US$0.25/0.36 per kWh to US$0.06/0.07 per kWh. 

Combining these benefits of the gas to power project and the overall growth in the economy from oil and gas production, it is likely that electricity demand will increase by 100% over the next decade (Brugman 2018)^[1].

The gas to power project will have significant transformational benefits for Guyana:

1. Affordable, accessible, and more reliable electricity;
2. Economic diversification and job creation;
3. Savings in foreign exchange;
4. Environmental benefits

The gas to power project is expected to support diversification and a competitive economy. Investment in gas to power generation to lower electricity prices could foster development in new industries and sectors. The project also presents opportunities for investment and expansion in

manufacturing, particularly in agro-processing and new products. This can support

broad-based job creation and inclusive growth. As rents from the new hydrocarbon sector are spent, the currency could appreciate leading to Dutch Disease effects; however, investment in gas to power generation will lower electricity prices, potentially drive development in new industries and sectors, and offset these effects.

International and regional experience shows that there could be pitfalls as Guyana follows this development path. To avoid costly errors, including Dutch Disease, Guyana should consider the following policy imperatives:

1. Adequate grid infrastructure, policy, and legislative changes are required to ensure that all Guyanese benefit from the gas to power project.
2. Avoid gas oversupply and unnecessary government liabilities by ensuring that the fiscal incentives, purchase agreements for gas and power purchase agreements should be grounded in comprehensive demand and supply analysis.
3. Given the government’s commitments under the Paris Climate Change accord and the desire to follow a low carbon development path, gas to power should be considered as a bridge to a low carbon future while renewable energy is developed.
4. Gas to power must benefit the most deprived populations living in the hinterland and rural communities, directly or financing decentralized grids.
5. Gas to power, including ancillary services and latent economic activity, should be compatible with the government’s local content legislation.
6. Any adverse environmental and social implications from the project should be mitigated as far as possible.