The Economy: How will Natural Gas benefit Guyana economically?

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On May 28, 2018, News Room reported that the Minister of Public Infrastructure stated that more than some 200 Guyanese will be employed during the civil works and construction phase for the natural gas and liquid petroleum plants.

It was also reported that “a US$70,000 desk study is being conducted by consultants, Energy Narrative, on the options, cost, economics, impact and key considerations of transporting and utilizing offshore natural gas for electricity generation.” The full article can be accessed here: https://newsroom.gy/2018/05/28/over-200-guyanese-to-be-employed-under-natural-gas-project/.

This development is, of course, a positive dimension with respect to Guyana’s long-term economic development and transformation – hypothetically without conducting an in-depth study. Politics aside, it is against this background that today’s article seeks to address by bringing some bit of context and deeper understanding of how this overall natural gas project could benefit Guyana with respect to transforming the livelihoods of its people. In doing so, the article draws on empirical evidence of such from other countries around the world, particularly the United States.

Natural Gas explained

Firstly, according to the U.S Energy Information Administration, “natural gas occurs deep beneath the earth’s surface. Natural gas contains mainly of methane, a compound with one carbon atom and four hydrogen atoms. Natural gas also contains small amounts of hydrocarbon gas liquids and nonhydrocarbon gases.” Natural gas is used as a fuel and to make materials and chemicals, including electricity generation as well.

Drivers of new natural gas demands

In the next decade, the power sector will provide the largest growth in gas demand which depends on two major drivers: growth in total electric generation and growth in the gas share of electric generation. Most of the growth in the power-sector demand will be met by increasing amounts of natural gas-fired generation and also by renewables.

Coal-fired power plants will be retired in response to more stringent environmental regulations and more competitive low gas prices, which will lead to a change in the mix of generation fuel and an increase in natural gas market share. The second largest demand increases are felt in the U.S. industrial sector, which uses natural gas as both a fuel and feedstock to meet a variety of energy requirements. The U.S. manufacturing sector accounts for about 80% of total industrial gas demand, with the remaining 20% coming from agriculture, construction and mining.

Use of natural gas for electric energy generation

In recent years, the amount of natural gas being used as fuel to generate electricity has been gradually increasing due in part to the decreasing price and increased supply. Electric utilities have been increasingly turning to natural gas as a fuel source, especially for new electric generating plants, such as combustion turbines and combined-cycle plants.

The primary benefit to the manufacturing sector is that the increasing use of fuel will result in lower generation cost for electric power. The significance of shifting electric power sources is such that the rising demand for the use of natural gas fuel in electric power generation will contribute to electric power generation will contribute to investment in new natural gas infrastructure, such as transmission lines, gas processing plants, and compressor stations.

Forward linkages

The outputs from the natural gas-intensive sectors are used as inputs by other sectors of the economy in a variety of ways. Such uses are referred to as forwarding linkages and include:

  • Intermediate inputs (e.g., goods and services sold to other sectors that are used in production processes to make other types of goods and services, with no sales to final demand occurs).
  • Sales to final demand (e.g., goods and services that are not used as intermediate inputs and no further processing of the output occur).

Types of final demand include:

  • Personal consumption expenditure (e.g., purchases of refined products such as gasoline at filling stations or home heating oil).
  • Gross private investment
  • Private inventory accumulation
  • Exports or imports
  • Government consumption and gross investment

The forward linkage or downstream manufacturing sectors will potentially benefit from increases in supply and/or the lower cost for natural gas. Final demand sectors, such as personal consumption, exports, and imports are also affected by changes in natural gas production and pricing, but indirectly, through industry production changes captured by intermediate inputs shifts to industrial production.

For example, personal consumption impacts, such as those resulting from lower electricity prices, are captured first by feedstock inputs to the electricity industry and flow through to all industries before resulting in lower prices for the consumer.

In the final analyses, the natural gas industry is a major contributor to the GDP of many countries. The industry is inherently large-scale, generating millions of dollars in associated revenues and tax income and employing thousands. As an example, in 2008 natural gas production in the U.S added US$385 billion to GDP. Gas exporting countries as diverse such as the U.K, Netherlands, Russia, Qatar, Australia and Indonesia have benefited from the enormous economic benefits that are the combinations of the following:

  • Taxation of profits and of gas production
  • Wider job creation in the industry from upstream exploration and production (E&P) companies, midstream processing and pipeline transportation companies, downstream local supporting arms focusing on law, human resources, public relations and many other aspects
  • A local source of natural gas can act as a catalyst to other industries such as chemicals, driving wider economic growth
  • Employment transformation from old industries such as coal and steel to new high-tech natural gas extraction and innovative appliances.
  • New job creation across the skills and knowledge base, from entry-level to Ph.D

A study by the Center for Global Development (CGD), found that the greater use of natural gas for electricity could help lift some countries out of poverty by providing greater access to affordable and reliable power.  Natural gas has to be extracted in sufficient volumes, however, in order to be economically viable.

It is within these conceptual frameworks that for Guyana, natural gas development in tandem with the oil industry, could potentially transform Guyana and alleviate poverty, under prudent management and politically visionary commitments.

*The author is the holder of a Master of Science Degree from a UK university in Business Management, with specialism in Global Finance and Financial Markets.

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