Ghana Economic Alerts (2009 and Beyond)
By Bright B. SimonsFeature Article | Mon, 12 Jan 2009
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The newly elected government has barely settled in, and the three-man committee tasked to coordinate the transition from the economic policy of the erstwhile government to a new regime under the incoming administration has yet to issue a preliminary report.
In keeping with IMANI's oft-repeated assertion that civil society ought to take the lead in defining the terms of national discourse concerning the national agenda, we have decided to set in motion a national debate on the economy using as our principal guidepost the ongoing global economic crisis.
In an earlier comment, a colleague of ours highlighted the impact of the global crisis on commodity price trends and related matters. We will build on the issues identified by focussing on three principal areas of discussion: the oil discovery, remittances and investment (foreign direct investment – FDI), and the fiscal picture, with the understanding that the latter issue combines elements of the preceding two with general and partial analyses of a range of various factors affecting the state of the Ghanaian economy in 2009 especially and a few years thereafter.
We intend to be critical and assertive in our conclusions, in the hope that better specialised commentators in all the aforesaid areas will in their responses moderate our positions.
OIL
Insofar as Government of Ghana has in the two previous dispensations, from 1993 to date, been operating with a fiscal deficit, it goes without saying that the incoming administration, whatever its policy orientation, has nearly no room to implement any radical departures from the current trend in government spending. Nor is the prospect likely that revenue mobilisation would accelerate dramatically in the next few years.
The oil find has thus come to be viewed as the magic wand to wipe away all the structural constraints in government fiscal policy, and put Ghana on a genuinely transformational growth path.
We have grave reservations about this view. Our earlier comment placed a $3 billion dollar per annum price tag on oil receipts accumulating to the state from 2010 onwards. We now have strong cause to considerably revise this outlook downwards, and not merely because the $100 per barrel mean range we adopted has been shattered by recent developments on the crude market. There are other issues.
We are compelled after close scrutiny of the matters involved to question the forecasts of Tullow and Kosmos regarding crude oil output from the companies' concessions off the coast of Ghana (note: the GNPC and the fourth partner have been restrained in issuing forecasts).
The joint oil prospecting operation covers three blocks in the western coastal area of Ghana. Crudely speaking, the prospecting operation aims to demarcate oil producing fields for development and eventually for the production of petroleum. One such field is the Jubilee, which lies in the deepwater section between West Cape Three Points and Tano. Our understanding is that prospects in the shallow section are less significant.
Initial forecasts suggested a recoverable load of between 500 million and 1.3 billion barrels of oil from the Jubilee field, with subsequent upward revisions of the upper bound to 1.8 billion barrels. It must be noted that Tullow, the unit and technical operator, has always been particularly bullish about the outlook for the Jubilee field. The technical blueprint for the development of the concession called for 7 exploratory and appraisal wells (think of these as giant holes in the seabed dug or 'drilled' with the aim of measuring how much oil is down there and not necessarily for actual production though they may in fact be eventually used for the latter purpose).
Tullow's first forecast (i.e. projecting a maximum commercially viable lifetime output of 1.3 billion barrels) was made when just two exploratory wells were in place. While there is no doubting the fertility of the oil-bearing rocks identified during that initial exploration, some experts are inclined to consider this approach highly optimistic. Indeed it is safe to say that the more exploratory wells there are across the concession the more accurate projections are likely to be, especially also when the practice is to overlay the concession with a seismic map followed by the effort of determining correspondences between the data yielded by the wells and the imaging of the field produced by seismography (a process that can significantly reduce the risk of fruitless search investments). Simply put, forecasting oil reserve quantities with data from too few wells is somewhat equivalent to projecting election results from too few declared constituency results.
We concede that the geological issues can be highly technical and experts frequently disagree. Our concerns were nonetheless heightened by an analysis of Tullow's recent operational and financial history.
Our understanding is that Tullow currently produces about 80,000 barrels of oil a day from its operations around the world. Its 23-country profile is concentrated in the prospecting or exploration rather than in the production business. As an 'independent' oil company it maintains no retailing or marketing ('downstream') commitments. As such, and as a FTSE-100 company, the bulk of its assets are valued by the financial markets in correspondence with investors' perception of the worth of its exploratory holdings, that is to say the value of oil and or gas beneath its licensed concessions across the 23 countries in which it operates. To put this in perspective, consider that Tullow's share price has risen from under £1 to nearly £10 over the past five years (nearly 1000% increase), and also that by some expert's reckoning 60% of the company's stockmarket value is tied to its exploration prospects.
Jubilee is now the jewel in Tullow's crown. The company's North Sea holdings are mature, and none of its prospects, not even in Uganda, are in the same leagues as Jubilee. Indeed since its Gawain South East exploration well in the North Sea failed to strike any load, and the declines in output from its Kelvin and Orwell fields, the Anglo-Irish company has shifted most of its investments to better prospects in Africa and Latin America.
The Gawain South East incident however highlighted the downside of Tullow's usual strategy of fast-paced field development, in that it tends to incur higher than industry-average costs in a number of its core operations. Adding this factor to the company's usual operational optimism provides the backdrop to another incident of interest to this analysis: Tullow's underperforming Ivorien operation, owing primarily to the 30,000 barrel a day Espoire field's disappointing results.
We must stress that all our inquiries confirmed that Tullow is a well managed company. The sole purpose of the foregoing analysis was to identify reasons why it may be necessary to downgrade Tullow's forecasts for the near-term future by establishing a structure of incentives which underlie a posture of chronic optimism.
But besides the concern over quantities, and before presenting our own independent view about likely output levels, there are other relevant factors that merit mention and serious consideration.
Tullow's present debt position is at least $800 million. It needs to restructure this debt in order to raise the $2.3 billion it says it needs, inexplicably revised downwards from an initial estimate of $3.2 billion, (or the $3.5 billion some experts estimates it actually needs) to develop Jubilee's deepwater oil resources (bear in mind that deepwater drilling is more expensive than shallow or onshore drilling). Furthermore, by its figures, it needs to keep production costs at $15 to meet the performance standards it has promised investors. One might, in this light, want to consider that the United States Energy Information Administration puts the production cost profile for Africa at roughly $30 per barrel.
The combined effect of all the foregoing analyses leads us to conclude that firstly, oil production is unlikely to begin in Jubilee by mid 2010 as anticipated. Even late 2010 will be optimistic. We suspect mid-2011 is a more realistic timeline. The reason is that in the current environment Tullow will encounter difficulty raising even the $1 billion it requires to construct the offshore platform (or FPSO) needed to begin production at jubilee within the timeframe it first announced. What finance it raises will be on less salutary terms not least because the downturn in oil prices means banks' and investors' appetite for exploration is likely to diminish. Secondly, it is unlikely to be taken for its word that it can produce offshore oil as cheaply as it can in this environment of heightened investor scepticism, which will in turn impact on its projected profit/loss fundamentals and dampen investor enthusiasm.
As far as Ghana's external earnings account is concerned, this means oil production will start late and the output is likely to be restrained. We now suspect that sometime in 2011, 60,000 barrels a day will be issuing forth for sale at $60 spot market prices. But we must hasten to add another clarification. The quoted prices on the NYMEX and IPE indices are hardly what Tullow can expect for its oil. It will probably be selling at a decent discount to brent, meaning that $50 is more like it. This takes us to $1 billion gross per annum. Tullow expects to be selling 30m cubic feet of gas to Ghana for energy generation within the same timeframe as it will be producing crude. We suspect this expectation is also overoptimistic and at any rate any such production will not occur, at least not in any significant quantity, within the four-year window that is our concern. Continued
Source: Bright B. Simons
In keeping with IMANI's oft-repeated assertion that civil society ought to take the lead in defining the terms of national discourse concerning the national agenda, we have decided to set in motion a national debate on the economy using as our principal guidepost the ongoing global economic crisis.
In an earlier comment, a colleague of ours highlighted the impact of the global crisis on commodity price trends and related matters. We will build on the issues identified by focussing on three principal areas of discussion: the oil discovery, remittances and investment (foreign direct investment – FDI), and the fiscal picture, with the understanding that the latter issue combines elements of the preceding two with general and partial analyses of a range of various factors affecting the state of the Ghanaian economy in 2009 especially and a few years thereafter.
We intend to be critical and assertive in our conclusions, in the hope that better specialised commentators in all the aforesaid areas will in their responses moderate our positions.
OIL
Insofar as Government of Ghana has in the two previous dispensations, from 1993 to date, been operating with a fiscal deficit, it goes without saying that the incoming administration, whatever its policy orientation, has nearly no room to implement any radical departures from the current trend in government spending. Nor is the prospect likely that revenue mobilisation would accelerate dramatically in the next few years.
The oil find has thus come to be viewed as the magic wand to wipe away all the structural constraints in government fiscal policy, and put Ghana on a genuinely transformational growth path.
We have grave reservations about this view. Our earlier comment placed a $3 billion dollar per annum price tag on oil receipts accumulating to the state from 2010 onwards. We now have strong cause to considerably revise this outlook downwards, and not merely because the $100 per barrel mean range we adopted has been shattered by recent developments on the crude market. There are other issues.
We are compelled after close scrutiny of the matters involved to question the forecasts of Tullow and Kosmos regarding crude oil output from the companies' concessions off the coast of Ghana (note: the GNPC and the fourth partner have been restrained in issuing forecasts).
The joint oil prospecting operation covers three blocks in the western coastal area of Ghana. Crudely speaking, the prospecting operation aims to demarcate oil producing fields for development and eventually for the production of petroleum. One such field is the Jubilee, which lies in the deepwater section between West Cape Three Points and Tano. Our understanding is that prospects in the shallow section are less significant.
Initial forecasts suggested a recoverable load of between 500 million and 1.3 billion barrels of oil from the Jubilee field, with subsequent upward revisions of the upper bound to 1.8 billion barrels. It must be noted that Tullow, the unit and technical operator, has always been particularly bullish about the outlook for the Jubilee field. The technical blueprint for the development of the concession called for 7 exploratory and appraisal wells (think of these as giant holes in the seabed dug or 'drilled' with the aim of measuring how much oil is down there and not necessarily for actual production though they may in fact be eventually used for the latter purpose).
Tullow's first forecast (i.e. projecting a maximum commercially viable lifetime output of 1.3 billion barrels) was made when just two exploratory wells were in place. While there is no doubting the fertility of the oil-bearing rocks identified during that initial exploration, some experts are inclined to consider this approach highly optimistic. Indeed it is safe to say that the more exploratory wells there are across the concession the more accurate projections are likely to be, especially also when the practice is to overlay the concession with a seismic map followed by the effort of determining correspondences between the data yielded by the wells and the imaging of the field produced by seismography (a process that can significantly reduce the risk of fruitless search investments). Simply put, forecasting oil reserve quantities with data from too few wells is somewhat equivalent to projecting election results from too few declared constituency results.
We concede that the geological issues can be highly technical and experts frequently disagree. Our concerns were nonetheless heightened by an analysis of Tullow's recent operational and financial history.
Our understanding is that Tullow currently produces about 80,000 barrels of oil a day from its operations around the world. Its 23-country profile is concentrated in the prospecting or exploration rather than in the production business. As an 'independent' oil company it maintains no retailing or marketing ('downstream') commitments. As such, and as a FTSE-100 company, the bulk of its assets are valued by the financial markets in correspondence with investors' perception of the worth of its exploratory holdings, that is to say the value of oil and or gas beneath its licensed concessions across the 23 countries in which it operates. To put this in perspective, consider that Tullow's share price has risen from under £1 to nearly £10 over the past five years (nearly 1000% increase), and also that by some expert's reckoning 60% of the company's stockmarket value is tied to its exploration prospects.
Jubilee is now the jewel in Tullow's crown. The company's North Sea holdings are mature, and none of its prospects, not even in Uganda, are in the same leagues as Jubilee. Indeed since its Gawain South East exploration well in the North Sea failed to strike any load, and the declines in output from its Kelvin and Orwell fields, the Anglo-Irish company has shifted most of its investments to better prospects in Africa and Latin America.
The Gawain South East incident however highlighted the downside of Tullow's usual strategy of fast-paced field development, in that it tends to incur higher than industry-average costs in a number of its core operations. Adding this factor to the company's usual operational optimism provides the backdrop to another incident of interest to this analysis: Tullow's underperforming Ivorien operation, owing primarily to the 30,000 barrel a day Espoire field's disappointing results.
We must stress that all our inquiries confirmed that Tullow is a well managed company. The sole purpose of the foregoing analysis was to identify reasons why it may be necessary to downgrade Tullow's forecasts for the near-term future by establishing a structure of incentives which underlie a posture of chronic optimism.
But besides the concern over quantities, and before presenting our own independent view about likely output levels, there are other relevant factors that merit mention and serious consideration.
Tullow's present debt position is at least $800 million. It needs to restructure this debt in order to raise the $2.3 billion it says it needs, inexplicably revised downwards from an initial estimate of $3.2 billion, (or the $3.5 billion some experts estimates it actually needs) to develop Jubilee's deepwater oil resources (bear in mind that deepwater drilling is more expensive than shallow or onshore drilling). Furthermore, by its figures, it needs to keep production costs at $15 to meet the performance standards it has promised investors. One might, in this light, want to consider that the United States Energy Information Administration puts the production cost profile for Africa at roughly $30 per barrel.
The combined effect of all the foregoing analyses leads us to conclude that firstly, oil production is unlikely to begin in Jubilee by mid 2010 as anticipated. Even late 2010 will be optimistic. We suspect mid-2011 is a more realistic timeline. The reason is that in the current environment Tullow will encounter difficulty raising even the $1 billion it requires to construct the offshore platform (or FPSO) needed to begin production at jubilee within the timeframe it first announced. What finance it raises will be on less salutary terms not least because the downturn in oil prices means banks' and investors' appetite for exploration is likely to diminish. Secondly, it is unlikely to be taken for its word that it can produce offshore oil as cheaply as it can in this environment of heightened investor scepticism, which will in turn impact on its projected profit/loss fundamentals and dampen investor enthusiasm.
As far as Ghana's external earnings account is concerned, this means oil production will start late and the output is likely to be restrained. We now suspect that sometime in 2011, 60,000 barrels a day will be issuing forth for sale at $60 spot market prices. But we must hasten to add another clarification. The quoted prices on the NYMEX and IPE indices are hardly what Tullow can expect for its oil. It will probably be selling at a decent discount to brent, meaning that $50 is more like it. This takes us to $1 billion gross per annum. Tullow expects to be selling 30m cubic feet of gas to Ghana for energy generation within the same timeframe as it will be producing crude. We suspect this expectation is also overoptimistic and at any rate any such production will not occur, at least not in any significant quantity, within the four-year window that is our concern. Continued
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Comments To This Article
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Ghanaian economy
Keith | Northampton-UK (United Kingdom) | 7/12/2009 1:56:00 PM
HAving read the report ,Yaking Tallow oil as a possible prodicer for oil when their speciallity is exploration is in my opinion a na, na when there are high producing low cost oil compnaies about. Ghana should consider more long term their policies on remitance for oil licences and prodution from foreign contenders. History has shown that in Africa the " locals" always seem to get a poor deal in the mid and latter times of the business venture. Looking back to the 1950's Ghana was 25% ahead of Asia where GDP was concerned and is now reversed. Maybe Ghana needs to look more at the reason why it still lags behind Asia and looks deeper at the education system. There could be many potential entrepreneurs. You do not have to be a brilliant academic meet such a criteria though it does have its positives as shown within the UK. Take the career of Damon Buffini who is black was brought up on a council estate by a single mum, went to a state school but won a scholaship to a university i s now head of Europes largest private- equity business, and Sir Alan Sugar who has no formal qulifications but is a self made industrial millionaire. There are quite a number of bright individuals within the Ghanaian state public service doing legion work on a pittance of pay ( I know of 2) one who is looking to increase his academic ability further. Unlness Ghana taps into this possible pool of talent and reward it accordingly,then it will be years before they catch up with Asia!!
