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01.05.2009 Feature Article

GHANA: On the Cusp of an Oil Boom

GHANA: On the Cusp of an Oil Boom
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Attempts to produce commercial quantities of oil in Ghana date from the late 19th Century, and at regular intervals between that time and the present the West African country has had its hopes dashed by enthusiastic announcements of commercial oil finds that have later turned out to be premature.

Anticipation was therefore far from fervent when the current crop of successful oil exploration companies expressed interest in prospecting for the valuable black stuff off the South-western coast of Ghana. It was a bold move, considering that just a few months before, Dana Petroleum, following a persistent pattern, had been compelled to abandon their concession in the area after failing to convince partners like Woodside and others that the commercial petroleum resource potential was worth their while in a risk-sharing joint venture.

Dana's experience was part of a trend that has dogged the West African country's oil ambitions throughout the 60s and 70s, the peak of the first phase of government of Ghana's relentless search for black gold.

By the early 80s, a decade of strained hopes had compelled the “petroeconomic establishment” in Ghana to seriously consider reform. A revolutionary-military government was then in power and felt obliged to demonstrate its technical and managerial superiority over the “inept” civilian and praetorian regimes it had overthrown. The Ghana National Petroleum Corporation, formed primarily to harness Ghana's engineering talent, was placed at the vanguard of the new thrust. Plans were drawn to set up an integrated gas production and thermal generation system to produce electricity to power local industries, and to pay for this relatively ambitious scheme by exporting Ghanaian expertise abroad, particularly to Angola and the South-West Atlantic littoral shelf in Africa. Energy distribution infrastructure also received attention, with intra-country pipelines and storage depot networks, as well as upgrades to the country's only refinery, forming part of a $100 million strategy to alleviate the country's energy poverty.

Oil majors like Amoco were enticed to engage, and soon, with the Tano basin having become the prime focus, some exploratory wells begun to bud, confirming the earlier evidence of commercial potential. Companies such as Devon and Vanco begun to move in.

The gradual shifts of focus from shallow to deep waters, and from the eastern to the western shore, accounted for the increasingly favourable results, so that Dana Petroleum, its funding constraints notwithstanding, could confirm the presence of petrologically significant structures in 2003. The residual emphasis at this time on shallow exploration however meant nevertheless that resources continued to be misapplied, as they'd been for several decades, well until mid-2003. It was Dana Petroleum's highly favourable assessment of the Western Tano deep water section that in subsequent years changed the game.

Even so, it was not until 2007 that the transition of emphasis to deep water was consolidated with the entry of an alliance of mainly British and American prospectors – Tullow, Anadarko and Kosmos – and in their wake a flurry of spectacular early exploratory successes.

While much of the action today is happening on the Western Coast, the eastern Keta Basin continues to attract attention, most recently from UK-Nigerian firm Alfren and Japan's Mitsui marking the first foray into Ghana of a Japanese player, albeit one backed predominantly by Japanese Government money. In the 1980s Keta was a major drawer, pulling in E&P operators like Diamond Shamrock into its inviting bosom.

According to the Ghana National Petroleum Corporation, a regulator cum government interest vehicle, 89 wells have so far been drilled in Ghana, and six discoveries have resulted from them, with 75% of 50 exploratory wells encountering “varying degrees of hydrocarbon shows”. There are at least 15 active players, spread along the Ghanaian shoreline and parts of the coastal interior. They include Gulf investors; Russia's Lukoil, which has committed to spending upwards of $100 million to onshore activity; and oilfield services companies from Norway and elsewhere in Europe, with one such company already providing equipment for the ongoing appraisal program in Jubilee.

Stakes in the Jubilee Field*

West Cape Three Points
Anadarko - 30.875%
Kosmos Energy -30.875%
Tullow - 22.896%
Sabre Oil & Gas - 1.854%
E.O. Group (only Ghanaian private interest) - 3.5 percent
Ghana National Petroleum Corporation - 10%

Deepwater Tano
Anadarko - 18%
Tullow - 49.95%
Kosmos Energy - 18 percent%
Sabre Oil & Gas - 4.05%
Ghana National Petroleum Corporation - 10%

*”Jubilee field” refers to oil discoveries made separately in the two blocs but, because they are linked, are required to be developed in unison according to Ghanaian law by means of a “unitization agreement”.

Jubilee is the jewel in the crown of Ghana's nascent oil boom. No other prospect, notwithstanding recent hysteria about other plays in Deepwater Tano, comes close in terms of potential. Straddling between two rather fertile deep water blocs: West Cape Three Points and Deepwater Tano, Jubilee is said by its operators to hold between 500 million and 1.8 billion recoverable barrels of oil. Despite years of skepticism about the geology of this part of the Ghanaian territorial seabed, many analysts concur with the owners' analysis of ongoing appraisal work that the field is indeed world-class.

The development of Jubilee is proceeding on a “fast-track basis”, in which exploration, appraising and development appears to be going on concurrently. This has drawn some criticism from a number of observers, who have pointed out that a similar approach to the development of the nearby Ivorian Espoir field, of which one of the Jubilee partners, Tullow, is a principal developer, has not yielded the spectacular production results that were forecast. Indeed Tullow has had to endure some painful write-offs in its now overshadowed North Sea operation due to the same aggressive discover-to-production timeline model.

Other reservations that have been raised relate to the possibility that international oil industry culture may clash with policy culture in Ghana. E&P (exploration & production) companies like Tullow and Kosmos are rewarded on the market based less on their production successes or their hard assets than on their estimated proven reserves. Thus it is in the interest of such companies to drill aggressively and update the market frequently about any seeming success. Tullow has seen its share price boosted by more than 1000% over the cause of the past five years because of its intensive drilling program across the coast of West Africa. This kind of simulated hyper-optimism could easily saturate local discourse in cash-strapped countries like Ghana and lead to fiscal incontinence, as public purse holders scramble to sell their chickens before they have hatched.

During Ghana's recent electoral campaign, for instance, various members of the two major political parties were heard bandying about figures in the low ten figures as Ghana's likely take from the oil find. Tullow's aggressive development strategy has moreover emplaced in the public mind an oil delivery date of mid-2010. Some have argued that the prospect of inward-bound oil funds may have significantly raised the stakes in that election, producing some hair-raising moments and a tight finish for the current ruling party.

It is obvious however from basic calculations that Ghana can hardly look up to oil to remedy its short-term financial headaches, brought about by a bloated public sector expenditure profile (70% of revenues go to servicing this “burden”) and unaffordable utility subsidies which have nearly bankrupted various state-owned energy producers and distributors, and severely constrained the country's only petrochemical refinery. Even if oil does stay on the $50 mark for 2009, as predicted by Merrill Lynch and Moody's Investor Services, and climb to $55 in 2010 as the latter firm of analysts is forecasting, Ghana's deep water oil industry will still have little cause to celebrate. The comfortable range is between $65 and $75. One reason why the industry will forever be very sensitive to the price of oil on the international markets is the deep water profile of nearly all the best prospects. One of the partners in the project, Tullow, once offered a $15 per barrel production cost estimate. The United States Energy Administration suggests close to $30 is the more typical figure for West Africa deep water.

Already there are hints that the cost dynamics are constraining the ability of some of the partners to secure favourable financing, though of course the ongoing credit crunch has played no small a role. The Erik Raude semi-submersible which is at work on the Deepwater Tano bloc in recent months is reported to have been leased at a dayrate of $636,000 with an option to renew at $607,000. These costs are reflected in the $3.4 billion or so needed to develop the first phase of the Jubilee field in readiness for the production of 120,000 barrels per day. It is estimated that some $12 billion might be required to take the production level to 500,000 barrels per day. Credible reports suggest that all the Ghanaian owned interests will pull out before commercial production begins confirming rumors that they are struggling to raise their share of the funds. At least one major partner, Kosmos, is also said to be facing a financing hurdle, and rumours are rife that the Dallas-based firm will sell its stake, pocket the windfall, and move on.

By some calculations, 120,000 barrels per day over the first few years will bring in about $100 million in taxes and royalties, from a gross turnover of about $1.5 billion. The seeming discrepancy owes to the fact that Ghana's receipts from the oil sector, at least until the present agreement is modified, is heavily dependent on 30% corporate taxes to be levied on the production companies. Given the cost of developing the oil resource, and the cost of borrowing, it is unlikely that the companies will make sufficient profits for taxes to rein in much. Tullow recently refinanced its debt into a $2billion facility at 3.75% above the London inter-bank offered rate, nearly 300 basis points above what it had previously enjoyed.

Other African countries have tried to do better. Uganda, for instance, is to receive 70% of revenue generated by recent finds in the Lake Albert basin over the next 5 years. The higher returns are due to a 30-70 production sharing agreement (PSA), with the government receiving the lion's share. But PSAs have their disadvantages too, mainly by increasing investor risk aversion to unconventional geographies, which is the nature of most non-traditional oil-producing African countries. And even in Uganda, the 70-30 arrangement wont kick in until the production companies have recouped most of their costs within 5 years.

With growing reticence about the likelihood of oil spraying Ghana with cash, attention has begun to turn to the less direct economic benefits.

The current law – under review – requires that in the first year of production 20% of technical and managerial talent in the oil sector should be of Ghanaian stock, with the figure increasing to 80% over 5 years. Some worry that projected direct employment openings in the first few years appear to be less than 200, and that the use of subcontractors and consultants may help the companies undermine the stipulation. Others raise more pragmatic questions about whether the country's tertiary institutions are up to the task of training professionals in allied specialized areas of law, accounting and logistics. It is worth mentioning that an earlier capacity building effort at the Ghana National Petroleum Corporation (GNPC) proved quite successful, with one of the results being that the organization over the course of two decades manage to acquire “over 30,000 km of 2-D and over 5,000 km2 of 3-D seismic data”, though material constraints have impeded the adoption of the latest technological tools such as 4-D. The exploration companies are outsourcing most of the geophysic-driven imaging and analytical work abroad to companies such as Rock Solid Images.

Nevertheless, the increased traffic and land speculation in the twin port cities of Takoradi and Sekondi – the urban conurbations closest to the find – indicate that the impending oil boom will stimulate some growth spurts in selected regions and sectors. The likely unevenness of such growth is evident in the fact that while construction has picked up in Sekondi-Takoradi, the much expected port upgrades are proceeding slower than anticipated. This may be due to the fact that the production companies plan to rely on a floating, production, storage and offloading (so-called FPSO) system to manage the oil transport needs of the industry, perhaps obviating a strong dependence on the onshore port facilities.

Indeed in a recent scuffle with environmentalists, which nearly scuttled a $215 million facility subsequently approved by the IFC, a World Bank subsidiary, Tullow and Kosmos contended that the FPSO was integral to the oil companies' intent to minimize the impact of the sector on Ghana's marine and maritime environment.

Some mild “social justice” agitation by some “indigenes” of the Western region, which “borders” the finds, has also been in evidence in recent months. Perhaps responding to these trends, the E&P firms have embarked on a charm offensive. Some of the promises sound dubious though. Lukoil, the Russian operator, promises to spend $1 billion on social relief measures, but has since provided no details, leaving observers wondering why a for-profit Russian company will spend ten times more on CSR than on actual business operations in a West African country it has barely any commercial footing.

On the plus side of the social and governance dimension, Government of Ghana is committed to disclosing all oil contracts, a process that should be much-facilitated by the ongoing effort to pass a Freedom of Information Act and the country's enrolment into the Extractive Industries Transparency Initiative. The government of Uganda, by contrast, has been resolutely opposed to full disclosure in the same manner, citing confidentiality clauses in the contracts it has signed. This reticence sits somewhat uncomfortably with that government's seeming intent to completely domesticate the oil industry, at least in its first phases of development, which should presumably also involve a greater openness. Ghana has announced no such radical domestication initiatives.

Despite occasional lapses it has not been in the nature of Ghanaian policymakers, generally speaking, to be rash. The hope of most observers is that they will maintain their cool and judgment as the country enters into the heady start of an oil producing future.

The Author is a Development Analyst at IMANI: the Center for Policy & Education, a think tank recently adjudged the 6th most influential in Africa by Foreign Policy Magazine.

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