Crude oil hedging, TOR and Tsatsu…

Is our crude oil management on the verge of collapse again?

Like the popular English football chant “Here we go, here we go, here we go ooh”, the NDC is back to their ways in (mis)managing Ghana's oil economy again and typical of the mess they left the nation in during NDC mark 1 and 2, they have started again. In March this year the government announced its intention of entering into hedging contracts the sixty-six with crude oil purchases. Accordingly sixty-six million dollars ($66 million) is expected to be spent on oil hedging as the nation begins this Commodity Price Risk Management Policy which is understood to have received cabinet approval.

This money does not consist of money that would be spent by state-owned Tema Oil Refinery (TOR) to import oil into the country. Today as I write this paper, TOR has shut due to the erratic crude oil supply. The staff of TOR are calling for the blood of the Energy Minister who they believe has been surrounded by some “greedy bastards”

According to the report four financial institutions namely, Standard Chartered Bank, PNP Paribas Bank, BP International and Citi Bank UK, have been selected to serve as consultants for the implementation of the policy and the cost of implementing this risk management strategy includes a budgetary provision of $2.8 million to $5.5 million per month or a price protection cost of GH¢0.03-GH¢0.05 per litre to be factored into the petroleum price build-up at the level of the import imparity.

Hedging is like an insurance against future price hikes and like the NPA is saying they are going to protect the Ghanaian consumer from price rises, up to a locked-in maximum price. This is all well and good. However while the NDC is doing this for political expediency, it is failing to see the overall risk involved with such an exercise because unlike an insurance, hedging does not guarantee against losses.

Every hedge has a cost, so before they decide to use hedging, they must ask themselves if the benefits received from it justify the expense. At the moment the whole exercise is going to cost us $66 million at a time when Ghana is six months down the line to begin lifting crude oil in massive quantities. Remember, the goal of hedging isn't to make money but to protect from losses. The cost of the hedge - whether it is the cost of an option or lost profits from being on the wrong side of a futures contract - cannot be avoided. This is the price you have to pay to avoid uncertainty.

Again we should not jump into such a costly venture as a result of speculations in the crude oil trade. Fluctuations and speculation take place on daily basis in crude oil business. What happened in 2008 when the price hit the roof to $147 was extraordinary. At the time the decision was taken crude oil was hovering around $85 a barrel. Now it is at $77, a barrel. Is this the time for panic hedging? This is typical of an NDC knee jerk economic decision. Thus if the price was to be hedged at $90 a barrel, which the government is thinking as its locked-in maximum price, we would be losing now. This leads to a loss and this has happened to Ghana before.

A visit to history will tell us that hedging has left Ghana with a huge debt. In October 1996, led by the NDC's financial genius, Mr. Tsatsu Tsikata, Ghana undertook a similar hedging contract with a French Commodities Bank, Societé General, which led to a loss of $47 million for Ghana government to pay. As a result of such financial loss to the state through reckless hedging, the government had to sell the GNPC drill ship The DISCOVERER 511 to pay the debt. Tsatsu did not go to prison for this (although he went in for another offence) and now he has set his 1996 shenanigans into motion again. He is the man who surely will benefit from this, having placed his company STRAOIL in a position to lead these negotiations by the scruff of the neck.

Now the workers of TOR are baying for the blood of the same Tsatsu Tsikata and the likes of Kwame Peprah and Ato Ahwoi for acting as middle men in the supply of crude oil to TOR and which has led to the latter being shut down. These men are using GNPC to buy crude oil from private oil firms and selling it to TOR at a profit, a time when PNDCL 64 and 84 clearly are against that. They are running down TOR and blaming the erstwhile NPP administration for the woes fifteen months after the latter left office. Tsatsu Tsikata and his wife have allegedly set up STRAOIL (an oil trading company) in UK, registered in Virgin Islands. In a clear case of conflict of interest, Tsatsu advises GNPC in its purchase of crude oil for TOR while he is the Chief Executive of STRAOIL, a private company that negotiates oil purchases for GNPC. The whole process is tacky and yet President Mills sits unconcerned and is on the verge of wasting $66 million of our hard earned money to a useless speculation of hedging.

What the NDC ought to do which is what the NPP did which is to BUY and HOLD and as such our investment in crude will grow with the market. I am sure they will hate to do that because they would not touch an NPP policy [even though it is a success story] with a barge pole. Hedging a portfolio such as in crude isn't a perfect science and things can go wrong. Although risk managers are always aiming for the perfect hedge, it is difficult to achieve in practice. In January 2001, the NPP administration met a hedged crude contract with less than 21day crude supply left. With BUY and HOLD policy, the NPP left the NDC in 2009 with a 90 day supply buffer.

Somebody is making some serious cash out of our crude oil trade in Ghana and it is about time the government stops playing politics with it and come out with solutions.

Credit: Kwesi Atta-Krufi Hayford
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