“Buyer Beware”: Oil Collateralized Loans (OCL)

The benefits of Oil Collateralized Loans (OCL) are obvious; easy to obtain and could be cheaper in terms of interest rate charges. OCL can also provide immediate funds to support developmental projects to spur economic growth in the shortest possible time if funds are used judiciously. However, seeking a collateralized loan can also be trickery and there are potential landmines that Ghanaians need to be aware of. Technically, OCL is not any different from a securitized asset or traded derivative backed by a substantial asset.

As starters, what if the price of oil falls? What if the projected oil reserve does not pan out? To illustrate with basic assumptions about the recent Ghana oil find. Let's say the current international market price of crude oil is $ 80 per barrel and the projected reserves is 2 billion barrels. GNPC and for that matter the government of Ghana's equity percentage in the Jubilee field is approximately 15% plus 5 – 10 % royalty fees and when you add taxes payable to the government from OIC's (international oil companies) and other entitlements, the government has a combined stake of approximately 50%.

Based on these facts, the government can seek a collateralized loan to the tune of $ 80 billion if 100% of the projected reserves are collateralized. If you take the conservative approach and collateralized only 25 %, it implies $20 billion loan can be sought for infrastructural and other developmental projects. Lenders however may take into consideration political, business and other risk factors and pare down the loan to $ 15 billion with $ 20 billion collateral.

Now, if the world economics take a downturn and oil prices fall to say $60 per barrel from the original $80 per barrel. All of a sudden, our $20 billion collateral is only worth $15 billion to the lender or creditor, creating a shortfall of $ 5 billion. Our creditors could ask the government to provide additional collateral (margin calls) to compensate for the shortfall. The additional collateral or margin call ensures that the risk of the loan stays the same, as far as the down payment to the amount borrowed.

Also, the Jubilee reservoir estimates are based on engineering calculations, and the estimate could change. It could turn out that the reserves are only 1.5 billion barrels of crude oil. This also means our $20 billion collateral is now $15 billion, and, again the government will be asked by our creditors to provide additional collateral.

Ghana could face a double whammy of falling crude oil price and lower reservoir estimates. The initial collateral of $20 billion could be pared down further to say $10 billion. How would Ghana find additional funds to meet the margin calls or boost the collateral?

The danger in the scenario depicted above is a real possibility. For example, two years ago, the price of crude oil dropped to $33 a barrel, after reaching a high $140 a barrel. The drop to $33 a barrel disrupted the budgets of major oil exporting countries in Africa , because the cash flow projections were way-off. The Government of Ghana can be very aggressive or be very conservative with its cash flow projections. If the government does the unthinkable and aggressively collateralized a higher percentage say 50% to 75% of the oil reserves, and an adverse scenario occurs, the government will have to tap into other national assets, such as future cocoa production to provide additional collateral. This may all seem surreal but it happened in Angola , Nigeria and other oil producing countries.

To avoid such potential pitfalls and be caught in such financial and economic quagmire, it is imperative that the government takes a deliberate and cautionary approach in considering OCL as a means to finance developmental projects. It may sound silly to some using the old cliché of counting our chickens before they are hatched to describe the situation but truism of the cliché in this instance is not far-fetched at all. OCL is always a viable option but the government needs to buy some time before rushing to make such decisions. The Bible says “the debtor will always be a slave to the master or lender”. Proverbs 22:7.

The timetable to start pumping the oil at the Jubilee field is around the corner and it only make sense to initially build a nest egg, study and understand the industry and operations a little bit longer before we tap into OCL funding. Accumulating oil revenues for a year or so will give us a buffer or cushion to weather any unanticipated eventualities when we decide to tap into OCL. As a matter of fact, it will also be prudent for the government to see how the wells are performing and study the production curve for a period of time to give us a better feel for the actual versus projected production levels.

Waiting for a year or two prior to taking advantage of OCL will also give us an opportunity to put together a comprehensive developmental plan to optimize the economic benefits of such a plan. Yes, we need to catch up on infrastructural gaps throughout the country but we don't need to jump into a spending spree just because OCL is available, only to second guess our decisions. It is almost like someone who hits a lottery jackpot and without careful planning, rushes to fulfill his desires and dreams and spends money without knowing what he/she REALLY needs.

In conclusion, oil prices can go up or down. Neither does the Government of Ghana controls the price of crude oil nor can guarantee the reservoir estimates of the Jubilee field. The government could be getting itself into a can of worms by prematurely venturing into OCLs. At the appropriate time and situation we can always revisit clause 5 of the petroleum revenue management bill, to tweak and amend it appropriately. Let us put politicking aside and do the right thing for the country to achieve a lasting solution to our current infrastructural gaps.

Yaw Owusu
Tennessee , USA