26.02.2014 Opinion

The State Of Oil And Gas Industry In Ghana: The Nagging Issues

By Mustapha Iddrisu
The State Of Oil And Gas Industry In Ghana: The Nagging Issues
26.02.2014 LISTEN

With over three years into the commercial production of oil and gas in Ghana, the industry has contributed immensely to the economic well-being of the country. So far the Jubilee Partners have produced over 83 million barrels of oil with a daily production of 110,000 barrels by the end of 2013. The production from the Jubilee oil fields has already created job opportunities for many Ghanaians and makes significant contributions to the national purse. Notwithstanding the feats that have been chalked by the industry, some challenges have emerged which need to be surmounted.

Probably the most crucial challenge facing Ghana Continental Shelf's Oil and Gas Industry is the maritime boundary dispute with Cote d' Ivoire over an area considered to be rich in oil. The disputed oil rich area is estimated to have about two billion barrels of oil reserves and 1.2 trillion cubic feet of natural gas. In 2010, Cote D' Ivoire petitioned the United Nations to see to demarcate the Ivorian maritime with Ghana.

This decision follows the discovery of oil in the Dzata -1 deepwater well by an American exploration company, Vanco in Cote D' Ivoire waters. But some people have been reading political meanings into this action by Alhassani Ouattara led administration. The dispute about the ownership of the South Deepwater Tano Basin is negatively affecting the investor confidence in the oil sector in Ghana.

Due to this sovereign crisis, several companies such as Statoil have already dissented oil exploration in the disputed fields. It could pose a big challenge to Ghana if Ivory Coast decides to explore oil in this field. The implication is that if strategic measures are not taken to resolve this challenge, it could adversely affect the efficiency of the exploration of the proven reserves of the Jubilee fields.

It is therefore, implies that both countries might not be able to optimally and efficiently harness the oil finds. Fortunately, the joint committee has visited the disputed areas to determine the coordinates and resolved to settle the matter by the end of June, 2014.

Another obstacle facing the oil and gas industry in Ghana is the acute shortages of skills. Attracting appropriate skills and its resultant wage bill remain the biggest challenge confronting almost every sector of the industry. The most difficult to fill vacancies in the industry in Ghana are drillers, engineers, mangers, production and operation workers.

This is due to the fact that many Ghanaians have not yet taken careers in these areas as a result of immaturity of the industry in the country. The main causes of the skills shortages in Ghana could be attributable to the immaturity of the industry, and insufficient capacity building in the acute areas. Also, demand for skilled labour exceeds the supply, insufficient skilled applicants, competition for labour among the oil companies and high cost of labour. All these factors have led to intercompany competitions for skilled employees in the labour market causing significant wage inflation in Ghana. Recently, there have been agitations from the youth of the “oil” region due to insufficient job opportunities. The issue is whether they are prepared to be actively engaged in the industry?

Labour is abundant in Ghana but the oil and gas industry is highly risky and therefore, requires appropriate skills. In order to overcome the skills gap in the country, the government in conjunction with the oil companies as well as higher education should appraise the employment challenges in the labour market and fashion out well coordinated capacity building programmes to address them.

Promotion of science based programs by pumping huge sums of money into the training institutions will go a long way to reducing the skills shortages. Capacity building of the youth and the local contractors along the value chain needs an urgent attention. Otherwise, the recent passage of the Local Content Law for the oil sector that makes it mandatory for job creation through the use of local expertise would be a mirage.

Failure of the Jubilee Partners to peak production of 120,000 barrels of oil per day in 2012 as envisaged since 15th December, 2010 when Ghana became oil producing country. This peak production target, if achieved, could have yielded nearly 1 billion US dollars year from revenues and other payments there off. However, the failed targets at the end of the 2012 have resulted to drastic decline in the oil revenue and adversely affected the budget of the country and the industry.

According to the oil companies, the decline is due to “sand contamination” of the flow lines that serve as passage of the oil to the storage facility on the surface. The followings are the oil production levels over the years: 45,000 in 2010, 80,000 in 2011, 85,000 in 2012 and an average of 102,503 in 2013. Unfortunately, the current oil production of 110,00 barrels per day is still below the peak production target.

Another significant challenge facing the Ghana Continental Shelf's Oil  and Gas Industry is the issue of gas flaring. The jubilee field contains light quality oil with high level of associated gas content. Every 1,000 barrels of oil produced is accompanied with one million standard cubic feet of gas.

Giving the zero gas flaring policy by Ghana National Petroleum Corporation, the need to monetize this associated gas became imperative. Hence, the establishment of Ghana National Gas Company at Atuabo to harness the potential of the associated gas to be utilised by Aboadze Thermal Plant for electricity generation as well as domestic usages and industrial purposes.

The worrying signal is the recent request by the Jubilee Partners for Environmental Protection Authority to allow some flaring due to safety reasons. The zero gas burning policy produces tremendous benefits to the state in terms of health, economic and environmental gains. Therefore, the delay in the completion of the Ghana gas project may have serious implications.

Its environmental impacts on the communities near to flared stack are dire. Both carbon dioxide and methane are by-products of the gas flaring which cause the climate change. Furthermore, it generates tremendous heat in the surrounding which does not support vegetation growth. Atmospheric contaminants such as particulate matter, hydrogen sulphide, carbon and sulphur acidify the soil thereby depleting soil nutrient. This naturally affects the livelihood of crop farmers in the catchment areas throwing them out of business. The question is what are the alternative livelihood initiatives available to them?

Perhaps, the most serious effect of flaring is the impact on the health of the people. Flaring has harmful effects on the health of the people of the communities in their vicinity as variety of poisonous chemicals is released into the atmosphere.

The people who are exposed to these poisonous substances can suffer from variety of health problems such as cancer, leukaemia, anemia, asthma, breathing difficulties and chest pains as well as deformities including lung damage and skin problems among children. The health implications are more severe on those who live and work in proximity to the production process. The proximity has been defined as any distance between 0.2 to 35 km from the flare stack.

Also, gas flaring has negative impact on the economics of the nation in terms of loss of funds and revenue. For example, Ghana is estimated to lose 1.2 million daily in revenue for either flaring the gas or delay in utilising the associated natural gas by the Ghana Gas Company. On the other hand, the Chief Executive Officer of the Ghana Gas, Dr. George Sipa Yankey states that the country stands to save more than 500 million dollars per annum from the utilisation of the gas by Volta River Authority.

The delay of the gas infrastructure project as a turnkey contract could also result to cost overrun. The cost of the project may be doubled at the time of the completion. In order to keep the cost under reasonable levels, the current timelines for mechanical aspect to be completed on 31st March, test-run to be conducted on 28th April and supply of the lean gas to VRA to begin by the middle of May, 2014 as given by Mr. David Xu, the Technical Director of Sinopec, must be strictly adhered to. The various postponements and lack of clarity on the completion date are the bane of this laudable project.

The management of petroleum revenue remains a nagging issue for the nation. Ghanaians naturally have high expectations about the prospects of the oil find. The most pronounced expectation is that the oil exploration would propel the accelerated economic growth, thereby fast-tracking the middle income status of the country.

In the light of this, two main funds were created; the consolidated fund for budgetary purposes and Ghana Petroleum Funds (heritage and stabilisation funds) to efficiently manage the revenue emanating from the oil production. The “resource curse” is imminent when the local content requirement is excluded and the oil revenue is badly managed.

However, in Ghana concerns have started tickling in concerning the government's spending of the revenue in non-priority areas such as art and culture and others which are in contravention to the Petroleum Revenue Management Act. Such priority areas according to the Act include; expenditure and amortization of loans for oil and gas infrastructure, road and other infrastructure, agriculture modernization, and capacity building in oil and gas. Even in these areas, concerns have already been expressed about the judicious use of the revenue in the budgetary allocations. For instance, in 2013, an amount of 24 million dollars was allocated to 64 road projects with a total distance of 2,124 kilometres across the country.

These disbursements will take 30 or more years to complete these projects making it imprudent expenditure. Projects taking 30 years to complete in Ghana? Consequently, the projects will suffer cost over-run, doubling or tripling the project sums. Focusing the disbursement of the oil and gas revenue on specific road networks to ensure prudence and efficiency moving forward is critical. Norway as the best oil revenue managed country and Nigeria as the worst case scenario are the examples that should provide useful lessons for Ghana.

Despite the above stated challenges, the Ghana Continental Shelf's Oil and Gas Industry looks promising and bright with production expected to peak beyond the 120,000 barrels a day. However, if these challenges remain unresolved, they will have adverse impacts on the efficient operations of the oil companies and greatly the government's revenue.

Therefore, collaborative efforts with right investment climate, government policies, appropriate capacity building and other proactive measures are needed to surmount the obstacles if the industry would continue to play significant role in the country's economy.

By Mustapha Iddrisu, Energy Analyst