1. 12 June 2013
Ghana Politics & Security
Oil & Gas Supplement
Projects & Production
Government approves plan of development for the TEN fields,
after weeks where conflict between the Jubilee/TEN partners,
the GNPC and government had become increasingly apparent
As the Jubilee field edges towards its peak production of 120,000
b/d it now appears that - the Tweneboa, Enyenra and Ntomme
(TE") discoveries to the west of Jubilee – in the Deepwater Tano
exploration block adjacent to the maritime border with Cote d’Ivoire
which is currently disputed - will soon benefit from a major US$6
billion development project just approved by Ghana's government.
The two major TEN and Jubilee partners - Tullow and Kosmos -
both confirmed at the end of May that the TEN Plan of Development
submitted by them, along with international partners Anadarko and
South Africa's embattled PetroSA,) to the government in late 2012,
has now been approved.
In the weeks before approval it emerged that the TEN/Jubilee
partners were in dispute with the government over the need,
according to the government, to drill another appraisal well
("Ntumme") to confirm the commercial viability of the project prior to
Plan of Development approval. The TEN partners - having spent
approximately US$1 billion on field appraisal at that time - strongly
argued that further financial confirmation was unnecessary, and
already believe that the field could hold up to 1 billion barrels of oil.
Government officials claimed that they needed further confirmation
due to "technical mistakes” made by the partners during the first TEN
phase, likened by the government to those that had allegedly been
made by the partners at Jubilee which caused last year's production
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shortfall which required remedial activity and led to lower than
expected revenues and taxes. One official in Accra suggested that
the low level of Jubilee local content was also a result of a host of
Jubilee partner actions that ignored Ghana's national interests.
By contrast, the TEN partners emphasised the opportunity cost of
not promptly starting the field’s development given that it is still
expected that it will take around three years to bring the field on
stream with production of around 80,000 b/d.
In addition, it should be noted that, as mentioned in Ghana Oil and
Gas Supplement – 14.05.13, Kosmos is also in disagreement with
the government at its Mahogany Deep and Mahogany East
discoveries to the east of the Jubilee field in the West Cape Three
Points (WCTP). There is an outstanding "notice of dispute" filed by
Kosmos being disclosed along with a description of the matter in its
latest quarterly filing with the US’ Securities and Exchange
Commission.
The approval of the TEN plan of development is, however, a major
step forward and will, among other things, enable the TEN partners
to finalise and award a number of contracts needed under the plan
of development. This is important at a time when contract approvals
and personnel changes have been slowed right down at Ghana's
state agencies due to uncertainty over the Supreme Court election
case and a possible fresh election.
According to Tullow, whose CEO Aidan Heavey expressed his
delight at the approval of Ghana's "second major offshore
development", the US$6 billion project should not only produce
around 80,000 b/d once completed (including the drilling of over 20
development wells and the provision of another FPSO), but should
also be a source of future gas production.
Although Tullow still aims to divest a portion of its almost 50% equity
in the TEN project for strategic and policy reasons, it is certainly a
positive development for the company. The news, however, caused
only a modest rise of around 4%-5% over a week in Tullow's share
price on the London Stock Exchange.
This was partly due to market expectations that the development plan
would inevitably be approved in the coming months and the less than
positive news from the Calao-IX well in the Tullow-operated CI-103
Cote D'Ivoire block.
Its planned divestment would bring Tullow more in line with other
major partners including Anadarko (17%), Kosmos (17%) and the
GNPC (15%), with PetroSA’s Sabre Oil & Gas subsidiary holding less
than 4%.
Changes of leadership for Tullow in Ghana
Meanwhile, Tullow local management team is set to change with the
impending replacement of the high-profile Dai Jones by current
electricity transmission entity GridCo chief executive and Tullow
chairman Charles Darku. Last month, Jones stated that Total’s oil
discoveries in Cote d'Ivoire’s CI-100 block adjacent to the disputed
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maritime border would not threaten Ghana's western-most fields
including, presumably, TEN.
Although official reports suggest that Dai Jones is simply moving
back to London there are reports that Jones' decision was the result
of a power struggle. That should be seen in the context of Tullow
has vacillating between supporting the ruling NDC and NPP. Jones
was close to the NPP and Darku supports the NDC. Darku's
business reputation is poor among Ghanaians but he is a
consummate political networker
As long as the NDC and President John Mahama win the Supreme
Court case then Tullow would have made the right choice. But if the
NPP emerge as the ruling party then Darku could become more of
a liability for Tullow.
This is bad news for Tullow which is already trying to manage some
complex Ugandan litigation over tax payments plus a history of
criticism by Ghana's governments due to now resolved Jubilee field
underperformance and the revenue implications.
Darku's role will, however, be to satisfy and soften NDC demands
for more local content in Tullow's operations. His own position as a
Ghanaian managing director of the company which is quoted on the
Accra Stock Exchange is part of this carefully crafted image of a
medium size company that is absolutely committed to Africa.
Heavey repeatedly claims that he wants Tullow simply to be
“Africa's biggest and best oil company”.
Finance & Economics
Ghana's cedi continues to depreciate as banks set to introduce
new formula for calculating policy interest rate, and fiscal deficit
set to narrow in second half of 2012
After the Bank of Ghana's (BoG) increased the policy interest rate
from 15% to 16%, as it viewed that inflationary risks outweighed any
risks to growth, the cedi continues to depreciate. This time it reached
the headline threshold of below two cedis per dollar following declines
of around 5% already this year against the dollar.
By comparison, the exchange rate at the beginning of 2011 was
slightly better than 1.5 cedis per US$. That was shortly after Ghana’s
first oil production, which was partly responsible for cedi depreciation
by causing an increase in demand for dollar-denominated imports.
Many, including analysts at Ghana Commercial Bank (GCB), expect
depreciation to continue as these underlying trends continue. So far
Dutch Disease has not emerged as a major problem in Ghana – with
the prices and production of exported agricultural commodities and
minerals remaining at previous levels. Yet given that the real
exchange rate (incorporating purchasing power) depends on more
than the market or nominal exchange rate this could still become a
problem in future – with looser macro-economic management.
At a time of tightening domestic credit it should be noted that new
Bank of Ghana rules requiring that Ghana's "universal" banks - the
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over-twenty major indigenous/local banks and the local subsidiaries
of foreign banks, including Ghana Commercial Bank, Ecobank and
Stanbic among others - implement a new "base rate formula" to
ensure transparency in the calculation of Ghana's lending rates will
be enforced as from 1 July.
Whether this will lead to a reduction in lending rates in the short
term is another matter given that a major formula input, the policy
interest rate, has been steadily increasing. Yet Ghana's banks –
after they completed recapitalisation exercise on schedule - have
been shown to respond to incentives.
ADB forecasts strong economic growth for Ghana
Last week the African Development Bank projected GDP growth
would reach 8% this year and 8.7% next year. This acceleration of
2012 economic growth matches the recent projections of finance
minister Seth Terkper.
Not only does this bode well for Ghana in the medium term but also
projects like TEN could enable this trend to continue into the next
administration. The Ministry of Finance also expects the fiscal
deficit to narrow in the second half of the year although as some
observers say this is unduly optimistic. The deficit has stayed high
over the first few months of the year and the government has to
finance some large public pay awards and perhaps fresh elections.
Ghana continues to court foreign investors
Last month President Mahama visited Japan - a country whose Prime
Minister Shinzo Abe recently announced a new US$32 billion plan
for African investment to an audience of African leaders at the 5th
Tokyo International Conference on African Development ("TICAD").
Not only is Japan investing in Ghana infrastructure under a renewed
Yen loan, but Ghanaian officials have been encouraging Japan to
invest in Ghana's energy and oil and gas sectors. Major Japanese
companies are already interested in other sectors such as agriculture
and agro-processing.
Meanwhile, a proposed US$20 billion African Development Bank
(ADB) infrastructure fund could provide an alternative to Chinese
financing. AfDB officials expect the fund to be supported purely from
sources outside Africa as well.
Investment was also the focus of President Mahama's recent trip to
France with finance and oil majors Société Générale and Total
emphasising their commitment to making future investments. Total
signed up to participate in several projects this year. Technip,
operating in Ghana since 2009 at the Jubilee field, also reaffirmed its
commitment to Ghana operations including its joint venture with the
GNPC (see Ghana Oil and Gas Supplement – 19.11.12).
France continues to be a major destination of Ghana's exports,
accounting for around US$1 billion of exports in 2012, compared to
under US$800 million of imports from Ghana, significantly exceeding
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Ghana's exports to its former colonial power, the United Kingdom,
and any other individual trading partner.
Ghana's banking sector continues to make positive noises
The major local Ghana Commercial Bank - fresh from a minor name
change to GCB Bank Ltd as part of a re-branding project to position
the bank as "modern, progressive and people centred" according to
bank managing director Simon Dornoo - announcing a 30%
increase in consumer lending, including personal loans.
In addition, Dornoo emphasised that the debt owed to the bank by
the indebted and non-operational Tema Oil Refinery (TOR) is not a
major cause for concern as measures have been put in place to
recover the debt which should be settled "in due course". The
government, through cash payment and debt raising, has partially
paid off the approximately one billion Ghana cedis (or just under
US$700 million dollars at prevailing exchange rates at the time) that
TOR owed to GCB in 2010 prior to Ghana's first commercial oil
production at the Jubilee field.
With only US$50 million of this debt remaining, according to Mr.
Dornoo, TOR's future viability outweighs concerns about the knock-
on effect of its debt on Ghana's banking sector.
The National Petroleum Authority completes the removal of
subsidies on the key fuel products, against backdrop of
impending Public Utilities Regulatory Commission review of
power prices and Nigerian fuel subsidy dialogue
The long process of reducing and removing Ghana's fuel subsidies
has, according to downstream regulator the National Petroleum
Authority (NPA), been completed on the major fuel categories
accounting for around "95%" of Ghana's fuel with prices in petrol, gas
oil and liquid petroleum gas rising by between 2%-3% effective on 1st
June. The pricing of other fuels, such as kerosene and marine gas,
remains unchanged.
According to the NPA’s CEO, Alex Mould, these controversial
changes will be supported by the future passing through of future
market price changes to consumers, even though Mould stated that
the pricing policy would shortly be reviewed. He was quick to note
that reductions in international market prices would mitigate any
increase in "pump prices". That raised the question of whether a
major change in market environment and international prices would
cause a reversal in subsidy policies. The implied answer is “no” but
the NDP will face heavy political pressure over the subsidy issue.
Earlier this month the government reduced the price of aviation fuel
by 20% and asked airlines to reduce aviation transport prices to
reflect this decrease. It claims that these reductions were necessary
to develop Ghana as an "aviation hub" with Accra's Kotoka
International Airport as its centre suggests a more flexible – if not
politicised – attitude to subsidies and prices. Industry operators still
claim that airport taxes rather than fuel prices are largely responsible
for Ghana's high airline fares. In addition, reducing airfares will not
resolve the issue of expensive road and water transport on which
movement of most goods largely depends.
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The effect of downward movements in Ghana fuel subsidies can
also be seen in two other examples: that of energy prices and with
regard to fuel subsidies in Nigeria. The Public Utilities Regulatory
Commission is to begin a review of the Electricity Company of
Ghana’s request for a significant increase in the power tariffs that it
can charge its end-consumers who currently pay much less than
the marginal cost of power production (a marginal cost that has
recently increased due to the shortage of cheaper gas to fuel
Ghana's thermal power stations).
Meanwhile the reduction and removal of Ghana's subsidies on
major fuel products has been cited in Nigerian press reports that the
Nigerian Federal Government may also further reduce fuel
subsidies. There is pressure on Abuja from the IMF but it also
faces pressure to maintain the subsidy because of early 2012
protests and unrests at the removal of subsidies at that time. Ahead
of the 2015 elections President Goodluck Jonathan will tread
carefully on the fuel subsidy issue in Nigeria and is unlikely to do
Ghana any favours on gas supply given his critical plans to improve
Nigeria's electricity supply over the next two years.
Strategic View
Power sector goals will have wide-ranging implications for oil
and gas sector
The inauguration by President Mahama of a small (2MW) solar
power plant at Navrongo in Ghana's Upper East Region in May has
prompted broader discussion of Ghana's energy needs and the
balance between hydrocarbons and renewables.
A visiting delegation of German industry and commerce
representatives or "AHK Ghana" in May concluded that Ghana had
significant potential in solar power as well as other forms of
renewable energy.
Ghana's renewable power currently consists of hydropower that has
long been the anchor of its local power needs as well as providing
support for key industrial plants (including the partially operational
VALCO aluminium plant). Now the government aims for around 10%
of electric power from renewables excluding existing hydropower by
2020, in addition to aiming for a near-doubling of Ghana's electricity-
generation capacity to 5,000MW by 2016.
Power growth will increase demand for Ghana's gas although the
impact of renewables may slow the increase of the country’s
dependency on gas to produce economically viable thermal electric
power. The gas has several other uses such as export and to support
fertiliser plants - including a planned US$1.2 billion plant to be
constructed with the assistance of Indian investment - the major
planned gas processing plant at Atuabo in Ghana's Western Region,
and feedstock for the planned petrochemicals industry.
Future increases in electric power from new thermal plants, mini-
hydropower plants or renewables will help the development and
reliability of industries and businesses.
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