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IMANI Alert: Petro Policy Under Trial

Ghana’s energy sector never ceases to fascinate.

We decided to reduce our spate of commentary for a couple of weeks to concentrate on putting together the next instalment in our series of reports on Ghana’s energy security and her fledgling petroleum industry. But the onslaught of new developments has compelled us to issue an unscheduled brief in the interim.

Happenings in the energy sector have been under three main themes.

The ExxonMobil – Kosmos – GNPC – CNOOC – BP – CNPC – Sinopec etc. etc. Slinging Contest

In one of our earlier reports, we mentioned interparty litigation as a credible prospect in view of the fact that the Jubilee Field is a multi-bloc, multi-party, entity (see: www.imanighana.com/Ghana%20Oil%20&%20Gas%20Update.html). The protagonists in the current saga aren’t exactly dragging everybody in sight to court, yet, but there is seething resentment in many quarters about the state of uncertainty the development of the field has been thrust into. If Tullow refuses to sell, will it seek to maintain its status as the field’s operator if ExxonMobil was to come in (http://www.africanliberty.org/node/703 )? Why will Anadarko hold on to its stake? Will BP make a pass at Anadarko? Has any of the majors the guts to snap up the stakes of not just Kosmos but that of either or both of the two remaining key players?

The price named by ExxonMobil is interesting. Using a conservative figure of $60 as the average sub-NYMEX price of crude over the lifetime of the field, and 50% as the share of total field output due the investor, will suggest that ExxonMobil puts the total recoverable reserves of the field at somewhere around 500 million barrels. Tullow has been giving the impression that recoverable reserves in the field are 3 times that figure in recent days. What does GNPC think? If it agrees with Tullow, then it should persist in its current demand of buying into the field at the same $4 billion being offered to Kosmos, as it would mean that the asset is being grossly undervalued by the market.

We are not too sure where the Chinese come in though. From some of the statements making the rounds, it appears that Ghana’s energy bigwigs want the Chinese to propose one of those fat, multilayered, development “packages”, containing, of course, enough financing sweeteners for GNPC to become a major stake owner. The thing however is that Chinese negotiators are as tough as nails. Most folks who have survived deal making with the Chinese will tell you that ratification of the contract is usually only the beginning of a more sophisticated but draining tango. Remember, for instance, that the Bui dam was supposed to come online this year. As we understood it, Ghana was to pay for the bigger part of its share of the cost with cocoa. Apart from the small matter of some rare hippopotami, the commencement of the project was generally plain-sailing. Yet, inexplicably, we are now being told that commissioning has been pushed back to 2013.

At any rate, CNOOC, SINOPEC, BP and all the others performing courtship rituals around the field are nowhere as advanced in their bidmaking compared to Exxon, which has named a price and has seemingly got the private equity backers of Kosmos on their side. The government’s strategy, it would seem, is to bully Exxon into agreeing to make additional sovereign stake concessions that will see GNPC top 20% or more, instead of its measly <14% or so post-deal carried interest. The problem is that the Americans think government of Ghana is bluffing. They know the energy sector establishment in Ghana is fractious, and growing more so by the day. They know ruling party bigwigs want accelerated field development in order to bring in much-needed, non- Bretton Woods controlled, cash by 2011. They know that it will take months of complex negotiations for the government to assemble a genuinely credible rival bid that substantially increases GNPC's share of the asset. Now that energy sector bigwigs are contemplating melding various oil majors into one contender, including, according to some reports, an effort to tie BP with one of the Chinese giants, the prospect of a prolonged deal-fixing marathon has deepened. But Exxon knows better than to try to call the bluff of the energy bigwigs. It dares not take the legal route to challenge Dr. Kwabena Donkor's "right of first refusal" mantra. It's just got to talk, and it is doing a lot of that nowadays. What is more worrisome is that government of Ghana has almost no real cards to play when it comes to post-deal field development pace. The more GNPC's stake rises, the harder it would be for the cash-strapped sovereign player to raise cash to finance its share of the joint venture, and the more imperative therefore it becomes for government to rub co- financing into the deal, somehow. But the fundamental issue is that the new buyers will still maintain strong autonomy when it comes to field development. It gets curioser and curioser.

Erratic Fuel Supply

As we write, Tema Oil Refinery is sorting out quality and financing issues with a crude dealer in order to take in a consignment of nearly a month’s supply of crude. It appears this is a cargo-by-cargo spot transaction of the plain vanila kind: cash and carry, more or less. While everyone is righteously cagey about any attempt by Ghana to engage in futures trading, by virtue of bitter past experience, it has generally been safe to assume here in this country that the more ‘forward’ and the less ‘prompt’ the oil deal the better. Which is why our governments spend an unbelievable amount of senior management time hunting for one diplomatic deal after the other. Indeed, in 2005, Ghana signed a 30,000 barrels-per-day (bpd) deal with Equatorial Guinea that to date has yet to materialise.

Even as we pester Nigeria for a sweet deal, we seem to ignore the perils the Nigerians themselves are facing in their own backyard. Due to joint venture – effectively-mutated-to-production-sharing-agreement type arrangements in the Nigerian petroleum sector, the Nigerian government usually has at its disposal about 1.1 million bpd for assignation by a simple formula to global oil traders, distributors, and bilateral treaty counter-parties (around 20% of total) through the Department of Petroleum Resources cum Nigerian National Petroleum Corporation (NNPC).

This categorisation is however much too theoretical, and in practice those who actually get the oil justify their entitlement by intertwining the various types of deals. It is therefore usually prudent for a country seeking a contract for crude on bilateral treaty basis to also engage an oil trader in good standing with the Nigerian National Petroleum Corporation. Otherwise, one bizarrely finds that, despite the existence, of a duly executed treaty, NNPC still insists on scrutinising the financial bonafides of whichever entity is designated by the beneficiary country under the treaty to handle the lifting transaction. This in our case has led to a frustrating ring-a-roses featuring TOR and GNPC.

“Irrevocable letters of credit” become a specter haunting such sovereign-to-sovereign deals. That is why the most consistent tune from the government has been that TOR difficulties with lifting crude in Nigeria is ultimately to be traced to the indebtedness of TOR. As we have consistently been told, oil marketing companies (OMCs) owe TOR millions, and because of that are sinking TOR’s credit-worthiness. The fact though is that a cascading column of debt bestraddles the industry like the coils of a tropical python. The OMCs owe TOR; TOR owes the Bulk Distribution Companies; and some of the Bulk Distribution Companies owe the banks or their trading partners. The OMCs of course don’t just owe TOR; they also owe the banks, and their capacity constraints are a reflection of their weak credit standing and vice versa.

The question though is this, why is everybody swimming in debt? Why can’t the OMCs grow their capacity? Why is it that despite the debt, the ranks of OMCs are swelling rather than thinning? Why are OMCs not being subjected to the fine principle of survival of the fittest? Why are bulk distribution companies not bypassing TOR to engage the distribution network directly, and more aggressively? Is it not barely a year ago that Cirrus was touting the building of the first indigenous, privately owned, bulk terminal, and gearing up for a facedown with the TOR-BOST system? Where are the Iranians who were going to build that export-oriented refinery? And the folks behind the iconic Granada hotel? Weren’t they also on course to deliver a fully-fledged rival to TOR?

Weren’t we going to see a situation where a bold private operator will build their own Single point Mooring facility (SPM), receive product from a Trafigura-sized partner, pipe it all the way to Bimbilla to bypass the rickety barges at Akosombo? Or rather pipe it to that new refinery on the eastern seaboard, unload the resultant product onto bulk carriage vehicles, which shall in turn unload same into depots in Tamale for onward distribution across the Savannah and the Sahel? Where is the spectacle of the integrated petroleum chains we were promised when deregulation begun over a decade and half ago? What has happened since 2005?

For therein lies the rub. If we intend to diversify our supply sources, build strategic reserves, service the sub-region, enrich the midstream capacity of our petroleum sector, and eventually build companies capable of participating in the high-value oil prospecting and production ends of the industry, then we better return to the path of deregulation (http://www.africanliberty.org/node/747). The current set of half-measures represent the worst of both worlds. The private sector forgoes the hard risks to engage in trading, while government chokes on debt even as it jacks up prices. What kind of a system is that? The key to genuine petroleum sub-sector growth is investment. It is trite fact that in our current circumstances, what we require to see investment flourish is more private money inflows. Investors, however, will not be enticed to invest in the infrastructure that shall ensure a reliable supply of fuel without crippling the sector with unsustainable debts unless they are fully assured of the liberalisation regime. It is such a regime that will guarantee their autonomy of action and the recoupment of their financial injections.

The competition that deregulation will foster will drive out of the market the OMCs that have no business dabbling in the sector. A bulk distributor selling directly into the retail network will not suffer bankrupts with a penchant for name-dropping. It shall not suffer fast-talking, self-aggrandizing, incompetents. The credit checking capacity of such distributors will be more formidable. They will find it easier to weed out dabblers and time-wasters in the sector than TOR ever shall. The general improvement in the health of the sector will attract funds into now crippled institutions like TOR and BOST. TOR is small because it is poor, and poor because it is small. It has zero economies of scale. Its equipment are far from state of the art. Forced to accept crude even when the quality is questionable, because of an over-dependence on concessionary trading, the outmoded equipment is being further subjected to additional stress from unsuitable feed. Sometimes it has to depend on the unreliable pipe-borne network for part of its cooling needs. Overstaffed, under-capitalised, and plagued with an unacceptable turnover rate for its most qualified employees, the refinery is in a dire need of regeneration.

In the current half-regulated, half-deregulated, regime, with its Platts-based price-control regime, TOR wont attract bird-droppings even if it went into poultry management.

Deregulation will bring money. Money will make the sector more specialised, more integrated, more sophisticated, more competitive, and therefore more efficient. Fully deregulate we must.

Petroleum Revenue Management

We will only touch very briefly on this subject as we shall be treating it in great detail in the future, building on a recent article by our colleague.

The most worthwhile point to make is that not all petroleum funds are the same. Dating back to the 70s, our Nigerian friends have experimented with a couple. They have had the Petroleum Technology Development Fund, the Petroleum Equalisation Fund, the Petroleum Trust Fund etc. etc. The origin of financial flows into these funds are also usually different. Whichever type of fund(s) Ghana establishes, we may decide to capitalise them with income from royalties, carried interest, lease rents, taxation of on commercial operations, bloc and concession sales etc. etc. A specific strategy may undergird the choice of fund, and the particular income stream.

That is why in Norway, for instance, both main funds are managed by private sector specialists in fund management. In Ghana, we have the SAS, Data Bank, EDF, etc. etc. They may be asked to bid to manage the fund.

In Nigeria, some of the greatest controversies have erupted over bureaucrat-managed funds. In fact, one of the most titanic clashes in the erstwhile administration, between the President and his Vice, was over deductions from one such bureaucrat-managed fund, ostensibly for completely irrelevant expenditure.

The point is: the only reason why one may set up a special fund for petroleum income receipts, rather than lump everything into the consolidated fund, is because one has “investment” in mind. Investment does not succeed by providence. A fund must have a sophisticatedly deduced investment strategy. Certain Norweigian funds invest a fixed proportion of inflows overseas in a bid to diversify risk. Will our fund(s) invest in our stock exchange? What will be the criteria for selection of interests?

Some funds, such as those prominent in Russia, are stabilisation funds, more so than growth funds. They exist to smooth out fluctuations in national earnings due to erratic international trading prices for the commodity. In places like Abu Dhabi, the main funds are essentially transitional hedges, anticipating a time when national reserves will shrink or disappear. In Dubai, diversification has been the strategy. Even here, stark differences can emerge as to the focus of diversification. The idea may be simply that petrodollars boost venture and private equity reserves, which in turn are used to grow new lines of businesses well outside the petroleum mainstream (consider Dubai’s real estate and logistics emphases). But it could also aim at sprouting branches from the root petroleum sector. Oil production can facilitate ICT by creating a major need for imaging, seismography, and modelling capacities. It frequently leads to a boost in transport infrastructure, freight insurance and environmental risk engineering. An oil fund may well be geared towards facilitating such spin-offs and outgrowths.

It is doubtful though that a single fund can be as multi-strategic as one would in theory wish. Focus is a brutal necessity. That is why it is not enough for government to announce a revenue management bill and leave it at that. The legal and legislative imperatives are only as important as the financial and engineering concerns, and cannot therefore take undue priority. Government needs to publish serious forward-looking documents on these various issues, and should afterwards revel in the spectacle of civil society tearing these documents into shreds.

The National Petroleum Authority and the Energy Commission are the primary instruments of research in the sector, and should be given much more clout than they currently possess in the policy formulation process. Even more than that, they are also regulators. We are worried, for instance, that contrary to stipulation the Energy Commission doesn’t appear to be as involved in gas infrastructure policy (eg. Jubilee-to-Aboadze) in this country as it is mandated to be.

There ought to be greater institutional maturity in the way we manage the energy sector in this country, and transparency will aid that greatly.

We on our part, as civil society, wont vacate our vigilance role anytime soon.



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