Ghana oil & gas supplement 12.06.13.


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Ghana oil & gas supplement 12.06.13.

  1. 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
  2. 2. Ghana Oil & Gas Supplement 2 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
  3. 3. Ghana Oil & Gas Supplement 3 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
  4. 4. Ghana Oil & Gas Supplement 4 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
  5. 5. Ghana Oil & Gas Supplement 5 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.
  6. 6. Ghana Oil & Gas Supplement 6 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.
  7. 7. Ghana Oil & Gas Supplement 7 New methods of power generation and new plants will intensify the pressure for coherent pricing of power in the electricity sector. That will require coherent pricing across the gas and oil sector so fuel prices that reflect international prices. Just as with the mining sector, where regulation and tax policies have been compared, power sector developments and oil/gas sector developments should not be viewed in isolation. Local Content & Contracts Oil and gas local content policy is approved by cabinet and looks set to be presented to parliament in the near future Ghana's lack of official local content laws for oil and gas has been perceived as a significant impediment to increasing the participation of local businesses and employees in the oil industry. Some, such as Kwame Donkor of the Petroleum Commission (see Ghana Oil & Gas Supplement - - 01.05.13) claim that existing laws (a 1984 petroleum law and a bare-bones regulatory infrastructure for gas production and development) contain local content provisions. The lack of an updated and specific law, however, risks undermining the progress of local initiatives. Following last week’s cabinet approval of a "legislative instrument" for oil and gas local content policy the policy will be presented to parliament where it should become law with immediate effect. Information Minister Mahama Ayariga confirmed the cabinet approval, emphasising that the local content policy and future laws will include reporting procedures, research and technology transfer requirements. They will also prioritise the granting of agreements and licences to Ghanaians and requirements that foreign operators partner with Ghanaians in their operations (with at least 5% interest to be held by the Ghanaian partner). It should be noted that investment laws supervised by the Ghana Investment Promotion Centre also include requirements for a local partner at certain levels of foreign investment, so the inclusion of such requirements in the oil and gas laws should not be a surprise. The precise content of the impending laws should be made clear in the coming days, including the mandated contribution of Ghanaians at higher levels in foreign organisations/ joint ventures as well as non- technical and more fungible roles. © 2013 All rights reserved
  8. 8. 8 Produced by Menas Associates Limited, 31 Southampton Row, London WC1B 5HJ, UK. Tel: +44 (0)20 3585 1401 exclusively for Kosmos Energy All information contained in this publication is copyrighted in the name of Menas Associates Ltd and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. Disclaimer Menas Associates Ltd cannot ensure against or be held responsible for inaccuracies. To the full extent permissible by law Menas Associates Ltd shall have no liability for any damage or loss (including, without limitation, financial loss, loss of profits, loss of business or any indirect or consequential loss), however it arises, resulting from the use of any material appearing in this publication or from any action or decision taken as a result of using the publication.