Ghana: Fuelling the economy

After months of anticipation, Ghana has joined the ranks of oil-producing nations. As the oil pumps get up to speed, so are the West African country’s plans for the newfound income.

“Revenues from the oil will be used for the benefit of all, and not the benefit of a few,” said President John Atta Mills at the December 15 ceremony to mark the start of production. He promised that the precious resource would turn Ghana into a "modern 21st-century prosperous industrial nation".

With an estimated reservoir of 1.5bn barrels, the offshore Jubilee Oil Field, at present Ghana’s only producing field, is this decade’s largest oil province to be discovered in West Africa. Moreover, the crude’s light and sweet character is set to command competitive prices on the international market.

Tullow Oil, the field’s leading production partner, has declared that initial production of 55,000 barrels per day (bpd) will gradually increase towards 120,000 bpd as new wells are completed over a three to six-month period. Production is set to reach around 250,000 bpd in three year’s time, according to the company.

Besides Tullow Oil, which holds 34.7% of the venture, the consortium consists of five other players including US independent Anadarko at a share of 23.49%, Texas-based Kosmos Energy at 23.49%, Ghana’s national oil company, Ghana National Petroleum Corporation (GNPC) at 13.75%, Sabre Oil and Gas, a privately owned exploration company, at 2.81%, and Ghana-based EO Group at 1.75%.

In the wake of Jubilee’s discovery, several other high-quality offshore reservoirs have been discovered in the region. In March 2009 the Tweneboa reservoir was laid bare, whereas in July 2010 the Owo-1 well struck a substantial gross oil column of 200 metres. Exploration has also been planned alongside Tweneboa to further explore the Ntomme prospect.

Nevertheless, despite these, and possible other discoveries, the Ghanaian government has taken strides to manage public expectations of the oil wealth, which given the forecasted production rates for the coming years, are relatively moderate.

While announcing the 2011 national budget, Kwabena Duffuor, Ghana’s Minister of Finance and Economic Planning, declared that oil is expected to account for about 6% of Ghana’s domestic revenue in 2011 and added that oil revenue will be considerably lower than the non-oil tax and non-tax revenues. Duffuor estimated total revenue from oil for the first year at GHS584m ($399.2m).

An IMF-mission to Ghana in October 2010 emphasised that oil production should not be considered a cure to persisting macro-economic challenges such as a lingering budgetary and fiscal deficit as well as unemployment.

Peter Allum, head of the mission stated that “[oil production] won’t create many jobs in and of itself. It’s a very capital-intensive industry and the oil is based offshore so a lot of those jobs are going to be expatriate jobs.” As far as average annual revenue is concerned, the IMF has estimated that Jubilee will generate around $1bn.

The message of the government as well as their international donors is a clear one; the impact of Ghana’s oil wealth on its economy won’t be instant or spectacular. However, the additional income does offer important development potential.

Shortly after talks with government officials, Allum underlined the importance that the oil revenues are used to improve Ghana’s infrastructure and its competitiveness which could lead to further growth and job creation.

One issue that continues to raise both domestic and international concerns is the allocation of oil revenue. To date the Ghanaian parliament has yet to reach consensus on the Petroleum Law and Oil Revenue Management bills.

One key obstacle here is the demand of residents of the Western Region where the oil was struck for a significantly improved standard of living. Chiefs from the region are demanding 10% of the total oil income be spent on infrastructural development.

An amendment allowing the government to collaterise up to 70% of revenues from oil has equally slowed down the approval process. Opponents of the idea feared that this would further erode Ghana’s debt position posing unacceptable risks on the economy in case of an unexpected drop in the oil price. As per December 9, however, a majority in parliament voted favour of the regulation.

“The amendment was carried by 97 against 67. It means 70% of oil revenues which will go to support the government budget can be used as collateral for loans,” Jones Kugblenu, spokesman for Ghana’s legislature, told local media on the day of the event.

In a bid to stem concerns, Duffuor vowed that Ghana would “avoid the pitfalls that have characterised some countries on the discovery of new national resources”.

With oil production now fully on-stream, public pressure has mounted on parliament to come to an agreement; industry experts expect both bills to be pushed through parliament before the end of the year.

The worries of domestic and multilateral interest groups seem to have left interest of foreign investors unscathed.

At a recent energy conference in Riyadh, Saudi Arabia, Crown Prince Alwaleed bin Talal bin Abdulaziz Al Saud commented that the Saudi Kingdom had taken a serious interest in Ghana’s oil and gas industry. The Crown Prince was quoted saying that “Ghana is witnessing a major renaissance and a boom in its economy and I think the leadership by the president and his vice-president is moving Ghana in the right direction.”

Besides Saudi Arabia, interest has also been expressed by China’s state-run offshore oil company CNOOC and South Korea’s National Oil Corporation to obtain shares in downstream oil activity. Furthermore, Japan-based Mitsui Ocean Development and Engineering is looking to increase its activities in Ghana after winning $875m contract to provide oil-processing facilities in 2008.

Investments are also expected outside of the oil sector and related areas. “Blue-chip companies in industries such as IT and telecommunications are likely to give Ghana even more consideration as a result of the oil,” Heather Byrnes, head of the US Embassy’s commercial section in Accra, told OBG.

Ghana’s political stability has contributed significantly to its positioning as a regional business hub and the nascent oil and gas sector will act as a bonus to that. According to Byrnes, “It gives the country that competitive edge that can put it just above other high-ranking investment destinations in the region.”

Despite the modest size of the proven oil reserves, Ghana’s economy is set to grow at impressive speed over the coming years. According to the IMF’s latest country analysis, Ghana stands the chance of achieving middle-income status within 10 years, putting it at a par with countries such as China, Egypt, India and Jordan. Provided the government uses its new-found oil wealth wisely and defies concerns of being distracted from a diversified economic development policy, foreign investors are keen to come on board.