Game changer: Hydrocarbons reserves have reshaped the economy

Since the discovery of offshore oil in 2007, Ghana has been adapting to the new reality of its hydrocarbons economy. The initial euphoria has given way to some of the more challenging aspects of extracting oil and gas offshore, but with the Jubilee field producing near capacity and plans to develop the TEN field approved, Ghana is on solid footing to maximise oil production, development and exploration. As production grows, so too is energy consumption, and securing fuel for electricity, industry and transportation is a key issue.

This medium-term need to link hydrocarbons wealth with local consumption has lent added urgency to the drive to build the required downstream infrastructure, but crucially – and unlike some of its neighbours – the country is in a good position to maximise the local value wrought from its reserves. Furthermore, the sector is still young, and the field is wide open for investment all along the value chain.

HISTORY: The first oil was pumped from Jubilee field, located off the coast of Takordai, in December 2010. In 2012 production at Jubilee increased 15% year-onyear (y-o-y) to reach 27.4m barrels of crude oil, all of which was exported for a total of $2.97bn, according to data from the Bank of Ghana. Offshore exploration had been unsuccessful until 2007, when the oil deposits now producing were identified by UK-based Tullow Oil and US-based Kosmos Energy. While Tullow drilled in their Deepwater Tano Block and Kosmos drilled at West Cape Three Points, it was discovered the finds were part of a single reservoir, now re-christened the Jubilee field in honour of the 50th anniversary of Ghana’s independence and the year the oil was found. Kosmos and Tullow signed an unitisation agreement in 2009, dividing shares of Jubilee with the state-owned Ghana National Petroleum Company (GNPC), along with independent operator Anadarko Petroleum, Sabre Oil and Gas Holdings, and EO Group.

Tullow acquired the stake of Ghanaian-owned EO Group for $305m in 2011, and South Africa’s national oil company PetroSA purchased Sabre in its entirety for $365m in 2012. Stakes in Jubilee are now divided between Kosmos, the operator, with a 23.49% share;

Tullow with 36.05%; GNPC with 13.75%; Anadarko with 23.49%; and Sabre, now a wholly owned subsidiary of PetroSA, with 2.81%. In 2012 oil surpassed cocoa, traditionally one of the country’s largest foreign revenue earners, to become Ghana’s second main export after gold, contributing 9.1% to GDP.

JUBILEE: A World Bank report estimated total Jubilee reserves at 683m barrels and forecasts oil production to plateau around 140,000 barrels per day (bpd) from 2013 to 2023. Gas production is expected to plateau at around 100m standard cu feet per day (mscfd) in 2015, although that figure is somewhat below initial targets of 250 mscfd. The Jubilee partners commenced Phase I development in July 2009, with the goal of producing 120,000 bpd by the end of 2011.

Using a floating production, storage and offloading (FPSO) vessel, the partners drilled 17 wells for production, water injection and gas injection. Production peaked at 88,000 bpd in 2011 before declining to 70,000 bpd. In 2012 production averaged 72,000 bpd, below the target, partly due to technical complications.

However, the operators worked to improve production at the beginning of 2013. “Production was a little restricted in 2012, but that is part of the learning curve for new facilities,” said Ken Keag, vice-president and country manager of Kosmos. “We did not get to the plateau of production at the time we had anticipated.”

Additionally, they commenced the $1.1bn Phase 1A development, which consists of eight new wells, five producers, three water injectors and an expansion of the subsea network. By the first quarter of 2013, production at Jubilee averaged 110,000 bpd, and with the completion of Phase 1A, scheduled for the end of 2013, production is estimated to top 120,000 bpd.

“Kosmos is planning an additional $330m of capital investment in Ghana in 2013 and a further $1.5bn over the following four years,” Keag told OBG. “In the next two years, we plan to continue the development and carbons, but the nearby Wawa discovery is being appraised for oil. “This is an important project that will give Ghana its second major offshore development,” Tullow’s CEO Aidan Heavey said in an official statement when the PoD was approved in June.

SANKOFA: A consortium led by Italy’s ENI Group identified oil and gas reserves in 2011 at the Sankofa well in Offshore Cape Three Points block. After more recent appraisals, ENI now estimates the overall recoverable oil to be at some 150m barrels. The site is also Ghana’s first non-associated gas find, where recovery is projected to peak at 160 mscfd. Oil production is forecast at 40,000 bpd. Stakes in the field are divided between ENI, which will operate the field through its subsidiary ENI Ghana Exploration and Production (47.22%), Vitol Upstream Ghana (37.78%) and GNPC (15%). GNPC has an option for an additional 5% stake in the project. The group is preparing a development plan in which production is due to commence in 2017.

FUTURE EXPLORATION & DEVELOPMENT: Kosmos has drilled exploration and appraisal wells throughout their West Cape Three Points block, identifying some promising sources at Mahogany Field. Unlikely to be commercially viable on their own, wells at Mahogany, Teak, Akasa and Bada (MTAB) could instead be developed as Jubilee satellites, according the World Bank’s analysis.

In March 2013 Hess hit oil at Pecan, its seventh successful exploratory well in the Deepwater Tano-Cape Three Points block. It owns a 90% stake in the block with de-bottlenecking of operations at Jubilee and export gas to shore, in the first instance bringing production up to the FPSO vessel’s capacity of approximately 120,000 bpd gross by the end of 2013.” The Jubilee field is rich in associated natural gas and is expected to produce 100 mscfd, but the infrastructure needed to transport and process gas is still under construction and not expected to be complete until the end of 2013 at the earliest. The government has a noflaring policy, leaving operators to re-inject the gas produced. As there is limited capacity for gas re-injection, the partners feared doing so past December 2012 might damage oil production. But with delays in getting the infrastructure on-line, three additional re-injection wells have been built to comply with the policy.

TEN: In June 2013 the plan of development (PoD) was approved for the complex known as TEN, an acronym for the Tweneboa, Enyenra and Ntomme fields. TEN is in the Deepwater Tano Block, 30 km west of Jubilee, and is divided among Tullow as operator (47.18%), Kosmos (17%), Anadarko (17%), Sabre (3.82%) and GNPC (10%). TEN output is estimated to peak at 80,000 bpd of oil and 85 mscfd of gas, with Kosmos forecasting production to begin in 2016 and the World Bank anticipating a 2017 start. Total oil reserves are 250m barrels, according to World Bank calculations. The development plan requires drilling up to 24 wells and will allow Tullow to tie-in both TEN resources and nearby discoveries to the FPSO. The proximate Okure well failed to identify hydrothe GNPC controlling the remaining 10%. Hess will submit plans for appraisal of the discoveries to the government and has begun pre-development studies, the company said in a public statement. The upside potential of development at Pecan is 300m barrels, starting production in 2020, and MTAB is 140m barrels starting in 2022, according to World Bank forecasts.

Outside the Tano basin, Keta Block off the coast of Accra is being explored. UK-listed oil firm, Afren, in partnership with ENI, Mitsui and GNCP, drilled a second unsuccessful well in the area in mid-2012, but told the press they would use that data to better understand “what still remains a very high-potential basin”. Ophir, a UK firm focused on Africa, also announced plans to drill in the Keta Basin in June 2013, and estimated success at 20%. “There is a lot of untapped potential in Ghana, as a couple of the licences have still not been explored,” James McDougall, the managing director of oilfield services company Baker Hughes, told OBG.”

REVENUE: Jubilee’s light and sweet crude is highly prized and of a similar quality as the price-reference Brent. Realised price per barrel averaged $114.54 in the first quarter of 2013, according to Kosmos’s earning report. Production costs for the Jubilee-operator were $6.73 per barrel during the same period, down from $7.87 in the first quarter of 2012. In a 2008 report, Tullow predicted production costs would rise from $7 a barrel the first two years to $7.50 three to seven years after, estimates that were considered relatively inexpensive compared to other deepwater sites.

Producing an average 72,000 bpd, Ghana’s oil industry contributed GHS4.65bn ($2.4bn) to GDP and brought in $542m in government revenues in 2012. The World Bank estimates that when production peaks in 2019 at 230,000 bpd and 345 mscfd in 2020, oil revenue will reach almost $4bn, assuming stable oil and gas prices.

GOVERNING STRUCTURE: Since oil was discovered in Ghana in 2007, the government has been sorting out the right way to capture and maximise benefits from hydrocarbons. The Ministry of Energy and Petroleum is the main agency tasked with developing and implementing policies and regulations in the sector, and is responsible for the spectrum of energy activities. The ministry coordinates other public bodies with specific objectives. The state-owned oil company, GNPC, was established in 1985 to encourage investment in the oil and gas sector, but in recent years has seen significant changes in its mandate. With the inflow of foreign interest following hydrocarbons discoveries, the GNPC now receives a portion of oil revenues to fund operations and investments in oil developments. The government is revising the GNPC’s mission to transform it into a stand-alone national oil company.

The deals with Jubilee partners were struck when exploration in Ghana bore higher risks than it does today. Under the contracts, the government receives a 5% royalty, a 35% petroleum income tax, a 10% carried interest (through GNPC), a 5% withholding tax on sub-contractors and surface rental fees. If returns to operators are between 19% and 40%, the government gets an additional oil entitlement of 5% to 25%.

The Ministry of Finance forecasts the effective share of revenue accruing to the government to be 42.2%. However, in 2012 the state received an effective 17% share of Jubilee revenue due to the codified limitless carried forward losses and capital allowances for operators. Over the next 19 years, the World Bank forecasts the effective share to average 51.7%.

SPLITTING THE SPOILS: Of course, as in every oil- and gas-producing country, questions of dividing the hydrocarbon spoils are inherently political, and some are increasingly arguing that Ghana is not benefitting enough from its hydrocarbons production. “We currently do not have a proper law to regulate the exploration and production of our oil and if we do not act quickly, we will virtually be selling off our oil,” Solomon Asoalla, the director of finance and administration at the Ministry of Energy and Petroleum, told the local media.

On top of the vast regulatory infrastructure governing Ghana’s supply and demand of hydrocarbons, Parliament makes decisions around revenue distribution and taxation, and has been debating a new law to regulate exploration and production of hydrocarbons for Oil & gas contribution to GDP, 2010-12 several years. Specifically, the legislature is considering expanding royalty rates and requiring oil firms to contract set quotas for local content and employment. The political debates unfolding at the presidential and parliamentary level have injected some uncertainty into the planning of Ghana’s upstream operators and is one reason that 2013 has been a slow year for investment, Kosmos’s Keag told OBG. Indeed, in conversations with OBG, the sense across the industry was that the contracts signed more recently were more favourable to the government. In mid-2013, several energy and petroleum bills were being reviewed by Parliament, including statutes that would change the royalty structure and require foreign firms to adopt local content.

UTILISING GAINS: Perhaps one of the most prominent issues facing the country is how to best divide and utilise the influx of oil money. In 2011 the government’s petroleum revenue was about half the amount predicted, largely due to the production shortfall at Jubilee and initial allowances for producers. The miscalculation contributed to the government’s 14% deficit that year. In 2012 the production shortfall was offset by higher than predicted oil prices, according to the World Bank. In a bid to avoid the same mistakes, the government forecast $582m in oil revenue in 2013. “These assumptions are quite conservative. At expected levels of production (105,000 bpd) and a price of $100 per barrel, Petroleum product consumption, 2010-12 government revenues for 2013 would reach roughly $800m,” the World Bank report stated.

Oil revenue is distributed according to the 2011 Petroleum Revenue Management Act, which requires that all hydrocarbons revenue be deposited into a single fund, the Petroleum Holding Fund. Of the fund’s benchmark revenues (the estimate of petroleum revenue forecast for the following year), 70% is allocated to the annual state budget. GNPC receives a portion to cover operating and investment costs, while excess revenue of roughly 30% is deposited into the Ghana Petroleum Funds, composed of a Future Generations Fund and an Oil Price Stabilisation Fund. Up to 70% of the oil revenues can also be collateralised.

The formula used to predict the benchmark revenue and distribute funds accordingly has some technical shortcomings and should be reconsidered, according to the World Bank report. Although the Public Interest and Accountability Committee, which is responsible for oversight, needs more funding, “Nevertheless, the core oversight and public disclosure functions appear to be solidly on track,” the report stated.

MAXIMISING BENEFITS: Oil and gas have rarely brought the sort of benefits hoped to other producers around the Gulf of Guinea. For different reasons, it has proven challenging for countries like Nigeria to use hydrocarbons production to trigger broader job or revenue creation. Upstream production is not labour-intensive, domestic financial institutions rarely have the capacity to finance or insure investments, and infrastructure to process output locally is generally limited. As a result, the true benefits of hydrocarbons wealth lie in developing mid-stream and downstream industries and reducing the country’s energy import bill. While oil has become Ghana’s number two export, the country remains a net-importer of petroleum and petroleum products. Crude imports totalled 1.21m tonnes in 2012, largely from Nigeria. Crude demand in Ghana is traditionally divided between oil for electricity and oil for the state-owned refinery, Tema Oil Refinery (TOR). However, production at TOR has declined due to underinvestment, poor management and debt issues. The demand for crude is thus increasingly driven by rising power consumption, especially given to use of oil as a substitute for natural gas for generation.

The government’s most pressing task in leveraging its new hydrocarbons resources is to complete the construction of the infrastructure needed to transform Jubilee’s gas into feedstock for the country’s power plants. “The industry now needs to gear up to be able to adequately support the potential of growth coming from local gas production,” Riccardo Muttoni, the Central and West Africa regional director of UK-based oilfield services firm Expro, told OBG.

ELECTRICITY: The importance of sourcing gas locally is all the more clear when taking into account the push to raise activity in the secondary and tertiary sectors, including manufacturing. The current power crisis was cited as the number-one constraint to business growth in the first quarter of 2013, according to the Association of Ghana Industry survey (see Utilities chapter). The costly power shortages and the unsustainable expense of securing fuel will be ameliorated once Ghana can access the 100 mscfd of natural gas from Jubilee. Capacity of Ghana’s power plants is 54% hydro and 46% thermal, with the majority of thermal plants using a flex-fuel technology allowing them to run on light crude oil (LCO), diesel or natural gas. Running all the thermal plants on natural gas would require 300 mscfd at 2013 demand. Ghana had no access to gas between August 2012 and July 2013 when the pipeline bringing 120 mscfd from Nigeria was damaged and shut down. Ghana lost 200 MW in capacity from the closure of gas-only power plants and was forced to run the flexfuel power plants on more costly LCO.

Akunor Azu, the managing director of power services company Cummins Ghana, told OBG, “The national grid will not provide reliable power 100% of the time, so we expect demand for generators to go up, with possible growth of 25% in the next three to five years.” In 2012 Ghana imported about 5m barrels of LCO to fuel its thermal power plants, which has been pricey. Managed off-loading rose, resulting in multiple outages each day in early 2013. The government contends that the infrastructure to secure a domestic supply of gas will be completed by the end of 2013, but many observers believe it will be mid-2014 before gas flows to Takoradi’s power plants (see analysis).

SUPPLYING GAS: Ghana National Gas Company, the state-owned firm founded in 2011, is tasked with building, owning and operating the natural gas and liquefied natural gas infrastructure. Its top responsibility is to build the gas-processing plant and transportation infrastructure needed to turn the Jubilee gas into feedstock for electricity. China provided financing through the China Development Bank, while Sinopec, the Chinese oil company, is building the infrastructure. An ambitious timeline and payment challenges led the project to miss its initial 2012 deadline for completion.

While not all disbursement challenges have been solved, it seems likely that gas supplies will start flowing soon.

However, domestic gas supply may not be the gamechanger many imagine. Ghana may not have reserves sufficient to fuel growing power demand. The Energy Commission predicts gas production to reach about 400 mscfd by 2018, with a potential of 500 mscfd by 2020.

However, power demand will require at least 800 mscfd by that time. Even with the additional 120 mscfd from Nigeria, Ghana will experience a shortfall. The supply and demand projections cast some doubt on Ghana’s vision of a gas-led industrial revolution, and both public and private entities are urging the state to invest in the infrastructure to import liquefied natural gas.

These long-term challenges aside, access to natural gas will provide short-term relief for the current electricity situation when the gas-processing plant comes on-line in 2013-14. Even Jubilee’s current production will allow the gas-powered Sunon-Asogli plant to run, restoring much needed capacity to Ghana’s power grid.

DOWNSTREAM DEMAND: For refined products, Ghana’s demand is highest for gasoline and gas oil. Total consumption of petroleum products more than doubled to 3205.5 kilotonnes in 2012 from 2409.1 kilotonnes in 2010. The downstream oil sector has expanded rapidly since the bulk distributing market was deregulated in 2009. However, due to the deterioration in capacity of Ghana’s single oil refinery, there is a limited link between upstream production and downstream consumption. As oil production increased from 195 kilotonnes in 2010 to 4133.8 kilotonnes in 2012, production of petroleum products decreased from 946.4 to 454 kilotonnes during the same period. Crude oil imports fell, but petroleum products rose to 2477.6 kilotonnes. Due to limited capacity at TOR, Ghana must import at least 40% of refined production and, in months when TOR shuts down completely, imports rise to 100%.

REFINERY WOES: TOR, Ghana’s state-owned refinery, has run intermittently since 2008, when the Ghana Commercial Bank cut off lending due to unpaid debts of up to $600m. Even after the government secured funds to pay off debtors and purchase new crude in 2012, problems with TOR’s aged equipment resulted in continued shut downs at the refinery.

In 2012 capacity utilisation at TOR was around 25%, about a third of the utilisation the previous year, according to the Energy Commission. Even if running at 90% of its 45,000-bpd capacity, the refinery would supply less than half of the nation’s petroleum product demand. For the products that TOR does produce – gas oil, kerosene and premium fuel – market share remained below 2% in 2012. TOR’s market share of all petroleum products sold in Ghana was 0.85%. In the short term, TOR’s capacity is unlikely to be expanded.

DISTRIBUTION: Growing consumption of refined products, along with deregulation of the sector, has been a boon to bulk distribution and oil marketing companies. In 2012 gasoline consumption grew by 23% y-oy to reach 992.7 kilotonnes and gas oil demand rose 16% to 1665 kilotonnes. Driven largely by increased demand for transport fuel, the Energy Commission forecast the 2013 total liquefied petroleum gas (LPG) requirement to be 250,000-300,000 tonnes. However, limited storage and insufficient revenues constrain national capacity, according to the commission, with supply likely to be in the 220,000-250,000-tonne range.

As a result, investment in storage capacity and distribution networks is growing. The state-owned Bulk Oil Storage and Transportation Company (BOST) was created in 1993 to tackle oil distribution, and is developing pipelines and storage containers to transport petroleum products and maintain reserves. BOST is Production estimates from confirmed reserves now also responsible for transporting and storing gas. Current storage infrastructure has been responsible for fuel shortages and is insufficient for Ghana’s needs, the Energy Commission and the World Bank stated in 2013 reports. At an event organised by the National Petroleum Authority (NPA), the group’s chief inspector Esther Anku described challenges in the supply chain as inadequate infrastructure and large capital requirements, local media reported in May 2013.

Anku said deregulation and price liberalisation was critical to promoting private participation and improving supply chain efficiency. Indeed, the government ended BOST’s monopoly on transportation and storage infrastructure, allowing bulk distribution companies (BDCs) to construct their own storage facilities. In 2012, the NPA mandated that BDCs build their own infrastructure or secure long-term leases. “The next two years will be essential in expanding the infrastructure for the midstream sector,” Chris Chinebuah, executive chairman of the BDC Fueltrade, one of Ghana top three BDC’s by market share, told OBG.

BDC FACILITIES: With 19.9% of Ghana’s market for petrol products, FuelTrade secured a $21m loan from Stanbic in late 2012 to build an 80,000-tonne capacity fuel tank in Tema. The investment followed the construction of a 4000-tonne LPG facility in Tema. Cirrus Oil Services, with 18.8% of the market, currently operates 2.47m cu feet of storage, with facilities in Takoradi and Tema. Chase Petroleum, another top BDC with 17.5% of the market, has partnered with Tema Tank Farm, the largest private storage facility in Ghana, and the United Storage Company, to secure 80,000 tonnes of storage. In total, 15 BDCs operate in Ghana.

CONSUMER PRICES: As with many emerging markets in Africa, end-user subsidies are a tricky issue for Ghana. Subsidies have worsened balance sheets across the continent – in Egypt, for example, they account for a nearly 10% share of GDP – but their attempted removal has provoked significant unrest, as was evidenced in Nigeria in 2013. Ghana so far has avoided the worst of the fallout related to subsidy issues, but the withdrawal of the fuel subsidy in June 2013 has been the biggest development for the Ghanaian consumer to date. The move was taken to reduce the budget deficit and appease international lenders, and the effects on inflation and consumer spending are being closely watched.

When the NPA cut fuel subsidies, there was an immediate 3% rise in petrol and LPG prices, and a 2% jump in the price of diesel fuel. Gasoline prices rose 24% since the phasing out of assistance began in February 2013. Global finance institutions lauded the cut, including ratings agency Moody’s, which said the subsidy accounted for 4.15% of government spending in 2012.

OUTLOOK: With GDP forecast to grow 8-9% in 2013, both oil production and demand are sure to continue rising. As the gas-processing plant nears completion in 2014, Ghana will be able to link its hydrocarbons output with its energy needs, bringing stability to the nation’s electricity sector. A link between oil production and petrol demand is more distant, but opportunities remain for investors along the production chain.