Ghana’s latest effort to seek major international financing is coming for a somewhat unexpected reason, but nevertheless one that may prove to be so crucially important that even the country’s usually deeply politically divided legislature may be more or less united on the issue. Last week it emerged that government is seeking approval from Parliament to borrow around US$1.65 billion to accelerate oil and gas exploration by acquiring increased equity stakes in two potential oil and gas fields and another which is at actual development stage, but whose majority owners are reluctant to press ahead with field development at the current time..
The financing is needed to acquire stakes in two potential fields in the resource rich Deep Water Tano area off shore of Ghana’s Western Region, close to where all three oil and gas fields currently in production are located. The nation estimates it will need as much as US$1.3 billion to buy a 37 percent stake in the Deep Water Tano/Cape Three Points asset operated by Aker Energy AS and a further 70 percent stake of the South Deep Water Tano field operated by AGM Petroleum Ghana, according to a parliamentary proceeding on Monday last week.
Aker Energy is also in protracted talks with authorities to reduce the development cost of its Pecan oil field, for which Ghana is now seeking to borrow US$350 million to cover capital expenditure, bringing the total funds required to US$1.65 billion.
If approved, the stakes would be acquired through the Ghana National Petroleum Corp subsidiary, GNPC Explorco. Importantly GNPC already owns significant equity stakes in both fields; indeed if it acquires the stake it is seeking in the field currently majority owned by AGM it would effectively be the dominant majority owner although this is a property still quite some distance away from being declared a commercial one, despite strong prospects having already being identified.
Another field though – Aker Energy’s Pecan field – has been declared a commercial one since late 2018 but developing a mutually acceptable plan of development has been problematic for both sides. Finally one was agreed last year, but the uncertainties thrown up by COVID 19 have thrown it askew since then.
Aker Energy aims to approve a revised plan for developing the Pecan oilfield off Ghana by the end of this year, its parent company Aker ASA confirmed recently
The company had previously estimated the field’s reserves at 334 million barrels of oil, before putting on hold the final investment decision in March 2020 due to the fall in oil prices and the COVID-19 pandemic.
“The company is currently working to submit a revised Plan of Development (PDO) to the Ghanaian government by the end of 2021,” Aker said in its quarterly report.
Aker Energy has managed to reduce the cost of the project by simplifying some of its technical aspects and opting for a staged development, Aker CEO Oeyvind Eriksen told Reuters.
“The capital investment is down 50% and the corresponding production volume is roughly two-thirds or what we assumed in 2019, when the capital investment was US$4.4 billion,” he added. Back then, Aker Energy expected Pecan’s peak production at 110,000 barrels per day.
But the proposed new plan will require new equity investors and Ghana’s government has decided to be a partner, in order to speed up the field development process and increase its eventual revenue streams. Aker Energy is now aiming to produce oil at a break-even price of US$30 per barrel. Brent oil – which is similar in texture to the oil found in the Pecan field – has been trading at over US$70 per barrel since the start of June
Ghana’s aggressive stance towards increased ownership goes beyond the need to accelerate their potential development as the respective foreign multinational majority stake owners are dragging their feet, primarily for financial reasons.
The investment push comes after Exxon Mobil Corp. pulled out of an offshore prospect in May, dealing a blow to its burgeoning oil and gas sector. This is particularly galling for government after it had rode major criticism for agreeing to offer what some industry analysts and public policy commentators regarded as inordinately generous terms. Government, it its own defence pointed to the reputational gains Ghana stood to benefit from by having The world’s biggest international oil company prospecting for oil in the country’s jurisdiction. But the company’s unceremonious withdrawal has now worked the other way, raising questions as to Ghana’s attractiveness as an investment destination for the international upstream oil and gas industry, the doubts further exacerbated by the lack of clarity as to the precise reasons for the sudden exit. Whatever is really behind it, government is clearly determined to prove that it is now adept enough to take up the slack domestically where an international oil company (IOC) opts out.
There is yet another strategic reason for government’s stance – there are also rising concerns that the push for lower-carbon energy may reduce the value of Ghana’s hydrocarbon resources over time.
Ghana’s Finance Minister Ken Ofori-Atta warned, a fortnight ago that the country could be “left with stranded assets,” if it didn’t accelerate exploration amid the transition to renewable energy. Nine of the world’s largest international oil companies sold US$198 billion worth of assets from 2015 to 2020 in a bid to decarbonise for the long term. Indeed Exxon Mobil’s exit has been partly attributed to a strategic decision to move away from expanding its fossil fuel portfolio when decarbonization is now clearly on the cards globally.
Ghana, which only started producing oil and gas in commercial quantities a little over a decade ago is however in no hurry to join the energy transition even though it is encouraging the development and use of renewable energy sources, which it hopes will account for about 10 percent of its energy mix by 2025, up from less than four percent currently. For now, its major effort towards cleaner energy involves the substitution of the use of diesel oil for power generation with natural gas. Even more importantly the country desperately needs oil export revenues to finance public spending and most crucially, finance its public debt.
Ghana’s public debt already stood at 77.1 percent of its economic output by the end of June. A shortfall in oil receipts and the fallout from the pandemic pushed last year’s budget deficit to 11.7 percent of gross domestic product, compared to an initial projection of 4.7 percent for 2020. Debt servicing costs for 2021 amount to the equivalent of 49:5 percent of the country’s targeted tax revenues for the year.
Having learnt invaluable lessons from the evolution of its gold mining industry, which for a century had been basically an enclave industry disconnected from the rest of the economy, Ghana introduced local content and participation laws for its upstream oil and gas industry in 2014, less than four years after commercial oil production commenced. Now the state itself is seeking to intensify its own involvement pending when the indigenous private sector can develop the capacity to become a major player.
The time has come for Ghanaians to “become masters of our own destiny when it comes to our oil and gas resources,” Charles Adu Boahen, Minister of State at the Ministry of Finance said to .Parliament last week when announcing that government would be seeking approval from it to source the requisite debt financing. “There will certainly be the demand for fossil fuels in countries outside of the West that will continue to use diesel- and petrol-fired cars and consume power generated from fossil fuels for the foreseeable future,” he said.
The new strategy for the country to “become an operator in its own right” may require a legal amendment to allow the state-owned oil company to enter into reserve-based lending transactions, which could raise financing without putting further pressure on the government purse, Ofori-Atta said in his mid-year budget speech a fortnight ago.
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