‘Death Knell’ Approaching for Ghana’s Oil & Gas sector. CAN GHANA EFFECTIVELY MANAGE ‘STRANDED’ ASSETS RISKS AND OPPORTUNITIES?
Fossil fuel-dependent economies across the world face a likely GDP loss – decline in government revenue and export receipts, from the transition to a lower-carbon economy over the coming decades. For those most-exposed to this imminent threat and do not adequately prepare for it, climate change stranded-asset risk, will be a catastrophic scenario.
Antonio Guterres, Secretary-General of the United Nations, in a prepared remarks of the findings of a new report released by the UN’s Intergovernmental Panel on Climate Change in August 2021, has warned that the high rise of global temperatures by 1.5 degrees Celsius over the next two decades is a “code red for humanity”. This sounds a death knell for coal and fossil fuels before they destroy our planet, he emphasized. Etched within this context, it appears that the transition from fossil fuels may even be faster than imagined. Yet, the extent and speed of the decline in demand for fossil fuels remain uncertain.
Where does Ghana fit in this matrix, given the global clarion call for the eventual retirement of hydrocarbon resources? Ghana, like other hydrocarbon-dependent African economies face a trilemma of issues: transition towards energy security, moving towards a low carbon emissions pathway and charting a growth and transformation plan that will have to lift millions out of poverty.
Already, some experts are of the view that Ghana’s mineral resources that have been exploited since the colonial era, including its decade-long oil find, have not yielded maximum benefits; for the reason that the real value of resource wealth, has not brought prosperity to wider populations of the economy.
CLIMATE-RELATED TRANSITIONAL RISKS AND OPPORTUNITIES
As the world moves towards a fossil fuel phase-out, hydrocarbon resources– such as oil and natural gas and coal, are likely to become stranded. Statistics show that by limiting global warming to 1.5 or 2 degrees Celsius requires one-third of the world’s oil reserves, half of the world’s gas reserves and over 80 percent of the global coal reserves to be stranded.
For Ghana, a latecomer to the fossil fuel boom, this poses a serious risk in an era where climate change mitigation lies at the heart of a historic global climate activism. This call to action does not only have an economic dimension but also a political one that needs to be looked at holistically. In a much broader context, sub-Saharan Africa has about 115.34 billion barrels of oil and 21.05 trillion cubic meters of gas of undiscovered, but technically recoverable, energy resources.
These provide a real test regarding economies’ commitment to climate change and at the same time a hazard, inching towards stranding of such huge oil reserves. Currently, Ghana has witnessed a land mark exit from its upstream petroleum sector by oil giant- Exxon Mobil.
In fact, the tragedy in this unexpected and abrupt pull out by Exxon Mobil shades the country’s present ability to produce more than 200,000 barrels per day of oil – even to talk about reaching the 200,000 b/d mark, has been a hard-nut to crack. Meanwhile, the country’s yet-to-realize gas reserves in the three fields combined (Jubilee, TEN, Sankofa) are anticipated to be momentous, making up trillions of standard cubic feet. Currently, the country’s production capacity lies on two oil majors, Italy’s ENI and Tullow Oil plc.
DIRE ENERGY SECURITY DILEMMAS LOOMING
Given this background, the risks and opportunities that the trending energy transition poses to Ghana’s economy must be considered from the impact on both the downstream and upstream sectors. Ghana is a heavy petroleum products-import dependent country and essentially, the country’s downstream petroleum sector thrives on imports of petroleum products from Europe.
With an already struggling refinery (Tema Oil Refinery), as the transition away from hydrocarbons gain grounds in Europe and leads to a drastic and rapid phasing out of oil production and refining, Ghana will face big hurdles in serving its downstream sector with petroleum products which may lead to dire consequences. To this effect, Dr. Yussif Sulemana, an Energy Analyst and a Senior Oil Production Operations Specialist with Petroleum Development Oman argues that “in the downstream, Ghana is heavily dependent on importation from Europe.
Assuming in Europe, the energy transition should take centre stage to the point that all their refineries are closed down, where are we going to get the products. And yet, we don’t have a running refinery locally? “…of course, there is gradual close down of refineries for lack of patronage because a lot of Electric Vehicles are coming to the stream. So, if that happens, the danger it will pose is that, we might not be able to get importation of finished goods and that is a dire energy security issue that we have.”
As much as this risk exists, there is an opportunity that can be utilized. That lies in the fact that the country’s refinery is currently begging for investment to be revitalized, he indicated. Ghana’s consumption of finished petroleum products ranges from 90,000 to 100,000 barrels per day. With this quantum of consumption on a daily basis and no robust and running local refinery(s), this is going to be a huge energy security issue for the country— cascading into a potential high prices due to demand and supply dynamics, he stressed. Another clear-cut opportunity will be to build and expand on the existing petroleum products storage capacity in the country.
NEED FOR A STRATEGIC LINK BETWEEN THE UPSTREAM AND DOWNSTREAM
“If renewables and Environment, Social Governance-ESG initiatives take the centre stage and investments into the world of hydrocarbons reduce, players will not find it easy to invest in the upstream sector. Because, it will simply not be economical. And so, when that does happen, the country will have a lot of challenges.” Investments in the upstream sector is driven by oil prices as much as the ongoing global energy transition.
The call for a decline in hydrocarbon investments, in addition to the oil price collapse in 2020— have cumulatively led to the exit of quite a number of players in the industry worldwide. Meanwhile, the bounce back in oil prices to as high as US$70 presents limitless opportunities for hydrocarbons, and lifts up some sense of hope for economies to act in a timely fashion.
According to the energy expert, “the transition is not going to be the same for every country. Every country at a point in time will depend on where they have strategic advantage, and so mostly, the speed and the momentum is high in Europe and America now. But in the Asian community (China, Japan), the Arab world and Africa, a lot is still dependent on the world of hydrocarbon. “So, for our part of the continent and Ghana, we need to be strategic to make sure that we are able to link our upstream and downstream sectors. This is so that when oil prices are collapsing or [trend on the high-side], we are not going to be affected.”
GHANA’S PROACTIVE DECISION
In its Mid-year budget review, the Minister of Finance, Ken Ofori-Atta proposed that the Petroleum Revenue Management Act (PRMA) be amended to allow Ghana National Petroleum Corporation (GNPC) to enter into reserve-based lending transactions to raise funds so its subsidiary Explorco can acquire assets for hydrocarbon exploration. Following this, there are plans in motion, although wrapped in controversies, for GNPC to acquire majority stake in AGM Petroleum Ghana Ltd and Aker Energy Ghana.
These assets-purchase anticipated involve 70% stake of the South Deep Water Tano field operated by AGM Petroleum Ghana Ltd and 37% stake in the Deep Water Tano/Cape Three Points asset operated by Aker Energy. With a good turn of events, Dr Sulemana stressed that for Ghana to achieve energy security, there is the need for the country to be able to link the upstream and downstream sectors seamlessly. “If the country continues to operate its upstream and downstream sectors as independent entities, then it is bound to struggle in multiple fronts.
Because, the raw materials for the downstream [Refinery] is coming from the upstream— whatever is going into the refinery starts from crude oil. So, the idea of Ghana achieving self-reliance [in the upstream & downstream sectors] is all in the ambit of linking [both] together.” This notwithstanding, some experts suggest that countries on the continent must convert investments into renewable power now, because it makes economic and developmental sense in the long term.
However, the energy expert shared an opposing view, stressing that, countries on the continent and especially, Ghana should make efforts to take advantage of its hydrocarbon resources and “move fast, get the proceeds, but make a concerted effort to channel part of that into renewables for tomorrow.” He further indicated that countries invest where their strategic advantage is, and for instance, Ghana’s oil resources are being channeled into ‘Free SHS’, and implicitly, that appears to be where Ghana thinks its strategic advantage lies.
CURRENT PETROLEUM SECTOR FISCAL REGIME ‘STRANDING’ ASSETS
Ghana’s Petroleum Sector Fiscal Regime currently is more tilted towards profit-sharing and royalties than towards a production sharing regime. Given the scope of profit-sharing and royalties exacted— hybrid model— whatever profits that are accrued is shared and then royalties are charged. Whereas a production sharing regime makes the country shares the production portfolio with the exploration and Development Company.
With the latter, Ghana increases its participating rights, and thus gains the largest shares in the portfolio. Commenting on the Petroleum Sector Fiscal Regime, the energy expert noted “Ghana operates a hybrid model. We operate a little bit of profit-sharing and then a lot of royalties. [Countries] have moved away from royalties.
Royalties is a lazy way— if you depend so much on royalties, you will end up with stranded assets. Because, you are just waiting for an International Oil Company to extract the minerals and give you your part as well as pay taxes.” By juxtaposing GNPC’s asset-buy of Aker Energy and AGM Petroleum which requires a loan of US$1.65 billion to complete the transaction, he intimated that, if Ghana had started with production sharing, this asset purchase would not have been necessary.
Because, Ghana could have acquired the largest share and therefore accrued the largest returns from the assets. “So, going forward, I think we need to gravitate into production sharing agreement model (PSA), because that is what is happening [in most places]. If you do production sharing agreement model, your percentage is going to be high.
But, your percentage will not be high if you are not able to pump more money into your sector. “Anyhow you look at it, you will come back to the fact that we have no other alternative than to make concerted effort to invest into our upstream, through our upstream portfolio.” Besides, it is argued that jurisdictions where there are rising financing costs are likely to face disinvestments, given the current global context of the oil and gas sector. As it stands, if Tullow Oil plc and ENI should exit from Ghana’s upstream sector, there is no upstream sector that Ghana could boast of any longer, he emphasized.
MAXIMIZING THE HYDROCARBON RESOURCES: THERE IS HOPE!
Ultimately, it is impractical for Ghana to make a 180 degrees turn overnight to renewable energies. In the next couple of years, hydrocarbon resources will still be a sought-after commodity, although the risks of a global transition to renewable energies still loom. Moreover, Ghana’s carbon footprint is quite negligible. In fact, the continent’s carbon emissions as compared to the global average is a mere 4 percent.
Thus, while the lustre in hydrocarbon resources last, the government must ensure that the upstream and downstream sectors are linked together. Furthermore, there should be the conscious effort to ensure that the National Oil Company’s (GNPC) role as an operator in the upstream sector, is done right and swift to inure to the benefit of the country. However, attention should not only be centered on the upstream sector exclusively.