Africa Oil & Gas: Ghana plays it by the book

AGM Gibraltar concession agreed
Controversy over the award of a new exploration deal now seems to have died down. Upstream newcomer AGM Gibraltar was given a concession to explore the South Deepwater Tano Block in the western half of the Ghana Offshore Sedimentary Basin, despite having no direct exploration and production experience. The company’s development plans also fall short in terms of local content on the project; although the agreement was signed before the new content legislation was passed.

The Ghanaian parliament finally ratified the deal in late November, banking on the expertise of some of the companies that own stakes in AGM, including Norwegian deepwater drilling specialist, AGR Group.

The block lies in what is categorised as ultra deepwater of between 2km and 3.5km depth. It is now commercially viable to drill in such extreme depths and similar acreage elsewhere in the Gulf of Guinea has yielded impressive results. According to an official statement from the Ghanaian government, during the first phase of the seven-year concession, the company will be required to spend a minimum of $259m on exploration. AGR chairman, Sverre Skogen, commented: “We now look forward to bringing our significant collective experience in deep water exploration and moving forward with a plan to fulfil the agreed work programme.”

Responding to criticism from the Ghanaian press, the head of the Ghanaian parliamentary energy committee, Kwabena Donkor, added: “This is the best oil deal we’ve signed so far in fiscal terms.” A government spokesperson revealed: “To facilitate the establishment of programmes to train Ghanaian personnel to work in petroleum operations, and to ensure transfer of management and technical skills required for the efficient conduct of petroleum operations, the contractor has committed to pay to the GNPC at beginning of each contract year, an amount of $1m.” In the event of any commercial discoveries on the block, the government would benefit from 35% corporation tax and agreed royalties

Weak refining
One sector that could benefit from both oil production and oil revenue is the refining industry. The Tema Oil Refinery (TOR) in Ghana has production capacity of 45,000 b/d but has long suffered from being required to sell fuel at below a commercial rate.

Its weak finances prevented adequate investment in improvements and the replacement of old parts. Refinancing allowed it to reopen in April 2013, albeit with reduced production capacity of 28,000 b/d, but it closed three times before the end of year, indicating that the underlying difficulties had not been tackled. Managing director Ato Ampiah has revealed that he is looking for private sector investment as the “government alone cannot finance the refinery’s activities”.

The refinery is usually supplied with crude oil from Nigeria rather than from Ghana’s own fields. The emergence of a large domestic upstream oil industry might be expected to turn around TOR’s fortunes and plans to expand the plant’s capacity to 60,000 b/d have been drawn up, but the problem of the heavily regulated market remains. As we consider later, the TOR plant’s problems are not unique to Ghana.

Estimates of Ghana’s oil production potential vary considerably. Some government officials predict output of 250,000 b/d by 2021; while others have mentioned 550,000 b/d by 2023. The latter figure would make Ghana the third biggest producer in Sub-Saharan Africa by some distance. Indeed, anywhere in excess of 250,000 b/d would put the country in the same league as Equatorial Guinea, Gabon, Congo-Brazzaville, Sudan and South Sudan, in the second rank of Sub-Saharan oil producers, behind Nigeria and Angola.

Thus far, the government has done everything by the book in terms of ensuring that the country benefits from its oil boom. Taking advice from a wide array of international organisations, it has passed comprehensive legislation on exploration and production, distribution of oil revenues and the creation of the Petroleum Holding Fund and Ghana Petroleum Funds, in order to manage the revenues in the long-term interests of the country. There is of course no guarantee that this legislation will actually be implemented in practice; that the oil income will be used to support growth in the wider economy; and that local content rules will be carried out as intended.

Future politicians could seek to take a cut of oil monies. In particular, there is a danger that economic development will be concentrated in the areas already most developed: along the coast in the far south of the country. It is up to the country’s strong and active press to keep their politicians accountable.