We don’t really need Brad Pitt’s latest documentary film production on Ghana and oil industry greed to tell us that Ghana is in a bit of trouble, coming down from the boundless optimism fueled by the first major oil discovery in 2007. Now the government and foreign oil companies are going to have to pay closer attention to the details because gone are the days when African companies bow quietly to the “resource curse”. Oil companies will have to adapt along with them because no one wants another Nigeria (ask Shell).
That said, the film is about to bring a lot more attention to Ghana—enough to make investors look a little closer at what they’re getting into here. So we’ll lay it out for you in the simplest way:
• Commercial production began three years ago, but has fallen short of the 120,000 bpd target planned for 2012. Since production began in the prolific Jubilee oil field, the partners have produced over 83 million barrels of oil, but by the end of last year had only managed to get daily production up to 110,000 bpd--a year late and 10,000 bpd short of the target. Investors are taking notice, and so are government officials. (Producers blame sand contamination in the flow lines going to the oil storage facility).
• Jobs have been created for Ghanaians, which is in turn helping to improve the country’s economic picture, but state revenues are lower than some…
We don’t really need Brad Pitt’s latest documentary film production on Ghana and oil industry greed to tell us that Ghana is in a bit of trouble, coming down from the boundless optimism fueled by the first major oil discovery in 2007. Now the government and foreign oil companies are going to have to pay closer attention to the details because gone are the days when African companies bow quietly to the “resource curse”. Oil companies will have to adapt along with them because no one wants another Nigeria (ask Shell).
That said, the film is about to bring a lot more attention to Ghana—enough to make investors look a little closer at what they’re getting into here. So we’ll lay it out for you in the simplest way:
• Commercial production began three years ago, but has fallen short of the 120,000 bpd target planned for 2012. Since production began in the prolific Jubilee oil field, the partners have produced over 83 million barrels of oil, but by the end of last year had only managed to get daily production up to 110,000 bpd--a year late and 10,000 bpd short of the target. Investors are taking notice, and so are government officials. (Producers blame sand contamination in the flow lines going to the oil storage facility).
• Jobs have been created for Ghanaians, which is in turn helping to improve the country’s economic picture, but state revenues are lower than some would like; these revenues are not being put to the best use; and only so many jobs in the industry can be created for locals because there is a severe shortage of skilled labor required for oil and gas work. This makes the “Local Content Law”, which regulates how much of operations are “localized”, difficult to adhere to. Ghana is in dire need of some capacity-building because it lacks driller, engineers, managers, and production operators, just to start with.
• Associated gas is another problem that is creeping up quickly. The Jubilee field puts out about 1 million cubic feet of gas with every 1,000 barrels of oil produced, but there’s nowhere for the gas to go so oil companies want to flare it. Gas flaring is not allowed for clear environmental and health reasons, however, but the Jubilee partners have requested temporary permission to flare, which will become a major public issue. Ghana knows it needs to put together the infrastructure to handle gas, but things have gotten off to a slow start. The plan is for the gas to be used by the Aboadze Thermal Plant for electricity generation predominantly. But the delays in this could prove critical, politically and economically. The state is losing massive revenues to this flared gas and missing out on massive savings as well. In mid-February, Ghana began discussing with Jubilee operators the possibility of cutting crude output by 10% or flaring gas to reduce the amount of gas re-injected into the deposit. Jubilee partner Tullow Oil said in January that it would probably lose $100 million in revenue in limiting production. Gas shipments from Jubilee have been delayed by at least a year because the processing plant to handle them is not finished. Also in February, Tullow said the gas processing facility should be ready by the middle of this year. And even then, it has estimated that oil production will be about 100,000 bpd at Jubilee for this year.
• Foreign oil companies tend to jump the gun, politically, getting too excited over their success at fostering strong connections to a government and failing to adequately consider what will happen when a new government is put in place—which is an obvious inevitability. (More on this below)
• The adrenalized optimism tends to ignore the implications of the maritime boundary dispute between Ghana and Cote d’Ivoire over the oil rich area estimated to hold about 2 billion barrels of oil reserves and 1.2 trillion cubic feet of natural gas. This issue continues to affect investor confidence in Ghana despite the attempts by foreign oil companies to diminish its importance. While we do not believe that the current Ghanaian administration has any desire at all to intensify this dispute, no one can be certain what the next administration will think, or how they will interpret Ivorian actions on this issue. Of particular concern is the South Deepwater Tano Basin, over which both countries claim ownership. How would Ghana respond if Cote d’Ivoire suddenly started exploring in this basin? Statoil, at least, was concerned enough to forego exploration in any of these disputed fields. Right now, a joint committee is trying to resolve this issue by July 2014—a date we will be closely watching. Because of the overlap of territory here, both countries would benefit from a clear demarcation, which would help with drilling in adjacent fields, such as Jubilee.
The Politics of Optimism
Look at the story of Dallas-based Kosmos Energy, which made the first major discovery in 2007 and enjoyed a great deal because it had good ties with the then-government. This is one of the main sub-plots of the Pitt-produced documentary film, for which Kosmos actually cooperated in what is probably a very savvy move for this once tiny company that was only a start-up when it discovered oil in Ghana.
Very suddenly, Kosmos found its contract for the Jubilee field challenged with a change in government. This spiraled into a US Justice Department investigation into alleged corruption at Kosmos. The once-vaulted middleman, George Owusu, who brokered the deal for Kosmos with the government, suddenly found himself on the wrong side of things, and was summarily ousted from his firm EO Group. Kosmos CEO James Musselman also found himself ousted for his failure to deliver on time under the contract.
Then in late 2012 there was another, similar scare when the Supreme Court was tasked with deciding whether to overturn the December 2012 elections that put John Dramani Mahama in power. With production launched only in 2010 and 16 new major discoveries since then, investors were more than a little concerned. Mahama had won by only a very narrow margin, and his challengers alleged massive vote-rigging and fraud. Eventually, the Supreme Court ruled in favor of Mahama, as we predicted in an Oil & Energy Insider executive report in August, but this is Africa—and political stability is a very tenuous thing. Foreign oil companies should be analyzing this backwards and forwards if they are to have any chance of staying ahead of the politics and securing their contracts. Mahama and key ministers are vulnerable as long as the public sees that the government’s oil contracts with foreign companies aren’t in the best interests of the state and that the state itself isn’t putting these revenues to the best use. The resource curse, and Nigeria, is on everyone’s mind and they are watching the economy and employment opportunities very closely.
