Diversification:- A must as oil price slides further
The country’s recent oil and gas economy, no doubt, provides hope for more revenue to finance the national budget. However, with consistent drops in oil prices since last year, it is obvious that the 70 per cent set aside as the annual budget funding amount (ABFA) will be affected as well as the transfers to the Ghana Stabilisation Funds.
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To mitigate these risks, there is the need for diversification in oil and gas activities and the need to add value to the associated gas as well as other derivatives.
Service sector
The country’s economy over the years has depended so much on cocoa and mining. Therefore, a little tremor in the global commodity prices causes the country a lot of financial stress.
It is also interesting to note that the service sector even before the oil, for some time now has become one of the strong factors when it comes to the gross domestic product (GDP) accounting for about 50 per cent since 2006. Therefore, the sector requires serious improvement and more players.
Ghana no doubt is young in the oil and gas sector but has a lot of absorbing capacities for the private sector in the downstream sector, such as pipeline transportation, support activities for oil and gas operations, natural gas distribution both private and public, ready product for asphalt paving, fertiliser plant, LPG, and saturated materials manufacturing.
The setback in global commodity prices sends reminders to captains of the economy of the urgent need to ensure diversification for the oil related service sector to lead the way.
Ghana has set for itself a target of achieving gas-based energy generation through thermal power plant production and increase in liquefied petroleum gas (LPG) consumption across residential facilities by 50 per cent this year.
Since the commencement of oil production in December 2010, the completion of the Atuabo gas processing plant, which is currently supplying more than 100mmscf to thermal units at Aboadze, is expected to save the country more than half-a-million dollar a year and supply more than 70 per cent of 240,000 tonnes of LPG needed by the country.
Therefore, while there is much talk about improving oil service sector to overtake the service and agriculture in terms of contribution to the GDP, there is the need for conscious efforts to drive it, and it should be backed by the Local Content and Local Participation Law passed by Parliament.
The pressure
The current price of oil, which has dropped from US$110 to about US$53 per barrels at the end of August, means that if the country focuses on the diversification as a net importer of petroleum products it would ease the pressure on the Cedi as pre money is needed for the importation of light crude oil for the thermal units.
During a recent interaction with the Minister of Finance, Mr Seth Terkper, in Takoradi, he indicated that “because in Ghana when you have the prices of gold, cocoa and crude oil falling you have to use more foreign exchange to import light crude due to unavailability of gas, if you don’t increase the supply of foreign exchange, it results in the fall of the cedi.”
The process of diversifying the oil and gas economy in Ghana will mean that the country will have to look at variety of products in the oil and gas that could be developed into exportable commodities.
This will ensure that if the country’s benchmark revenue dips resulting from an economic fall affecting oil prices, there will be something to fall on since the domestic absorbing capacity will be ready to consume.
Currently, Ghana National Gas Company is providing more than 100mmscf of gas to the Aboadze Thermal Plant in the Shama District and the revenues accruing to it from these supplies alone is over US$120 million since it started operations in the last quarter of 2014. This excludes revenues from LPG and condensate.
Infrastructure
To ensure that a well-planned diversified oil and gas services sector comes into fruition, there is the need to have the appropriate infrastructure in place to ensure that every benefit along the value chain is harnessed.
The country’s 2012 Natural Gas Pricing Policy (NGPP) unveiled by the sector ministry has in it the need to secure commercialisation, and ensure the country’s economic viability for all parties along the gas value chain with adequate incentives for investment.
The policy is also to ensure sustained and secure availability of gas, leading to the provision of secure power supplies for the country and supported by a stable and predictable commercial framework
There is also the need to protect the state from the adverse effects of subsidies by developing a pricing policy that defends the state from pressure to intervene in the actual price paid by users of gas.
Structure and system
Since the sector represents a strategic cushion for the economy, there are structures and systems in place to ensure that the gas policy achieves the expected result in the long term.
Obviously, the industry is depicted by the international oil companies, which have entered into Petroleum Agreement with the state to explore and produce oil in partnership with the national oil company, Ghana National Petroleum Company (GNPC).
In the scheme of things – GNPC emerged as the gas aggregator, which is solely credited with the counterparty for gas purchase agreements with upstream gas producers.
To help the process of diversification and value addition, in 2011, Ghana National Gas Company (GNGC) was established and charged with the responsibility of processing and wholesaling the Atuabo gas and own pipeline and major pieces of infrastructure.
Another strategic company added for the transmission was the Bulk Oil Supply and Transport Company (BOST) – with traditional role of the operation of oil pipelines in the country with all permits from the Energy Commission Act in 2009 - BOST will be responsible for the installation and operation of both oil and gas transport systems.
The challenge
The problem currently is, should Ghana move towards diversification of the oil and gas sector with lack of proper structure and system, it is likely to suffer some challenges due to the inability of GNPC, Ghana Gas, and BOST to have clear roles.
For Ghana to succeed there is the need for a business strategy with a practical plan for achieving the mission and objectives which is to be backed by an organisational structure, with an oversight of the formal layout of the hierarchy of GNPC, Ghana Gas and BOST to drive the mission.
There is also the need to ensure that there are separation of powers between GNPC, Ghana Gas and BOST. GNPC as the aggregator must focus on the upstream sector, while at the downstream Ghana Gas focuses on the processing of the gas.
Along the value chain, issues of management and transmission of gas through the pipelines has to be the responsibilities of BOST.
The puzzle
Interestingly, however, while the country is looking for ways to ensure that there is value addition for domestic use of associated gas, unhealthy political powerplay in the sector is thwarting the directive by the Ministry of Petroleum to allow GNPC to position itself as a holding company to absorb Ghana Gas and allow BOST to play its role since ENI-Sankofa and the Project-TEN are coming up.
The gas shipment to the shore would increase by next year; therefore, the faster the issues between thestate companies are resolved the better for the country.
Experts were of the view that, it would be too cumbersome for Ghana Gas to negotiate for the gas from IOCs, process, market and transmit. However, Ghana Gas is not ready to allow GNPC to swallow it and both are engaged in doing the same thing differently.
There is an urgent need to ensure that there is harmony in the sector to ensure that Ghana Gas operated as a subsidiary to GNPC and BOST takes its role.
Opportunities
With a perfect structure, Ghana can comfortably tap into Cote d’Ivoire and Togo-Benin markets by exporting to these countries. With that, there will be Ghanaian shippers/brokers, who are mainly marketers, to arrange wholesale, retailing and shipping of gas from producers to end-users within Ghana, Cote d’Ivoire, Togo and Benin.
There will also be distribution companies that will be responsible for installation and operation of low pressure gas distribution and service lines at downstream in the country.
Interestingly, the finance minister called on the private sector to lead an export led strategy for the country which the exportation of gas could be one of them.
Consequently, the wrangling between the top state companies in the sector will mean that the minister’s challenge to Ghanaian businesses to venture into areas that will lead the country into exporting more to complement the long-standing efforts of the extractive industry and the cocoa farming will be in vain.