The Government has been cautioned against any hasty moves to hedge its share of crude oil exports from the Jubilee and Tweneboa-Enyera-Ntomme (TEN) fields.
Although hedging would ensure that petroleum revenues were not unduly affected by oil price volatilities on the global market, especially at a time when the other partners on the Jubilee Field were benefitting from their hedging policy, industry players believe any attempt by Ghana to emulate same should be done with extreme caution.
An economist, Dr John Gatsi, said although hedging was not strange with respect to the management of revenues in the petroleum sector, any hasty move will expose the economy to greater risks.
“This is an area we ought to be careful if we want to go into it. If we are not very careful and we rush into hedging for hedging sake, that can rather bring more risk to the economy,” he told journalists in Koforidua at an IFEJ/PIAC workshop, sponsored by GIZ.
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Pressure on govt
There has been calls on the government to consider hedging its crude oil exports, especially at a time when crude oil prices are not stable on the global market. The Jubilee Partners – Kosmos and Tullow- which hedged their prices before the oil crisis in 2016 benefited, but Dr Gatsi explained that the country needed to have adequate foresight of the market before initiating such a move.
“If you look at the losses we made in 2015 and 2016, it was largely because there was a collapse of price in the market, so that makes it difficult for prediction. Those International Oil Companies (IOCs) that actually benefitted in the midst of the crisis anticipated some uncertainty in the market and they did the hedging before the crisis,” Dr Gatsi, who is also the Head of Finance Department, School of Business of the University of Cape Coast said.
He said hedging was a two-edged sword, because there were there both positive and negative aspects of hedging and that should be the guiding principle. The environment should, therefore, be correct before the country went into hedging.
“Public funds are supposed to be managed conservatively, so you cannot, without adequate knowledge and foresight in the market expose the country into hedging instrument and when it goes bad that tends to affect the country negatively and we lose a lot of revenue,” he said.
Participants and PIAC members after the workshop
The Vice Chairman of the Public Interest and Accountability Committee (PIAC), the body with oversight responsibility over the management of the country’s petroleum revenues, Mr Kwame Jantuah, said the country must be in a position to forecast appropriately how oil prices would fair for a period before going into hedging.
“We should be able to forecast where the oil price is going to be within a certain duration. We need to be able to forecast and see where the oil price is likely to be within the next six to eight months. The volatility of the oil price should decide whether we will hedge and we should be able to determine that. It has worked for the IOCs that hedged.”
“If you hedge and the prices shoot up to US$100 per barrel, then your hedging will stop you from gaining from that increased margin. However, if you don’t hedge and prices drop then you will lose,” he said.
Hedging, a two-edged ‘sword’
The representative of the Ghana Extractive Industry Transparency Initiative (GHEITI) on PIAC, Dr Steve Manteaw taking journalists through the merits and demerits of hedging said for a country that aimed at maximising its oil revenues, it was necessary to exercise precaution before doing that.
Hedging, he explained would help reduce the impact of volatility of oil revenues, guarantee crude prices over the period of the hedge, reduce risk exposure at the macroeconomic level and also help the government to predict its revenues inflows from oil for better planning.
Some downsides, he identified associated with hedging included the fact that hedging amounted to a bet against the experts of the oil market and payment to middle men. For countries producing in smaller quantities, there would be an absence of large, efficient markets through which price risks can be transferred.
Dr Manteaw said the expertise to hedge appropriately and the uncertainties surrounding hedging would also be a disadvantage.