Sparks of light

Feature | 24 February 2017
Sparks_of_light

Dr Abhishesk Deshpande and Cristina Peicuti analyse how Ghana's oil and gas sectors are evolving and suggest the country's energy outlook is bright

Sub-Saharan Africa is projected to continue its slow, subpar trajectory as it slows in 2016 to 1.6%, down from an estimated 3.4% in 2015, according to the IMF. This is 1.4% lower than April 2016 projections due to a slowdown in Nigeria and South Africa.

The Nigerian economy is expected to contract in 2016 due to continued oil infrastructure attacks, the resulting damage impacting oil supplies and revenue in Nigeria, in addition to lower commodities prices and severe foreign currency shortage. For South Africa, power shortages, low commodity prices, droughts in parts of the region and weaker consumer confidence due to political uncertainties has led to significant revisions to its expected GDP growth, down to just 0.1% growth in 2016.

However, sub-Saharan GDP is expected to expand by 3.3% in 2017 (also revised down from 4% since April 2016), driven by gradual improvement in the region's largest economies and the stabilisation of commodity prices. Oil product demand is projected to increase in sub-Saharan Africa by 4.6% year-on-year (yoy) in 2016 to 2.05 million bbl/day and 5.4% yoy in 2017 to 2.16 million bbl/d according to Wood Mackenzie data.

According to the IEA's October Oil Market Report , total demand for the whole African continent is estimated at 4.19 million bbl/day in 2016 and 4.33 million bbl/day in 2017. Non OPEC African supply (excluding Nigeria, Algeria, Libya and Angola) is estimated to be 2 million bbl/day in 2016 (-40,000bbl/day yoy) and 2.1 million bbl/day in 2017 (+80,000bbl/day yoy).

Ghana

Ghana's strong points are political and social stability, significant commodity resources, a services sector that is gathering momentum, and an attractive business environment. The nation can count on the support of the World Bank and the IMF. It has developed sustainable relationships with countries such as the UK, the US and China. Among its weaknesses, we can mention the dependence on commodity prices (oil, gold, cocoa), a high public debt, insufficient infrastructure (there is an underdeveloped transport infrastructure and many power cuts in the country) and weaknesses at state-owned banks, which affect the banking sector.

The Ghana Finance Ministry announced in September 2016 that Ghanaian economic growth slowed to 2.5% in Q2 of 2016, down from a revised Q2 2015 growth figure of 3.8%. The second quarter slowdown is mainly accounted for by a 49% contraction in oil sector output during this period, caused by a technical fault at Tullow Oil's Jubilee Field. The technical fault found in the turret bearing at the FPSO Kwame Nkrumah halted production between March and May 2016, taking 100,000bbl/day of crude offline throughout this period.

However, the downward trend in general since 2012 is also partly explained by the reduction in revenues related to exports, which have suffered as a result of the fall in commodity prices.

Ghana, which had built its economic model on significant commodities revenues, increased government spending from 2011, notably by considerably increasing civil servant wages. The commodity crisis impacted oil and gold revenues significantly in particular, and as a result, weighed on the country's public finances. Moreover, the informal economy accounts for a shortfall of around US$2.1bn, according to a study conducted by the Integrated Social Development Centre.

As the debt is increasing (70% of GDP in 2014), revenues are falling and the deficit is rising (12.4% of GDP), doubts about the country's financial sustainability have arisen. Ghana's financial credibility has taken a hit and investors have lost confidence. Through a domino effect, the exchange rate has depreciated steeply (50% since 2012) and annual inflation has risen (16.9%).

While Moody's deemed the financial sustainability to be worrying in 2015 (downgrading the country's rating from B2 to B3 with a negative outlook), the rating agency upgraded the sovereign debt outlook from negative to stable in September 2016 because of the successful implementation of structural reforms during the year. The first reform was a drastic reduction in government spending (freezing hiring in the public sector, excluding healthcare and education, and freezing wage increases for civil servants), despite the election campaign.

These badly needed reforms were carried out largely thanks to the help Ghana had received from the IMF, when it asked the international organisation to help it regain investor confidence and thereby stem the downward spiral of the Ghanaian cedi. In April 2015, the IMF approved a three-year aid programme totalling US$918m. The country is starting to see the first results with the liquidity risk being slightly mitigated and the trend in the balance of payments, including FDI inflows, improving to 9.1% of GDP in 2014, in comparison to 6.7% in 2013.

Thanks to the IMF aid, Ghana has restored its financial stability somewhat, but to consolidate it the country will have to pursue its reforms by continuing to reduce government spending in order to lower the deficit to 3.5% of GDP, and by rebalancing the current account, which is currently in deficit.

Figure 1: Crude production vs imports ('000 bbl/day)

Source: Ghana National Petroleum Corporation

Oil upstream

Commercial crude production in Ghana began in the 1970s with the exploitation of the Saltpond fields with production peaking at 4,500bbl/day. Major production only began in 2010 with the Jubilee field, which had a gross average production of 102,600bbl/day in 2015. In the first half of 2016, crude production declined to 62,900bbl/day due to the shutdown of FPSO Kwame Nkrumah oil production vessel on Jubilee field.

The output is expected to rise to 85,000bbl/day in the second half of 2016, 35,000bbl short of the target of 120,000bbl/day. Crude from Jubilee is light and sweet with an API of 36.4° and a sulphur content of 0.26%.

Ghana transitioned from being a net crude importer to a net exporter when production started at Jubilee field. The sub-Saharan oil producer exported an average of 98,890bbl/day in 2015. Crude imports are for Ghana's state owned Tema Oil Refinery and for electricity generation. In 2015, crude imports averaged 6,235bbl/day, of which 1,241bbl/day were used for refinery activities and the remainder for electricity generation. The level of imported crude has fallen significantly in recent years, falling by 76.2% (19,915bbl/day) from 2013 to 2015, mainly due to lower processing rate of domestic refiners.

The Jubilee oilfield will be shut down for around three months in 2017, sometime between February and July 2017. This will allow the partners to complete works on one of the major pieces of equipment that aid exploration of crude oil from the seabed.

Counteracting this shortfall is the additional production from the TEN oil fields (Tweneboa, Enyera and Ntomme, currently operated by Anadarko, Tullow, Kosmos, Petro SA and GNPC), from which oil first flowed in August 2016. The TEN field are expected to average around 23,000bbl/day in 2016, eventually reaching 80,000 bbl/day with associated gas to be extracted to ease a domestic power deficit.

In addition, the start-up of the World Bank-supported Sankofa project (currently operated by Eni and Vitol) and improvements in recoveries to existing fields and drilling of additional wells, is estimated to double Ghana's production in 2017 to 220,000bbl/day. Total oil production is forecast to average over 350,000bbl/day at the end of 2018. Sankofa is primarily a gas condensate field with smaller amounts of oil than TEN.

Ghana's National Petroleum Corporation (GNPC) expects oil production at the offshore Sankofa field to start in the second half of 2017, with initial gas output following in early 2018. Such additions mean that total gas production in Ghana is expected to average more than 300 million standard cubic feet per day (MMSCFD) at the end of 2018, according to President John Mahama.

In May 2015, the finance minister Seth Terkper said the Ghanaian government is targeting oil production of 660,000bbl/day in 2018. However, in August 2016, Mr Terkper played down such expectations and suggested it would be prudent to be conservative, especially in the currently low price environment as oil and gas companies reduced the capex and delayed projects worldwide.

Figure 2: Net crude exports ('000 bbl/day)

Source: Ghana National Petroleum Corporation

Oil downstream

The refining sector in Ghana is not well developed with two refineries having licenses. The first is the state owned Tema Oil Refinery, which was originally constructed and operated by Eni before being purchased by the state in the 1970s. The refinery has a capacity of 45,000bbl/day and is being expanded to 60,000bbl/day. Second is Platon Gas Oil Ghana Ltd, a private company that has built a small refinery in Tema.

Tema Oil Refinery has struggled to maintain operations with utilisation rates crashing down to as low as 3.3% in 2014, before rising to 17.7% in 2015. Thus, domestic production of oil products has fallen to less than 1,800bbl/day in 2015, significantly lower in comparison to the total domestic demand which remains strong and stands in excess of 70,000bbl/day as of 2015. As a consequence, Ghana has become increasingly reliant on imports of oil products. President Mahama has revealed government plans to build another 100,000bbl/day refinery within the Tema Oil Refinery enclave.

Oil product demand

Ghana's oil product demand has doubled between 2000 and 2014, driven predominantly by high rates of economic growth which doubled demand for gasoil and gasoline. Gasoil demand grew by 11% yoy in 2015, while gasoline saw a more modest 1.4% yoy growth. Demand for liquefied petroleum gas has also grown, as households exchange charcoal and firewood for gas, in order to use it for cooking and other domestic needs.

Liquefied petroleum gas demand reached its highest ever level with 15.5% yoy growth in 2015. Total demand for oil products also continued its long run growth, increasing by 8% yoy 2015. At the same time, the depreciation of cedi (a decline which started in 2013) continues to drive away benefit from lower oil product prices as Ghana is not self-sufficient in meeting its domestic demand through crude processing, and relies significantly on oil product imports.

The Ghanaian government has plans to make the country the hub for the distribution of petroleum products in the West African region, according the oil minister Emmaneul Armah-Kofi-Buah. The state owned Bulk Oil Storage and Transportation Company (BOST) started exporting fuel and gas oil to the landlocked countries of Burkina Faso, Niger, Mali, Benin Republic and Nigeria from the Bolgatanga Petroleum Depot. Exports to Liberia are expected to begin in 2017. Bolgatanga depot has a capacity of 46 million litres and according to Mr Buah, Ghana's strategic stock is high.

Natural power fundamentals

As Ghana has developed, so has its requirement for electricity. Residential demand has doubled since 2000 and non-residential demand has tripled in the same period. However, total demand for electricity consumption in 2015 was down 9% yoy at 8,646gigawatt/hour (GWh). Non-residential electricity consumption has remained stagnant between 2013 and 2015 at 1,532GWh, while residential consumption has fallen heavily from its 3,060GWh peak in 2013 by 20.4% to 2,437GWh in 2015.

Ghana has a strong hydropower generation sector with several large hydroelectric dams providing a rising share (43.2%) of Ghana's electricity generation capacity in 2015. The remainder of the capacity is predominantly thermal with production split between natural gas and crude oil. To satisfy the domestic demand, Ghana began to import natural gas from Nigeria along the West African Gas Pipeline in 2009.

Imports of natural gas peaked at 84MMSCFD in 2011, but have since declined. Gas imports reached a trough of 31.7MMSCFD in 2013, before recovering to 56.5MMSCFD in 2015. This decline was due to Nigeria prioritising the domestic market before exports. This led to insufficient volumes being imported into Ghana to satisfy demand, resulting in widespread blackouts.

In order to sustain economic growth, it is estimated that Ghana needs to add an additional 200MW of generation capacity per year for the next 20 years, much of which will be thermal capacity. The government has a target of 50% of generation from thermal sources as low rainfall can leave the country vulnerable to power shortages due to low water levels in lakes which supply the dams.

As a consequence, the government has prioritised gas production and is considering importing liquefied natural gas. In 2014 associated gas production from Jubilee began, with Tullow Oil stating that gas exports had reached 100MMSCFD in August 2015 from a potential capacity of around 120MMSCFD. However, the turret bearing issue confronting the FPSO vessel Kwame Nkrumah has compelled the Jubilee partners to reduce gas supply to Ghana Gas from 87MMSCFD to 47MMSCFD.

Sources at Tullow oil have attributed the issue largely to bad weather conditions since the defective turret was no longer in control of the anchoring system of the vessel. The three month shutdown scheduled between February to July 2017 aims to correct all problems with the Jubilee FPSO turret bearing.

Ghana Gas Company recently completed the extension of its pipeline to the battery limit of the West Africa Gas Pipeline Company's regulatory and metering station at Aboadze. Ghana hopes to expand gas infrastructure in order to use natural gas in sectors other than power generation, such as fertilisers and petrochemicals.

Figure 3: Gasoline vs gasoil demand ('000 tonnes)

Source: Energy Commission of Ghana, NPA

Natural gas projects

The passage of the Petroleum (Exploration and Production) Act 2016 and the development of a number of subsidiary legislation to better enforce the act, have contributed to Ghana maintaining its position as a preferred investment destination in the region despite the downturn in the oil and gas industry. The government announced in October that it was to acquire a third FPSO vessel to receive lean gas from the Sankosa field, adding to the existing two vessels at the TEN and Jubilee fields.

In the near future the TEN project will come onstream and will produce 80MMSFD for 20 years. This will be joined by the Sankofa field which has the capacity to produce 185MMSCFD, of which 170MMSCFD is expected to be produced by the end of 2018. This scheduled increase in production will not be sufficient to supply demand and imports will still be required, particularly as the government has revised down its expected gas output to more conservative levels this year.

Ghana's prospects

An optimistic outlook can be held for the oil and gas industry in Ghana as long as the TEN and Sankosa fields can reach their promising peak production figures and there are no significant unplanned outages in the Jubilee field. A recovery in oil prices will provide further boost to the sector and GDP growth.

Dr Abhishek Deshpande leads energy research in the commodities research team at Natixis and Cristina Peicuti is deputy head of economics, global markets, corporate and investment banking at the bank. The report was produced with the assistance of energy analyst, Edwin Poon

This article is an extract from the Natixis commodities report, Ghana oil and gas. It has been reproduced here with Natixis' permission

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