Ghana’s oil boom gathers pace amid rising output
Rising output and new discoveries offer a bright future for Ghana’s energy industry
When Ghana started pumping oil from the offshore Jubilee field in December 2010, ushering the country into the ranks of the world’s energy producers, the feat aroused joy and trepidation in equal measure among Ghanaians. The optimists looked to Norway, where well-managed oil wealth has turned an economic backwater into one of the richest and most stable countries in the world. The pessimists looked closer to home, to countries like Nigeria where mismanagement of the oil industry had corroded political institutions and distorted the economy.
Two years on, talk of the oil curse has faded, petrodollars are fuelling a growing economy, oil output is on the rise and the country’s exploration prospects look as bright as ever. Yet risks remain. Newly elected president John Mahama, who was vice president for the late John Atta Mills and won election in December, and his new energy minister Emmanuel Armah-Kofi Buah take the reins of the industry at a crucial juncture. Missteps now could still easily derail the country’s oil boom.
The industry will receive a boost this year as the Jubilee oilfield overcomes its early hiccups and ramps up to peak production. Tullow Oil and its partners at the field initially expected to reach output of 120,000 barrels a day (b/d) by the summer of 2011. Technical problems at the field’s first producing wells, however, have limited growth. The country produced around 85,000 b/d last year, well below government and company expectations.
The project now appears to be back on track. In January, Tullow said the field was producing around 110,000 b/d after Tullow pumped acid into the reservoir to increase permeability and flow rate. Output could actually exceed the Kwame Nkrumah floating production storage and offloading (FPSO) vessel’s nameplate capacity of 120,000 b/d by the end of this year as new wells drilled during Phase 1A development come on stream, Paul McDade, Tullow’s chief operating office, said in February.
That is good news for Ghana. Its economy grew at 14.4% in 2011 and around 9% in 2012 as oil revenues began to flow. The government is targeting an average rate of GDP growth around 8% a year over the next four years, which would make it one of the fastest-growing economies in the world. In 2012, activity in the oil sector accounted for a relatively small 6.9% of the country’s GDP. That is expected to rise over the next few years.
But not all is well in Ghana’s booming economy. Spending has outpaced economic expansion, and the country’s deficit rocketed to 12.1% of GDP in 2012, nearly double the government’s target. That led both Moody’s and Fitch, two credit-rating agencies, to chide the government for its profligate spending. Increased oil output amid sustained high prices, combined with reduced fuel subsidies, should help the government deal with its deficit, but international investors have lost some confidence in the country’s economic management.
Jubilee offers more than its own oil, too. Tullow is looking for ways to boost production through the field’s infrastructure. It is in discussions with Kosmos Energy about producing the Teak, Mahogany East and Akasa discoveries at the adjacent West Cape Three Points (WCTP) block through Jubilee’s pipes, said McDade. WCTP was seen as potentially large enough to justify a standalone FPSO development, but poor results at the Teak-4 appraisal well scuppered those hopes, according to analysts at Investec.
The next major development offshore Ghana is the Tullow-operated Tweneboa-Enyenra-Ntomme (TEN) project, located about 25 km east of the Jubilee development in the Deep-water Tano (DWT) block. Tullow and its partners submitted its development plan to the government this year. The proposal envisions spending around $4.5 billion to drill around 23 wells and produce a total of around 300 million barrels of oil equivalent (boe) at a rate of 80,000 barrels of oil equivalent a day (boe/d).
Figure 1: Oil and gas infrastructure of Ghana
Approving the plan will be the first major item of business that crosses the new energy minister Buah’s desk. Tullow says it hopes to get approval on TEN in the first quarter of 2013 and is targeting first production in early 2016. The project could see Ghana producing at least 200,000 b/d of oil in the latter half of the decade. That is a far cry from the 250,000 b/d that Tullow had once thought possible by the middle of the decade, but it does point to the industry’s strong growth prospects.
As the country pumps more oil, it will have to find a reliable market for Jubilee’s light sweet crude. Ghana’s neighbours in the Gulf of Guinea, especially Nigeria, have seen demand for their light oil plummet in the US as similarly light crudes flow from the Bakken, Eagle Ford and other tight-oil plays.
Ghana, though, seems to have pre-empted this problem, already sending little of its oil to the US since exports started in 2011. Average exports for 2011 were just 8,000 b/d, and fell to less than 1,000 b/d in 2012, according to data from the US Energy Information Administration. Ghana has not exported any oil to the US since May last year. Instead the country will look to Asia, where nearly 60% of Africa’s oil was shipped last year. “The key importing economies to watch will be China and India, who will remain firm trading partners,” according to analysts at Ecobank, an Africa-focused bank.
China in particular will be an important export market for Ghana. Under the terms of an $3bn oil-for-loans agreement, Ghana has committed to sending at least 13,000 b/d, or more than 10% of its output, to China. Once Tullow receives approval for the TEN development plan it will likely accelerate a planned sale of part of its 49.95% interest in the project, as it looks to cut its share of the development cost. That sale is likely to attract strong interest, particularly as it will include a stake in the producing Jubilee field, which is operated under a unitisation agreement between the WCTP and DWT stakeholders. Tullow has not said how much of its stake it plans to sell.
Chevron, Shell and South Africa’s PetroSA are frontrunners for the stake, according to analysts at Ecobank. Chevron and Shell have both shown an interest in Ghana and could see the proven DWT block as a relatively straightforward way to boost flagging output. Both companies have struggled to increase production in recent quarters. PetroSA, meanwhile, bought local company Sabre Oil & Gas in September, which gave it a 4.05% stake in the DWT block, and could be looking for more exposure to the country. There are a number of other potential bidders. In 2009, Kosmos put its 23.5% stake in the Jubilee field on the market, which attracted a host of interested companies. It initially struck a $4bn agreement with ExxonMobil. Controversially, the government nixed that deal, saying Kosmos had improperly shared data with the US supermajor during its negotiations.
A subsequent joint $5bn bid for the stake from state-run Ghana National Petroleum Corporation (GNPC) and its counterpart China National Offshore Oil Corporation (Cnooc), raised concerns that the government had blocked the ExxonMobil offer to keep the door open for a preferred Chinese company. Around the same time, the China Development Bank signed its $3bn deal with the government to help develop its energy infrastructure, leading some to question whether a quid pro quo had been reached. In other countries such oil-for-loan deals often allowed China’s state-run companies to snap up lucrative resource deals.
Kosmos ultimately decided to hang onto its stake and listed itself on the New York Stock Exchange to raise development funds. Nevertheless, the government’s approach to the deal, by far the biggest in the country’s history, raised concerns. Investors will be watching the TEN sale process closely for similar signs of political intervention.
While the DWT and WCTP blocks have been the main hub of activity offshore Ghana, other companies have also seen exploration success. US independent Hess has had a string of oil and condensate discoveries at its Deep-water Tano/Cape Three Points (DWT/CTP) block (like the other DWT block, adjacent to the Cote D’Ivoire border), where it owns a 90% operating stake and works alongside GNPC, which owns the remaining 10%.
Norway’s Statoil had acquired a 35% stake in the block in April 2012, but turned around and exited shortly afterwards. “Statoil entered the DWT/CTP to test a new play. We consider the discoveries made not competitive compared to other opportunities in our portfolio, and we have therefore left the block,” a spokesperson told Petroleum Economist.
Hess, though, is still optimistic about its prospects in Ghana. The company is in negotiations with the government to move forward with an appraisal programme but has yet to release a reserve estimate for the DWT/CTP discovery. “What I will say... is we are progressing pre-development studies. So I think that’s a clue that we believe we have enough for a commercial hub there to begin development,” Gregory Hill, an executive vice president at Hess, told investors in March. The company has said that it is looking for a new partner to replace Statoil.
Italy’s Eni has also started plans for commercial production of its oil discovery at the Offshore Cape Three Points (OCTP) block, which it operates with a 47.222% interest alongside oil trader Vitol’s upstream unit and GNPC. In January, the company said its first appraisal well at the Sankofa East oil discovery confirmed the project’s commercial viability. It estimates total recoverable oil volumes of up to 150 million barrels, but has not yet outlined a production rate. The government, though, is putting pressure on Eni to accelerate development of the OCTP block’s gas reserves as a standalone project. Eni’s initial two wells at the block found gas, but when subsequent wells found oil deposits Eni’s attention turned to the acreage’s liquids potential, which would likely prove more lucrative for the company.
At a meeting in March, energy minister Buah urged Eni to work with state-run Ghana National Gas Company (GNGC) to develop the block’s gas resources, estimated at 2.36 trillion cubic feet of gas in place, as fast as possible. Ghana is keen to reduce its reliance on the West African Gas Pipeline, which supplies gas from Nigeria. Deliveries through the pipeline, though, have been sporadic since its inception because of technical problems and supply issues on the Nigerian end. Most recently, the pipeline was shut in last year after pirates damaged the line when they ran an anchor over it while fleeing the Togoan navy in a hijacked oil tanker.
The government sees oil as a crucial revenue generator, but its gas resources could be more important to the country’s social and economic development. Building the necessary infrastructure and legislation, though, has lagged far behind that for oil development. Relatively cheap gas could stimulate local industry and expand Ghanaians’ access to electricity and heating. A large minority of the country’s population still does not have access to reliable power supply, according to the World Bank. One of president Mahama’s first pledges in office was to achieve universal electricity access by 2016.
The loans secured from China will help Ghana build the country’s gas gathering, processing and transport infrastructure, but the responsibility to supply gas into the system will fall to international upstream investors. China’s Sinopec has been contracted to help GNGC develop a gas pipeline from the Jubilee field and an onshore gas-processing plant, the centrepiece of the gas-development plan. The project had been due on line late last year but is now not expected to be completed until the third quarter of 2013. The project is the first major test of Ghana’s state-led plan to develop its gas industry.