Oil and Gas Management in Ghana

Copyright © 2017 by John Gartchie Gatsi.

Library of Congress Control Number:       2017908507

ISBN:            Hardcover                         978-1-5434-8573-8

                  Softcover                           978-1-5434-8572-1

                  eBook                               978-1-5434-8571-4

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Rev. date: 06/09/2017

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CONTENTS

1 Introduction

2 Petroleum Operations Expenditure

3 Oil and Gas Value Chain

4 Legal Issues in Oil and Gas Management

5 Local Contents and Stabilization Clauses

6 The Seven Sisters

7 Derivative Markets

8 Transaction Cost and Ricardian Rent

9 Petroleum Revenue Management

10 Some Principles of Oil Revenue Management

References

1

INTRODUCTION

C OUNTRIES WITH HUGE DEPOSITS OF oil and gas resources have much potential for socio-economic development. The arrangement for the exploitation of petroleum resources allow for the participation of both domestic and international private oil and gas companies. In many developing countries, only international oil companies engage in exploration, development and production with national oil companies participating in the interest of the government. Governments seem to focus more on defining the regulatory and investment environment. Discovery of oil and gas resources in commercial quantities is considered a gain for both the government and oil companies. Ghana discovered oil in commercial quantities in June 2007 with celebrations at the seat of government by some officials of Kosmos Energy and key government officials including the then president J.A.Kufuour. Discovery of hydrocarbon is a technical term which means finding, during exploration operations, an accumulation of Petroleum which can be and is recovered at the surface in a flow measurable by conventional petroleum industry testing methods. The Jubilee field is reported to have 800 million barrels of proven reserves and an upside potential of about 3 billion barrels of oil. However, Ghana emerged as a new oil-producing economy in December 2010 when actual production began. New discovery and improved technology may increase proven reserve of the country in the future.

The jubilee oilfield is located about 60km offshore between the Deepwater Tano and West Cape Three Points blocks in Ghana with water depth of 1,100m The recoverable volume was estimated to be more than 370 million barrels with maximum expected volume of about 1.8 billion barrels. Tullow, Kosmos, Anadarko, Sabre Oil and Gas and Ghana National Petroleum Corporation (GNPC) are partners in the jubilee field with the benefit of economies of scale and scope. It is also important to state that before the Jubilee discovery, Ghana had been producing oil, albeit on a limited scale, since the 1980s from the Saltpond Fields. The GNPC currently has a joint venture operation with Lushann Eternit Energy Limited, which was entered into on 11th November, 2004. The ownership interest of the joint venture partners who are operating under the Saltpond Offshore Producing Company Limited (SOPCL) are as follows: Lushann - 55% and GNPC - 45%.The Jubilee Field is situated in Deepwater Tano (DT) and West Cape Three Points (WCTP) blocks; approximately 60km offshore Ghana and 130km west southwest of the port city Takoradi which provides shorebase infrastructure. Water depth within the Jubilee Field Unit area ranges from 1,000 to 1,700m. According to the Public Interest and Accountability Committee Report (2011), the start of oil production was preceded by three and a half years well structured investment by consortium partners with a capital of over $4.1 billion. The report explains that the original commercial partners on the Jubilee field were Tullow Oil plc (34.70%), Anadarko Petroleum Corp (23.49%), Kosmos Energy (23.49%), the Ghana National Petroleum Corporation (13.75%), Sabre Oil and Gas (2.81%) and the E.O. Group (1.75%). In line with normal industry practice, Tullow Oil Plc in May 2011 acquired the shares of EO Group to end up with 36.5% equity interest.

Oil is described as having the highest energy density of all fossil fuels of about 40- 45GJ/t. Gas which has methane as its main component is described as having 35-45MJ/m³ which is about one thousandth of energy density of oil under atmospheric pressure. Liquefied natural gas (LNG) is about half that of oil. Records show that Ghana intensified her efforts in oil exploration since 1983 with the promulgation of the petroleum exploration and production law, Provisional National Defence Council Law eighty- four (PNDCL 84) to invest vigorously in the upstream activities. Since the discovery in commercial quantities in 2007, many efforts have been made to ensure proper management of every aspect of the new oil and gas industry to benefit Ghanaians. It is generally believed that onshore oil and gas exploration, development and production is less expensive than offshore as in the case of Ghana. It is expected that very soon discovery in commercial quantities in other parts of Ghana including the Keta Basin and onshore will be possible. The Saltpond Offshore Producing Company has been producing oil below 600 barrels per day but is less noticed by analysts; we overly focused on the jubilee oil fields in the western region. Ghana currently has two oil terminals in Takoradi and Tema for the transportation and offloading of vessels. The new oil and gas industry has attracted a lot of development in education, politics, investment and governance. Some private and public universities and polytechnics have introduced short courses and degree programmes in oil and gas. Community leaders of the western region are asking for 10% share in the oil revenue largely because the jubilee field is located in the region. Recently an opposition politician announced his support for the call by the Chiefs of the western region. Ghanaians have not yet asked what happens to other potential oil regions like the Volta region. Africa is positioning itself by adopting democratic governance and investing in key sectors of her economies thereby attracting more foreign direct investment from non-traditional sources such as China. Most African nations have established national oil companies (NOCs) to meet the strategic interest of the economies. However, China is aggressively investing in oil rich nations in Africa through a concerted strategic mapping.

Uncertainty is a common phrase in the oil and gas industry such that experts categorise oil discovery into proven reserve, probable reserve and possible reserve. The level of uncertainty with respect to production level does not only affect the oil company but also the host-nation as revenue projections will not be met and budget expectations may record massive disappointment. The explanation by Tullow oil below explains it all "The Jubilee Field started by producing an average of 24,395 barrels per day for the three final days of November 2010. The production levels increased up to an average level of 37,932 barrels per day in December, 2010. But the production forecast of 120,000 barrels of oil per day June 2011, was not achieved due to technical production challenges faced with the wells.

According to section 95 of the Petroleum Act, 2016 (ACT 919), Crude Oil means hydrocarbons which are liquid under normal atmospheric conditions (at 14.65 psia pressure and sixty(60) degrees Fahrenheit)and includes condensates and distillates obtained from Natural Gas. Ghana was historically referred to as the Gold Coast because of abundance of gold throughout the country and mainly along the coast. The fact that, apart from the Jubilee fields, there are more active oil explorations activities going on in the off-shore basins including the Keta basin with expectations of huge onshore activity describing Ghana as Black gold coast or hydrocarbon coast is not an exaggeration. Oil companies actively operating in these basins include; Kosmos Energy Ghana, ENI Ghana, Tullow Ghana Limited, Hess Ghana Exploration Limited, Tap Oil Ghana Limited, Vanco Ghana Limited and Afren Energy Ghana Limited among others with the possibility of many new entrants. Most of the exploration, development and production activities are undertaken through effective unitization agreements among the partners. Currently the Ghana National Petroleum Corporation (GNPC) is in strategic partnership with the international oil companies as the national oil company. From the model petroleum agreement, exploration (Exploration Operations) means ‘‘the search for Petroleum by geological, geophysical and other methods and the drilling of exploration well(s) and includes any activity in connection therewith or in preparation thereof and any relevant processing and appraisal work, including technical and economic feasibility studies, that may be carried out to determine whether a discovery of Petroleum constitutes a Commercial discovery’’. The purpose of any exploration operations is to produce crude oil. Gross production becomes an important focus in any production process. Gross Production is defined as the total amount of Petroleum produced and saved from a development and production area during production operations which is not used by Contractor in petroleum operations and is available for distribution to the parties. The parties are the state represented by the national oil company (GNPC) and the contractor (International Oil Company or investor). In the production process natural gas may be produced in association with crude oil or not. Natural Gas means all hydrocarbons which are gaseous at 14.65 psia pressure and sixty (60) degrees Fahrenheit temperature and includes wet gas, dry gas and residue gas remaining after the extraction of liquid hydrocarbons from wet gas. Non-Associated Gas means Natural Gas produced from a well other than in association with Crude Oil. Gas has become an important commodity because of increasing demand globally. This is because new uses for gas have emerged in developing and developed countries from domestic consumption to commercial activities and for general transportation. As a result the principle of full utilisation of associated gas occupies the minds of upstream regulators when drafting petroleum agreements. It is therefore a requirement in the model agreement that development plan of each development and production area should include a plan of utilisation for associated gas. If a contractor considers the production, processing and utilisation of associated gas from any development and production area to be non-economic, GNPC shall have the option to off take such associated gas at the outlet flange of the gas-oil separator at its sole risk for its own use and to that end the development plan proposed by the contractor shall include: a statement of the facilities necessary for the delivery to GNPC of such associated gas; and a plan for the reinjection of such associated gas into the reservoir. The point is that gas is now useful and cannot be allowed to suffer any economic waste. If the contractor cannot utilise it the state can. GNPC must bear the cost of any additional facilities and any related production cost required for the delivery of the gas. This provision has been given an effective expression by the construction of the gas processing plant at Atuabo in the Western region to produce gas that can help in power generation for domestic and commercial use. It is expected that 150M standard cubic feet of gas is produced per day to enhance power generation. Already, the plant has delivered some sample LPG to the market thereby signalling its commercial importance in helping to diversify the energy mix and the economy. The provision about full utilisation of gas also hedges against flaring or venting of gas. This also strengthens the argument that venting of gas is a function of the readiness of the state to provide storage facility or processing plant to receive excess gas in oil production process. This implies that flaring may not happen if at the time of production the state has in place adequate storage facilities to store or process the excess. Production and transportation of gas demands specific transportation mode and investment to ensure safety. If the contractor decides to take part in GNPC’s gas utilisation programme, it shall reimburse GNPC for the costs of such facilities plus a premium of three hundred percent (300%). This is important to ensure contractors do not take economic advantage of the state since investment in gas infrastructure is estimated to be more expensive than that of oil. Specialised storage facilities must be provided as a result it is more related to long term contracts. With the new demand for gas beyond residential and commercial use, gas consumption maybe assuming price inelastic demand in the future especially when a structured global market is fully established just as it is for crude oil. In the face of these specific infrastructural needs and general uncertainty both oil and gas price trends are similar as shown below:

Fig 1

Source: US Department of Energy and Natural Gas Week

The graph shown in figure 1 above indicates that both crude oil and natural gas prices are volatile and prices can rise sharply and fall steeply depending on demand and supply factors at the time and the influence of speculators. We also need to bear in mind that the demand for crude oil in particular is derived demand since crude oil is usually demand to be refined into various derivative products such as gasoline, diesel, bitumen, aviation fuel among others. However, geopolitical factors are common in