I have a decent internet connection this morning, so I’ll take advantage of that to post some of the back and forth between Ghanaian think tank, IMANI, and the Ghana National Petroleum Corporation (GNPC). IMANI has recently published some interesting articles on the Jubilee field’s underperformance. In contrast to the excited tone of most of the business news about the country’s oil industry, the IMANI articles raise serious questions about the industry’s costs and prospects.
Worrying Developments in Ghana’s Oil Sector discusses production levels that are hovering around 60,000 b.p.d. The projected 120,000 barrel daily output has never been met and at this time, it is unclear when production will reach this level. IMANI has questioned both the speed of the Jubilee field development and the original production projections.
In a more detailed article on fiscal risks to the economy, IMANI spells out how the lower than projected oil production leads to less money for Ghana and Ghanaians. Of course, if the country is collecting royalties on 60,000 b.p.d. that’s half the amount it would collect on 120,000 b.p.d. But Ghana should also collect taxes on the oil. Taxes, however, take cost into account. The lower than expected production levels, along with the ongoing technical fixes, raise the cost per barrel:
Because government budgeted for oil revenue of more than $650 million, the shortfall in the budget is correspondingly more than $410 million. The 2012 shortfall is nearly 3 times more than the 2011 oil-related budget shortfall of about $140 million.
Apart from lower than expected production in the field, the government also budgeted to receive $200 million in corporate taxes from the oil companies but reports indicate that they are in no position to pay. The corporate tax dimension to the shortfall issue has not been clearly explained by the government.
The article also discusses the ongoing technical issues in the Jubilee field (the official explanation for the low output levels). Was Jubilee developed too quickly, IMANI wonders:
Our own view, based on interactions with specialists, is that the overall Jubilee development project was based on overoptimistic technical assumptions. The simple fact is that there are just too few wells in production. The rush to start producing, and to cut corners in the name of cutting-edge technique, rather than mitigating financial risk, has ended up compounding the growing fall in competitiveness of Jubilee.
This article is looking at fiscal issues, but it’s worth noting that the technical problems may have environmental implications, as well. The general lack of information on what’s happening offshore is not reassuring in any case.
Another article, How Overpriced is Ghana’s Jubilee Field Expansion Project?, questions the projected cost of the Jubilee expansion. The higher the costs, the lower the revenues for Ghana. “It is important to note,” the article states, “that the more money that is spent on the project the longer it takes for the field to be profitable, the lower the taxes Ghana can collect, and the longer it takes for even those meagre taxes to show up.”
Besides providing an important public service, the IMANI articles have also prompted a response from the Ghana National Petroleum Corporation. You can read the lengthy GNPC press release on Ghana Oil Watch: Recent Media Discussions on GNPC and Jubilee Oil. The press release refutes IMANI’s allegations and IMANI has since issued a final statement backing up the think tank’s original estimates and statements.
IMANI’s final statement begins by pointing out how unusual it is for the GNPC to provide information to the public:
Rather uncharacteristic of the secretive organisation, the Ghana National Petroleum Corporation (GNPC) finally issued a press statement to respond to concerns raised by civil society about Ghana’s underperforming oil industry. While the GNPC is to be commended for its increasing responsiveness and transparency … The truth is that the information the GNPC has now supplied to inform the public debate about Ghana’s oil sector would not have received broad coverage had IMANI not engaged in strong advocacy to demand such information.
Although all this back and forth may seem somewhat technical it concerns all Ghanaians. We’re talking about government revenues and the ability of the government to finance projects, borrow money, etc. Of course, oil production levels also impact currency rates and inflation. IMANI is to be commended for making this information public.
On a somewhat related note, a U.S. law firm has announced it investigation of potential claims against KOSMOS Energy, one of the Jubilee partners:
The investigation concerns allegations that the Registration Statement and Prospectus issued in connection with the Company’s initial public offering (the “IPO”) were materially false and misleading and misrepresented or failed to disclose that:
(1) at the time of the IPO, gross oil production from the Company’s Jubilee field off the coast of the Republic of Ghana was not on track to reach its design capacity by the third quarter of 2011;
(2) several Jubilee oil wells were not meeting production expectations, due to design defects which existed at the time of completion and pre-dated the IPO; and
(3) design defects in the Jubilee wells would cost the Company hundreds of millions of dollars to remediate, and prevent the Jubilee wells from meeting production expectations for several years.
These allegations echo what we’ve heard from IMANI.