Bright B. Simons And Franklin Cudjoe
13 January 2009
analysis
The newly-elected government has barely settled in, and the three-man committee tasked to coordinate the transition, from the economic policy of the erstwhile government, to a new regime under the incoming administration, has yet to issue a preliminary report.
In keeping with IMANI's oft-repeated assertion that civil society ought to take the lead in defining the terms of national discourse concerning the national agenda, we have decided to set in motion a national debate on the economy, using as our principal guidepost the ongoing global economic crisis.
In an earlier comment, a colleague of ours highlighted the impact of the global crisis on commodity price trends, and related matters. We will build on the issues identified by focusing on three principal areas of discussion: the oil discovery, remittances and investment (foreign direct investment - FDI), and the fiscal picture, with the understanding that the latter issue combines elements of the preceding two, with general and partial analyses of a range of various factors affecting the state of the Ghanaian economy in 2009 especially, and a few years thereafter.
We intend to be critical and assertive in our conclusions, in the hope that better specialised commentators in all the aforesaid areas, will in their responses, moderate our positions.
Insofar as the Government of Ghana has in the two previous dispensations, from 1993 to date, been operating with a fiscal deficit, it goes without saying that the incoming administration, whatever its policy orientation, has nearly no room to implement any radical departures from the current trend in government spending. Nor is the prospect likely, that revenue mobilisation would accelerate dramatically in the next few years.
The oil find has thus come to be viewed as the magic wand to wipe away all the structural constraints in government fiscal policy, and put Ghana on a genuinely transformational growth path.
We have grave reservations about this view. Our earlier comment placed a $3 billion dollar per annum price tag on oil receipts accumulating to the state from 2010 onwards. We now have strong cause to considerably revise this outlook downwards, and not merely because the $100 per barrel mean range we adopted has been shattered by recent developments on the crude market. There are other issues.
We are compelled, after close scrutiny of the matters involved, to question the forecasts of Tullow and Kosmos, regarding crude oil output from the companies' concessions off the coast of Ghana (note: the GNPC and the fourth partner have been restrained in issuing forecasts).
The joint oil prospecting operation covers three blocks in the western coastal area of Ghana. Crudely speaking, the prospecting operation aims to demarcate oil producing fields for development, and eventually, for the production of petroleum. One such field is the Jubilee, which lies in the deepwater section, between West Cape Three Points and Tano. Our understanding is that prospects in the shallow section are less significant.
Initial forecasts suggested a recoverable load of between 500 million and 1.3 billion barrels of oil from the Jubilee field, with subsequent upward revisions of the upper bound to 1.8 billion barrels. It must be noted that Tullow, the unit and technical operator, has always been particularly bullish about the outlook for the Jubilee field. The technical blueprint for the development of the concession, called for 7 exploratory and appraisal wells (think of these as giant holes in the seabed dug or 'drilled' with the aim of measuring how much oil is down there and not necessarily for actual production though they may in fact be eventually used for the latter purpose).
Tullow's first forecast (i.e. projecting a maximum commercially viable lifetime output of 1.3 billion barrels) was made when just two exploratory wells were in place. While there is no doubting the fertility of the oil-bearing rocks identified during that initial exploration, some experts are inclined to consider this approach highly optimistic. Indeed, it is safe to say that the more exploratory wells there are across the concession, the more accurate projections are likely to be, especially also, when the practice is to overlay the concession with a seismic map, followed by the effort of determining correspondences between the data yielded by the wells, and the imaging of the field produced by seismography (a process that can significantly reduce the risk of fruitless search investments). Simply put, forecasting oil reserve quantities with data from too few wells is somewhat equivalent to projecting election results from too few declared constituency results.
We concede that the geological issues can be highly technical, and experts frequently disagree. Our concerns were nonetheless, heightened by an analysis of Tullow's recent operational and financial history.
Our understanding is that Tallow, currently produces about 80,000 barrels of oil a day from its operations around the world. Its 23-country profile is concentrated in prospecting or exploration, rather than in the production business. As an 'independent' oil company, it maintains no retailing or marketing ('downstream') commitments. As such, and as a FTSE-100 company, the bulk of its assets are valued by the financial markets in correspondence with investors' perception of the worth of its exploratory holdings, that is to say the value of oil and or gas beneath its licensed concessions across the 23 countries in which it operates. To put this in perspective, consider that Tullow's share price has risen from under £1 to nearly £10 over the past five years (nearly 1000% increase), and also that by some expert's reckoning 60% of the company's stock market value is tied to its exploration prospects.
Jubilee is now the jewel in Tullow's crown. The company's North Sea holdings are mature, and none of its prospects, not even in Uganda, are in the same leagues as Jubilee. Indeed, since its Gawain South East exploration well in the North Sea failed to strike any load, and the declines in output from its Kelvin and Orwell fields, the Anglo-Irish company has shifted most of its investments to better prospects in Africa and Latin America.
The Gawain South East incident, however, highlighted the downside of Tullow's usual strategy of fast-paced field development, in that it tends to incur higher than industry-average costs in a number of its core operations. Adding this factor to the company's usual operational optimism, provides the backdrop to another incident of interest to this analysis: Tullow's underperforming Ivorien operation, owing primarily to the 30,000 barrels a day Espoire field's disappointing results.
We must stress that all our inquiries confirmed that Tullow is a well-managed company. The sole purpose of the foregoing analysis was to identify reasons why it may be necessary to downgrade Tullow's forecasts for the near-term future, by establishing a structure of incentives which underlie a posture of chronic optimism.
But besides the concern over quantities, and before presenting our own independent view about likely output levels, there are other relevant factors that merit mention and serious consideration.
Tullow's present debt position is at least $800 million. It needs to restructure this debt in order to raise the $2.3 billion it says it needs, inexplicably revised downwards from an initial estimate of $3.2 billion, (or the $3.5 billion some experts estimate it actually needs) to develop Jubilee's deepwater oil resources (bear in mind that deepwater drilling is more expensive than shallow or onshore drilling). Furthermore, by its figures, it needs to keep production costs at $15 to meet the performance standards it has promised investors. One might, in this light, want to consider that the United States Energy Information Administration puts the production cost profile for Africa at roughly $30 per barrel.
The combined effect of all the foregoing analyses, leads us to conclude that firstly, oil production is unlikely to begin in Jubilee by mid 2010 as anticipated. Even late 2010 will be optimistic. We suspect mid-2011 is a more realistic timeline. The reason is that in the current environment, Tullow will encounter difficulty raising even the $1 billion it requires to construct the offshore platform (or FPSO) needed to begin production at jubilee within the timeframe it first announced. What finance it raises will be on less salutary terms, not least because the downturn in oil prices means banks' and investors' appetite for exploration is likely to diminish. Secondly, it is unlikely to be taken for its word that it can produce offshore oil, as cheaply as it can in this environment of heightened investor scepticism, which will in turn impact on its projected profit/loss fundamentals and dampen investor enthusiasm.
As far as Ghana's external earnings account is concerned, this means oil production will start late and the output is likely to be restrained. We now suspect that sometime in 2011, 60,000 barrels a day will be issuing forth for sale at $60 spot market prices. But we must hasten to add another clarification. The quoted prices on the NYMEX and IPE indices are hardly what Tullow can expect for its oil. It will probably be selling at a decent discount to Brent, meaning that $50 is more like it. This takes us to $1 billion gross per annum. Tullow expects to be selling 30m cubic feet of gas to Ghana for energy generation within the same timeframe as it will be producing crude. We suspect this expectation is also overoptimistic, and at any rate, any such production will not occur, at least not in any significant quantity, within the four-year window that is our concern.
We will work with $1 billion per annum gross. Assuming that a significant proportion of production costs will be retained in Ghana (this is by no means a mundane assumption), we will peg accruals to the wider economy at $150 million (henceforth we will be separating Government earnings from financial effects on the economy for ease of analysis). Using $25 production costs, suggests gross earnings of roughly $700 million. Tax and royalties of 30% and dividend returns to the state's 10% holdings would have brought some $300 million to the Government of Ghana, but there is a catch. As far as we understand, if corporate taxes are levied on net earnings, and given the debt profile we have described for Tullow, that is likely to be negative. So, regrettably, it is highly likely that the Government's earnings will be confined to the 5% of royalties it has negotiated. The Government will be lucky to get $40 million per annum in 2011 and 2012 directly from Tullow's earnings. Taxes on the accruals to the general economy should bring in a further $40 million or so.
$80 million per year, beginning 2011, is the additional receipts the national budget should realistically anticipate, and even that, as we have said, not before 2011. To put this figure into perspective, consider that the National Health Fund is worth $230 million thereabouts, and government expenditures on health is in the region of $520 million.
INFLOWS (Remittances & FDI injections) Many pundits have predicted a decline in the inward flow of remittances to Ghana as dead certain. We disagree. The logic is that as unemployment increases in the West, migrants who fall victim to that situation are likely to become less disposed to sending money home. There are many flaws in this assumption.
Firstly, the bulk of migratory flows are south-south. That is to say, the majority of migrants are actually not resident in the West at all. It cannot be taken for granted that the global effects of the global recession will be increased, uniform, unemployment around the world. Indian migrants from Kerala in the UAE may not experience the same level of labour market turmoil, as Mexican migrants in California; nor are Philippino nurses in the UK subject to the same culling effects as Polish plumbers in Germany.
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