26 August 2014

Ghana: Gas Supply Contract - Ghana May Dump Nigeria Over Breach

The Ghanaian government may look elsewhere for reliable gas supply to her Volta River Authority (VRA) following repeated failure by NGas, a company owned by Chevron, Shell and the Nigerian National Petroleum Corporation (NNPC).

LEADERSHIP gathered that the contract provides that, in the event of failure to meet agreed volumes, the supplier (Nigeria) will pay to enable the receiver buy crude oil for the shortfall. The contract was signed more than 10 years ago when the crude oil price was below US$20 per barrel

Currently, the level of gas supply to Ghana has fallen to 70 mcf relative to the 120 mcf indicated in the contract. Six months ago, Nigeria was delivering around 80 mcf in what industry operators said has become a persistent trend of erratic supply.

The development has meant that the largest power producer in Ghana, Volta River Authority (VRA), has to spend US$55million every three weeks to import crude oil to power its thermal plants.

The business development manager of the VRA, Kofi Ellis, who spoke on the vexed issue, explained that Nigeria's domestic gas demand currently outstrips production, making it difficult for NGas to supply the full contractual volume to Ghana. Ellis stated that VRA was already questioning the wisdom of continuing to rely on gas from Nigeria and what could be done to prevent NGas from continually reneging on the agreed volume.

Ellis confirmed that the Ghanaians are increasingly worried especially as electricity generation from hydro sources is currently at risk from poor inflows of water into the Akosombo, Kpong and Bui dams.

According to him, total demand in Nigeria is about 1.6 billion standard cubic feet of gas, and the production is about 1 billion.

"So, ideally, you would say Nigeria should not even put any gas in for Ghana because it's not enough for them. But they are doing something to increase production to 2 billion by 2015, and the idea is that when they are able to improve it to 2 billion, there will be enough for the domestic market. Because our price is much better than the domestic market, they will definitely put full gas in the pipeline for us at that stage.

He said the price of gas is half the price of crude oil for an equivalent amount of electricity generation, and that "the idea of Ghana gas is purely to try and reduce our cost of production by bringing VRA's plants from crude production to gas production".

Speaking further he said, "The contract says that if you don't give me gas, you have to pay to enable me buy crude oil for the shortfall. But this contract was signed more than 10 years ago when the crude oil price was below US$20 per barrel. At the time of negotiating the contract, we agreed that because we didn't know what the future price of crude oil would be, we would price it at a default rate of US$35 per barrel. We expected that, within the contract period, even if the price of crude oil doubled, it would fall within that price range.

"Now, the crude oil price has jumped from that low level to more than US$100 per barrel. Using the US$35 price, compensation for the entire contract period came to about US$20million. They've paid us US$10million already. So what is left is US$10million for the remainder of the contract period."

Ghana's current gas demand is about 300million standard cubic feet.

The imminent completion of the Atuabo pipeline linked to the Jubilee oil field is expected to bring on stream at least 120 million standard cubic feet of gas. Given the unreliability of Nigeria's gas, a supply volume of 80 million from them would still leave a deficit of some 100 million cubic feet.

Over the long-term (2014-2021), the VRA projects electricity demand to grow at an average of 10 per cent annually, rising from 1,950MW to 3,300MW in 2021.

The VRA has therefore started negotiations with other gas suppliers in Nigeria for the supply of additional gas via the West Africa Gas Pipeline. The pipeline is designed to carry up to 200 million cubic feet of the fuel.

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