Fuelling Ghana’s Growth Oil and gas industry

Fuelling Ghana’s Growth | Q1 2015 | 3

Contents5 An overview of

Ghana’s oil and gas industry

7 How has the industry evolved?

9 How is the market structured?

11 How is the industry regulated?

13 What are the driving forces?

15 What type of challenges exist?

17 How valuable is oil and gas for Ghana’s economic growth?

19 What differentiates Ghana’s oil and gas industry?

21 Will Ghana’s economic environment support growth?

23 What lies ahead for oil and gas in Ghana?

25 In summary

The growth of the African economy has frequently been linked to the richness of its untapped mineral reserves and infrastructure development. While these sectors continue to hold their importance, the economy is diversifying, with Africa emerging as a key oil-producing region.

Until recently, Nigeria and Angola were the dominant African countries in oil exploration and production, but there is a hidden jewel that is gradually growing in importance. Since our first report highlighting investment scenarios in Africa, in 2011, Ghana has come a long way from being one of the largest producers of gold on the continent to becoming a key oil-producing nation.

Ghana commenced commercial oil production in 2010, and the discovery of new oil fields has provided a critical boost to the industry. This growth story has attracted increasing support from the government and global entities, such as the World Bank. However, at this nascent stage, the industry’s growth will be largely dependent on external investments.

While huge capital investments are inevitably required to develop the infrastructure necessary for oil exploration, external technical expertise is also required – to train the existing unskilled workforce, improve downstream operational efficiencies and support sustainable growth practices. These needs for investment and technical expertise offer immense opportunities for global and regional entities focused on the oil and gas sector.

This report covers the evolution of the oil and gas sector in Ghana, focusing on its driving forces, challenges and evolving regulatory environment, with a brief summary of the industry’s future outlook. It offers Integreon’s considered point of view on Ghana’s unique position as an oil-producing nation and touches on different investment opportunities within the oil and gas sector.

Introduction

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An overview of Ghana’s oil and gas industryGhana’s oil and gas sector possesses strong growth potential; since the discovery of new oil fields, the country has witnessed a significant rise in its production capacity, with the sector making increasing contributions to the country’s overall GDP.

While the oil and gas industry is at a nascent stage in Ghana, oil production has seen a significant rise since 2010.

The discovery of the Jubilee field, one of the major oil fields in Ghana, in 2007, has been a key factor in the growth of this industry.

Ghana has commenced production from its new Atuabo gas processing facility, financed by China Development Bank, at the Jubilee field.

Gas production is expected to reach 604 MMcfd1 by 2020.

Notes: 1. Million Cubic Feet per Day; 2. Barrels per DaySources: ‘Ghana – US Energy Information Administration’, August 2014; ‘Release of Gross Domestic Product: Quarterly GDP for 3rd Quarter 2014 and Revised Annual GDP estimates for 2013 and 2014‘, Ghana statistical service, 2015; ‘Ghana earns $1.4 billion in oil revenue’, Ghana Web, 2013; ‘Ghana reaps nearly 979 mln USD from oil in 2014’, Shanghai Daily, 2015; ‘Ghana makes over 847 million dollars from oil export’, Reporting oil and gas, 2014; Energizing Economic Growth in Ghana’, 2013, World Bank; ‘Atuabo Plant Supplies Domestic Market With Gas’, Modern Ghana, 2014

Oil Production within Ghana

534 2020E

99 2013

80 2012

78 2011

Ghana Oil Production (in thousand bpd2)

Oil Exports (in thousand bpd2)

Increasing Contributions to Ghana’s Overall GDP

33 2013

16 2012

13 2011

7.7% 2013

7.5% 2012

6.2% 2011

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How has the industry evolved?Since the discovery of oil fields in the last decade, the oil and gas industry has undergone a major transformation, commencing commercial production and attracting large investments from foreign players.

2015Eni, Italy’s largest oil company, in collaboration with Vitol Energy, signed a contract with the government worth USD 7 billion, for oil and gas production

2013In January, oil production from the Jubilee field peaked to 110,000 bpd1

2010Oil production officially started in commercial quantities

2007The Jubilee field discovered by Tullow Oil and Kosmos Energy, marking Ghana’s entry into the exclusive club of oil-producing countries

2014Oil exports generated about USD 979 million of revenue

2011The oil sector accounted for 6.2% of the country’s GDP, which grew by 14.4%, one of the highest growth rates in the world

2009Tweneboa, Enyenra, Ntomme (TEN) and Sankofa oil fields discovered

2004Licenses sold for offshore oil production and exploration

Note: 1. Barrels per DaySources: ‘Ghana’s Jubilee reaches 110,000 b/d production’, Oil and Gas Journal, 2013; ‘2013 Budget Highlights’, PWC, 2013; ‘Ghana Oil Revenue’, Petroleum Africa Magazine, 2011; Ghana Web, 2013; ‘Ghana reaps nearly 979 mln USD from oil in 2014’, Shanghai Daily, 2015; ‘Offshore Cape Three Points (OCTP)’, SubseaIQ, 2015

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How is the market structured?The oil and gas sector in Ghana is largely dominated by private players, primarily due to the large amount of investment required for exploring oil fields. These players are seeing significant growth and are planning for expansion in Ghana.

13.7%Ghana’s National Petroleum Corporation (GNPC)

2.8%Sabre Oil & Gas

23.5%American Kosmos Energy Ltd Kosmos, one of the major players, is expected to start extracting oil at Twenboa, a new site, by 2016 with daily production of approximately 80,000 bpd1.

It also plans to invest approximately USD 1.5 billion in Ghana during 2014–2017.

23.5%Anadarko Petroleum Corp After announcing its first oil discovery from the Jubilee field in 2010, Anadarko started oil production in 2014. Since then, Anadarko, along with its partners, has made major discoveries in the Tweneboa, Enyenra and Ntomme fields. The discoveries, referred to as TEN complex, are expected to start production by 2016.

36.5%Tullow Oil

Tullow Oil is a British company that primarily operates in the Jubilee field, one of its flagship

offshore fields in Ghana.

The company witnessed an increase in revenue from USD 958.5 million to USD 1,245.3 million,

a growth rate of 30%, during 2012–2013.

Note: 1. Barrels per daySources: ‘Tullow Oil Annual Report 2013’, tullowoil.com, 2013; ‘Oil Industries in Ghana’, Africa Europe Faith and Justice Network, 2013; Ghana plans new investment in energy sector for 2014’, Oxford Business Group, 2013; ‘Advanced Development and Production in Ghana’, Anadarko.com, 2014

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How is the industry regulated?The government has set up a regulatory body to control the sector and has framed guidelines for oil exploration, thus increasing transparency for foreign players to operate in Ghana.

Taxes and Regulations

The oil and gas industry in Ghana, especially the upstream sector, is regulated by the Petroleum Commission, an entity that acts, not only as a regulator, but also as an interface between government and the industry.

The commission encourages local participation by mandating a number of conditions, such as taking at least a 5% equity participation from a local company, other than themselves, for a corporation to be eligible for a petroleum license.

Ghana National Petroleum Corporation (GNPC) is a national oil company, responsible for independent exploration activities or partnering with foreign/regional companies for the exploration and production of petroleum in Ghana.

After significant oil discoveries, the government proposed a new bill in 2007, the Ghana

Petroleum Regulatory Authority Bill, covering points related to commercial discoveries between regulatory body and oil firms.

In the event of a discovery, the following taxes are applicable to the oil firm:

• Oil royalty: 12.5%

• Gas royalty: 7.5%

• GNPC carried interest: 10% (may include 10% additional interest subject to conditions)

• Corporate income tax: 35%

Recently, Ghana adopted an ‘Oil to Cash’ module to curb corruption in this sector:

• ‘Oil to Cash’ distributes a fraction of the state’s oil revenue directly to the citizens as annual dividends, therefore, ensuring equitable distribution of revenue and transparent collection of domestic taxes.

Sources: ‘Oil and Gas’, Corporate Africa; ‘Oil to cash’ module can reduce corruption, Reporting Oil and Gas, 2014; ‘Africa Oil & Gas Review: On the brink of a boom’, PWC, 2014; GNPC Website

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What are the driving forces?In Ghana, a country with large proven reserves, the growth of the oil and gas industry has been spurred by the discovery of offshore fields and investment by local government and other foreign entities.

Large Proven Reserves As of 2014, Ghana’s Tano Basin had proven reserves of around 0.66 billion barrels of oil and 0.80 trillion cubic feet of natural gas.

Discoveries of Offshore Sites Since 2009, at least 11 offshore sites have been discovered in Ghana, with more than 90% of them located in deep water.

Investment by Government Government will invest approximately USD 20 billion during 2014–2018 to boost the production of oil and gas in Ghana.

Increase in FDI Ghana is ranked fourth in Africa as the most attractive investment destination for Foreign Direct Investment (FDI), mainly due to the opportunities in the oil and gas sector.

Participation from Foreign Players In 2015, Italy’s largest oil company, Eni Spa, started a USD 7 billion project in alliance with Vitol Energy to operate Ghana’s thermal power plants for the next 20 years.

Support from the World Bank The World Bank is financing various projects with a total investment of USD 58 million. The projects include training of 800 students in petroleum engineering and establishing a national data centre within the Petroleum Commission to assess the effect of oil and gas operations on the marine environment.

“Ghana in particular benefited from FDI in the newly-developed Jubilee oil field, where commercial production started in December 2010.” – United Nations Conference on Trade and Development (UNCTAD), July 2012

Sources: World Bank increases support for Ghana’s oil and gas sector’, out-law.com, 2014; ‘Ghana secure $7bn energy and power contract with Eni’, Reporting Oil and Gas, 2015, ‘Ghana Country Profile’, U.S. Energy Information Administration, 2014; ‘Ghana: WB Helps Build Strong Public Oversight of Oil and Gas Production in Jubilee Field’, World Bank, 2014; ‘Oil is Ghana’s best investment driver’, Joy Online, 2012

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What type of challenges exist?The rapid growth of Ghana’s oil and gas sector can be slowed by a shortage of skilled labour, a maritime boundary issue and illegal oil bunkering.

Lack of a Skilled Workforce Ghana is facing a severe crunch of skilled labour. Ghana lacks an adequate number of drillers, engineers, managers, and production and operation workers to support the industry. Marketing of Stolen Oil Due to a rising international market for stolen oil, Ghana faces the threat of smuggling across its borders. Maritime Boundary Issues Ghana is engaged in a maritime boundary dispute with Cote d’ Ivoire over an area that is rich in oil reserves. The matter is pending before the United Nations. Illegal Oil Bunkering Due to high unemployment, thousands of people in Ghana engage in a practice known locally as ‘oil bunkering’, which involves hacking into pipelines to steal crude, refining it and selling it abroad for higher profit margins.

Downstream Sector Under-performing The Tema Oil Refinery, the only oil refinery in Ghana, has a production capacity of 45,000 bpd1, but its operational capacity has been fluctuating due to old equipment and a shortage of funds to purchase crude oil. Utilisation of Revenues Utilising the revenues generated from the oil and gas industry could be a major challenge for Ghana. Countries such as Chad have seen the so-called ‘resource curse’ in the past, wherein countries that are rich in natural resources tend to grow less than those with relatively fewer resources.The primary reasons for the ‘resource curse’ could be a decline in the competitiveness of other economic sectors, mismanagement of the resources or weak, ineffective, unstable and corrupt regulatory bodies.

“Ghana, regarded as one of Africa’s brightest prospects, is struggling to reap the benefits of its oil and gas reserves as production targets are missed and crippling power shortages belie its hydrocarbon wealth.” – The National, Leading Abu Dhabi Newspaper, April 2013

Note: 1. Barrels per DaySources: ‘Major Challenges in Ghana’s Oil and Gas Discovery: Is Ghana Ready?‘, ARPN Journal of Science and Technology,2013; ‘Ghana: The State of Oil and Gas Industry in Ghana - the Nagging Issues’, All Africa, 2014; ‘Ghana fired up for a brighter future’, The National, 2013

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How valuable is oil and gas for Ghana’s economic growth?The oil and gas industry has been a major contributor to GDP growth in the recent years. Surplus revenues generated from this industry have enabled the government to raise its expenditure on other key sectors.

Increasing Contribution to National GDP• Oil and gas sector’s contribution to national GDP has increased

from 6.3% to 7.7% during 2011–2013.• In 2013, the oil industry registered a growth rate of 18%, higher

than any other industry vertical.

Supporting Other Sectors—Health, Agriculture and Education• Additional revenue from the oil and gas industry is being used

to develop the health, agriculture and education sectors in Ghana.

• The Ghana government has passed a law ‘Ghana Petroleum Revenue Management Act, 2011 (Act 815)’ to ensure that the revenue generated from this sector is used to reduce poverty.

Increased Investment in Basic and High-level Public Infrastructure• The growth of Ghana’s oil and gas industry has attracted major

investments in its infrastructure development projects.• To meet the needs of international energy organisations,

Ghana has developed airports and planned townships that are comparable to world standards.

Sources: ‘Release of Gross Domestic Product: Quarterly GDP for 3rd Quarter 2014 and Revised Annual GDP estimates for 2013 and 2014’, Stats Ghana, 2014; ‘Counting the benefits: Ghana’s oil wealth and development’, Governance for Extractive Industries, 2013; ‘Ghana Economic Outlook’, Africa Development Bank Group, 2014

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What differentiates Ghana’s oil and gas industry?High-quality oil, strategic access to international markets and support for investment initiatives are potentially a recipe for success in Ghana’s oil and gas industry.

Quality of Ghana’s Crude Oil• Crude from the Jubilee oil field is high-quality light sweet crude,

which is highly marketable and competitive in international markets.

• As a result, countries such as South Africa rely on Ghana as a crude oil supplier.

Strategic Location and Robust Port Infrastructure• Ghana is ideally located, with easy access to not only regional

but international markets, such as the US and Europe. The Jubilee oil field’s close proximity to Europe enables the export of significant volumes of its crude to European refiners.

• Ghana’s location is perfectly supported by its maritime infrastructure, which is considered advanced compared to that of other low-income African countries and adequate to process both local and international transactions.

Market Openness towards Investment• The market is enabling various investors to access the oil and

gas industry. In 2014, Weston Capital, a private company, established Ghana’s first sector-focused mutual fund, Weston Oil and Gas Fund (WOGFund), with an objective to support local small and medium enterprises in the oil and gas industry, and raise a minimum of approximately USD 15.7 million1 through shares issued to the general public.

“It makes economic sense to sell the Jubilee oil on the international market for now because it is premium quality and very expensive.” – Dr. Steve Manteaw, Steering Committee of the Ghana Extractive Industries Transparency Initiative, December 2011

Note: 1. Converted from GHS to USD using the average annual exchange rate for 2014Sources: ‘Basic overview of Ghana’s emerging oil industry’, FES Ghana, 2011; ‘South Africa’s oil imports from Angola, Ghana, Nigeria’, SAFPI, 2013; ‘TOR must refine Jubilee oil’, Vibe Ghana, 2011; ‘Ghana’, Africa Development Bank, 2014; ‘Ecobank Country Profile: Ghana’, Ecobank Group, 2014; ‘Oil and gas in Africa’, KPMG, 2013; ‘Africa gearing up’, PWC, 2013; ‘Ghana gets first Oil and Gas Mutual Fund’, My Joy Online, 2014; ‘Weston Capital launches “Oil & Gas Fund”’, GhanaWeb, 2014

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Will Ghana’s economic environment support growth?Increasing flows of FDI and expected favourable GDP growth in the future indicate a suitable environment for all the sectors, including oil and gas, to achieve sustainable growth in Ghana.

Increase in FDI FDI projects are likely to increase in Ghana, as it is ranked fourth among the most attractive FDI destinations in Africa. FDI in Ghana has risen at a CAGR of more than 50% during 2007–2013, the fastest in Africa. It also ranks sixth on the list of FDI Intelligence’s African Countries of the Future 2013–2014.

Economy to Continue to Grow Ghana is one of the fastest developing countries in Africa, with an average annual GDP growth rate of approximately 10.3% during 2010–2012, and a predicted average growth rate of 5.9% during 2012–2017. The commercialisation of oil since 2007 is one of the major factors propelling this growth. It has widened the scope of utilisation of natural resources in Ghana and enabled it to become an oil exporter, with production expected to rise to 200,000 bpd1 by 2019.

Note: 1. Barrels per DaySources: ‘EY’s attractiveness survey: Africa 2014’, Ernst & Young report,2014; ‘Opportunities in the oil services and Ancillary Businesses’, GHANA SUMMIT 2014; ‘Ghana: Skills Shortages in the Oil and Gas Industry – Lessons for Ghana’, Reporting Oil and Gas, 2014; ‘Africa gearing Up’, PWC, 2013

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What lies ahead for oil and gas in Ghana?Increasing oil production, supported by the development of new capabilities, is expected to significantly fuel the growth of the oil and gas industry in Ghana. Moreover, strategic measures adopted by the government and oil companies to offset falls in oil prices will ensure sustainable growth for this sector in the future.

Oil Industry Likely to Flourish Ghana expects its oil production to reach 200,000 bpd1 by 2020, which will be more than double its current production level. The problem of the oil deficit is expected to end by 2018, when two of Ghana’s major projects, the Sankofa and TEN fields, are expected to start production. The TEN project is expected to start in 2016, with a production capacity of 80,000 bpd1. The Sankofa-Gye project, which is expected to start production in 2017, contains reserves of approximately 116 million barrels of oil and 31.1 billion cubic metres of gas. The revenue generated from this sector is expected to exceed USD 3 billion per year during 2018–2022.

Rise in Competencies of Oil and Gas Sector With better strategies being framed and implemented across the oil and gas industry, employees and companies are expected to develop new capabilities, such as human resources, quality management, infrastructure development, technical expertise and bid preparation, which will make the overall industry more competitive and allow it to expand, both locally and internationally.

Government and Oil Companies Adopting Strategic Measures to Offset Fluctuations in Oil Prices Amid concerns of rising inflation, a depreciating currency and decreasing oil prices, the government has struck a three-year financial assistance deal worth about USD 1 billion with the IMF, requiring IMF’s intervention to improve its fiscal stability and attract foreign investors. Even oil companies, such as Tullow Oil, have adopted cost-cutting measures, such as suspending its dividends in the short-term to subsist as a low-cost oil producer, offsetting the impact of falling oil prices. The company is banking on reinstating its dividend from the first production of Ghana TEN in 2016.

“By the end of 2016, we should be producing something close to 60,000 bpd1 from TEN, and we should be looking at 130,000 barrels (per day) from Jubilee.” – Head, Ghana National Petroleum Corporation (GNPC), October 2014

Notes: 1. Barrels per DaySources: Energizing Economic Growth in Ghana’, World Bank, 2013; ‘Future prospects in Africa for the transportation & logistics industry’, PWC report, 2013; ‘OIL AND GAS in Africa - RESERVES, POTENTIAL AND PROSPECTS OF AFRICA’, KPMG, 2014;‘West Africa starts opening up more deepwater oil, gas plays’, McGraw Hill Financial, 2014; ‘Ghana to increase Jubilee and TEN oil production by 2016’; The African Report, 2014; ‘Ghana reaches agreement with IMF on $1bn aid deal – source’, Moneyweb, Feb 2015; ‘Tullow Oil Suspends Dividend Amid Oil Price Fall’, Feb, 2015, The Wall Street Journal

Fuelling Ghana’s Growth | Q1 2015 | 25

With large proven reserves, the exploration of new fields and increasing inflows of FDI, Ghana’s oil and gas industry is equipped with all elements required to power growth. However, the trajectory of this growth will be defined by the strategies adopted by players across the value chain.

In summary

To boost competitiveness, the local oil and gas entrepreneurs will be required to build or upgrade infrastructure to explore new fields and increase process efficiency to reduce oil production costs - a task that is not possible without huge external capital investment and technical assistance. Moreover, to achieve sustainable growth, companies will be required to

adopt risk mitigation policies, which will help them overcome exposure to external factors, such as falls in oil prices and an evolving regulatory environment.

With the sector embarking on a remarkable journey, it will be exciting to see how the future unwinds for Ghana’s Black Gold.

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• Looking to understand the competitive landscape of Ghana’s oil and gas sector.

• Interested in identifying opportunities for growth across the oil and gas value chain in Ghana.

• Seeking to understand needs related to regulatory compliance and structuring of agreements for players across the oil and gas value chain in the country.

• Interested in assessing the impact of global events on Ghana’s oil and gas sector.

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