The Africa Centre for Energy Policy (ACEP) has criticized the government of Ghana and the Ghana National Petroleum Corporation for not taken the interest of Ghanaians at heart in the signing of the doubtful US$7 billion integrated oil and gas development agreement in the Sankofa-Gye-Nyame Fields.
The President of the Republic last week announced a big time Gas deal between GNPC and the Offshore Cape Three Point (OCTP) Partners; ENI Ghana and Vitol Ghana (Contractors) over a US$7 billion integrated oil and gas development in the Sankofa-Gye-Nyame Fields but the agreement seems to be a bad one that will make Ghana lose millions of dollars according to the Africa Centre for Energy Policy (ACEP).
According to ACEP’s Analyses of the terms and conditions of the Agreements and Term Sheets show that the deal is fraught with badly negotiated terms, and at most serving the interest of the Contractors rather than Ghana’s.
The findings from the analyses show that the government offered over-generous terms to the Contractors just to satisfy Ghana’s thirst for gas supplies. In trying to satisfy the country’s demand for gas, the incentives provided to the Contractors exceeded what pertains in international transactions of similar nature.
ACEP noted that Government’s fiscal support package, which included an exempt debt-to-equity ratio of 2:1 at 7% interest on the commercial loans of the Contractors, would lead to significant revenue losses to the state over the project life of 20 years, since interest expenses are tax deductible. The state must guarantee that at anytime, the free fiscal support to the Contractors remain $125 million to make the initial gas price of $9.8 per mmBtu. This could run into several millions of dollars when gas prices fall. In the event that the contractors source the loans from their affiliates, the gains to the Contractors could increase at Ghana’s expense.
The Government is required under the Security Package and Fiscal Support Agreement to issue five (5) different Sovereign Guarantees estimated at about $1.5 billion in addition to World Bank and IDA guarantees. This situation over-exposes the state to too much risks and demonstrates the lack of investor confidence in the Ghanaian Government.
It said the plan by GNPC to make an upfront payment in cash to the Contractors or allow the Contractors to over-lift GNPC’s share of oil at the beginning of production of oil, for the purpose of making Gas price of $9.8 per mm Btu viable in not fair . he said although the amount is expected to be recovered at the end of production, the recovery amount does not attract interest charges. This is not consistent with sound financial management.
According to ACEP, Government’s decision to allocate the maximum 55% Net Carried and Participating Interest to GNPC beyond the 15 year period for the capitalization of GNPC as provided in the Petroleum Revenue Management Act 2011 (Act 815) or PRMA violates Section 7.3 of the PRMA and will therefore amount to an illegality.
The Agreement covers terms and conditions for the financing of the project by the Contractors and for the sale of the Contractors’ share of gas produced to GNPC.
The Sankofa-Gye-Nyame Fields is estimated to hold petroleum reserves of 131 million barrels of crude oil and 1.15 trillion cubic feet of natural gas. The project is in two phases – Phase 1 (Oil) and Phase 2 (Gas). First oil is expected on stream in March 2017 whilst first gas is expected in February 2018.
Daily production of oil will be at 80,000 barrels whilst daily production of gas will average 171 million standard cubic feet over 20 years.
Several Agreements and Term Sheets cover the project as follows:
i. OCTP Petroleum Agreement signed in 2006 (Approved by Parliament). ENI farmed into the Petroleum Agreement in September, 2009.
ii. Supplementary Agreement for Submission of OCTP Plan of Development singed in 2014 (Approved by Parliament);
iii. Fiscal Support Agreement and Security Package Term Sheet for signsed in December 2014 (Approved by Parliament)
2.0. Sharing of Petroleum
Sharing of petroleum in monetary terms is based on the fiscal regime in the OCTP Petroleum Agreement. The fiscal terms include royalty of 7.5% for oil since the water depth is in excess of 400 mters; gas royalty of 5%, corporate tax of 35%. GNPC has a carried interest of 15%; and additional paid interest of 5%. The working interest of the partners therefore amount to ENI Ghana (44%), Vitol Ghana (35%) and GNPC (20%).
Based on after tax working interest, the contractor group will be entitled to $14.3 billion (56%) of total cash flow over the project life whilst the state is entitled to $11.1 billion (44%). The state take is lower than what pertains to previous contracts. Given that the project is a $7 billion project, the contractors will be making profit of $7billion. This makes the project a profitable one at an oil price of US$90 per barrel and gas price of US$9.8 per mmBtu.
3.0. Over-generous Concessions by the State
In spite of these gains the company is likely to make from the deal, the Government has further over-exposed the country to too much risks due the decision to buy all the gas produced by the contractor. The exposure takes the form of guarantees and security to keep gas price at $9.8 per mmBtu and to support the Gas Sales Agreement. This is where the real challenge is. The over-generous concessions the Government and GNPC are providing to the Contractors are examined here.
3.1. The Fiscal Support
The Government and GNPC have offered through the Supplementary Agreement to make the initial gas price of $9.8/mmBtu viable by providing a fiscal package to the tune of $250 million. A total of $125 million will be provided by GNPC upfront, whilst the remaining fiscal concessions amounting to another $125 million to be provided by Government will ran over the project life.
The Government fiscal concessions are:
a. Tax deductible interest of 7% on the commercial loans of the contractors based on a debt-equity ratio of 2:1; which translates into a net present value of $105 million.
b. Tax deductible Decommissioning cost, which translates into a net present value of $20 million.
The Government fiscal concessions are problematic. Over the project life of 20 years, the fiscal support of the state translates into significant revenue losses to the state, as the state will not have tax revenues from interest expenses on commercial loans of the Contractors. It is even more problematic because interest commercial rates are declining and could remain below 7% for a long time. The contractors’ gain could be more if it decides to contract loans from its affiliates or Banks in which it has interest once the debt to equity ratio does not exceed 2:1.
The Government is further required to provide a Sovereign Guarantee of $125 million to pay for any negative difference if the fiscal concessions do not translate into monetary value of $125 million or if the fiscal concessions are not approved or are disallowed. Thus, revenue losses to the state could run into several millions of dollars when gas prices fall below the initial price of $9.8 per mmBtu.
3.2. GNPC’s Upfront Payments
As per the Supplementary Agreement, for the contractors to execute the second phase project (Gas), GNPC is required to make upfront payments of $125 million to ensure that the contractor makes an NPV of $125 million based on the initial oil price of $90 per bbl and gas price of $9.8 per mmBtu. The contractors must make an NPV of $125m at all times. Therefore, if the initial price changes such that the contractors will not make an NPV of $125 million at any point in time, GNPC is required within 3 months of any shortfall occurring, to implement alternative mechanism to eliminate the shortfall; or pay cash to the contractors if the mechanisms have not been implemented.
The implication of this is that, there is no room for the contractors to make a loss at anytime or for their profit levels to decrease; and the state is obliged to assume the full risk of a loss occurring to the contractors through GNPC paying cash to offset any decrease in the contractors’ profitability. In addition, the Government must issue a Sovereign Guarantee of $125 million to pay for the shortfall in case GNPC defaults. The assumption of these risks by the state alone is too high in an industry that is very volatile. Since, the Contractors already make substantial profits from the oil project, the risk of a loss to the contractors must be shared with the state rather than the state entirely assuming the risks.
GNPC has two options for executing its upfront payments to the Contractors:
i. Cash contribution of the total amount of $125 million, or
ii. Contractor over-lift of oil due GNPC to the tune of $105 million plus GNPC cash purchase of remaining oil barrels in stock to the tune of $20 million at the beginning of production.
What is worrying is that the upfront payment is to be recovered by GNPC at the end the project life. However, in recovering these upfront payments, the state is not entitled to interest charges on the amount because it is not considered as advancement but a contribution. In this case, one wonders why the state has to provide security in the form of a Sovereign Guarantee to cover its contribution to the contractor just because the state desires to purchase the contractor share of the gas produced. The important questions that need urgent answers are:
– What is the commercial value of the state’s contribution to the project?
– Should we necessarily commercialize the gas in OCTP if it is not a viable project?
– Why should we commercialize the gas at $9.8 per mmBTu higher than gas from Nigeria at $9 per mmBtu in addition to GNPC’s contribution and other fiscal packages that could cost the state revenue losses?
– Given that the cost of the phase 2 (Gas ) of the project is estimated at $2.7 billion, could the Government not borrow to finance the project substantially and eventually increase its benefits rather than providing free fiscal and other incentives to the Contractors to finance the project?
3.3. Security Package for the Gas Project
3.3.1. Gas Price and Savings
The initial gas price negotiated from 2014 is $9.8 per mmBtu. However, the price is indexed to United States CPI and Henry Hub prices. Therefore changes in gas price will reflect changes in the two parameters.
The Government in an attempt to deceive the public convinced Parliament that the initial gas price would reduce to $8.075/mmBtu if GNPC invests $300 million in offshore receiving facilities and pipelines and would further reduce to $7.0135/mmBtu if GNPC invests additional $193 million. This in the view of Government will lead to savings to the country of $5.1 billion in price reduction.
The motive for presenting the $5.1 billion as savings is not clear. Fact is, the reduction in price is based on investments to be made by GNPC, and the purported savings are what Ghana would have paid if the contractor executed the offshore receiving facilities and pipeline. Therefore the purported savings are the returns over the project life from the investments of $493 million to be made by GNPC. The money for these investments are already earmarked from the $700 million loan the GNPC is contracting, to be repaid from gas sales and GNPC’s share of Net Carried and Participating interest provided for in Section 7 of the Petroleum Revenue Management Act 2011 (Act 815).
3.3.2. Security Package for gas payment and performance obligation by GNPC
A number of disturbing security packages are being provided to cover GNPC’s payment obligations for the contractor’s share of gas produced. The security package include the following:
i. Take or pay clause
ii. Commitment for a minimum contracted off-take by GNPC of 90% of annual quantity produced by contractor
i. The opening of an Escrow Disbursement Account to receive GNPC’s revenues to be used for payments in respect of gas sales
ii. The opening of an Escrow Reserve Holding Account with a minimum balance funded by GNPC
iii. Government Sovereign Guarantees
iv. World Bank Partial Risk Guarantee cover
v. Risk of payment default from the International Development Authority (IDA)
These guarantees are required to make a Gas Sales Agreement effective. Whilst guarantees are normal with international transactions such as this, some of the guarantees provided in the term sheet for the security package are disturbing. At most, they undermine Ghana’s sovereignty by tying down the hand of the Minister of Finance, GNPC and violating sections of the Petroleum Revenue Management Act 2011 (Act 815). Further, GNPC shall not sell gas in any currency apart from US Dollars conflicting with the domestic currency regulations.
These disturbing guarantees are examined below:
a. The Escrow Disbursement Account
GNPC is required to open a US Dollar main Escrow Disbursement Account, which shall receive revenues from the following sources:
– Domestic gas sales revenue including GNPC’s net carried and participating interest from Sankofa-Gye Nyame, Jubilee and TEN gas revenues.
– All funds representing GNPC’s share from the Petroleum Holding Fund (excluding GNPCs cash calls and financing costs associated with petroleum agreements which are included in equity financing costs under section 7.2a of PRMA).
– All revenues arising under gas sales agreements including on-sale gas by GNPC from existing and new developments from or across OCTP, Jubilee and TEN.
At this juncture, it is not clear why gas sales revenues from Jubilee and TEN projects must be transferred to the Escrow Account provided for in the Security Term Sheet for the OCTP Block; and managed by GNPC and the OCTP partners. That is, the OCTP Contractors are invariably dictating the conditions under which Jubilee and TEN gas purchases will be paid for by GNPC. In the event that the Jubilee and TEN operators have different terms covering payment for their gas sales, the OCTP Gas Sales Agreement will be adversely affected. This also means that the Security package must not exclude Jubilee and TEN partners from the negotiations.
Also, the payment for gas sales from the Escrow Disbursement Account will be further backstopped by a World Bank Partial Risk Guarantee equivalent to $600 million and GNPC’s risk of default payment cover of $150 million by the International Development Authority (IDA). Notwithstanding these guarantees, the Government must issue a Sovereign Guarantee to cover any payment shortfalls after the Partial Risk Guarantee provided by the World Bank is exhausted.
b. Escrow Reserve Holding Account
Apart from the guarantees provided by the World Bank and IDA; and the Sovereign Guarantees provided by the Government for any shortfalls in payment for gas by GNPC, the corporation is further required to open a US Dollar Escrow Reserve Holding Account for the exclusive benefit of ENI Ghana and Vitol Ghana. The Reserve Account shall be funded by GNPC before first gas with an amount equivalent to 4.5 months of the Contractors share of Annual Contract quantity. This requirement is more stringent given that Jubilee and TEN Gas sales payments Escrows require an amount equivalent to 3 months of annual contract quantity.
Again the Government is required to issue a Sovereign Guarantee of $100 million to offset any shortfalls in debt service from the main Escrow Disbursement Account.
c. Payment of GNPC’s Net Carried and Participating Interest into the main Escrow Disbursement Account
For the period of the Gas Sales Agreement covering 20 years, the state must ensure that GNPC continues to receive its Net Carried and [Participating Interest (CAPI) as provided for in the PRMA, which GNPC must pay into the main Escrow Disbursement Account for the purpose of paying for gas sales from the Contractor.
The conditions under which the above provisions will be executed provide that:
a. GNPC will budget and request for 55% Net CAPI and the Ministers of Finance and Petroleum are required to support this proposal and secure parliamentary approval for it.
b. The allocation of 55% Net CAPI to GNPC will continue after the 15 years provided in Section 7.3 of the PRMA for the capitalization of GNPC.
c. In the event that Parliament does not approve a Net CAPI allocation to GNPC at 55%, then for any period when Net CAPI is less than 55%, the state shall pay the Net CAPI deficit into the main Escrow Disbursement Account.
d. The State shall issue a Sovereign Guarantee to cover the Net CAPI deficit.
Some of the conditions above have grave implications.
The first condition ties the hands of the Minister of Finance as the Fiscal Manager in the PRMA and in this case, the Minister can no longer vary the allocation of the Net CAPI to GNPC from the maximum 55% as was done previously from 2011 – 2015.
The second condition violates Section 7.3 of the PRMA, which provides an exit period of 15 years for the capitalization of GNPC from petroleum revenues. In this case, the Government may be compelled to amend this Section of the Law or engage in an illegality. and also violates the PRMA.