Some energy experts have described the contract signed between the government of Ghana and ENI in 2015 as a bad one and called on the president to review it to save Ghanaians from more economic hardship.
Mr Agyei Samuel Amoako, an oil and gas Analyst, in an interview with the New Crusading Guide indicated that the ENI gas would be expensive when it begins selling in Ghana. Statistics indicate that ENI is selling gas to government at $9.8 per mmBtu when the market price is around USD$ 3.028 per mmBtu.
“The prices were not properly fixed. The prices are very high compared to the cost of the same commodity on the open market. I can tell you that Ghana cannot operate with such a high price . Government must do something about it. There is a need to review the price to save all of us, a source at Ghana Gas; name withheld told this Journalist in an interview.
According to the Mr Amoako, Gas from the Jubilee and Ten Fields are free because it is an associated gas which is not being flared but transported to Atuabo for processing. A gas is termed associated when it emerges with crude oil which is the main focus of production
According to Analyses by The Africa Centre for Energy Policy, ACEP, 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 any time, 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.
A policy Analyst and Executive Director of the Integrated Social Development Centre, Dr Steve Manteaw corroborated the call for the review of the contract with the view that it will have negative consequences on power generation in Ghana. He said the contract was signed in a manner that only Ghana National Petroleum Corporation has the right to buy the process Gas from ENI and it dared not fail to buy else government would be cited for Judgment Debt. He regarded this clause in the contract as awkward and called for the review of the contract.
Dr Manteaw also reiterated the need for the country to build its capacity in contract negotiations to be able to get the best of the deal from the oil and gas sector.
He said the country had weak negotiation capacity and should therefore tie the rules of negotiation into the laws of the country governing the sector.
He further explained that if the procedures on negotiations were present in the laws of the country, it would make the rules mandatory which would prevent public officers from giving too much away and manipulating the terms of negotiation.“We are not known to be great negotiators so if you have a law that actually stipulates how an investor should acquire a concession in the oil sector, let that law work for you,” he said.Concerns have been raised about the price negotiated for the commencement of oil and gas production at the Sankofa Gye-Nyame field (SGN) operated by ENI and several other related contracts.
Dr Manteaw said the prices negotiated for the gas operated by the ENI fields were not very competitive and would be dangerous for the country’s economy.
Sharing his views on the US$7 billion signed contract for the SGN oil and gas project, he said the price negotiated for the gas was higher than that of Ghana’s gas and added that there was a worrying clause in the contract that committed the country to buy the ENI gas at the negotiated price even when cheaper options became available.
“So once we have already signed these and therefore cannot alter them, we should relook at the terms of negotiation and not repeat the same mistakes by tying the terms of the contract mostly to our laws and allow the laws to operate,” he said.
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 many 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.