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Oil Sector Saddled With Medium Term Risks

66e19567c25fe568a262e6307f80d14f_L (1)Ghana’s oil sector will start facing setbacks after 2020, especially of no new fields are discovered since the country will not be able to increase production in the next five years should that eventuality materialise, energy think tank Africa Centre for Energy Policy (ACEP) has warned.

In the interim, ACEP said in a publication titled: ‘Beyond The 2016 Elections: Energy Sector Priorities For The Next Government of Ghana’, that: “The outlook for oil output is positive going into 2017 as oil production could increase to between 180,000 and 200,000 bpd by the last quarter of 2017.”

“This will be realised due to the following: i. The commencement of oil production in the TEN fields in 2016 and the plan to increase production to 60,000 bpd in 2017; ii. The plan to permanently moor the FPSO Kwame Nkrumah, which is expected to commence in April for a period of 3 months, will ensure jubilee production recovers before the end of 2017; iii. Sankofa-Gye Nayme fields will also start oil production in the first quarter of 2017 with about 45,000 bpd.

“Based on existing fields and on-going field development works, crude oil production is estimated to reach 240,000 bpd by 2020, which will make Ghana the fourth largest producer in Africa,” it said.

The think tank, however, warned that: “The oil industry faces a serious setback if no new commercial discoveries are made. Beyond 2020, Ghana will not be able to increase production for 5 years or more, even if new discoveries are made between 2017 and 2020 considering that it takes an average period of 7 years between discovery and production.”

“Also, the inactivity offshore which affects future production prospects can be attributed to the provisional ruling on the Ghana-Ivory Coast maritime dispute by the International Tribunal on the Law of the Seas (ITLOS), which has frozen exploration works in the disputed areas. Therefore, with the difficulty of replacing depleting reserves, the oil and gas industry faces medium term risks, which will be further aggravated if all the producing and development fields enter their natural decline phase by 2024.

“Also, existing Petroleum Agreements face market and execution risks and some of the companies holding these agreements are already responding. For instance, UB Resources is reported to have requested for a renegotiation of the terms of its Offshore Cape Three Point Block Agreement, whilst Eco Atlantic has sold its interest in the Three Point West Deep Water Offshore Block to PetroGulf Ghana Limited, a locally held Ghanaian company, which held a 4.5% interest in the Block prior to the sale, and is expected to reimburse Eco Atlantic US$576,580 for past operating expenditures owed to the company on the Block.

“There are other companies holding Petroleum Agreements who are not complying with their work obligations. These developments reduce the attractiveness of Ghana’s oil and gas industry and could have a compounding effect. The next government must act fast to improve on the upstream investment climate to attract more experienced companies to ensure renewed activity and possible new discoveries to revive the oil industry. The passing of the Petroleum Act 2016 and the Income Tax Act 2015 will no doubt provide some regulatory certainty, and incentivise upstream investments. The laws provide some incentives to investors including for instance a requirement for the extension of exploration periods and sub-periods, beyond the standard periods where necessary, the introduction of recognisance license likely to accelerate data acquisition urgently needed to derisk the oil basins, and the introduction of an open and competitive public tender process for acquiring concession rights which now provides a levelled playing field for investors to openly compete for oil blocks,” ACEP added.

There are, however, some disincentives as well in the new laws, but these can be addressed through regulations, it said, adding that: “The Petroleum Act in particular reduced the period of a Petroleum Agreement from 30 to 25 years, introduced new fiscal terms including bonuses and capital gain tax, and minimum rates for some of the fiscal terms have been set reducing the negotiation window. The Income Tax Act also provides for an exempt debt-equity ratio to 3:1 for oil and gas project financing, a rule which did not apply to the oil and gas sector. It is important to note however that these new provisions strengthen the position of the government to maximise revenue, but this could not be achieved without cost to the growth of Ghana’s frontier status. With current levels of production against the huge untapped potential, Ghana remains a frontier area and its sudden shift from investment attraction to revenue maximisation could hurt the oil industry. Balancing the two objectives through the use of progressive fiscal provisions could help neutralise any investment disincentives the law presents.”

Source: https://www.newsghana.com.gh/oil-sector-saddled-with-medium-term-risks/

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