August 27, 2008 6:02 pm

Crude realities

Accra Ghana

The world needs Africa’s oil, but the stuff has a habit of ruining the places that produce it. From the civil war battlefields of southern Sudan to the slums of Angola and the swamps of the Niger Delta, the discovery of crude has done little to improve local lives. Often, it has destroyed them.

Yet a fisherman who makes his livelihood in Africa’s newest oil province – a deep-water field off Ghana’s Atlantic coast – can hardly wait for it to start flowing. “With God’s help, I’ll be a rich man,” says Joseph Cudjoe, one of a chain of young men hauling a net into a brightly painted longboat beached at the village of Axim. “If the oil is coming, we’ll get a lot of money, just like the Saudis.”

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Ghana, while no match for Saudi Arabia’s roughly 9.5m barrels a day, aims to start pumping 120,000 b/d from the Jubilee field operated by the Anglo-Irish Tullow Oil in 2010 and perhaps double that a few years later – becoming the latest to join the club of African oil exporters. Autocracy, instability and poverty afflicting the existing members reveal the corrosive effects the industry can bring. But Ghana could be different. Regarded as a pace-setter in economic and political reform, the country of 23m holds Africa’s best hope of proving that oil’s curse can be broken.

The revenue could transform Ghana’s economy. According to economists at South Africa’s Standard Bank, gross domestic product growth could rise from some 5-6 per cent in the past few years to top 20 per cent in the first few years of output, assuming oil prices stay above $100 a barrel. The dollar incomes will help stabilise the cedi – the currency has fallen by more than 20 per cent in the past 12 months – and reassure holders of Ghana’s eurobond, which matures in 2017. “We dare not fail,” says Kwaku Appiah-Adu, an adviser to President John Kufuor. “It will not only be the hopes of a nation being dashed but the hopes of Africa.”

The first test will come before a drop is pumped. Presidential and parliamentary elections in December will decide who controls billions of petrodollars. With Mr Kufuor stepping down after two terms, whoever wins will rapidly have to devise a plan to ensure Ghana avoids oil’s pitfalls.

The world will be watching. As fields from Russia to the North Sea and the Gulf of Mexico begin to decline, energy companies from Houston to Beijing are betting on Africa to help make up the shortfall. The continent produced 12.5 per cent of the world’s oil last year and is projected to account for almost one-third of the growth in global production over the next two years. Success in Ghana would augur well for a new generation of foreign investors who argue that Africa’s commodities boom will drive unprecedented economic progress by the continent. Failure would at best mean more uncertainty.

For a lesson in how not to do it, Ghana need only peer a few hundred miles along the coast to Nigeria, the continent’s biggest oil exporter. The insurgency in the Niger Delta, where attacks on oil installations have helped spur oil prices to record highs, shows how the world economy can suffer when a big producer goes bad.

Many of Nigeria’s problems can be traced to the advent of oil production half a century ago. The prize of capturing the flood of dollars accruing to the state turned politics into a no-holds-barred contest that fostered coups and secessionist civil war in the 1960s. Oil encouraged a culture of corruption where political connections rather than business acumen were the key to overnight riches. Fraud and violence at elections last year suggest the competition has become only slightly less raw.

Ghana, by contrast, has regarded itself as a torchbearer for African aspirations ever since 1957, when it became the continent’s first colony to win independence. Ghana endured its own share of coups in the early years until Jerry Rawlings, the half-Scottish flight lieutenant and military ruler, restored the multi-party system by quitting the armed forces and winning an election in 1992. As limb-chopping rebels marauded their way through other west African countries such as Sierra Leone and Liberia, Ghanaians queued up to vote.

December’s elections will reveal how far democracy has matured. Mr Kufuor’s New Patriotic party will battle it out with the National Democratic Congress, the main opposition grouping, in a contest that many in Accra, the capital (pictured above), expect to be a nail-biter. High prices for Ghana’s gold and cocoa exports have boosted growth in recent years but global food and fuel inflation has hurt the poor. Evidence of growing involvement by the security forces and politicians in trafficking cocaine from South America to Europe has also bolstered opposition feeling. An MP from the ruling party was sentenced to 10 years in jail in New York in February for smuggling heroin. John Atta Mills, the NDC candidate, bills himself as “Mr Clean”.

Ghana map

Mr Mills, who has lost twice to Mr Kufuor, was quoted this year as warning of a Kenya-style crisis if the result was rigged. Ghana lacks the ethnic polarisation that fuelled the recent killings in Kenya but a regional bias in the parties’ support base has raised concerns among some analysts about potential friction if the outcome is disputed. The big unknown is how much impact the lure of oil may have, but it seems likely to sharpen the competition.

Nana Akufo-Addo, who served Mr Kufuor as foreign minister and is now the NPP flagbearer, reckons the country could earn $15bn (£8bn, €10bn) in the first five years of production alone. “The person who, as it were, gets hold of these resources and uses them well could be in power for a very long time,” says Mr Akufo-Addo. “You’re playing for probably more than for one election in December. You’re playing for power for a generation.”

Standard Bank projects that oil income could wipe out Ghana’s trade deficit, which stood at $1.1bn in the second quarter of this year, and cancel out the budget deficit, projected to stand at about 8 per cent of GDP in 2008, providing a healthy boost to the macroeconomic outlook. Donor officials say the present government seems committed to finding a transparent mechanism to ensure oil is managed wisely, but so far there is little public detail on what it might look like. “Oil has generated too much excitement and too much expectation,” says Kwesi Aning, a senior researcher at the Kofi Annan International Peacekeeping Training Centre in Accra. “Ghana is already rich in mineral resources, but that has not translated into public welfare.”

The government says its record in economic management proves it can cope with an influx of oil money. The country has experience in allocating funds freed up by debt relief. Foreign investors gave their seal of approval in September last year by snapping up Ghana’s $750m eurobond issue while Vodafone of the UK has just spent $900m to buy a 70 per cent stake in the previously state-owned Ghana Telecom.

But crucial questions remain: should the oil be used for infrastructure or simply added to the budget? Should a fund be set up to counter price shocks? Or should Ghana simply invest its earnings and spend the interest? A new oil policy, circulated to MPs this month and seen by the FT, commits the government to use the funds to develop Ghana for current and future generations but is silent on precisely how revenues will be managed. Energy exporters from Norway to Malaysia and Trinidad and Tobago are offering advice, but as Felix Owusu-Adjapong, the energy minister, admits: “If you are not used to good management of money and you win a lottery, you can still become a pauper.”

Nigerian history shows the passions that oil can ignite. Most of today’s militants in the Niger Delta may be motivated more by money than ideals, but the sense of alienation in a region that thinks leaders in a faraway capital have squandered their treasure allows the conflict to persist.

Africa oil production

With Ghana’s oil facilities located reassuringly far out to sea, and little history of violence on the adjacent coastline, few are predicting a Nigerian-style scenario. But demands for preferential treatment echo the discourse in the delta. In his home near the 16th century Portuguese slave fort in Axim, Awulae Attibbrukusu III, the leader of 22 western chiefdoms, says the area deserves an extra slice of oil funds to avoid the problems of Nigeria. “A greater share of the cake should be given to us,” he adds, speaking in quarters decorated with chiefly symbols from a hyena skin to a staff topped by a brass eagle.

Both main parties have pledged to invest in industries that will help achieve broad-based prosperity. But as Nigeria has learnt, oil tends to undermine the very sectors that could be capable of providing mass employment. Nigeria’s oil dollars caused exports to become less competitive and imports to surge. Farming and manufacturing collapsed and idle youths crammed into ever more chaotic cities.

The scale of Ghana’s oil income suggests it will have to be careful to avoid a similar fate. The International Monetary Fund projected in an internal report in June that oil production would be worth $3.5bn by 2013, with the state’s take reaching $1.3bn. Oil income could thus outweigh both gold and cocoa earnings, which totalled about $2.8bn in 2007. Plans to create jobs by encouraging local companies to service the oil industry are likely to prove tough to implement. “I worry about our capacity to benefit from this resource,” says Thomas Manu, director of exploration and production at Ghana National Petroleum Group, the state oil company. “How much Ghanaian goods and services will be used in this whole thing?”

Oil executives heading to Ghana have an interest in ensuring the country gets it right. Tullow Oil, whose discovery in Ghana helped hoist it into the FTSE 100 index last year, says it is taking steps to soothe local feeling, such as not flaring gas. “We need to manage public expectations,” says Gert-Jan Smulders, Tullow’s country manager. “Tullow Oil is committed to grow and maximise the number of national staff, but the size of the operation isn’t such that you’ll get hundreds of people employed.”

Working with the US private equity backed Kosmos Energy, Tullow has a world-class find in Jubilee – estimated to hold 500m-1.8bn barrels. Mr Manu says that with companies including Vanco Energy and Amerada Hess planning to drill this year, there could be a lot more.

Walking past rusting cannon in Axim’s fort, Kingsley Quayson, the curator, reflects that in centuries past, Ghana’s slaves helped build America. “We are proud of oil,” he says. “Now Ghana will be rich.” Everyone hopes he is right.

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