January 10, 2013 7:40 pm

Energy: Trial by oil

An unidentified man stands near a gas flare belonging to the Agip Oil company in Idu Ogba, Niger Delta area of Nigeria©AP

Alongside the road outside Ghana’s main western city of Takoradi, four men in red overalls and hard hats stand next to a yellow digger. They are workers from Sinopec, the Chinese energy company, laying a gas pipeline through the nearby hills. Ghana became an oil producer just over two years ago and has about 3bn barrels of oil equivalent in discovered reserves. This year, gas comes on stream.

That is why December’s closely contested election, won by John Dramani Mahama, was also a “proxy battle for the control of Ghana’s oil and gas revenue”, says Emmanuel Gyimah-Boadi, a professor of politics at the University of Ghana.

Africa charts Thumbnail

Africa charts Thumbnail

Mr Mahama has pledged to use the country’s oil-swollen revenues to improve infrastructure, education and power supply. “There’s no denying the fact that even after 55 years Ghana is still a young country. Every young country goes through its share of instabilities and difficulties,” he said after his inauguration last week.

His country, like a clutch of other African nations, is struggling to come to terms with its hydrocarbon riches. All have the same problem: how to put their new-found wealth to work for the good of all. Almost four decades ago, oil was labelled the “devil’s excrement” by Juan Pablo Pérez Alfonso, a Venezuelan minister who was among the founders of Opec.

There are plenty of examples from around the world proving the wisdom of his judgment. In Nigeria, an investigation into the industry found that the state was short-changed at almost every stage of accounting for oil revenues between 2002 and 2011. Signature bonuses and royalties amounting to billions of dollars went unpaid.

Its petroleum sector has been riddled with inefficiencies and corruption. Cut-price gas deals made between Nigerian officials and multinational oil companies are estimated to have cost the country, Africa’s biggest oil producer, $29bn over the past decade, according to the same report. Oil theft is rife and estimated to be as high as 250,000 barrels per day, or 10 per cent of total production.

There are also instances of oil and gas being a profound influence for good and providing a financial bulwark for the future, with Norway’s sovereign wealth fund a much-admired example. Ghana and its fellow new members of the oil-producing club are not Norway, however, and are striving to harness their wealth before it harnesses them.

Mr Mahama’s policies will determine the course of the oil and gas industry and, with that, the bedrock of Ghana’s economic growth. Revenues from its Jubilee field (output reached 105,000 barrels a day at the end of 2012), plus strong production of cocoa and gold, helped push economic growth to 14.4 per cent in 2011. Yet about half of the country’s 25m people still live on less than $2 a day.

“We all have our fears about oil, because we have seen what happened in the Niger delta,” says Nana Kobina Nketsia, paramount chief of Essikado, in the western region close to the offshore oil production. “The measure of trust that should be built around oil has not been nurtured. The government is in a hurry for the revenue but has put the cart before the horse.”

A plea for the oil boom to create local jobs

Despite Ghana’s emergence as an oil producer, Ebow Haizel-Ferguson is frustrated. The director of Sigma-Base Energy & Construction, a services company in Takoradi, says he has trained 2,000 people in welding, electronics and pipe-fitting but complains that there are few jobs for them. When he tried to find work for some of his graduates on a new gas pipeline, China’s Sinopec said that the welding was too technical and used its own staff, he says.

His difficulties reflect a widespread concern that local people will not reap the full benefits of any boom.

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Ghana’s progress is being watched by its African peers, in particular on the east coast where a wave of discoveries off Mozambique, Tanzania and Kenya has sparked a scramble by the world’s largest energy groups. The discoveries are not small beer. Wood Mackenzie, the consultancy, estimates that gas discoveries in Mozambique and Tanzania so far are more than 100tn cubic feet and “resonate on a global scale”, says Martin Kelly, lead analyst for sub-Saharan Africa.

By comparison, Australia, which is expected to overtake Qatar to become the world’s largest producer of liquefied natural gas by 2020, has discovered 200tn cubic feet. “East Africa might not become quite as big as Australia but it has the potential to be that kind of size,” Mr Kelly says.

Governments, too, are taking note. The two African countries’ reserves “are large enough that they can significantly contribute to global gas supplies and to help diversification of supply for energy-consuming countries in Africa and beyond,” says an official at the US state department.

The biggest finds have been off Mozambique by America’s Anadarko Petroleum and Italy’s Eni. Their two fields combined could contain up to 60tn cubic feet of recoverable resources of gas and provide power as well as a lucrative revenue stream from LNG exports to Asia’s energy-hungry nations.

Alongside the explorers flocking to the region are small armies of private and public sector consultants eager to provide expertise on how to build a sustainable industry. The International Monetary Fund, Norway and the World Bank are all advising.

For Mozambique, by almost any measure among the poorest countries on the planet, the potential prize is great. It was ranked 184 out of 187 nations in last year’s UN Human Development Index, with a life expectancy of just 50 years and a gross national income per capita of $898. Its gross domestic product last year was $12.8bn – half the estimated cost of two planned “trains”, as gas liquefaction facilities are known.

“This is a transformational moment and they are aware of that ... There is a lot of pressure – everyone wants to be there,” says Claudio Descalzi, chief operating officer of Eni’s exploration and production division.

“It’s all about revenue management,” says Farouk Al-Kasim, the Iraqi geologist credited with establishing Norway’s industry and chairman of Petroteam, a resource consultancy. “You must have a good system of governance in place, one that integrates the petroleum sector, and to use the revenues in a manner that will create a lasting benefit to society.”

New producing countries need to start with a petroleum policy, says Mr Al-Kasim. This should then be translated into legislation on how the petroleum industry will be governed, and only then should contracts be drawn up. “Most countries go straight to contracts,” he adds, but “by that time they will have already lost most of their interest.”

. . .

Ghana, Mozambique and Tanzania are at different stages in this process. In Ghana, the petroleum revenue management act, signed into law in 2011, mandates that 30 per cent of total receipts flow into separate future-generation funds. The finance ministry must publish detailed accounts. The act also established a public-interest watchdog. Its first report, last May, identified areas of concern, including a lack of transparency at the Ghana National Petroleum Corporation. A petroleum commission will now be responsible for regulation and management of resources, as well as licensing, freeing up GNPC to become more commercial.

“The oversight and disclosure requirements make us think that maybe, just maybe, Ghana will be able to tell a different and better story than Nigeria ... where oil has been more a curse than a blessing,” says Steve Manteaw, chairman of the Civil Society Platform on Oil and Gas.

In Mozambique the separate institutions – a regulator, a ministry and a national oil company in the form of ENH – were already in place before Anadarko’s discoveries. Tanzania, meanwhile, has proposed new legislation of the sector, which is regulated by laws passed in 1980.

Local people remain wary. “I think there’s more fear than expectation that we have an opportunity to speed up development, because we know [from] our neighbours there can be real opportunities, but mostly there have been huge social and environmental problems,” says Alda Salomão at Centro Terra Viva, a civil society group in Mozambique.

Valérie Marcel, associate fellow at Chatham House and co-author of a study on governance models, says Mozambique has “a capable regulator”. A report by the Norwegian Agency for Development Co-operation says the regulatory agency is a well established organisation although the energy business suffers from the country’s lack of an effective law promoting access to information.

“That should be a priority for government, which needs to communicate effectively and credibly with the public in order to manage expectations about what benefits the country will probably get from its gas,” Ms Marcel adds.

. . .

Legislation is a start but skilled people are vital. Anthony Lobo, oil and gas partner at KPMG, says: “I think the legislation gives a framework but many of these countries need to build the capacity in terms of people to implement the legislation.”

In Mozambique, the government surprised international investors last year during a bidding war for Cove Energy , a London-listed company and Anadarko’s partner, after it said it would impose capital gains tax on the transaction. “A tragic feature of many of these countries is that there is a temptation to do it as quickly as possible, egged on by a whole cheering crowd of companies, other countries, advisers telling you to use this opportunity to go as fast as possible. This means you will end up making decisions before you have improved your capacity,” says Mr Al-Kasim.

Introducing local content laws is one way to prevent “Dutch disease”, the term economists coined for a booming resources sector sucking the life out of the rest of the economy.

Managing expectations remains one of the greatest challenges. Ike Duker, executive chairman of Tullow Ghana, says that when oil was found there was “a huge expectation that it would change people’s lives”. But, he adds, “the government is now taking steps to address this”.

In Ghana the first year of oil production brought in about 7 per cent of GDP but this was capital rather than labour-intensive work. Officials are looking to develop a gas strategy and build up a petrochemicals industry.

Growth does not spell an end to poverty. Mozambique was the fastest-growing non-oil economy in sub-Saharan Africa over the past 15 years, with GDP growth averaging 8 per cent between 1996 and 2008, driven by reconstruction after its civil war. Progress in reducing poverty has stalled, with just over half of Mozambicans still living below a poverty line of $0.50 a day.

Corruption remains a primary concern in Tanzania. “Some people fear what will happen if corruption is not dealt with now. Concrete steps need to be taken,” says Barnabas Samatta, co-chair of EEE Mediation and former chief justice of Tanzania.

Mozambique became compliant with the Extractive Industries Transparency Initiative in October. New rules by the US Securities and Exchange Commission that require companies to disclose payments related to individual projects, an implementation of provisions in the 2010 Dodd-Frank financial regulation, have proved controversial. Keith Myers, now head of Richmond Energy Partners and a former adviser to the parliament in Ghana, says it is “a bit early to say but project-by-project reporting will undoubtedly be an administrative headache. Dodd-Frank doesn’t address the procurement and spending where many would argue much of the corruption problem lies”.

The question all these countries are grappling with is whether they can avoid the mistakes of others while managing expectations. “That’s the hundred billion dollar question,” says a donor official in Mozambique.

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