We doubt Ghana’s $1b a year earnings from gas estimations – IMANI

IMANI has taken note of recent publications in the local and international financial press which appear to suggest that Ghana is poised to earn
approximately $1 billion per annum from natural gas production once the ongoing gas harvesting and processing facilities come on stream.

We do not believe that this is very plausible in the short to medium term of between 3 to 5 years. Per our calculations, production from the Jubilee field would have to increase by at least 4 times before the quoted sum of $1 billion can begin to sound realistic.

Why is accuracy in the projections important?

Just as we persistently warned against the practice then of inflating projected financial proceeds from Jubilee oil prior to the onset of
production, we believe it is important to straighten the records about the proceeds from gas. The country has moved to a medium-term framework for fiscal forecasting, so inaccuracies in projecting revenue can only distort and interfere with government capacity to plan ahead. It may encourage an unhealthy risk appetite and create a wrong impression of Ghana’s ability to service its debts in the medium-term.

We base our calculations on the likely proceeds from gas on the current production levels in Jubilee, which presently hover just below 90,000
barrels per day (b.o.d). The 120,000 b.o.d target has now been postponed several times, with the latest promised timeline given as next year.

Additional resources cannot come onstream until about 3 years after the finalisation of the Jubilee phase II plans of development, and or the
development of other fields, which is likely to take even longer.

These circumstances provide us with two scenarios for the medium-term – a realistic one based on 90,000 b.o.d and an optimistic one based on 120,000 b.o.d.

Sampling activities carried out in Jubilee indicate that for every 1000 barrels of crude oil produced there is associated gas of 1 million cubic
feet. This is wet gas that needs to be dried before it can be used in various industrial applications such as energy generation and manufacturing.

We have not been told how much dry gas will be produced from a cubic meter of wet gas in the yet to be constructed Domunli gas plant. For simplicity sake, we will assume, highly conservatively, that the ratio is 1:1.

The numerical relationship between crude oil and gas volumes in the preceding paragraph implies that daily production of dry gas shall be a
maximum of 90 million cubic feet per day. For ease of calculation, this may be converted to 2.5 million cubic meters per day. Average annual
production can thus be estimated at roughly 900 million cubic meters.

A survey of the Henry Hub and Platts pricing indices since June of 2011 suggests a downward sloping price curve with March 2012 prices hovering around $72 per 1000 cubic meters. It should be noted that the prices of natural gas on the international markets can vary by quotation, and are usually influenced by long-term contracts. We shall use $150 as the medium term average price for this analysis.

Consequently gross proceeds from Jubilee gas should in the medium term average about $135 million per annum in the realistic scenario or $180 million in the optimistic scenario. To determine net proceeds on a mark-to-market basis, one must take into account pipeline costs,
processing costs and shipping costs. We conclude, using estimates from the industry, that the per annum market value of Ghana’s gas under current production conditions amounts to about $100 million per annum in the realistic scenario.

Readers should note that this analysis makes the highly conservative assumption that there is no net loss in yield in the conversion of wet gas
to dry gas.

Insofar as the plan is to use the gas locally rather than market it internationally, there would of course be positive ripple effects in the economy that may generate additional value. However, there are caveats.

The current gas production levels in Jubilee also implies that the Domunli gas plant currently under construction shall be operating at 60% capacity, which is not wholly problematic, but it still implies higher amortisation costs. Furthermore, Ghana’s road to self-sufficiency in thermal power production will now be delayed significantly. The critical demand for gas in the medium term is about 423 million cubic feet per day.

A crude formula for determining the gas – energy nexus in Ghana is to assume that 3.6 MW of energy is produced from 1 million cubic feet of gas. This implies that 1500 MW of gas-fired thermal energy is required to complement hydroelectric power production in the country’s energy mix (as we move away from diesel-fired thermal).

Unfortunately, the ongoing work to harness Jubilee gas can only meet less than 20% of this amount. The prevailing electricity prices in Ghana of
about $130 per MWh for commercial users and $50 per MWh for domestic users clearly indicate that the economics of the Domunli gas plant may require policy change to balance out. Another recommendation is to very quickly improve on Ghana’s liquefied natural gas handling capacity in order to, at least, fully exploit natural gas liquids and also ensure diversified, including maritime, inward trade in natural gas (the over-reliance on one pipeline has proved disastrous).

Whilst it is obviously important to aggressively market our gas resources in order to attract financing on favourable terms, it is equally important
not to develop policy based on overoptimistic projections. The best thing would be to encourage open and rigorous debate about some of the
challenges that are already evident in our nascent gas industry. We very much hope that the Ghana Gas Company and the Ministry of Energy shall react to this “alert”.

Source: IMANI

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