Oil price crash threatens Ghana’s impending new oilfields

The unprecedented crash in global crude oil prices is putting the brakes on plans and efforts to develop the country’s next two oilfields. The situation is made worse by the fact that these two pending fields – Aker Energy’s Pecan field and Springfield Ghana’s field – are expected to be considerably more productive than the Jubilee, TEN Cluster and Sankofa Gyaname fields already in production.

Ghana produced about 214,000 barrels per day (bpd) in 2019 and this was expected to rise to 420,00 by 2023, with the Pecan field expected to contribute the most to the anticipated increase. Springfield’s impending project is still in its infant stage, but its sheer size is expected to add on at least another 150,000 bpd. The timelines for these increases are now looking increasingly unlikely.

By early this week Brent crude oil, which is similar in quality to Ghana’s crude, was trading at a long term low of just US$18 per barrel. However, Ghana’s impending next fields, like the three already in production are all located in deep water, off of Western Region, where it costs about US$30 to produce a barrel.

This means that all Ghana’s fields are currently financially unviable. But while existing fields are maintaining production to meet recurrent and debt servicing costs – albeit with field expansion projects being slowed or suspended altogether – new fields will not secure requisite financing at current prices.

Actually, Aker Energy had already secured investment commitments for its impending Pecan field (much of it from its own corporate stash), but investors will likely pull back for now. Ironically, development of the field was supposed to have started nearly a year ago, but government twice insisted on revisions to its plan of development, which have now been done, only for the price crash to make the financial projections in the PoD unrealistic for now.

The impending project by Springfield is in even murkier waters. Being an indigenous Ghanaian firm, Springfield needs both a technical partner to develop and operate its field, as well as huge financing, to develop what is expected to be one of Africa’s biggest oilfields.

To be sure, the sheer size of the field that Springfield’s record discovery can support is enough to sustain the keen competition for the role of technical partner. But the oil price has crashed before any firm commitment for project finance could be secured and the project economics are unviable at current prices.

Crucially though, the price crash means a delay in both field developments but not cancellations; over the medium to long term oil prices are sure to recover enough to restore the economic viability of both fields. Indeed investors clearly remember that the global market price for Brent crude hit a peak of US$147 a barrel in 2008.

The current price crash has been partly instigated by the coronavirus pandemic which has decimated global demand for energy, but which is still widely seen as a relatively short term phenomenon which will subside before the end of this year. However the other factor driving the oil price downwards is the oil economics dispute between Saudi Arabia and Russia which has led the former – the world’s biggest exporter of crude – to flood the global market with cheap oil. It is uncertain how long the situation will prevail before it is resolved.

Furthermore, the situation has reminded investors of just how volatile oil prices are and this may leave a permanent negative impression on them, thus making them demand a higher risk premium on their investment capital.

The inevitable delay in the development of both fields will have unwanted repercussions for Ghana’s finances. Since 2013, the country has been issuing Eurobonds almost yearly, attracting investors with the promise of increased oil revenues from a growing number of oilfields. But a delay in the biggest ones yet, just two years before the bonds issued are to start maturing annually, will not impress investors, even as Ghana looks to start refinancing those maturing issuances.