06 April 2009

We have addressed in various media different aspects of the energy situation in this country. This approach has not succeeded very much in depicting the full scale of the challenge that confronts us; nor has it been very helpful in portraying the inter-linkages between the various problems. But energy expenditure constitutes nearly 20% of our GDP, demonstrating the extreme significance of the sector, and making it critical that institutions like ours dedicate significant resources to understanding its relationship with Ghana’s broader economic situation.

In this and future overviews, we will continue our public education drive by interweaving different shades of the chaos afflicting our energy sector. We try to offer constructive suggestions implicitly, by emphasizing the obvious flaws in the system and thus, we hope, expanding the scope of debate. We begin with the myths and close with the brutal realities.

1. Renewables

There is an oft-repeated argument that Ghana has completely neglected renewable energies, particularly solar, in its search for strategic energy solutions. To the extent that there has been any neglect, it has been one of effective energy policy generally. What attention the energy sector has received renewables too have had their share, in due accordance with their promise and the extent of public resources.

Indeed the Ministry of Energy used to run a 50 MW solar plant (the biggest such facility in Ghana) until recently when, according to our information, it had to be decommissioned for refurbishment.

In 1997 thereabouts, the Kingdom of Spain provided Ghana with a $5 million facility to develop off-grid solar electrification of 10 villages in the “home and community systems” approach. Water pumps and streetlights were expected to be powered with the system. Not too long thereafter, a loan of $185 million to be syndicated by DANIDA, IDA, ORET, NDF, and CDF was designed with the participation of Ghana’s Ministry of Mines & Energy for onward disbursement towards solar power production projects. EMPRETEC, GRATIS, KITE, and CEDEP were enlisted to provide the requisite technical support. Two solar service centers were to be constructed. Indeed, even the current budget has provisions for three solar mini-grids.

Meanwhile, 40 small hydro plant sites have been identified by the Energy Commission for potential development. We partly share the Commission’s enthusiasm for hydro. The experience of Portugal is quite relevant in this regard. For many years, solar held the fascination of the country’s policy elite because of the country’s fortuitous location in the well-burnished Mediterranean. Several hundreds of millions of dollars later, however, the consensus has metamorphosised into an emphasis on wind, and a commitment to world leadership in tidal. The reason was simple: despite the hype, the price/output ratio for solar is still far from favourable, and anticipated trends in technology improvement do not in any way favor solar over either tidal or wind.

The price/output ratio for hydro in Ghana certainly outshines that of solar. Perhaps, that brutal reality underlies the Energy Commission’s focus on small hydro. To repeat, we concur.

While biofuels hold some promise, serious land tenure problems (we have first-hand evidence of the collapse of at least two major projects because of this issue), water husbandry constraints, and general agronomic pressures undermine the full prospects.

Which is not to say that renewables should not play a role in our energy security but rather that we should not hype their contribution. Off-grid renewable projects can only be marginal to our need, whereas the possibility of selling to the national grid (just as of biofuel producers selling to BOST) might significantly improve upon the incentives of independent power producers (IPPs) to enter the renewables sector and enhance total output. That possibility advises a strong focus on smart grid infrastructure/policy investment as a necessary precursor and pre-requisite for renewable power production.

2. Petroleum Refining

Imports of crude oil in Ghana amount to little over 15 million barrels of oil a year (not much more than Russia’s daily output). A little more than 9 million barrels of this quantity go to the oil refinery, while 6 million is allocated to the power plants run by the VRA and its surrogates.

67.5% of Ghana’s petroleum product imports are made up of gas oil. Premium (“petrol”) constitutes 23%. 33.3% of the Tema Oil Refinery’s output is of Gas oil (“diesel”), while 41.4% is of gasoline (“petrol”). The shortfall in local production of gas oil is interesting, considering the role of the fuel in mass transport.

TOR’s problem is without doubt one of under-capacity. The problems with its current set-up reads like a rhyming litany, but it is no trifling matter: low capacity of the premium reformer; low capacity of the aged utility units; continuing, if reduced, losses at the refined product loading gantry; low capacity to blend different grades of crude oil (and thus to benefit from the incorporation of cheaper variants of crude); double the acceptable internal power generation waste levels due to a low-capacity power recycling mechanism; use of hydro-cokers rather than more efficient bi-metallic converters; storage, conversion systems and vacuum distillation unit gaps.

Recapitalisation and the resultant re-capacitation should enable the production of bitumen for use in our intensive road-building program, and much more besides.

According to Ghana’s own Ministry of Energy, some of TOR’s key ex-refinery products are sold in some of our neighbouring countries for double the going rate in Ghana. Clearly, the most rational solution to the refinery’s problem is therefore for it to “grow its way out” of its current crisis, by expanding to leverage its apparent efficiencies across the sub-region.

On that score we agree with the Tema Oil Refinery’s own strategic plan to scale up refining capacity to an eventual 145,000 barrel capacity, and disagree with the Ghana Strategic National Energy Plan’s projection of 115,000 barrel capacity by 2020 as unambitious.

Of course, as in every export-led growth model, there are risks of counter-party protectionism. Should Cote D’Ivoire, for instance, see the matter as one of energy security it might consider its own aggressive refinery expansion plans with a view to trading on efficiency gains within the region (as it has done in the electricity industry).

It would be wise for Ghana to better align its capacity expansion program with its industrialization plan. It appears from the evidence that an expansion of diesel and gas-fired thermal power capacity should provide a destination for a considerable proportion of ex-refinery output within the context of a policy that seeks to make Ghana the hub of energy-intensive industries within the sub-region. Aluminum offers clear possibilities, but the metal’s price-sensitivity to wild fluctuations on the international market (witness China’s withdrawal from its commitment to finance a multi-billion dollar bauxite-to-aluminum project in Guinea) advises that we also pay attention to the use of aluminum in local light manufacturing. Pre-fabricated housing is an industry that consumes significant quantities of aluminum. Solutions to our present housing crisis could thus be aligned with an energy-cum-integrated industry strategy, building vital, sustainable, linkages. What is more, the self-evident financial viability of such a strategy commends itself very well to market criteria and therefore to vigorous private sector participation.

3. Power Production

Crude oil dynamics have become inseparably bound with energy generation dynamics in this country following the growing intensity of thermal in our energy mix, with ramifications that are visible all around us. 80% of the trade deficit in crisis-plagued 2001 was constituted by oil imports alone. Indeed between 2000 and 2004 the import bill for crude surged from $280 million to $500 million. As much as 76% of the Sovereign bond had to go to underwrite struggling VRA’s investments. Government of Ghana has also been providing direct cash payments to cover VRA’s operational costs incurred for the import of crude oil, just so it can avoid the reality that it is providing “subsidies” to the sector. The current strategy is to “ringfence” VRA’s gas turbine capital expenditures and to transfer all transmission infrastructure to GRIDCO, a newer kid on the block. We have grave doubts as to whether this approach amounts to more than treating the symptoms and ignoring the malady. The underlying problem is of course strategy and policy instability.

It is definitely not for nothing that most energy producers in the country are still operating on provisional licenses from the Energy Commission. Energy appears to be an area of national life very much in flux. But for how much longer can we endure?

3.1 The Osagyefo Barge

The issue of the Osagyefo barge is so symptomatic of the chaos in our energy framework that we thought it deserves dedicated treatment. Interestingly, just about the time we went to press, the front pages of some of our papers were splashed with news of alleged ties between Gene Philips - Chairman of Balkan Energy, the refurbushers of the barge – and organized crime interests in the United States.

These news reports are inaccurate according to the information we have. Gene Philips has indeed sued search engines that host links to stories making similar claims, and even though he was forced to withdraw the suits, he seems justified in his indignation since due legal process did clear him of all preferred charges. (See Phillips v. Google Inc. filed on June 4, 2007 in a State Court of Texas; or access the case documents here:

http://news.justia.com/cases/featured/texas/txndce/3:2007cv01236/168932/). Gene Philips certainly does cut a larger than life picture though. A Dallas neighbour to former US President George Bush, he likes to draw attention to his ability to mingle with the rich, powerful, and famous. Mr. Philips’ lifestyle is however not of prime importance in these matters.

What is worrying is that Balkan does indeed appear to fall short of certain standards in business practice that should trouble our regulators.

The company’s marketing style at times crosses the mark of acceptable behavior. In several releases to the press, Balkan’s spindoctors have created the impression that the Osagyefo barge has been producing power for Ghanaians, when indeed this has not been the case, and that it is on course to deliver power to nearly 2 million Ghanaians in due course, when in fact it is wracked by malfunctions. These miscommunications all appear to be aimed at winning new business in Africa through a calculated effort to shore up the company’s thin record. Despite impressions that Balkan begun as a provider of bespoke energy solutions to Central Europe, the evidence clearly suggests that the company is a contraption cobbled together by Gene Philips (perhaps with his real estate backers) to grab the Osagyefo deal.

Even more troublesome is the fact that Balkan clearly has a different perception of its contract with Ghana from that of the country’s policymakers. Gene Philips and Balkan’s CEO, Philip Elders, appear to believe that the current contract entitles them to continue adding more barges to Osagyefo on increasingly juicier terms. Persistent claims that the Osagyefo barge will be operational within weeks rather than months have slowly aged into years. Nor can it be believed that Government of Ghana intends to pay $200 million for 185 MW of electricity. The additional two barges that were supposed to have been ordered by now are yet to materialise. Yet, Balkan continues to spin yarns of wild success in Ghana.

Balkan’s lead technical services contractor, ProEnergy Services (which itself makes vague claims of running a 100 MW power plant for Newmont Ghana – an entity we cannot locate on the country’s energy map), is suing for nearly $1 million in damages for breach of contract.

Perhaps this mess is inevitable given the Osagyefo barge’s own tragicomical history. After paying $10 million in demurrage, Government of Ghana lugged the aging craft from the Italian port of La Sperzia to the Sekondi Naval base in 2002, where it remained untill it was dragged to Effasu, also on Ghana’s western coast, in 2005. The grand idea was to feed the contraption with gas from a yet to be developed gas field in the Tano basin. Naturally this did not come to pass. Government announced in 2006 that it intended to move the barge from Effasu to Tema to power industry, but failed to give any details about what the cost implications would be. Policy chaos over the choice of fuel and other concerns derailed this grand plan too. In 2007, Balkan budged onto the scene and secured a 20-year contract with an obligation to spend “about $50 million” to commission the barge within 90 days, and augment its capacity with a combined cycle turbine at a cost of “about $100 million” within 9 months. 2 years have since elapsed.

The agreement is due to be reviewed in 2012, but no one will say if Balkan has been meeting its $10 million lease commitments since it entered into the contract with the government. Balkan claims it has employed 250 people in Ghana. It has proved difficult to confirm this proclamation, though that number of people will be hard to hide in Effasu.

The Osagyefo barge continues to play the clown of our energy circus though. Apparently, the current idea is to power it with gas from the Jubilee fields. Great.

3.2 West Africa Gas Pipeline

The West Africa Gas Pipeline (WAGP) from Itoki to Takoradi is apparently functional, but it is now trapped in the cesspool of confusion that is Ghana’s gas-fired thermal policy. The regulation and metering facility at Takoradi is supposed now to modulate the flow of gas to final destinations, generally considered to be turbines in Aboadze.

The delays in the transformation of the potential of the project into tangible economic benefits (blamed variously on excess gas moisture, inland pipeline problems at Badagry, Nigeria, and a host of other factors) are providing grist for the mill of critics who have vigorously denounced the pipeline as West African only in name (registered in Bermuda, it is majority owned by a consortium of Chevron-Texaco and Shell) and pro- regional integration only with respect to the interests of a few elites.

We harbour no such sentiments. Foreign participation in the project is more than effectively regulated by the existence of a West Africa Gas Pipeline Authority (WAGPA). WAGP is a great initiative in principle, if also somewhat poorly designed and executed. We are increasingly concerned about the relationship between the pipeline and Ghana’s medium-term gas-fired thermal strategy.

The fixed cost components of the original deal (now nearly $0.3 billion over budget) renders the purchasing-accounting problematic for VRA, as there are limited mark-to-market provisions and unbalanced counterparty and carriage risks (simply put, VRA has such limited bargaining and logistic flexibility in the deal that Ghana’s own Energy Commission counseled against its introduction into our energy equation).

One reckons that the current, apparent, bottleneck at the Takoradi Regulation and Metering facility, from where the gas from Itoki is supposed to be sieved into the Aboadze plant, is more one of financial accounting worries about what Ghana’s liabilities will be in the partially completed regime (the full project does not come on-stream until early 2010) than one of technical complications.

The seeming underperformance of WAGP leads to fears that the much heralded West Africa Power Pool – supposed to extend the regional grid to Burkina Faso and source gas from Cote D’Ivoire for local generators – may similarly fail to live up to its prospects, even granted that financing and political commitment will materialize in short order.

4. Oil Exploration Documentation

Ghana ought to develop a better capacity of tracking the operators searching for oil in our territorial waters beyond our monitoring of their activities within Ghana. As multinational players their activities elsewhere will impact on their business here. GNPC staff attached to the home offices of the main exploration companies work solely on the Ghana exploration project, and have no role, as far as we can tell, monitoring the general performance of the Andarkos and Tullows.

We are concerned with the attitude of some of the players, as far as reporting accuracy is concerned. Lukoil, the Russian operator, recently renewed its contract to continue exploration activities in our waters. The company, it may be recalled, promised to spend $1 billion on social relief measures, but has since provided no details, leaving observers wondering why a for-profit Russian company will spend ten times more on CSR than on actual business operations in a West African country it has barely any commercial footing. Granted that this was a forward-looking statement, but it would be helpful to the corporate governance fibre of the oil sector if operators were encouraged to take reporting and disclosure accuracy seriously in order not erode public confidence in the industry and it in needless social agitation.

Observers continue to advocate that Ghana develops “in house” capacity to carefully and judiciously document critical developments and trends in the oil exploration sector in order to better manage emergent risks, particularly in the areas of social impact and revenue forecasting. Where players can’t be expected to be fully transparent, civil society should step in.

5. Energy Economics

Beginning in 1998, our acute power crises have been getting more damaging for the economy and much more intense in scope and extensive in duration. The situation has compelled a radical shift in the energy production profile of this country. As late as 2007 thermal accounted for 39% of the total energy mix, while Hydro took pride of place with 61% (down from 74% in 2004). In 2008, the balance was 47% for thermal and 53% for hydro. Thermal will soon outstrip hydro and grow increasingly dominant as gas-fired becomes a major source.

Similarly, the country’s “balance of energy payments” has deteriorated steadily. Ghana exports power to Togo and Benin, but its imports from Cote D’Ivoire leaves it with a net trade deficit of about 186 Gwh. What is worse we owe the Ivorians at least $50 million. By relying more on gas-fired, Cote D’Ivoire is leveraging a regional efficiency that has made Ghana’s light crude-fired plants partly look increasingly uneconomic at capacities above marginal. Then there are the “losses”.

Apart from physical transmission losses of 3.2%, ECG also fails to recover electricity sales constituting a whopping 24.1% of the total wattage supplied to its customers. Part of the problem is that 60% of ECG’s customers are residential, making it socially, and politically, difficult for the organization to implement the kind of revenue “mobilization drive” that will prove genuinely effective. Since VRA sells 50% of its output to ECG (while the tiny NED takes its ration of 2% mainly for distribution in the North) it feels a considerable effect from the pulse of the “under-recovery blast”. In fact, energy losses have increased by almost 20% over the past few years. Things are getting worse rather than better. The ECG’s ongoing construction of high-voltage primary substations in Ofankor, Amanfrom, Abuakwa etc., and its renovation of others in 6 regions are a welcome but too feeble a development to arrest the situation.

So the question is: given the acknowledged shortfalls in energy production, and all the aforementioned issues concerning transmission and distribution loses, is it really prudent for government to continue to expand the electricity grid without an explicit linking of grid expansion policy to energy generation capacity? This year, for instance, Government of Ghana intends to extend electricity to at least 946 communities across the country, yet no comparable commitment has been made to generation capacity expansion. It is true that government aspires to double installed capacity to 5000 MW, but there are no timelines or financing strategies that our search has revealed and certainly no formal link between this vague ambition and the much clearer goals of electricity extension.

The above point is particularly poignant when you consider that 75% of indigenous primary energy is concentrated in biomass – a grand total of 7.5 million tonnes of oil equivalent (for perspective, recall that crude oil imports amount to about 2.2 million tonnes).

Only 9% of energy reaching the final consumer is in the form of electricity. 65% arrives as biomass (firewood, charcoal etc.). This is despite the extension of the electricity grid to over 60% of the population. What this indicates is that most Ghanaians are simply too poor to afford the means to utilize electricity (mainly electrical appliances). In fact the share of wood fuel has actually increased by more than 10% over the first half-decade of this century, even while the combined share of electricity and petroleum of fuel use has declined by more than 15%.

The Strategic National Energy Plan – SNEP - (covering the period between 2006 and 2020) is a great place to begin the debate over energy policy in this country.

The SNEP estimates that Ghana will require an investment of about $5 billion over the next decade merely to meet prudent targets, not necessarily to optimize the situation. Where will this funding come from? Especially as we continue to treat energy as a social welfare provision rather than as a factor of infrastructure investment?

All said and done, we find the Plan’s recommendation that Ghana ought to reduce energy intensification (enable us to obtain more value from the same amount of energy) by 50% by 2020 (the ongoing distribution of an anticipated 6 million compact fluorescent light bulbs should prove contributory). We disagree with the exhortation that 15% of rural electrification should be by decentralized renewable grids. In our view, the best-priced energy should always be given pride of place.

We also find the projection of reducing rural firewood intensity by 10% by 2020 as problematic whether as an economic forecast or as a policy target. The pace of deforestation and population growth (with its attendant effect on the balance of land use for human settlements as against other uses) should lead to considerable increases in the price of wood fuel, such that other sources of energy would progressively become competitive. For instance, only 10% of cooking fuel used in Ghana currently is in the form of LPG. This clearly can and must improve.

Finally, one wonders why funding for the Strategic Oil Reserve has been bundled together with the Savannah Development Agency’s and that of “other projects”, when these projects are all strategic in their own right. We suspect that this is a “flexibility measure” for the government, so that it can shelve the plan if the going gets tough. An oil buffer is a smart investment. It should not be left to founder on the piles of political quackery.

Final Word

Undoubtedly, the mess in our energy sector is one of ill-coordination. Ghanaians must endeavour to show more interest in developments in this sector and help impel our political leaders and their public sector sidekicks to confront the stark realities prevailing there. Otherwise we shouldn’t be surprised if the chronic crisis festers into another panic-inducing acute attack – sooner rather than later.

The Authors are affiliated with IMANI-Ghana, and Africaliberty.org