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Opinions of Thursday, 1 January 2015

Columnist: Adam, Mohammed Amin

New Year Message from ACEP

New Year Message
Power Sector Outlook Good In 2015 But Upstream Petroleum Sector Less Promising – ACEP

Accra, 29th December, 2014

There is no doubt that 2014 has been a very difficult year for the energy sector due to the many challenges that confronted the sector from multiple factors. The most serious challenges were encountered in the increased load shedding of electricity (including an extension of load shedding to industries); and shortage of petroleum products arising from the stalemate between Government and BDCs over debts accumulated from foreign exchange losses and non-disbursement of money to finance government subsidies of petroleum products.

In our New Year Message to Ghanaians, we wish to draw attention to our expectations of the energy sector in the New Year and to request all hands on deck as we strive to find enduring solutions to our energy sector challenges.

Generally, we expect to see improvements in the provision of energy services in 2015 premised on a number of factors.

1. Power sub-sector
We expect relative easing in the electricity load-shedding on account of a successful evacuation of the arranged emergency power barges to the shores of Ghana and the potential for the barges to provide over 400MW of power to address the immediate power generation challenge. Other reasons which make the power sector outlook brighter include the planned ramping up of gas supplies from the Atuabo Gas Processing Plant from the current levels to about 120mmscf/day; the planned commissioning of the Kpone Thermal Power Plant and TICO Expansion projects which are expected to add about 330MW of generation capacity; and improvement in VRA’s liquidity position to procure light crude oil at lower crude oil prices.

We are however doubtful about the commencement in 2015 of promised new generation projects expected to bring in 1,000MW since such projects are contingent on Government’s ability to start the implementation of the Millennium Challenge Compact II conditions including partial privatization of the Ghana Electricity Company (ECG).
We also expect significant reforms in the power sector following the creation of the new Ministry of Power and the need for the new Minister to establish the basis for justifying its creation.
Some of the reforms are likely to focus on improving the efficiency and performance of ECG, the process for the partial privatization of ECG through a franchise arrangement or transfer of ownership to some private sector operators and tariff reforms to discriminate in favour of industries and thereby reverse the situation by which industries subsidize residential consumers of electricity.

2. Petroleum Downstream Sector
We expect the National Petroleum Authority (NPA) to reduce ex-pump prices marginally by end of the year, 2014; following drastic fall in crude oil prices and the relative stability of the Ghana Cedi against major foreign currencies.

The NPA can no longer justify its hold on to current ex-pump prices on account of using over-recoveries to finance debts accumulated from under-recoveries in the past. As normal everywhere in the World, it is not the practice to apply all savings from over-recoveries to finance debts from under-recoveries especially since as in the case of Ghana, such under-recoveries in the past did not arise from higher crude oil prices. Consumers must therefore be compensated with windfalls from lower crude oil prices to build their confidence in the Automatic Adjustment Pricing Formula.

We however expect that with crude oil prices estimated to recover in 2015 especially in the second half of 2015, we expect NPA to readjust ex-pump prices upwards in the New Year.

3. Petroleum Upstream Sector
With crude oil prices falling by more than 45% over the last 6 months, we do not expect Government to achieve its target for petroleum revenues in 2015 estimated at US$1.2 billion even if oil production is increased by more than 10% over current levels of 105,000 barrels per day.

Given that major infrastructural projects are financed from the Annual Budget Funding Amount (ABFA), the proportion of petroleum revenues allocated to the annual Government Budget, the government’s development programme for 2015 will be truncated. The Stabilization Fund however has enough fiscal buffer of US$250 million to finance the gap.

We expect Government to appropriately deploy the Stabilization Fund under this circumstance, but this also exposes the 2015 and 2016 Budgets to serious price vulnerabilities because the Stabilization Fund would have been significantly depleted in 2015 such that it cannot provide its expected cover if crude prices remained lower than a third of the benchmark price of $90 per barrel. We therefore expect that Government will review the amount of the maximum cap on the Stabilization Fund to safeguard its liquidity as a buffer against negative price effects.

We also expect government to conclude and present for parliamentary ratification more than 5 Petroleum Agreements in 2015. Our optimism is based on Parliament’s readiness to pass the new Petroleum (Exploration and Production) Bill 2014, which is currently before Parliament’s Committee on Mines and Energy. The Bill has significant sections that are investment friendly and could increase the interest of investors in Ghana’s oil and gas industry.

We however expect some time lags in the TEN Development Project due to the liquidity problems confronting the major players in the project. With crude oil prices below $70 per barrel, the economics of the TEN-Development project has severely been undermined. We expect the project leaders to consider cost-cutting measures or make a case for renegotiation of the terms of its Agreement with Government if it is established that the fall in crude oil prices has caused economic disequilibrium to the fiscal terms in the Petroleum Agreement. Article 26.4 of the Petroleum Agreement between the Republic of Ghana and Tullow Oil provides that, “Where a Party considers that a significant change in the circumstances prevailing at the time the Agreement was entered into, has occurred affecting the economic balance of the Agreement, the Party affected hereby shall notify the other Parties in writing of the claimed change with a statement of how the claimed change has affected the relations between the Parties”.

In deed, Article 26.5 requires the parties where it is established between them that such significant changes have occurred to “engage in negotiations and shall effect such changes in, or rectification of, these provisions as they may agree are necessary to restore the relative economic position of the Parties at the date of this Agreement”.

These challenges the country faces require the support of all Ghanaians and particularly significant efforts from Government. The two Ministries of Energy and Petroleum; and Power; must begin serious consultations with major stakeholders to find lasting solutions to the challenges of the energy sector. Energy is the engine of economic growth and the country risks the prospects of accelerated development if we fail to provide adequate energy services for industries especially. ACEP as usual will continue to be critical of Government policies as well as provide alternative views on the best energy solutions the country needs to address the energy sector challenges.

We wish all Ghanaians a happy, productive, prosperous and fulfilling 2015.

Dr. Mohammed Amin Adam
Executive Director