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More trouble for economy

May 18, 2016, 10:53 a.m.

The cut in crude oil production output from the Jubilee field by over 50% has serious ramifications for the economy.

This unexpected development, occasioned by a faulty turret bearing on the Floating Storage and Offloading vessel (FPSO) Kwame Nkrumah, will result in a massive drop in expected crude oil revenue.

As a result, there will also be the need to increase import of crude oil to fire thermal power plants to avoid rolling power cuts, as well as increase the importation of Liquefied Petroleum Gas (LPG).

Expected oil revenue in the 2016 budget was based on International Monetary Fund (IMF) projected figure of $52 per barrel.

However, the price of a barrel of crude oil hovered around $45 as of last week. This price drop, coupled with 50% production cut, means government will lose more than half of the revenue expected from crude oil.

Impact on forex

While foreign exchange from the export of crude oil keeps dropping significantly, government needs more foreign exchange to import Light Crude Oil (LCO) to fire thermal power plants, and this is likely to impact negatively on the local currency.

Fiscal consolidation 

The International Monetary Fund (IMF) has said given the high level of public debt, fiscal consolidation needs to continue, notwithstanding the headwinds from low commodity prices.

Reduction in expenditure

Within the framework of the Petroleum Revenue Management Act, government will have to reduce expenditure further to offset the shortfall in oil revenues.

The cut in production translates into the loss of half of the lean gas from Atuabo gas processing plant to the Volta River Authority (VRA) to fire thermal power plants.

As government has signed contracts to provide fuel to Independent Power Producers (IPP), the gas from Atuabo will be given to Takoradi International Company (TICO), a dual-fired plant, and Africa and Middle East Resources Investment (AMERI) power plant, which runs on only gas.

Government will have to import Light Crude Oil (LCO) to power Takoradi Thermal Power Plant (TAPCO) and other thermal plants in the Tema Power Enclave, which is receiving only 10% of gas expected from N-gas of Nigeria.

Consequently, government will need not less than $45m to import one million barrels of crude oil, which would last not more than two months.

The over-drafting of hydro dams during peak hours would also continue until such a time that the FPSO Kwame Nkrumah is fixed and crude production at full capacity resumes.

When the FPSO produces 100,000 barrels per day, Ghana Gas Company supplies about 40% of LPG in the country.

With the cut in production, it means the LPG supply will also be cut by half, necessitating increased import of the commodity to satisfy consumers and avoid shortage.

6 months to resolve problem

“Fixing the problem itself in terms of the bearing, we did say that we are looking to come to a decision on the option to select by the middle of the year. 

“It could be one of three options that we discussed. It could be an off station solution, a spread moor solution and another one. 

“We will have discussion with the Government of Ghana, our partners and all other stakeholders to land that decision for that activity to take place,” Tullow’s General Manager, Charles Darku said. 

It is important to note that turret bearing of the FPSO Kwame Nkrumah is not on the open market to buy from shelves.

It has to be ordered and manufactured to meet specification. Therefore, the problem can take as long as six months to be resolved.

The Jubilee field was discovered in 2007 and production started in late 2010.

Tullow is the operator of the field with 35.48% interest. 

So far, total lifting proceeds and other income allocated from inception to the end of December 2015 amounted to US$3.198 billion. 

Annual Budget Funding Amount (ABFA) received a total of US$1.375 billion, representing 43% of the total revenue, while the Ghana National Petroleum Corporation (GNPC) received a total amount of US$968.81 million, equivalent to 30% of total revenue. 

The Ghana Stabilisation Fund (GSF) and the Ghana Heritage Fund (GHF) received an amount of US$604.36 million (19%) and US$249.92 million (8%) respectively.

Tullow’s partners are Kosmos and Anadarko, each with 24.08% interest, and GNPC and Petro SA with 13.64% and 2.73% interest respectively.