Readers of this site would be aware of a joint investigation by IMANI Center for Policy & Education (IMANI) and the Africa Center for Energy Policy (ACEP) into a sweetheart deal between GNPC, Ghana’s national oil company, and Genser, a US-based Ghanaian-owned company that recently announced that it has raised $425 million to expand its gas-to-power facilities in Ghana.
Under what circumstances then can a smaller power producer with far less impact on the economy, without any of the social constraints faced by VRA to service poor and rich alike, get gas at a price that is roughly 1/4th what the principal public utility is charged?
Even the main wholesaler of gas in Ghana, Ghana Gas, which on-sells/retails to the power industry, gets its gas at $5.4. Due to rampant under-recoveries in the power sector (implicit subsidies imposed by the government, which it nevertheless refuses to pay), it struggles to get paid by the utilities and therefore rack up debts to the upstream suppliers.
Under what circumstances then can a smaller power producer with far less impact on the economy, without any of the social constraints faced by VRA to service poor and rich alike, get gas at a price that is roughly 1/4th what the principal public utility is charged?
Even the main wholesaler of gas in Ghana, Ghana Gas, which on-sells/retails to the power industry, gets its gas at $5.4. Due to rampant under-recoveries in the power sector (implicit subsidies imposed by the government, which it nevertheless refuses to pay), it struggles to get paid by the utilities and therefore rack up debts to the upstream suppliers.
GNPC’s own calculations suggest that securing gas costs it $7.9 per MMBTU. It has therefore tried to persuade the pricing regulator, PURC, to increase gas prices above the $5.99 the latter has set for the downstream power sector.
How can a commodity that has been averaging $8 per unit in recent times, and which the seller claims costs it $7.9 to produce, be sold at $2.79 or, even worse, prospectively at $1.72?
GNPC’s Bogus Explanations
Following the ACEP-IMANI exposures, GNPC and the Energy Ministry went on the offensive this week. At an ongoing parliamentary enquiry, GNPC did it best to obfuscate the issues, and suggested all manner of reasons why Genser deserves to pay between 60% and 75% lower than virtually every other gas buyer in the energy industry.
First, it cited the fact that Genser is on the “industrial development tariff”, which at $4.20 per unit is lower than the regulated price (“weighted average cost of gas” – WACOG) set by the regulator.
Next, it insisted that Genser is one of a few companies that pays its bills on time and does not rack up arrears and thus deserves some back-patting.
Finally, and most importantly, it rolled out the Rolls-Royce of all justifications: Genser uses its own pipelines to transport the gas it buys and so deserves a rebate on that account alone. Even more vitally, Genser has given GNPC the right to use gas pipelines it is still building in the future to transport gas for free and thus deserves further discounts in what amounts to a barter trade.
None of these arguments hold water; some are plain lies.
The Sham “Industrial Development Tariff (IDT)”
As already pointed out, the Energy Commission rejected similar arguments about the role of Genser in 2019.
There is nothing exceptionally “industrial” about what Genser is doing. It is not facilitating manufacturing or doing manufacturing on its own, unlike other IDT beneficiaries. The agreements it has with GNPC and Ghana Gas do not impose any requirement for it to use the gas for industrial applications or purposes.
It virtually all the power it generates with the discounted-price gas to mining companies, which are in the “primary extraction” sector.
It is merely undercutting other power producers, who could easily meet the demand of the mines, by buying gas for cheap. Recall that for gas power producers, raw gas is roughly 60% of their total costs. There is absolutely no strategic, policy or developmental reason for Ghana to discount gas prices for a commercial power producer to undercut its rivals in selling power to rich gold mines.
Companies that are focused strictly on delivering power to Ghana’s industrial parks, export processing zones, and manufacturing corridors do not get these sweetheart deals.
The Hollow Pipeline Argument
It is not correct, as being canvassed by GNPC, government and Genser PR agents that only Genser has invested in private pipelines for receipt and onward transmission of gas. Companies like Aksa, Trojan and Early Power have all gone through the necessary regulatory screening to construct pipelines to convey gas to their plants.
Ghana Gas has the largest pipeline complex in the country. Roughly $1.6 billion of equity and public/ publicly-guaranteed debt have gone into this huge infrastructure base. All the offshore pipelines that bring the gas from the sea to land (the most expensive form of gas transmission) belong to Ghana Gas. Yet Ghana Gas is paying an average wholesale price of about $5.4 per unit for the gas it retails.
At any rate, as argued at length in the previous essay, the value of gas pipeline transmission is well established. Ghana Gas provides clear local benchmarks for how to value the contribution of pipeline infrastructure to cost buildup.
The PURC has set a regulated threshold price of $1.288 per MMBTU. And there are many global benchmarks (some of which were shared in the previous essay). If GNPC wishes to give Genser a rebate for transporting the gas it buys over the small proportion of distance covered by its own pipelines versus the much greater extent of public pipelines used in bringing the gas from under the sea, it can do so rationally and transparently. Such an approach will not generate a rebate of more than $0.5 per unit.
As for the planned use of Genser’s pipelines for free by GNPC, the proposition has been cited as a justification since early 2020. GNPC has not transporting any volume of gas through said pipelines. Some of the use cases for that arrangement, like the bauxite refinery at Nyinahin, are highly futuristic. It is plainly ridiculous to be granting massive discounts on the basis of hazy, unrealised, future barter arrangements.
More bizarrely, the agreement signed between GNPC and Genser does not bear out the “free” thesis. Genser intends to charge a “gas compression fee”:
Does Genser pay on time?
The short answer is “no”.
As of the end of December 2021, it owed roughly 50% of its due obligations to GNGC, in the amount of $4.6 million.
In the first half of 2022, as of June 30th, Genser owed GNPC more than $3.24 million. Whilst reconciliation is still outstanding for Q3 2022, that debt keeps rising and may hit $5 million.
Genser has a track record of owing suppliers. It recently had to pay damages to Vitol in a London court for failure to pay for LPG/NGL (mostly propane) deliveries made to it during the lean years of 2018 and 2019 when it had not yet secured its sweetheart deal with GNPC and was paying in excess of $7 per unit of gas to private suppliers.
Worst of all, it gets Worse
Imagine the horror of IMANI and ACEP analysts when they discovered that all the time GNPC and Genser PR agents were seeking to justify Genser’s $4.2/MMBTU IDT (“industrial development tariff”) and the various rebates as sensible commercial terms, the company was neither paying $4.2/MMBTU nor, as some of its spokespersons have said, $3.5.
Genser has not even been paying the contract price of $2.79 all the time.
According to reconciled GNGC accounting data, Genser has in fact been paying, wait for it, $1.14! Essentially, a giveaway price.
Comparing how much Genser pays with the rest of the industry, including those manufacturers that actually qualifies for the IDT rate as a result of their playing critical roles in resurrecting strategic dying industries like ceramics, throws into alarming relief the true scale of the mess.
Here is part of a pricing chart for January/February 2022:
And for June/July 2022:
Clearly, Genser is the golden-haired boy-wonder of the power consuming world. It is billed nearly 6 times LESS than the main public power utility and nearly 4 times LESS than companies that are actually using gas to drive Ghana’s industrialisation.
The Big Picture
Whilst we have talked about the risk of Ghana losing $1.5 billion if GNPC continues to sell gas to genser at the contract price (based on the contract gas volume of more than 328 million MMBTU), it is important to now clarify that Ghana has already lost considerable amounts of money.
Selling gas at $1.14, $1.72 or even $2.79 to Genser instead of the $7.9 it costs GNPC to acquire the gas or the $6.08 set by the regulator for the relevant period means losses of between $4.97 and $6.76 for every unit of gas sold. In 2021, Genser bought more than 7 million MMBTU of gas from GNPC implying a loss of between $34 million and $45 million already incurred, even after making provision for a fair transmission rebate for the use of Genser’s own pipeline. By the end of this year, $100 million in losses would have already accrued.
At a time when Ghana is seeking a $3 billion IMF bailout due to a debt crisis worsened by mounting energy sector liabilities of more than $2 billion a year in recent estimations, it is both unconscionable and mindboggling that GNPC can afford to lose nearly $100 million on a single contract in just two years or be willing to lose as much as $1.5 billion over the contract’s lifetime.
To underline the fishiness and level of impunity, consider that Genser started enjoying these discounts EVEN BEFORE GNGC signed the new agreement with the fresh discounts based on the futuristic pipeline barter trade. Here is a January 2021 trade ledger entry (the agreement was signed in July 2021).
Clearly, the Parliament of Ghana which now claims to be investigating this matter has its full credibility on the line as Ghanaians await its findings.
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