The fangs of the new Coronavirus, since its appearance in late 2019, have cut through all sectors of national economies leaving nothing unscathed. For the global energy sector, it has resulted in a historic dive in oil prices, way below projections of many oil-based entities and budgets of national governments. Consequences, thus, emerge for revenues, debt financing, development and production.
For Africa including Ghana, Wood Mackenzie predicts that about 33 per cent of upstream investments will not take place due to the current pandemic, which has implications for small businesses allied with or subsisting on the oil and gas value chain.
Though Ghana is not as dependent on crude oil as her sub-Saharan counterparts, Nigeria and Angola, the effects of the drop in global oil prices on the country’s finances have, nonetheless, been dire. By dint of Covid-19, West Africa’s second-biggest economy is predicted to grow at its slowest pace in 37 years, as it is being impacted in the short to long term.
Revenue from the oil sector had for three consistent years, more than doubled to fuel annual growth of 6.3 per cent. For the short-term, the government has already secured US$1bn out of the IMF’s fiscal package to support the economy against the impact being felt on account of the pandemic.
Meanwhile, the country’s projected US$1.5bn revenues from oil are two-thirds short as the Finance Minister announced not less than a billion decrease in that amount, thus a significant shock to the 2020 national budget. This may result in further borrowing to close such a gap.
In the medium to long term, the anticipation of the US$4bn investment from Aker Energy for its Pecan field in Ghana, located offshore the Deepwater Tano Cape Three Points block, scheduled to have commenced this year 2020, has been put on hold, thanks to COVID.
Further, Tullow Ghana has also suspended some investments it was supposed to have made to optimize its fields. These consequently have untold impacts, in the medium term, on service companies and Ghanaian enterprises that would have benefitted from procurement this year, but are no longer going to.
Government, in the wake of these developments, has had to revise its calculations for the year and consider exploring alternative sources of revenues to fill in the gap from the loss in the expected oil income. Analysts estimate current crude oil production in the country to peak in 2021 and then subsequently experience a steady decline if no new developments come on stream in a two-three-year window.
Low Oil Prices & Development Financing Higher crude oil and gas output have been deemed critical to sustaining Ghana’s growth drive. Since December 2010, Ghana has received more than US$7 billion in oil revenues. This amount has been a fundamental consideration and support to the national budget since commercial production of oil in the country.
Ghana’s oil receipts come from royalties, Carried and Participating Interest (CAPI), income tax and surface rentals.
These are subsequently allocated and distributed to the Ghana National Petroleum Corporation (GNPC), the Annual Budget Funding Amount (ABFA) and the Ghana Petroleum Funds – the Ghana Stabilisation Fund (GSF) and the Ghana Heritage Fund (GHF).
Since 2010, the GNPC has received an allocation of some 31 per cent of oil revenues, 39 per cent into the ABFA while the GSF and GHF have each been credited with 21 per cent and nine per cent of the revenues.
The reduction in oil prices at any point in time, therefore, significantly impacts the amounts that will be allocated to these funds.
The COVID’19-inspired downturn in oil prices has, thus, dealt a heavy blow to the cash flow of companies and revenue of the state.
The Government of Ghana, in its 2020 budget, projected to receive US$1.567 billion from oil revenues, founded on a price prediction of US$62 per barrel. Oil receipts for the country will experience a plunge of about 53 per cent, according to the Africa Centre for Energy Policy, ACEP. This decrease in revenues will affect funding for major infrastructure developments in the country.
The corresponding projected shortfall of oil receipts on the ABFA -a designated amount that funds critical infrastructure projects across the agricultural, health, educational, and roads sectors- is over GHS300 million; while shortfalls in the Ghana Stabilisation Fund and the Ghana Heritage Fund – funds that serve as a buffer to the budget and also for contingency expenses- are over GHS100 million and over GHS400 million, respectively, according to Ministry of Finance Data.
The impact is particularly felt in terms of physical infrastructure and debt servicing. In the 2020 budget, Ghana’s infrastructure development programme was heavily reliant on oil revenues; about 80 per cent of the government’s domestic revenue for its capital budget was to be sourced from the ABFA.
This, therefore, exposes development to significant risks as a drop in oil production or price will greatly reduce the government’s anticipated revenues, with a rippling effect on the ordinary Ghanaian. To mitigate these effects of the pandemic from an oil standpoint, government through the Minister of Finance proposed some measures to adjust the budget.
These included cutting expenditure by over GHS1.2 million; lowering the cap on the Ghana Stabilization Fund (GSF); reducing revenue allocation to Ghana National Petroleum Corporation (GNPC); and a proposal to amend the Petroleum Revenue Management Act (PRMA)-an act prescribing the judicious use of petroleum revenues- to allow the use of the Ghana Heritage Fund (GHF) to support the budget. This measure was, however, met with much contemplation and backlash.
The low oil price also means an ultimate reduction in GNPC – the National Oil Company’s share of petroleum revenues. Projected shortfalls in transfers of oil receipts to the GNPC is GHS642million, according to the Finance Ministry. The Corporation, which was initially programmed to receive an allocation of 30 per cent of the Net Carried and Participating Interest (Net CAPI), is now to get half (15 per cent) of the initial allocation in the revised projections to mitigate the impact of the low oil price on the budget.
This consequently leaves the GNPC with less revenue for investments and to cater for its programme for 2020. The Power & Gas Sector prior to recording the first confirmed case of the Coronavirus in Ghana, the debt situation in the power and gas sectors was a real concern.
Gas supply for power production has been largely reliant on gas supply from the OCTP Partners; which is currently the backbone of domestic gas supply in the country. However, due to challenges with cash flow in the power sector, OCTP gas has been owed substantial sums (about US$192 million for four months’ supply of gas) before registration of the novel Coronavirus in Ghana.
The debt situation is, thus, further augmented by the pandemic and its trail of difficulties with revenue accumulation. Experts argue that if the power sector was unable to pay for gas utilisation before COVID-19, how would it meet its payment obligations for gas supply in the midst of the pandemic?
The economic impact of the pandemic and the effect of government’s measures affect the disposable income of consumers, which harbour implications for revenue collection in the power sector.
In the midst of these concerns, analysts predict the country’s post-COVID-19 upstream sector to be likely dominated by tax and regulatory issues, and have, therefore, advised the government to put in place pragmatic measures that will ameliorate the situation and reduce the dire after-effects of the pandemic.
Such measures must include restructuring within the oil and gas sector, and also in terms of its linkages which include investment patterns, job creation, among others, as well as the total of the global oil and gas value chain in terms of trade and finance.
This will afford countries, especially in Africa the opportunity to determine how they can insure their economies against crises of such nature.
Furthermore, some economic experts have advised government to use this period of the pandemic and global oil price drop to reconsider its dependence on the oil sector.
The concern is that the booty earned from the oil sector has become a demotivating factor to develop other growth drivers of the economy. The current situation, therefore, calls for the country to readjust its priorities, redirect its focus on non-oil sectors, mainly agriculture as giant drivers for growth.
“Countries like Ghana should continue to chase diversification of the country’s growth drivers,” said Albert Touna Mama, the International Monetary Fund’s country representative in Ghana. “That will make the economy more resilient to commodity price shocks.”