Ghana’s Local Banks and the Ghanaian Petroleum Project Financing Mix

By Adwoa Oye Acquaiye 

Unlike other fuels, green-field financing of gas faces certain challenges due to its peculiar attributes. Gas projects are noted to be very complex and expensive. Financing gas projects ‘require a large combination of factors that must be knitted into a seamless fabric to ensure gas trade’[1] Gas projects are market driven hence require a market for the output. Gas trade is cyclical in nature with a regionally segmented market since they rely on the market for the gas produced to be purchased in order to continue production.[2]

Costs are a major determinant of the feasibility of gas projects. A standard investment in a gas project which takes advantage of economies of scale cost between $4 billion to $8 billion coupled with the interest payable during the construction period which is capitalised.[3]

The Ghana Gas Development Project as a Case Study

Ghana’s current Jubilee oil field has a gas-oil-ratio (GOR) of 1,000 cubic feet per barrel so that for every 1,000 barrels of oil produced some one million cubic feet of gas is produced in association (GNPC, 2010). Thus the current production rate of 80,000 barrels per day (bpd) flares approximately 80 mmcfd and this is expected to increase when production peaks at 120,000 bpd by 2012.[4]

In tandem with the government’s ‘zero gas flaring’ policy, a public-private partnership agreement between the state oil company, Ghana National Petroleum Company (GNPC), and its partners has been set up to monetize the gas from these fields. To do this, it intends to establish infrastructure capable of processing and delivering some 300 mmcf of gas daily to the Aboadze, Osagyefo and power plants. This includes an onshore processing plant with a 300mmcfd processing capacity and some dense and lean pipelines to transport gas to the various power plants.[5] The project is estimated to cost at least $6 billion with an upside of $8 billion and anticipated to be part financed with 40 percent equity.[6]

What Makes the Project Bankable? 

Like any project financing structure, lenders would only lend to a project which is bankable.[7] The Gas Development Project of Ghana is based on a carefully designed project structure (shown in figure 2) making it bankable. The project is managed as an SPV set up through a joint venture between the GNPC, its partners and the World Bank. The project is well structured allocating risks to parties best able to manage them. 

The immediate plan is to utilise the gas produced for power production and LPG for domestic use with long terms plans for export. Unlike the Aguaytia field project in Peru[8], the power plants will be operated by Independent Power Producers(IPP) and shall have Power Purchase Agreements(PPA) from the government of Ghana. Moreover, the country has secured offtake agreements with neighbouring country Ivory Coast. The project is even structured in such manner that it will supply the WAGP (West African Gas Pipeleine) with gas. Thus the level of market risk is reduced to an extent. 

Figure 2: Deal Structure of Gas Development Project. Available at http://www.gnpcghana.com

A turnkey construction model is used to mitigate construction risks. The first phase of the pipelines and processing plant are being constructed by Sinopec- a highly rated (Chinese) company[9] by Standard and Poor’s. Thus its reputation in terms of high standard delivery cannot be refuted. Operational risk is also mitigated as contracts have been secured with the operators of the oil fields to supply the gas free of cost to the plant.[10] Considering the fact that the operators are not allowed to flare the gas, regular and reliable supply to the plant should not be a problem. There is also a low likelihood of management risk since the project will be managed by experienced and qualified personnel. 

To alleviate payment risks ‘an escrow account of the robust cash receivables, of which about 80% will be in foreign exchange; in amounts sufficient to cover the security structure and priority payments to lenders’- shall be set up.[11] The project’s draft proposal proposes to mitigate its force majeure risk by matching the events of force majeure of the gas processing plant and pipeline operators with that of its offtakers’ agreements. 

A $500 million political risk insurance for the oil and gas fields by MIGA (Multilateral Investment Guarantee Agency) will also be used to reduce the political risk associated with this project. MIGA has already to date issued a $225 million political risk insurance for the FPSO Kwame Nkrumah being used by Tullow Oil Ghana for oil production.[12]

The Role of Ghanaian Banks in Financing Mix 

The Jubilee gas development project as already highlighted is estimated to cost $6 to $8 million. The financing structure of the field is proposed to use a 60:40 ratio of debt and equity funding. To date no bank operating in Ghana is financing this project. The government has had to resort to external financing from the China Development Bank. 

As at 2009, total of $3.075 billion had been invested in the jubilee oil fields operated by Kosmos Energy and Tullow Oil most of which were financed by foreign banks[13]. Out of the 26 commercial banks operating in Ghana, only Standard Chartered Bank, Barclays Bank and StanBic[14] were involved in the financing mainly as a result of their international affiliation. 

Figure 3: Financing Breakdown for Jubilee Fields[15]

In March 2010, Access Bank Ghana Limited announced its commitment to supporting Ghana’s Oil and gas sector although it is yet to finance any project. To date there has been no record of any major involvement by any Ghanaian banks despite the numerous seminars and fora organised by these banks affirming their commitment to support the industry. 

Reasons for Low Participation by Ghanaian Banks 

Perhaps the reason for low of level of participation by the banks is due to the sheer volume of financing required. The total operating asset base of the 26 commercial banks operating in Ghana as at 2009 was GHS 6.4 billion ($4.4 billion).[16] Notwithstanding the fact that these banks are restricted with respect to the single obligor limits set by the central banks, even syndication by all these banks would not generate enough funding to finance such big ticket deals. Thus with a project which cost billions of dollars, there is no significant financing the Ghanaian banks can bring on board. 

Moreover, the oil and gas industry in Ghana is an emerging industry with very few people that have the expertise to evaluate, assess and identify all potential risks associated with these projects. Without the requisite skills many banks fail to recognise the potential of this sector and the revenue they stand to earn. 

Additionally, gas projects like all other energy projects are capital intensive and a have a long lead time requiring an average period of some 10-12 years to pay off the loans.[17] In the Peruvian Aguaytia Gas project for instance, financing of the first phase was paid off over a period of 12 years.[18] UBA plc’s project finance loan for the NLNG was for a minimum tenor of 8 years.[19] According to the Bank of Ghana however, the average lending tenor for commercial banks operating in Ghana is barely 3 years due to the tolerable risk levels of these banks making it difficult to finance such large scale long term loans. Moreover, lending in the industry is characterised by high interest rates and stringent borrowing requirements. 

A more interesting reason for the lack of active participation is the political risks associated with financing government orchestrated projects even when all the project structures are in place. In fact, this has been noted to be the reason for the large participation of the World Bank and other multilateral agencies in financing of many infrastructure and energy projects in Ghana and most developing countries as a whole. The financing of the country’s Tema Oil Refinery (TOR) by the Ghana Commercial Bank (GCB)[20], is one such example. TOR until 2011 owed GCB 1,075 million Ghana cedis (US$ 1,474 million) for establishing deferred Letters of credits on its behalf. These debts remained unpaid until March 2011. This had serious implications for the bank as it had to make huge loan provisions which affected its profitability as well as its ability to lend to other businesses. Mention must also be made of the fact that even securing political risk insurance is not a long term solution as evidenced with the suspension of the political risk insurance on the FPSO Kwame Nkrumah by MIGA. 

Also, commercial risks such as over runs, construction delays, and shortfalls in revenue are prevalent in the constructions of a lot of infrastructure projects in Ghana. Thus the banks have to deal with advancing unexpected additional capital to ensure the completion of the project. This risk is a major deterrent for financing such large scale projects. 

Home Run 

Evidently, the banking sector in Ghana faces a daunting challenge of financing oil and gas projects far beyond its reach. Despite a growing robust banking industry it lacks the capacity hence the need for massive capital injection in the industry. 

With a total asset base of just about $4.4 billion, significant participation in the industry will be difficult. Only three banks have to date participated in any lending of some sort in the upstream sector of the oil and gas industry all of which are foreign owned. Ghanaian owned banks must therefore seek to raise additional capital via the use of local currency bonds to enable them meet their lending requirements in this industry. 

As happened in the Nigerian Banking sector in the early 2000s, mergers could be used to form stronger and more robust banks. 

The industry also requires highly skilled personnel with the expertise in appraising and managing such oil and gas projects. The proactive nature of the government in sending students outside the country for training in the industry would eventually benefit the industry. Nonetheless, in the short term, in house local training could be used. 

In the meantime, the banks could concentrate on the downstream sector. However, even in this sector, they would have to sharpen their risk management skills considering the volatile nature of the environment.

NUTSHELL:

Just imagine that the lack of financing capacity puts a nation at a competitive disadvantage. But then again are we not operating in an era of globalization? With the renewed push for local content in West Africa, to what extent can we BUILD CAPACITY to finance Oil and Gas projects? Adwoa has outlined the challenges and opportunities facing the Ghanaian Banks. The next logical step is to actualize a road map towards achieving this capacity. When will Ghana's banks be ready to finance big energy projects? Any takers?

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[1] Robert Mabro, ‘Prospects for International Trade in Natural Gas’, Natural Gas: an International Perspective. 1980-1985, ed. by Robert Mabro. (Oxford University Press, 1986)

[2] Gerald B. Greenwald, Liquefied Natural Gas: Developing and Financing International Energy Projects

[3] Supra 37

[4] Tullow Oil Ghana, available at:< http://www.tullowoil.com/ghana/index.asp?pageid=53> (accessed 01-05-2010)

[5] Supra note 40

[6] Ghana Business News, Ghana to finalise $1billim gas project . available at :<http://www.ghanabusinessnews.com/2010/08/02/ghana-to-finalise-1b-gas-project/> (accessed 01-05-2011)

[7] A project is said to be bankable when the lender feels secure to finance because all the risks have been mitigated according to the lender’s tolerable risk level.

[8] Supra note 5

[9] Rated as BBB+ by Standard & Poor’s. 2010. Available at : <http://www.standardandpoors.com/prot/ratings/entity-ratings/en/us/?sectorCode=CORP&entityID=272753> (last visited 01-05-2011)

[10] Modern Ghana, Operators of Jubilee to supply free gas. available at: <http://www.modernghana.com/news/266923/1/ghana-holds-5373-of-the-oil-revenue-dr-joe-amoako-.html>

[11]GNPC, 2010.  Report on Gas Development Project Concept. Available at :<http://www.gnpcghana.com/_upload/general/gnpc%20jf%20gas%20concept_for%20potential%20partners.pdf> (accessed 01-05-2011)

[12] Energy Daily ,Ghana to receive World Bank funding. August 2010.Available at: < http://www.energy-daily.com/reports/Ghana_to_receive_World_Bank_energy_funding_999.html> (accessed 01-05-2010)

[13] These banks were financed by their parent banks. AfDB, 2010. Additionally of DFIs in Upstream Oil and Gas in Africa: available at:<http://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/WORKING%20PAPER%20114%20A.pdf> (accessed 01-05-2010)

[14] StanBic is an acronym for Standard Bank

[15] Source of diagram supra note 52

[16] PWC,2010. Ghana Banking Survey.

[17] Gerald B. Greenwald, Liquefied Natural Gas: Developing and Financing International Energy Projects

[18] Supra note 12

[19] Supra not 52

[20] The state has a 21% stake in this bank.