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Funding for Ghanaian crude oil seemed to have cleared the starting blocks but now something is stalling the potentially lucrative industry. Sarah Rundell reports.

At first glance, when state-owned Ghana National Petroleum Corporation (GNPC) launched its debut US$500 mn pre-export financing last year, it seemed to herald the start of financing for Ghana’s crude exports. Yet the flurry of expectation around the debut deal has petered out and the mandate lapsed. It seems the prospect of commercial banks financing Ghana’s oil exports is still a little way off.

The West African country started pumping oil from its giant offshore Jubilee field, operated by UK company Tullow Oil, in 2010. The bounty promises unprecedented opportunity to finance strategic oil exports out of the country, slating production at 250,000 barrels a day (bpd) by 2013, in its goal to become Sub-Saharan Africa’s sixth-largest producer.

Ghana’s risk is tempered by a stable, diversified economy, a reputation for fiscal discipline and a history of democratic elections. Technical challenges in the new industry mean Ghana will miss its production target of 120,000 bpd by the end of the year – current output is still only 80,000 bpd. Yet Ghana’s long-term ability to produce at the levels needed to sustain high debt isn’t in doubt.

Production is offshore, unlike in Nigeria’s troubled Delta, and western oil companies are responsible for production. The government also has a long and successful track record of raising large amounts of debt from commercial lenders through the annual financing of its cocoa industry. Every year banks compete to join a receivables-backed syndicated loan that funds the purchase of the up-and-coming cocoa crop. This year, state-owned Cocobod raised a record US$2bn.

Cocobod may be more popular than ever, but a variety of factors thwart progress when it comes to financing oil exports. One reason the US$500 million Deutsche mandate has stalled is attributed to the government dithering on which offtaker to use. Oil major Shell was nominated offtaker but bankers close to the deal say this is no longer certain.

“The government blows with the wind,” one banker close to the situation told GTR. “There have been flurries of activity but it is still not clear if it will be Shell or someone else. Glencore and Trafigura are saying they can get a better offtake price for Jubilee.”

Shell already imports Nigerian crude oil into Ghana and wants to offtake the higher quality Jubilee, guaranteeing the government the spread between the two. “The idea is that Ghana imports and exports oil and makes a profit,” the banker says.

But Ghana’s emerging and still shaky regulatory framework poses a bigger hurdle to financing crude exports. Uncertainty has made it difficult to raise money against oil revenues and kept trade finance, and how to best fund flows, in a state of flux.

“Ghana is still working out the best way to ensure the country benefits from its oil revenues,” says Anne-Marie Woolley, director, head of trade finance and services at Standard Bank. A London-based lawyer adds: “Ghana is an emerging oil producing nation which has looked at its neighbours and made a decision not to make the same mistakes. As a result the government is often over-protective of what can be done.”

Bill passed

But things are progressing. After months of debate, the Petroleum Revenue Management Bill finally passed through Ghanaian parliament last March. The new law will permit the government to use oil revenue as collateral for loans. The idea is to overcome reservations of the consequences increased government borrowing could have on public finances and reduce the risk of white elephant projects or unsustainable debts.

Now the government can use 70% of oil revenues to support its budget and this allocation can also be used as collateral for loans. The remainder will be saved in “heritage and stabilisation” funds. Uncertainty over whether trade financiers could legitimately point to a stream of income to secure their loans during the passage of the bill hit the GNPC debut deal.

“It got caught up in the politics,” says one London-based expert. “How should they structure the deal? Who would they lend the money to? How would they be paid by the receivables and who owns those receivables? It ultimately ground to a halt over issues of who is entitled to what and particular provisions,” he explains.

Even with the passage of the bill, leveraging Ghana’s future revenue from crude as collateral on loans is still a sensitive issue. “Ghana seems afraid of borrowing money from the international banking sector,” says one observer. “Transactions involving the GNPC have not made progress because there is a perception that too much oil revenue is being used to service loans. Any syndicated loan in the public domain would prompt cries of ‘here they go again’. Until the election next year the government will want to export oil quietly,” says a local banking insider.

It is a moot point. Ghana’s oil exports increased by 62% to US$3bn in the first quarter of 2011. Overall exports for the year are likely to jump from US$7.6bn in 2010 to US$12.3bn as oil output rises, yet this oil will mostly be sold by licence holders direct to traders, leaving commercial banks out in the cold.

“These are sovereign transactions or deals that have been cut with international buyers. We don’t see commercial banks playing a role in the exports of crude,” says René Awambeng, head of commodity finance at Ecobank.

The absence of commercial banks lending to facilitate oil exports is a “problem that needs a solution,” urges another expert. It is denying Ghana’s oil industry bank debt, leaving the sector to rely on financing from licence holders and operators which could be more costly and scarce and ultimately limits Ghana’s choices.

It’s for similar reasons trade financiers are wary of the implications of Ghana’s recent approval of the US$3bn oil-for-infrastructure loan from China Development Bank. The long-term deal, serviced by oil revenues, is the biggest in the country’s history and part of US$13bn in agreements signed last year between China Development Bank and Ghana Exim Bank. “If China is lending big sums of money to the government, Ghana will have to spend that money on Chinese contractors. Apply this to the oil industry and it means China funds getting the oil out but Ghana signs up with China to buy that oil,” says one source.

If Ghana sources most of its borrowing requirements from China it will dampen demand for commercial loans with profound consequences for banks wanting to lend to finance broader trade and infrastructure in
the energy sector.

“If this money has been made available at concessional rates it squeezes commercial banks out of the game. Competing with Chinese financing is tough if not impossible,” says Yusuf Khan, director and head of structured trade and export finance at Citi. Another banker says: “If the US$3bn that China has put on the table is invested in the oil and gas industry it means all projects to monetise gas or build power plants will go to China.”

Downstream

Financing crude exports may have got off to a slow start but banks are busy financing downstream imports and re-exports around storage, refining and retail mandates. A more varied group of lenders operate at this level including Nigerian banks and development institutions, along with established European lenders. Single obligator requirements, which limit the amount a bank can lend according to its capital base, still frustratingly prohibit most local banks from getting involved in financing crude and petroleum imports.

Ghana’s own oil production could change this market. It could reduce the requirement for the cross-border procurement of crude oil, mostly from Nigeria, while new refining capacity could one day end the mass importation for petroleum products, turning Ghana an exporter to the regional market.

The US$6bn New Alpha Refinery will have a 200,000 bpd capacity on stream by 2015, which Ecobank forecasts will give Ghana a surplus of 148,000 bpd in petroleum products by 2016. This could go for export in West Africa’s non-refining economies like Burkina Faso, Mali, Gambia, Liberia, Guinea-Bissau and Guinea. Ghana’s only refinery, the sate-run Tema Oil Refinery (TOR), is still a long way from taking Jubilee crude, however. Experts say it’s not designed for Jubilee’s higher quality oil and the GNPC wants to maximise the price of Ghanaian oil, establishing a high benchmark, which can only be done by selling internationally.

Refining oil in Ghana is also a tricky business. TOR has to juggle paying for dollar-denominated crude imports with a revenue stream in local currency. Regulation also blights profitability as government subsidies ensure consumers pay less than the market price for petrol. Cash-starved, TOR has a reputation for running below capacity, poor maintenance and bad debt.

Ghana Commercial Bank was its main lender but cut off support in 2008 due to unpaid debts. Trade financiers insist “the regulatory framework is satisfactory”, that they “have sufficient headroom” to turn a profit and that Ghana’s central bank has plenty of reserves to pay suppliers. “Our facilities are well structured with reliable exit strategies for non-payment. There have only ever been delays in payment,” assures Ecobank’s Awambeng.

Regulatory uncertainties and little demand from within Ghana to borrow from commercial banks is stalling financing around crude exports. The European banking crisis will put pressure on banks that are already weary of the Ghanianan government’s policy changes.

However, the passing of the Petroleum Revenue Management Bill into legislation is a ray of light for international parties looking for a more stable investing atmosphere. GTR