GHANA’S OIL & GAS INDUSTRY

AN OVERVIEW OF GHANA’S PETROLEUM DOWNSTREAM SECTOR, THE IMPLICATIONS FOR THE UPSTREAM OIL DISCOVERY AND RECOMMENDATIONS FOR THE STRUCTURAL REORGANISATION OF THE OIL AND GAS INDUSTRY

PART 1

BY: OHENEBA LOVELACE PREMPEH, FCA

Since the change of Government in January 2009, Ghana’s Petroleum downstream sector, especially Tema Oil Refinery (TOR) Ltd. and the quantum of the “TOR Debt”, Ghana National Petroleum Corporation (GNPC), the National Petroleum Authority (NPA) and TOR’s banker, Ghana Commercial Bank Ltd.
(GCB), have been in the news for various reasons, including the recent agitations and allegations by TOR’s workers, at the staff durbar held at the Refinery on
Tuesday, 13th April, 2010, regarding the lack of crude oil, the role of GNPC in the supply of crude oil to TOR, the alleged inadequacy of the processing fee payable by GNPC to TOR, the Ministry of Finance’s payment of GH¢445 million on 24th
March, 2010 to reduce TOR’s debt at GCB, and resting with the Government’s replacement of TOR’s acting Managing Director, Dr Kwame Ampofo on 5th May
2010, by the former Managing Director of GHAMOT, Mr. Ato Ampiah, who, in many ways is not a stranger to TOR.

Given my previous position as the Finance Director of TOR, from May 1988 to
February, 2001 (i.e., for thirteen years), and my present position as a Board member of Ghana Commercial Bank Ltd., which, like TOR, has featured prominently in the news lately, I would humbly like to contribute to the on-going debate on TOR and the petroleum sector from the unique position of an “insider”.

Until the offshore discovery of crude oil in commercial quantities in July 2007,
Ghana’s oil industry featured more prominently in the downstream sector.
However, with the impending commencement of crude oil production in the last quarter of 2010, Ghana’s oil and gas industry can now be categorized into the upstream and downstream sectors.
The upstream sector covers the exploration, development and production of crude oil and natural gas. Currently, this involves the consortium of Kosmos
Energy, Tullow Oil Plc, Ghana National Petroleum Corporation (GNPC), Anadarko
Petroleum Corporation, Sabre Oil and Gas and E.O. Group which discovered the vast Jubilee oil fields in July, 2007. According to GNPC, the Jubilee oil fields straddle two deep water blocks, i.e. the Tano Deep-Water Basin, and the west cape three points Deep-water basin, offshore the Western Region of Ghana.
Jubilee is a discovery that is estimated by the Ministry of Energy to hold recoverable reserves of about 800 million barrels of light crude oil, with an upside potential of about 3 billion barrels. The discovery is said to contain significant quantities of associated natural gas.
The downstream sector covers the refining, storage, internal transportation, marketing and sale of petroleum products. This is what Tema Oil Refinery (TOR)
Ltd., Ghana National Petroleum Corporation (GNPC), Bulk Oil Storage and
Transportation Company Ltd. (BOST), Bulk Transporters and the Oil Marketing
Companies (OMCs) have been doing over the past fifty years or more.
THE HISTORICAL BACKGROUND
Prior to the commencement of crude oil processing at TOR, Ghana, relied completely on imported refined petroleum products distributed by the local branches of multinational oil companies, i.e. Shell, Texaco, British Petroleum, Mobil and Total. TOR was established in 1961 with the maiden name Ghanaian
Italian Petroleum Company (GHAIP) Ltd. “GHAIP” was how the Refinery was affectionately called, until 1991 when it was renamed “Tema Oil Refinery (TOR), Ltd.”, to reflect the city where the Refinery was geographically situated. After
Ghana’s independence in March, 1957, our first President, Osagyefo Dr. Kwame
Nkrumah, as part of his grand vision of industrialization, infrastructural development and oil security, dispatched two of his senior ministers, Messrs.
Komla Agbeli Gbedemah and Kojo Botsio to Italy, to meet with his friend Signor
Enrico Mattei, the president of the Italian Oil conglomerate ENI (Ente Nazionale
Idrocarburi) to negotiate for the construction and operation of an Oil Refinery at Tema, the eastern port city of Ghana. The negotiations ended successfully, culminating in the signing of two Agreements over 50 years ago. They were Agreement “A” and Agreement “B”. Messrs K.A. Gbedemah and Kojo Botsio
signed for the government of Ghana. I am reliably informed that President
Nkrumah was personally involved in the preparation of the contents of
Agreement “B”, which was the operational Agreement. With Ghana’s discovery of oil and gas in commercial quantities in July 2007, (over fifty (50) years after the signing of Agreements “A” and “B”, the historical Agreements between the
Government of Ghana and ENI, the original owner of GHAIP), one cannot help but admire the genius of President Kwame Nkrumah.
Read Clause 9 (1 & 2) of Agreement “B”
SUPPLY OF CRUDE OIL TO GHAIP
Clause 9 (1): “Should any crude oil be produced in Ghana during the lifetime of GHAIP, GHAIP shall be bound to purchase this crude oil for processing in the Refinery, provided that this crude oil is of such quality as can be technically and economically processed in the Refinery, and is suitable for the requirements of the Ghana market, and provided further that, such crude oil can be purchased by GHAIP at a price not exceeding that at which similar crude oil could be imported by GHAIP into Ghana.”
Clause 9 (2): “To the extent that such crude oil is not available, GHAIP shall purchase crude oil from abroad on the best terms and prices available. Where such terms and prices are equal, GHAIP shall give preference to crude oil offered by the ENI group.”
This was President Nkrumah’s vision more than fifty (50) years ago.
Since its establishment in 1961 and the commencement of crude oil processing in August, 1963, TOR, formerly called GHAIP, remains the country’s only crude oil refinery. From 1961 to 1977 it was owned by the Italian Group, ENI. Since
1977 it has remained 100% wholly owned by the state. TOR has a close working relationship with the Ministries of Finance and Energy, Bank of Ghana, Energy
Commission, National Petroleum Authority, Environmental Protection Agency,
Bulk Oil Storage and Transportation Company (BOST), Ghana National Petroleum
Corporation (GNPC), the Oil Marketing Companies and a plethora of banks, local and foreign. Its annual imports Bill which was USD 400 million in 1996 is now circa USD 2 billion. It consumes more than 40% of Ghana’s export earnings, by way of petroleum imports, and generates a significant portion of the Government’s fiscal revenues through taxes and levies on petroleum products. TOR has simply remained Ghana’s central nervous system. It is for these reasons that TOR has always been newsworthy.
Historically, TOR started its life as a “Tolling Refinery” processing third party crude oils for a tolling or processing fee. As stated above, under clause 9(2) of
Agreement “B”,

“To the extent that such crude oil is not available, GHAIP shall purchase or
import crude oil from abroad on the best terms and prices available, with preference given to crude oil offered from ENI”. Under clause 10(1) of Agreement ‘B’,
“GHAIP shall also process crude oil supplied to it by any oil company distributing scheduled petroleum products in Ghana, herein after called the Oil Companies. Any oil company supplying crude oil to GHAIP for processing would pay a processing fee to GHAIP”. Prior to GHAIP’s commencement of crude oil processing in 1963, the oil companies “distributing scheduled petroleum products in Ghana” were the local branches of multinational oil companies, i.e., Shell, Mobil, British Petroleum (later BP), Texaco, Total and AGIP. The petroleum sector was encapsulated by the brand name “SHELL”. Indeed, the older Ghanaian generation used to refer to virtually every fuel retail station as “PETROL SHELL”. These expatriate petroleum companies monopolized and dominated the importation and sale of petroleum products prior to Ghana’s independence in 1957 and soon thereafter. The multinational oil companies were virtually free to set their own products selling prices without the colonial government’s interference. The establishment of GHAIP in 1961 and its commencement of crude oil processing in 1963 curtailed their role in the importation of petroleum products.

It was the implementation of “Agreement B” which stopped the importation of finished petroleum products by the expatriate oil marketing companies.

Despite the above provisions in Agreement B which allowed GHAIP to import and process its own crude oil, the Italian Management of GHAIP made it clear to
President Nkrumah’s Government that, it would operate GHAIP simply as a tolling Refinery. i.e., it would only process third party crude oils into finished products for a tolling or processing fee. GHAIP would not import its own crude oil for processing.
THE EXPATRIATE OIL MARKETING COMPANIES AS SUPPLIERS OF
CRUDE OIL TO GHAIP
Accordingly, when the Refinery started operations in August 1963, it was the local branches of multinational oil companies i.e. Shell, Mobil, Texaco and British petroleum (BP) which were given the responsibility by the Government to import the crude oil required by GHAIP Refinery for processing into finished products.
They negotiated and signed a Processing Agreement with GHAIP. After processing, the refined products, including the residue belonged to the expatriate
Oil Marketing Companies (OMCs). They paid the negotiated processing fee to
GHAIP, added their margins, fixed their ex-pump selling prices and sold the petroleum products to the public through their retail outlets. There was no
interference from President Nkrumah’s Government.
FROM THE EXPATRIATE OIL MARKETING COMPANIES TO GHANA
SUPPLY COMMISSION
In 1965, Ghana Government cancelled the Agreement with the expatriate OMCs and stopped them from importing crude oil for processing at the Refinery.
Thereafter, responsibility for crude oil importation was transferred to the petroleum department of Ghana Supply Commission. The latter negotiated a new processing Agreement with GHAIP. From 1965 onward, the imported crude oil and GHAIP refined products belonged to Ghana Supply Commission. After paying the negotiated processing fee to GHAIP, it was Ghana Supply Commission which marketed and sold the finished petroleum products to the expatriate Oil
Marketing Companies. Ghana Supply Commission negotiated the ex-refinery prices of finished products with the expatriate Oil Marketing Companies. At that time, there was no established formula for determining ex-refinery prices. The
Oil Marketing Companies added their margins, fixed their ex-pump prices and sold their products. Once again, there was no interference from the Government.
To facilitate the importation of crude oil, Ghana Supply Commission opened a
“CRUDE OIL BUYING AGENT’S ACCOUNT” at Bank of Ghana. The latter granted
Letters of Credit facilities to Ghana Supply Commission. The cost of crude oil was
charged to the Buying Agent’s Account. The proceeds from the sale of finished
products to the Oil Marketing Companies were credited to the Buying Agent’s
Account. Accordingly, the Buying Agent’s Account virtually became the National Oil Account domiciled at Bank of Ghana.
FROM GHANA SUPPLY COMMISSION TO GHANA NATIONAL
PETROLEUM CORPORATION (GNPC)
GNPC was incorporated in 1983 by PNDC Law 64, and commenced business in
1985. When GNPC commenced business in 1985, it took over from Ghana
Supply Commission, the responsibility for the importation of crude oil for processing at TOR and the responsibility for the importation of deficit refined petroleum products for sale to the Oil Marketing Companies. Significantly, GNPC also took over the “BUYING AGENTS’ ACCOUNT” opened at Bank of Ghana by Ghana Supply Commission in 1965. However, not being satisfied with Bank of
Ghana’s management of the Buying Agents’ Account, GNPC eventually transferred the National Oil Account, firstly, to the London Branch of Ghana
Commercial Bank Ltd. and later to the Accra High Street Branch of Ghana Commercial Bank. This was how the National Oil Accounts came to be domiciled in Ghana Commercial Bank in 1988.
GNPC imported its crude oil mainly from Nigeria for processing at GHAIP (i.e.
TOR). Nigeria produces light, sweet and low sulphur types of crude oil, e.g. Bonny Light, Brass River, Quaibo (BBQ) and Forcados. TOR’s refinery configuration is suitable for refining light and low sulphur types of crude oil. From the view point of geographical proximity and the consequential savings in freight costs, importation from Nigeria is quite ideal. After processing at TOR, the refined products and residue were stored for GNPC. The products belonged to GNPC. It was GNPC which marketed, sold and invoiced the Oil Marketing Companies (OMCs) with the fixed ex-refinery prices in force on each day. Once again, there was no established formula for fixing ex-refinery prices. However, unlike the expatriate Oil Marketing Companies and Ghana Supply Commission, GNPC, the owner of the Crude Oil and its derived finished products was not given the power to determine and fix its petroleum products ex-refinery prices. Rather, it was the Ministries of Energy and Finance which arbitrarily fixed ex-refinery prices. This was the beginning of Government interference in the fixing of ex-refinery and ex-pump prices of petroleum products. Worse still, this was the beginning of the endless problems of GNPC and later TOR as we shall shortly see.