As Ghana Becomes an Oil Economy

The announcements in June and August this year that crude oil in commercial quantities has been discovered offshore Ghana should gladden the hearts of all Ghanaians. Some of us in the energy industry have been hoping and praying for something like this to happen. The announcements by U.K. firm Turrow Oil and its U.S. partners, Kosmos Energy and Anadarko; and Sabre Oil & Gas indicating recoverable reserves in excess of one billion barrels, suggest that there is hope for commercial crude oil production in Ghana, and that is good news.

Of course, not everyone is excited. The announcements have been greeted with skepticism by many Ghanaians who have doubts about the discovery and by those who think the discovery may be detrimental to the country because of concerns about the negative impacts crude oil has had on certain oil producing countries. This paper highlights some of the concerns, effects, and opportunities that exploration, development and production of crude oil in commercial quantities may have on the economy and people of Ghana. The paper discusses crude oil, but interchanges that term with petroleum, a term that includes crude oil and natural gas.

One major concern expressed by many is that petroleum operations would negatively impact the oil communities without a corresponding increase in economic developments. There is no question that petroleum operations pollute the earth, water, and air; and increase the risk of harm to oilfield workers. One way to minimize the negative impacts is for our government to enter into petroleum agreements for exploration, development or production of crude oil with only companies that take health, safety, and environmental issues seriously and demonstrate the ability and willingness to reduce negative impacts to the barest minimum. Another is for the government to vigorously enforce the relevant laws of the country and, if existing laws are inadequate or ambiguous, to enact appropriate laws that would be consistent with our oil economy. Fortunately for Ghana, and unlike other countries where crude oil is drilled onshore and in swamps closer to the people, the discovered crude oil reserves are located offshore, away from the immediate human communities. As a result, the negative impacts on the people would be relatively less.

Even so, oil communities that may be negatively affected by petroleum operations should benefit directly from the resources that nature has placed so closely to them. Here, too, we need socially responsible oil companies that can make a major difference in the lives of the communities where they operate. Oil companies lacking in proven record of good community relations should not be permitted to do business in Ghana. We should, however, guard against situations where governments shirk their responsibilities to their own people and expect oil companies to play the role of government. We should hold our own governments accountable for the proper use of the money to be derived from oil. The government and people of Ghana are primarily responsible for developing all parts of the country, and that responsibility should not be unfairly delegated to foreign oil companies. Any ambiguity in this area of responsibility may leave developments in limbo and create opportunities for community unrests. Inflation is another area of concern as Ghana becomes an oil economy. Multi-million dollar contracts abound in petroleum operations. More money would be pumped into the Ghanaian economy even if oil companies and contractors repatriate a bulk of it to their home countries. Since contracts are usually denominated in U.S. dollars, we would experience a dollarization of the Ghanaian economy where goods and services would be surreptitiously quoted in U.S. dollars and at higher prices. This would be particularly so for housing and other goods and services used by the expatriates who are expected in the country to assist in the crude oil production. All of these would put inflationary pressures on the Ghanaian economy. However, in some cases, the impact would be minimal in the short term because of the stability in our currency resulting from the government’s re-denomination exercise and introduction of the new Ghana Cedi.

There is also a concern that crude oil will displace other economic activities and make us overly dependent on oil revenues. This situation has occurred in some oil producing countries. This and other concerns expressed above are genuine and must be seriously acknowledged and addressed by every Ghanaian government. There are other concerns as well, but these would suffice for this short paper.

However, the positive side of oil far outweighs these concerns. With the price of a barrel of crude oil way over $90 and approaching $100, Ghana cannot afford to relent in its search for its own crude oil. At the very least, having our own crude oil would save us millions of dollars that would have been used to purchase the commodity on the world market. Beyond that, crude oil in commercial quantities would bring in much needed foreign exchange earnings. Currently, gold, cocoa, and timber, in that order, are the three leading foreign exchange earners for Ghana. In due course, earnings from crude oil will surpass each one of them. One advantage oil has is that unlike gold and cocoa which are heavily influenced by individual tastes and preferences, oil is a commodity that is used by all of us, including those who oppose the very operations that make oil consumption possible. As would be explained later on, the influence of crude oil in our lives is far greater than many people realize. Until we find economically viable alternatives, petroleum in general and crude oil in particular will remain the best source of energy to power the engines of our economy for the foreseeable future.

In addition to increasing the country’s tax base and tax revenues, petroleum operations would significantly increase our gross domestic product (GDP). It would also bring stability in prices of petroleum products to the Ghanaian consumers. Oil revenues may be used to increase the search for, and investments in, alternative, renewable energy like solar, wind, geothermal, and hydroelectric power. We should also use our oil revenues to strengthen and diversify our existing economic activities in the areas of agriculture, mining, education, health, information and communications technologies, and other industries. We are late comers to the league of crude oil producers so we can benefit from the experience of others and do the right things. Otherwise, we will rue the day when we ignore our traditional economic base and put all our trust in a depleting, nonrenewable resource like crude oil.

The importance of crude oil cannot be over-emphasized, however. It is virtually indispensable to our daily lives. One can hardly go through a day without enjoying some products derived from crude oil. Products derived from crude oil include the more obvious ones like gasoline or petrol for cars, diesel oil for diesel engines, jet fuel for aircrafts, kerosene for lamps, fuel oil for industrial power plants and home heating, and lubricants or greases for vehicles and other machines. Some less obvious products from crude oil are plastics, paints, synthetic rubber, detergents, cosmetics, and asphalt used to construct roads.

Indeed, the oil industry is very wide, complex and capital intensive. From exploration, development, production, manufacturing, transportation, and marketing, the industry presents varying degrees of technical and managerial expertise and capital requirements. In particular, the upstream sector of the industry - the part dealing with exploration, development and production of crude oil - presents unique challenges. Joint ventures are very common in this sector as a means of sharing risks and returns among oil companies. There are also a lot of interdependencies within the industry. For example, oil companies such as Turrow, Kosmos, Anadarko and others do not usually own the drilling rigs used to drill the crude oil from the ground. They depend on drilling and oil services contractors like Transocean, Seadrill, Schlumberger, and Halliburton to actually drill and service the oil wells; and these contractors also depend on several companies dealing in equipment and tools, vessels, helicopters, catering, training, health, safety, environmental, and other services. The supply chain goes on.

Therefore, we should prepare ourselves to meet the challenges and opportunities that an oil economy would present because there would be something within the industrial chain for many interested Ghanaians in terms of business and employment. The abundance of crude oil will have the collateral effect of creating small and medium scale industries producing many goods and services for Ghanaians. Government should encourage active Ghanaian participation in the industry through policies designed to benefit Ghanaians. Ghanaians can form alliances or joint ventures with foreign companies and provide the local support for them while learning about the industry.

We can learn. After working in the energy industry in three foreign countries for more than two decades, I am still learning new things. Other Ghanaians are also learning in some parts of the world; so can those in Ghana if given the appropriate learning tools. Government should begin to address the issue of local human capital, and consider introducing petroleum engineering, geophysics, oil and gas, and other energy-related courses into the curricula of some of our polytechnics and universities. It may also be helpful for the Ghanaian public to be aware of some of the petroleum agreements like concession agreements, joint venture agreements, production sharing contracts, joint operating agreements, and fiscal, contractual and legal regimes relating to exploration, development, and production of crude oil. The more Ghanaians know about, and participate in, the industry, the more we will understand its dynamics and provide the goodwill and support required for the industry to thrive.

I would like to conclude with this historical perspective. In 1879, Mr. Tetteh Quashie, a native of Osu, Accra, brought some cocoa seeds from the island of Fernando Po to then Gold Coast to start commercial farming. The Basel Missionaries from Switzerland had brought some cocoa seeds earlier, but it was Mr. Tetteh Quashie who established the first cocoa farm at Mampong Akuapem in the Eastern Region. History may be repeating itself. The announcements by Tullow, Kosmos and Anadarko were not the first time we had heard about crude oil discovery in Ghana. Marginal crude oil production is being carried out in Ghana today. However, those announcements and subsequent production of crude oil in commercial quantities may be the events that would put Ghana on the world map of crude oil producers. In effect, we are witnessing the birth of a new industry in Ghana. If we were to turn the clock back to 1879 and with the benefit of hindsight, we would find that cultivation of cocoa increases land disputes; deprives farmers of fertile lands that could have been used to produce foodstuffs and other commodities; infects the country with new diseases and pests like black pod, swollen shoot, thread blight, mealy bug and capsids; and breeds discontent among cocoa farmers who complain that the government does not take adequate care of their interests even though they produce the Golden Pod that sustains the country’s economy. Yet, the government and people of Ghana are managing these problems and the cocoa industry is thriving. What a loss that would have been to Ghana and Ghanaians if Mr. Tetteh Quashie and others had not been able to engage in cocoa farming because of the problems mentioned above!

Similarly, as Ghana becomes an oil economy, new problems will confront us. There will be more and bigger crude oil discoveries in Ghana, both onshore and offshore. The lives of many people would be affected, some negatively. However, Ghanaians are rational and reasonable people. We can solve the problems and we will. We will address the problems as citizens of one great country who share a common destiny. Let’s give our new oil industry the goodwill and support it needs so that it can come into fruition, provide employment and business opportunities, and increase our tax revenues and foreign exchange earnings that would be used to develop Ghana.