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Exxon’s exit from Ghana may be first sign of majors quitting Africa

By Jonas Nyabor, Nicholas Norbrook
Posted on Thursday, 17 June 2021 15:53

A worker is pictured at the Stena forth drill rig for Springfield Group, the first independent African energy company to discover oil in deep sea, at the sea near Takoradi
A worker is pictured at the Stena forth drill rig for Springfield Group, the first independent African energy company to discover oil in deep sea, at the sea near Takoradi, Ghana. November 15, 2019 Picture taken November 15, 2019. REUTERS/Kweku Obeng - RC20TD9TEZ5E

Ghana's upstream petroleum sector is going through a tricky patch. American giant ExxonMobil's unexpected exit from the sector has only ramped up anxiety. And it is not just Exxon: TotalEnergies is also actively moving away from crude in Nigeria. Ghana will need to aggressively tackle many challenges while quickly repositioning itself in the face of a global energy transition.

In May 2021, ExxonMobil announced to the Ghanaian government that it was exiting the country’s upstream petroleum sector where it has been conducting exploration after acquiring rights in 2018.

The company’s investment was the first after a landmark ruling from the International Tribunal for the Law of the Sea (ITLOS) in favour of Ghana, following the maritime border dispute with Ivory Coast a year earlier.

It held great prospects for the country which was looking to capitalise on ExxonMobil’s experience, to build the capacity of the state-owned Ghana National Petroleum Corporation (GNPC) within four years. The goal was to help GNPC eventually learn to operate fields independently.

ExxonMobil was allocated the Deepwater Cape Three Points block, 57 miles off Ghana’s coast where it held 80% interest and was expected to complete the full six-year exploration period. But its decision to exit came early, immediately after its contractual obligations for the initial exploration period of two and half years.

It might not hit the fiscus in Ghana too hard. “Any new exploration now will not in any case have made any near-term difference to production or FX,” says Razia Kahn, Standard Chartered’s chief economist for Africa and the Middle East. “As things currently go, the Ghana cedi is well-supported by offshore portfolio interest in the local currency bond market. The GHS has been stable, helped also by ample FX reserves, expectations of an IMF SDR allocation soon, and frequent Bank of Ghana FX forward sales as its bi-weekly auction.”

But it may herald a more strategic shift that African oil producers need to think about: the global energy transition of the next few decades. “The withdrawal of ExxonMobil from Ghana is a sign of things to come,” says Barbara Barungi, managing director at Imara Africa in Lagos and former lead economist for Nigeria at the African Development Bank.

Green shift drives major change

In its letter, Exxon did not state the reason for the decision to exit Ghana. But as global pressure mounts to divest from fossil fuels, greenfield oil production has become increasingly unattractive for majors.

Many big players in the industry – such as TotalEnergies, Eni and BP – have taken the lead in reducing investments in oil production activities and moving towards renewable energy projects. The CEO of TotalEnergies in Nigeria – Mike Sangster – tells The Africa Report that going forward, the company is focusing more on gas and oil projects with a ‘low break-even point’.

Preba Arkaah, a spokesman for Exxon in Ghana told Reuters a similar story: “Exxon Mobil is prioritising near-term capital spend on the most advantaged assets with the lowest cost of supply in the portfolio including developments in Guyana, Brazil and the U.S. Permian Basin.”

“We should now start to look at Nigeria, Angola and ask who will be staying who will be leaving?” says Barungi.

US oil companies have traditionally felt less pressure over climate change than European ones. “Therefore, this action of ExxonMobil in Ghana — an American company — is particularly significant,” says Barungi. “What will Mobil and Chevron be doing in Nigeria?”

ExxonMobil exited when we were expecting a lot from them…

Barungi says finance is the signal to how things might evolve: “The next question will be: which banks will fund? That is why all eyes are on the upcoming French banks decision as to whether to fund Total in Uganda…”

How to keep international interest?

Institute for Energy Securities, a Ghanaian energy think tank, suggests a downward review of royalties and other tax rates as a way to create a friendly environment for players in the sector. The organisation argues that lack of a downward review, resulting in high operational cost, and the impact of Covid-19 is to blame for ExxonMobil’s exit.

Nana Amoasi VII, the executive director of the Institute for Energy Securities, says: “ExxonMobil exited when we were expecting a lot from them. The oil findings in their field is below their international threshold. They were expecting tax exemptions and that exemption would have given them free cash flow for them to go onto the next phase of appraisal. Our oil is becoming stranded because key players that need to exploit it are not there.”

As per ExxonMobil’s Petroleum Agreement with the government of Ghana, the company was to be exempted from paying VAT with respect to its activities in the sector. However, reports suggest that the company paid over $4m in VAT alone to Ghana despite letters to the country’s revenue authority and the energy ministry reminding them about the exemption.

The ExxonMobil situation is not the only one that worries watchers of Ghana’s upstream sector.

  • In the first quarter of 2020, Norwegian oil firm Aker Energy announced that it was indefinitely postponing its final investment decision on the Pecan offshore development project in the Deepwater Tano Cape Three Points block. Although the local CEO, Kadijah Amoah, announced last month that the company is still committed to the project, a Geophysical and Geotechnical survey (G&G Survey) which will be a significant step towards finalising its plan for development is yet to be completed.
  • Italian major Eni is also in a tight corner after a government directive in April 2020 to unitise its Sakofa field with Ghanaian energy company, Springfield Energy’s Afina field. The government determined that the two neighbouring fields share the same Cenomanian reservoir and gave the directive in accordance with the Petroleum Act, 2016. More than 12 months later, the two are yet to sign an agreement to that effect. Eni, which operates a joint venture with Vitol Holding BV has not been enthused about the directive, calling for further studies on the fields as Springfield accuses it of being uncooperative. The unitisation is to ensure optimum oil recovery that will inure to the benefit of Ghana as well as the two companies, but the stalemate means that Ghana is losing out on huge royalties, taxes, fees and levies. Further delays in amicably resolving the issue would see more wasted days and lost potential revenues from the fading hydrocarbons industry in the face of the global energy transition.

Many African countries remain spectators to the shift to green energy, even as Denis Gyeyir, a programme officer at the Natural Resource Governance Institute (NRGI), says Ghana must make plans that will enable it to make gains even in the face of depressed demand for oil.

“If the government does not plan for this trend, it will get to a point where companies like Tullow and Eni that are investing in our oil fields will be pulling out their investments because they would no longer be interested. We are already seeing this trend with Aker Energy and ExxonMobil,” he says. “The government must plan for this. Ghana must invest the revenues sustainably in areas that will generate income when the petroleum is no longer available.”

At the end of 2020, the country’s crude oil exports had declined sharply by 35.2% largely due to the Covid-19 pandemic and the depressed demand for oil.

From $937.6m in petroleum receipts in 2019, Ghana received $666.4m in 2020. This year’s budget statement projects that the end of year petroleum receipts will be $885.7m; however, achieving that would be a shock owing to the exit of ExxonMobil and the ensuing challenges in the sector.

Ghana’s heavy reliance on petroleum revenues for many of its ambitious local development projects (such as education and infrastructure) means that it has to choose between slowing down on such projects or borrowing more to fund them.

Counterpoint

Not everyone is convinced that the global drive to decarbonisation will lead to the phenomenon of stranded assets.

“If western oil companies don’t invest in new oil production, we may end up ironically raising the oil price in the 2020s, providing windfall gains to what might now be seen as stranded assets,” says Charlie Robertson, global chief economist at Renaissance Capital.

Abdulazeez Kuranga, an economist at Cordros in Lagos, says other companies can do the job, as long as “the bidding process is transparent and on merit, [allowing] competent indigenous firms to take over, or even another foreign firm”.

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