In a previous essay, we announced a joint investigation by IMANI Africa and the Africa Center for Energy Policy (ACEP), two Accra-based policy think tanks, into a case of possible fiscal recklessness on the part of Ghana’s national oil company, the GNPC.

In our initial analysis, we explained how potential losses of up to $100 million per year could build up for Ghana if the GNPC’s current arrangement with Genser Energy Holdings, a US-based Ghanaian-owned energy company, persists under current conditions. Frequent readers of this site must be aware of our longstanding disquiet about how GNPC’s lack of technical prudence frequently courts financial disaster for Ghana. This inquiry follows faithfully in that tradition.

We intend to explore in a bit more depth the circumstances giving rise to the latest GNPC financial debacle. This essay will thus touch on both the antecedents of the original 16-year contract signed between GNPC and Genser in 2020 and more recent developments to paint a holistic picture of the fiscal risks to the country.

The whole mysterious saga can be traced to an agreement on 20th April 2018 between Ghana Gas, the state-owned gas distribution company (which for a short period, before the advent of the current administration in 2017, was a subsidiary of the GNPC), and Genser in which Genser committed to pay a reasonable price for gas to power embedded/off-grid power plants it leases to various large mines and consumers in the cement and ceramics industries.

Subject to various regulatory decisions and notices, Genser had committed to pay between $6.50 and $7.29 for each unit (mmBTU) of gas received from Ghana Gas as per the so-called WACOG, a regulated price set by the government of Ghana through an industry regulator (PURC).

Around the same period, it was frantically engaging various liquefied petroleum gas (LPG traders) to supply imported fuel for its plants. The logistics of trucking imported propane and LPG from the port being cumbersome and the costs being benchmarked to world prices, Genser’s ideal situation was a more stable domestic source of gas that it could transmit more conveniently, reliably and cheaply via pipelines. Besides, it faced cashflow constraints that made it difficult dealing with the strict European traders it was then buying from.

Having secured a fair deal with Ghana Gas, Genser began to feel that the price paid by the rest of the power industry wouldn’t work for its modular and embedded generation business model. Consequently, it attempted to influence an industry regulator, the Energy Commission, to grant it a waiver of the regulated price so it could cut a deal for a lower price but the Energy Commission wouldn’t budge.

Specifically, the Energy Commission did not regard Genser as “strategic” for which reason it would deserve a special discount and therefore ruled out any arrangement in which Genser would pay a lower price than the state-set amount (WACOG) it had already agreed to in its contract with Ghana Gas.

But what Ghana Gas had no appetite for, GNPC, as usual, couldn’t wait to gobble. As already discussed in the previous essay, GNPC agreed to price gas for Genser at just $2.79/mmBTU (i.e. at a whopping ~60% discount).

To provide political cover for this scheme, the Chief Executive of GNPC wrote to the Ministry of Energy on 10th August 2020 informing the Deputy Minister about this decision and asking for “ratification”.

Somehow, the documented history we have narrated above disappears from the record and a contrived basis is invented to suggest that somehow the proposed $2.79/mmBTU price is a better deal than what the GNGC had signed with Genser.

It is also suggested that because Genser has agreed to provide free passage to GNPC gas to other, third party, customers through its pipelines, some kind of barter arrangement is involved.

Consistent with the GNPC’s less than candid approach, the Chief Executive fails to disclose that the use of the Genser pipelines are not actually free because a “gas compression service charge” applies.

More to the point, even if the GNPC wanted to give a rebate to Genser for use of the latter’s pipeline, there are established costs for pipeline transmission in Ghana that would provide a sense of how much it could have knocked off the WACOG or market price of gas for Genser. GNPC provided no such analysis.

The following year, it decided instead to double up. Its Chief Executive wrote again to the Ministry to justify a revision to the contract for an even greater reduction of its gas sale price for Genser.

Note once again that the massive near- 40% discount is justified on the basis of pipelines to be built in the future for projects yet to be actually realised. Suffice it to say that no such pipeline to Kumasi was built by December 2021.

At this point, through the ingenuity of GNPC, the maximum price negotiated by Genser with Ghana Gas had been discounted by a whopping 77%. Genser stood to pay $1.72 if it built a pipeline to reach customers in the interior whether or not GNPC found the money to build the new power enclave in that part of the country and for which it claimed it needed all this future pipeline capacity (suffice it to say that GNPC has not been able to build the enclave).

Recall also that this was the period when economies worldwide were recovering from COVID-19 and prices in the most actively traded European hub (TTF) had surged past $10/mmBTU.

Genser, frantically raising funds to service debts and stave off harrassing Senior (Debt) Agents, needed the rosiest deals it could find and GNPC was always at hand to oblige. So, $1.72 it was.

The GNPC would also tell various people in policy circles that the source of the gas it was selling to Genser was exclusively Jubilee and TEN. Jubilee and TEN gas are very cheap because Ghana, until later this year, only pays for their processing and distribution costs, but not the gathering and feedstock.

Yet the agreement it had originally signed and the newly amended one would both contain clear “service delivery point” provisions establishing the source of the gas, at least partly, to be from the Sanzule (ORF) facility which is connected to the Sankofa Hub where, according to the same GNPC, gas costs $8.72/mmBTU.

At the same time that it was busily dispensing discounts like candy, GNPC was also busily harassing the PURC (a price regulator in the energy industry) for increments in tariffs due, among other factors, to the growing costs of aggregating gas. With TEN facilities contributing just 2% of the gas GNPC collects and Jubilee offering 28%, Sankofa was now responsible for a full half of all gas throughput. Yet, Sankofa gas was also the costliest for GNPC, at a mighty $8.72/mmBTU. Whilst Jubilee may cost GNPC $2.3 to obtain, a concession from the oil producers whereby Ghana got the gas feedstock itself for free, the concessionary pricing regime was on course to end in about a year and half from the time the 16-year agreement was agreed.

So, at worst, GNPC was willing to take gas at $8.72 from Sankofa and sell to Genser at $1.72. At best, we can use the industry practice, as GNPC itself does, and look at its average cost of sourcing gas, which it says is $7.9 in 2022 and set to rise to $9.37 in 2026, when the contract with Genser would still have ten more years to go.

When the Ministry of Energy was notified of the decision by GNPC as enshrined in the initial contract (2020) to grant those massive discounts to Genser, it was neither alarmed nor deterred by any of this.

The Minister waited for about seven months, during which period the contract was of course in force, and then sent the following gems of ministerial guidance.

Any surprise then that just four months later, GNPC will revise the contract and hand over another delicious 40% discount for yet more phantom pipeline promises?

Clearly emboldened by ministerial laxity, GNPC was now literally giving the gas away. The price of the commodity itself would be pegged at just $0.57 should Genser succeed in closing its fundraiser and build a pipeline for GNPC’s future use in distribution schemes that were then unfunded and very much on the drawing board.

The Ministry’s actions were, and it is easy to guess, in contravention of all settled policy. Just around the same time that GNPC was negotiating with Genser, the country’s highest decision making body in economic matters, chaired by no mean personage than the Vice President, had taken a decision about gas pricing. A decision the then Energy Minister in March 2020 had communicated to the GNPC.

The essence of the decision was simply that gas aggregators (like GNPC) should endeavour to recover their full costs. Full cost recovery and financial exposure mitigation are obvious commonsensical principles dating from Ghana’s first Natural Gas Pricing Policy from 2012. It had been further reinforced in the apparently discarded Gas Master Plan and continues to inform price regulation by the PURC today.

More recent reviewers of Ghana’s national gas policy have reinforced the simple point that in the absence of thoroughly compelling reasons there should be no deviation from the WACOG, as a reflection of average cost recovery across the power sector, in terms such as the following:

It is worth reminding readers that the WACOG, though set below the cost that GNPC says it pays to get the gas it sells, is definitely not $2.79. Or, God forbid, $1.72.

So, even if GNPC does not want to charge its own estimate of a fair price at $7.9/mmBTU, is there any reason why the $5.9/mmBTU WACOG minus any pro-rata transmission charges owing to the presence of Genser’s own pipelines in the mix shouldn’t apply? What exceptional reasons really?

On the point of Genser being somewhat unique in having its own pipelines, it’s worth recalling GNPC’s own numbers of the cost contribution of pipeline transmission to the price buildup.

In essence, one cannot justify a rebate for pipeline transmission higher than half of $0.919 if one wishes to account for Genser picking up the gas midway from their offshore source at the agreed “delivery points”.

Globally, until distances exceed 1,500km (total network length in Ghana is less than this), it is very hard to justify pipeline transmission tariffs exceeding one dollar per mmBTU for natural gas transportation.

In similar light, GNPC’s use of Genser’s pipeline construction and its potential use of same in separate contexts as the basis for discounts is highly suspect given the typically low contribution transportation makes to natural gas project capitalisation.

So, once again, what other exceptional reasons then? Let’s even suppose that the Energy Commission was wrong, and Genser, even though so far it basically just sells power to primary extractors like mines with a sprinkling of cement and ceramics players and is thus far from a massive value addition enabler, deserves to be regarded as a “strategic actor” as the GNPC insists it is. One would still have to look, before going anywhere near subsidies, at whether domestic prices of gas are in fact too high for competitively priced power to be produced.

Luckily, there are well settled methodologies for doing this, such as the use of netback price & value analysis. Done properly, netback analysis can approximate industry willingness to pay and provide robust estimates of gas pricing needed to accommodate breakeven points in the capital investment analysis of various industries. When Ghana last concluded such an exercise, it found that $9 to $12 per mmBTU was a reasonable price range for those industries for which gas-to-power generation makes economic sense.

To cut to the chase, is Ghana’s $5.9 WACOG rate exorbitant? So much so that it must be tempered by subsidies? Is it a “strategic industries killer”? Global comparative analysis does not suggest so. Indonesia, a fast-growing gas market that could offer benchmarks for Ghana in various ways has a $6 WACOG-like price threshold. There too, key industries cluster around the $9 to $12 per mmBTU sweetspot pricing range.

At the time Ghana Gas offered the $6.5 – $7.29 per MMBTU range, the global picture for gas pricing was pretty aligned with the regulatory view in Ghana.

The other question is whether based on the prevailing sentiment during the contract negotiation, a belief that relatively cheaper Jubilee gas could be used for strategic purposes to promote the emergence of a diversified energy conglomerate of Ghanaian origin could have justified that humongous 77% discount. Even that concession, wild as it is, removed from the reality of gas either coming primarily from the expensive Sankofa Hub or at best being commingled and thus costed at the GNPC’s own weighted level, still does not condone the pricing agreed upon in both 2020 and 2021.

The policy position among the country’s experts was clearly that Jubilee gas ought not to be included in pricing indices. And that even if it was, gas prices would not fall below the $4.5/mmBTU range. Taking cue from the logic in the now, apparently abandoned, Gas Masterplan, prudence ought to remain the policy anchor.

It is amply clear from the foregoing that GNPC’s decision to discount the price of its gas to Genser from the $7.9/mmBTU it says it costs on average to produce the commodity, and to deviate from even the regulatory price benchmark of $5.9 (2022) – $6.08 (2020) per mmBTU is suspect. Its further decision to offer the gas to Genser at a prospective amount of $1.72 for 16 years can therefore not be justified at any level on the evidence currently available.

Until GNPC presents compelling arguments to vindicate itself, we must consider the contract as constituting a massive financial loss as follows.

Fair Price of Commodity – $7.9

• Rebate for Buyer Transportation – $0.5
• Strategic Option Rebate for Third Party Delivery via Genser Pipeline – $1

Prudent Net Sales Price – $6.4

Choosing to sell the gas at $1.72/mmBTU to Genser therefore generates a loss of $4.68/mmBTU.

The contract envisages delivery of ~329 million mmBTU over its 16 year lifetime.

The total potential financial loss to Ghana is thus $1.539 BILLION.

Of course this number is an approximation of approximations. But all the trends point to elevated prices for natural gas in the medium-term justifying the projection into the future of these round numbers. It is a very sensible call to estimate losses around this general figure should the contract as currently crafted persist without very sound, genuine, strategic reasons.

The point must be stressed that no one is accusing Genser of wrongdoing. At worst, it is guilty of “excessively effective” lobbying and shrewd negotiation. But it is a private business seeking to maximise the welfare of its corporate backers who are taking risks worth ~$500 million so one can understand. Our focus is thus principally on the role of GNPC, which has a bounden ficuciary duty to prevent Ghana from losing such fantastical sums whether out of sheer incompetence or recklessness.

This essay is part of an active, ongoing, investigation by ACEP and IMANI. Readers with information are strongly encouraged to reach out.