Ghana saves $1 Billion on gas deal
The combined superior negotiation skills of Ghana’s Energy Minister, Boakye Agyarko, and the CEO of the Ghana National Petroleum Corporation, Dr K K Sarpong, have saved Ghana over $1 billion in a new LNG transaction that will allow for the addition of up to 1,000MW to Ghana’s power supply.
The new GNPC LNG deal, involving the world’s largest gas producer, Gazprom, is being hailed within the international energy market as a “masterstroke.” It replaces two signed competing contracts for the same Tema LNG project, signed by the previous John Mahama government, which were both considered over-priced and over-sized for Ghana.
The history of electricity supply in Ghana has been punctuated with several bouts of supply deficits – a huge attendant economic cost to the nation.
Over the past decade especially, ensuring reliable and affordable electricity supply in Ghana has been extremely undermined by the limited access to reliable and economic fuel sources.
The West African Gas Pipeline project was the first move by the power sector to displace crude oil and diesel as the principal fuel sources for the thermal plants. Unfortunately, supply of natural gas from Nigeria via this project has been gravely unreliable.
With the discovery of oil and gas in the country, the government recognizing the urgent need to cure the fuel supply risk in the electricity supply chain, invested in the Ghana Gas infrastructure to harness the indigenous gas. The rapid growth in demand for electricity and our quest for industrialization however has called into question the sufficiency of the current natural gas supply base in the country.
The World Bank and Ministry of Energy estimate that a total of about 250 – 300 mmscf/d of imported liquefied natural gas (LNG) will be needed by 2018 to undergird the supply of gas from the indigenous fields.
In a bid to meet this requirement, the erstwhile Mahama government entered into contracts with three different companies (namely, Quantum Power Ghana, West African Gas Limited and Kaheel) for the supply of LNG and the construction of its associated import terminal.
The aggregate contractual commitment made to these companies amounted to 1000 mmscf/d (only 25% of which was the country’s needs as prescribed by the World Bank and the Ministry of Energy at the time) or $25bn over the term of the contracts.
From a broader perspective, this was equivalent to more than half of Ghana’s 2016 GDP. A fourth entity called the Tema LNG (TLNG) also made submissions to the government but were not successful. Needless to say, if all three contracts were made effective, the country would have suffered a devastating and longstanding impact on its balance sheet.
On the assumption of office, the new administration felt the need to evaluate the four agreements/proposals on the table to compare the commercial benefits of each against the other, with the objective of deciding which of the projects if any could progress.
Subsequently, the Minister constituted a Committee to establish a common frame of reference and receive revised proposals from all four entities that would allow for a more transparent, fair and scientific comparative analysis.
The Committee came to the determination that the TLNG proposal offers the best value for the nation. TLNG is a consortium made up of Gazprom Marketing and Trading Ltd (the world’s largest supplier of natural gas with the largest natural gas reserves in the world), Helios Investment Partners (the largest investment firm in Africa with over $3 billion in capital commitments), Gasfin Development (a global leader in cryogenic tank design and currently involved in 6 regasification projects) and Blystad Energy Management (a Norwegian firm focused on developing and managing marine power projects that require LNG as a fuel source).
Subsequently, through a well-exhaustive and rigorous process, GNPC (and its external lawyers) have been able to negotiate a Gas Supply Agreement with Gazprom that reflects balanced equity and efficient risk allocation whilst delivering a huge value for the Corporation.
In summary, the TLNG proposal saves GNPC (and the nation for that matter) $100M in annual credit exposure and $1.2bn over the term of the contract.
The following highlights some of the major considerations culminating in the superiority of the GNPC-TLNG deal:
Low Total Cost of Delivered Gas
The total cost of gas delivered to GNPC is $7.70/mmbtu. This is not just the cheapest among the four projects; it is cheaper than the gas from the indigenous Sankofa gas fields.
Project Infrastructure Cost Fully Borne by TLNG
GNPC makes no capital contribution to the project. The TLNG consortium, led by Helios investment partners, the largest Africa focused fund ($3bn under management) is fully financing the entire capex of the project.
Minimal Credit Exposure to GNPC
GNPC’s liabilities to Gazprom are backed by a Single Standby Letter of Credit – approximately 25% of GNPC’s annual take-or-pay liabilities. Gazprom provides a guarantee to underpin the terminal’s liabilities.
No Government Guarantee Required
Unlike the other proposals, this deal requires no Government of Ghana guarantee.
GNPC Shares in Profits of Gas Sales to Neighboring Countries
GNPC has the right to share in profits of gas supplied by Gazprom through the terminal to other West African countries. This arrangement could yield GNPC in excess of $95 million over the term of the contract.
TLNG deploys Proven Engineering Technology/Approach
The engineering approach proposed by TLNG is well-proven and has demonstrably good safety record, having been deployed in several countries including USA, Holland, Indonesia, Egypt and Angola.
GNPC owns the Infrastructure at the end of Contract Term
Ownership of the entire import terminal infrastructure is transferred to GNPC/GoG at the end of the term of the contract. The residual value is estimated in excess of $100 million, with a useful technical life of over 10 years.
Counterparty Risk: Solid Balance Sheet and Credit Rating of Counterparty
contractual exposure under the TLNG structure is to Gazprom, the world’s largest gas producer and a publically traded company, with annual revenues in excess of $100 Billion – more than twice Ghana’s GDP.
Gazprom bears Terminal Failure Risk
Gazprom absorbs the risk and liabilities associated with the import terminal failure. This is backed by a Corporate guarantee of $1.2 billion.
Gazprom bears Risk of Off-spec Gas
Gazprom is wholly responsible for all damages caused by off-spec gas (gas that does not meet GNPC’s specification) whether caused by Terminal or their own LNG. This covers damages that may occur to downstream assets such as the VRA turbines that will ultimately consume the gas
Gazprom bears LNG Cargo Risk
TLNG consortium contractually commit to being available 98% of the year. Gazprom is liable for costs associated with import terminal’s failure to provide service. Gazprom will compensate GNPC for cost of securing alternative fuels, in the event of unavailability of the import terminal.
Low Take-or-Pay Gas Quantity Obligation on GNPC
TLNGs proposal is based on volumes of 250 MMscf/d, proportionate to the demand forecast by the Ministry of Energy, resulting in a lower exposure to GNPC as compared to the other proposals. The contract allows Ghana to reduce volumes by 10% per year if required.
In synopsis, there is demonstrably a need for LNG in the country beyond 2018. The complex nature of the LNG supply infrastructure, the volumes of transactions involved and the scales of risk associated calls for a well-coordinated solution with a carefully structured risk allocation among parties to ensure that the country is not unduly exposed or short-changed.
The GNPC-Gazprom deal has been well-structured to protect the interest of the country. GNPC has negotiated a unique structure whereby risks and liabilities that would have otherwise been to the account of GNPC (such as under the three other proposals) has been absorbed by Gazprom.
The biggest risk to Government on a regasification project is that of terminal failure and GNPC has secured a deal whereby Gazprom takes this risk.
This transaction will lead to the establishment of Gazprom’s first physical presence in Africa. The Gazprom Group has identified other significant energy related opportunities in Ghana where they believe they can add value in terms of the development and commercialisation of the gas sector in Ghana.
Their plan is to use Ghana as a regional hub into West Africa and ensure that Ghana benefits as a result. As afore-stated, Gazprom is the largest gas producer in the world with annual revenues (in excess of $100 Billion) more than twice the size of the GDP of Ghana.