Analysis of Ghana gas pricing policy

Introduction
Ghana is enriched with a large hydrocarbon resource endowment. This resource is of fast
growing benefit, as gas has become, and continues to be the fuel of choice in developed as well
as developing countries, in which Ghana cannot be left out. If oil has played a key role in helping
develop Ghanas economy, gas has started to contribute its share. This is the time the country
need to rise up to the responsibility of developing her own domestic market in a way that will
justify its resource base. It would also help the nation become a consistent regional gas supplier
if the development involved is properly planned and administered. In view of this the
government of Ghana has come out with a (to some extend) detail policy. This research seeks to
analyze Ghana gas pricing policy with the intent of providing consultancy advice concerning
specific incentive and disincentive on potential investment.

Investment Incentive analysis

Investment within this industry can be viewed from two perspectives: upstream Investment and
downstream investment. It is stated clearly that investment in the midstream is undertaking by
government and as such analysis of this sector is not the focus of this paper.
Upstream Investment
The upstream sector of the gas industry refers to as the search for, followed by the recovery and
production of, natural gas. Investment in this sector of the gas industry is done based on the
availability of the demand(market) of the gas. The current demand for gas to settle the power
crisis of Ghana and the petrochemical industry is a major trigger for investment. According to the
gas pricing policy, total Gas Demand (base case) is expected to start at 150mmscfd in 2013 and

grow to reach about 400mmscfd in 2020 and about 764mmscfd in 2030. A high case starts at
170mmscfd in 2013 and grows through 565mmscfd in 2020 to 1,200mmscfd by 2030. With the
availability of this demand and the estimated recoverable reserve of gas of up to 6.4 TCF(2.2
TCF associated gas and 4.2 non associated gas), investor needs to now look at the cost associated
with the production and the rate of returns which will be determined by the price of the gas and
the expected volume that will be sold. For this segment we will focus on investment in the nonassociated gas because this is where upstream investment is likely to be employed. The economic
evaluation of the development of the non-associated gas fields shows that the investors rate of
return (ROR) would depend on the volume and price of the gas itself. According to Dr.
Mohammed Admin Adam CEO of African center for energy Policy, gas from Atuabo is sold at
US$2.9 per million Btu. Comparatively, domestic average gas cost according to the gas pricing
policy is expected to oscillate between 1 and 3 US$/MMBTU. From this perspective (holding all
other factors constant) we can see that that gas investment may incentivize investment if the cost
remains below the current cost of production. If cost exceeds 2.5 it means, there should be a
corresponding increase in price. If not, investment maybe de-incentivize. Consumers will be
willing to pay this price if this is the lowest price available but this is not the case. Gas form West
African Gas Pipeline (WAGP) is being sold at 1.6MMBTU which indicates that it is cheaper than
domestic gas produced and at such consumer will exert effort by all means to first get the
cheaper of the two sources (domestic or WAGP). The only advantage domestic gas has over
Ghana imported gas is the quantity of gas being supplied. If supply of imported gas is to continue
at the historic level 60 MMSCFD and looking at the initial demand of 150mmscfd it means that
there will be a deficit of gas supply by 90 MMSCFD. Consumers are likely to consume same
product at a cheaper price and if available quantity cannot meet their demand then they might go

for the same product at another price even if it is higher to filled in the deficit. This is where
consumers will now opt for domestic gas produced. But the question to ask is: what if the
quantity supply of cheaper gas increases what will be the fate of domestic gas producers? This
means that profitability or return on investment will only be optimized when the residual
quantity demanded equals or exceeds domestic gas produced.
Gas producers may demand a further increment to $5 to $7 to bring the domestic price at par
with the Henry Hub price in the United States.

Downstream
The downstream sector of the gas industry deals with transforming the gas to finished products
to be consumed by ordinary consumers excluding those who purchase the raw gas.
Investment in this industry is done by either investing in the power sector or the petrochemical
industry. Again before investing in this sector, there has to be a reliable supply of raw gas (gas
from processing plant) at an affordable price that will entertain an acceptable rate of returns and
there has to be an available market backed by high demand of produced products. Primary
demand for the processed gas is mainly for domestic market and are listed in the following order:
o

Power Plants

Fertilizer

Industrial Heating

Other Petrochemicals

Others

Investment within the power sector

Existing installed power generation capacity is 1,960MW and demand is to increase by 7-10%
per annum. Ghanas current total dependable installed capacity for electricity generation amounts
to 2,125 MW of which 51 per cent is hydroelectric, 48.9 percent thermal, and 0.1percent
renewable. Ghana remains some 625 MW of capacity short of satisfying total electricity demand
( Fritsch & Poudineh, 2015).
This implies that these are potential areas investors can invest and are likely to receive returns
base on the availability of other economic factors.
According to the gas pricing policy, gas demand for power generation started at 150mmscfd in
2013 and grow to reach about 300mmscfd in 2020 and about 600mmscfd in 2030.
Given its geographic endowment, Ghanas hydroelectric generation potential is already largely
exhausted, while the large-scale installation of renewable electricity generation types, such as
solar and wind, is not feasible in a region which has such little experience with renewable
energies. Therefore, efforts to catch up with Ghanas rising demand for electricity are focused on
increasing thermal power generation. The Energy Sector Strategy and Development Plan
(ESSDP), published
by the Ministry of Energy, explicitly states that achieving 50per cent thermal-based generation
capacity by 2015 is a key goal of the countrys energy strategy.
This objective of government has created an invitation for investment in power sector by
investment in thermal plants. But this is not the only criteria an investor needs to look at. A major
criteria associated with investment within this sector is the cost which if high will have a
negative impact on investment rate of return. Major cost component of the operation of the
thermal plants is the purchase of natural gas. This investment venture may look attractive if there
is an available of gas at a lower cost. The gas pricing policy does not suggest any price as a cost

of gas resulting for thermal plant usage, it assumed that the power sector is willing to pay high
amount and justifying this assumption by comparing it with the opportunity cost of buying diesel
or light crude oil. On the other hand, taking into consideration the current price of natural gas in
the country which is $6.61MMBTU according to the ministry of finance, investor can scrutinize
this investment opportunity by also comparing this investment with the opportunity cost of
investing in other sectors of the economy or in another country.
The most likely country investor might use may be Nigeria looking at the huge deficit in their
power supply. Nigerias peak electricity demand has risen from 12,800 to 14,630 megawatts
because of increased use of electricity in the nation. the nations power stations collectively
generates 4,044.68 megawatts (AKPAN, 2015). With a reserve of over 187.44 TCF and a
recently approved upward $2.5 per MCF which is much lower than the cost of gas in Ghana,
investor may conclude that the current cost will dis-incentivize their investment. But taking a
look at the numerous vandalism of gas pipelines, unstable sources of gas and mix ownership of
the downstream sector, it gives a picture of an unsecure investment environment.
According to Ghana gas pricing policy, government has total control over the midstream and as
such they have delegated responsibilities to various autonomous agencies to govern this sector of
the industry. And also with Ghanas current and prior stability, this creates a since of secure
investment atmosphere.

Non-Power
According to the gas pricing policy, Non-Power demand includes industrial demand for:

combustion heating purposes

petrochemicals and
alumina

methanol

The base demand case incorporates demand from the development of a fertilizer industry based
on Ammonia and Urea and the setting up of an alumina plant. The fertilizer project can add
significant value to Ghanas agricultural sector, which is characterized by very low fertilizer use
and high soil nutrient depletion.
Investment in these sector is very cardinal to the economic growth of Ghana because of the vital
role they play independently as a product and as a sub-product in the supply chain of other
industries.
Like the power sector this will depends on similar factors like the demand of these products, the
price of the gas and other cost.
It is estimated that the maximum price each of these plants would be ready to pay is as follows:

Ammonia Urea:
Ethylene:
Methanol:

11.0 US$/MMBTU
7.0 US$/MMBTU
5.0 US$/MMBTU

Methanol commands a very low price globally and thus a methanol project needs to be
competitive on a global basis. Demand in the whole Sub- Saharan region is small and it is not
likely to grow sufficiently to sustain a world-scale plant and as such economic factors that leads
to sale price of methanol needs to be less or else investor are likely transfer their investment
elsewhere.

Policy analysis by acceptable criteria

In analyzing any giving policy there are also criteria that are expected to be inculcated in that
policies, and based on the content of that policies it compares to other policies that are

constructed with regard to international best practices. Generally, criteria that are anticipated by
analyst and are likely to provide incentive are the understanding of five universal principles of
good governance which transcend national boundaries: clarity of goals, roles and responsibilities;
sustainable development for future generations; enablement to carry out the role assigned;
accountability of decision-making and performance and transparency and accuracy of
information. This analytical work analyzes the Gas pricing policy of Ghana to determine if it met
acceptable criteria compliance which serve as a bedrock for incentivizing or dis-incentivizing
investment in this sector.

1. Clarity of goals, roles and responsibility

Whatever the organizational model for governing the pricing policy in the gas sector, there is
consensus among investors and domestic consumers that clarity of goals, roles and
responsibilities is stated clearly within the policy. For each policy, there has to be clarity on the
intended outcome of the decision, who will be involved in making it and how.
General goals stated within this policy dictates that government is implementing this policy in
order to ensure:

The development of these indigenous natural gas resources

A sustainable natural gas industry
Fostering of economic growth and development.

Specifically, Ghanas Energy policy has amongst its key objectives the following that are directly
relevant to the pricing policy:

to increase and diversify the fuel mix in power generation by supporting the strategic

exploitation of domestic natural gas discoveries;

to create a favourable environment;
to encourage public-private partnership financing of natural gas infrastructure;
to achieve universal access to electricity by extending the reach of electricity

infrastructure to all communities by 2020;

to reduce the cost of energy; and
to ensure that energy pricing is efficient and competitive, while providing rates that are
affordable.

Lack of clarity of goal in this policy would have led to conflicting agendas, duplication of effort
and policy paralysis. Clarity of goals and objectives in this policy gives investors a picture of
what government seek to achieve. This is very critical to the provision of incentives for investor
because A long-term goal will enable investors to deploy more capital and unleash a wave of
innovation and protect their investments in the industry.

While it is prudent that every policy has a clear goal it is also important that roles and
responsibilities must be assigned to individuals or entities that will collectively work together in
actualizing these goals. Those involved in the decision-making process should know who is
responsible for providing input, recommending a course of action, approving the decision,
implementing the decision and monitoring the implementation. In the implementation of these
objectives, the government of Ghana has assigned roles and responsibilities in the following
order:

Institution
Ghana national gas corporation (GNGC)

Functions
Responsible for negotiating long-term sale and

purchase contracts with upstream producers and

all end-users. establish accounting separation
between its aggregation and trading, processing
and

transportation

pipeline

ownership

and

maintenance business units, in alignment with

Bulk Oil Storage Terminal (BOST)

existing regulations.
Operate a national interconnected natural gas
transmission infrastructure to connect all gas
supply sources and facilitate smooth operation, in
these initial stages, there shall be a joint
operatorship arrangement

PURC

approve the tariff for BOST, approve the

aggregation and transportation service models
for BOST and GNPC, monitor the evolution
of the market to determine whether alternative
pricing approaches will be needed and
provide advice on overall base selling prices
(benchmark) and netback prices for the
strategic sector.

From the look of the responsibilities given to respective institutions, we can see that there is no
assigned role given to investor. It may seem like investor only function is to invest money in the
sector and recoup their investment however, inculcating investors with defined in actualizing the
objective of the policy is significant. Despite the regulation put in place, it is the investors that
provide the information and feedback to enable appropriate regulatory standards and policies. If
government wants to foster private sector participation, then theres a need to formally define the
roles and responsibilities of investors.

. 2. Sustainable development for the benefit of future generations

As a capital- rather than people- intensive industry, dependent on gas as a finite resource,
sustainability should be at the heart of gas sector policymaking. Sustainable development
policies address meeting the needs of the present without compromising the well-being of future
generations. In satisfying this criteria, the natural gas pricing policy has bridged the gap between
the need for sustained availability of energy at a competitive price and Ghanas aspiration to
become a vibrant energy processing hub that anchors Ghanas accelerated growth agenda. It will
make the development of indigenous gas resources an important part of the future energy mix,
enabling the monetization of gas reserves and maintaining the momentum for investments in the
upstream, gas transportation and power infrastructure sectors.
For the Ghana National Gas Corporation, the careful management of petroleum production and
minimizing environmental impacts are considered part of their principal contribution to the
sustainable development of their country. IOCs investing in the gas sector can assist by sharing
good environmental practice and technology.

3. Enablement to carry out the role assigned

Enablement is a major issue for producers because there is often a mismatch between where
skilled people are concentrated (in the operating companies) and where they are also needed (in
the ministry, regulator or broader government). Likewise, the remit of authority and financial
capacity of an actor may not be sufficient to meet the objectives and responsibilities assigned to
it. For optimum performance, each actor must have access to the necessary means in terms of

authority, financial resources, information, human capacity (skills, knowledge, experience etc.)
and supporting processes. Unfortunately, this policy does provide any clear definition of
enablement of roles assigned.

Conclusion
In conclusion, the principal barriers for investment in the Natural Gas Industry are:

Inappropriate domestic pricing policy heavily influences by gas pricing, for example,

sector policies.
structure of investment- the policy should be structure in accordance with international
best practice.

If gas price is set low, it becomes a distinctive to the upstream sector of the gas industry because
coincidentally, it price would be below the production and supply cost. If gas price is high, it
becomes a disincentive to the downstream sector of the gas industry. There is a need for
government to decide on a gas price that can be set at a level that reflects an incentive for both
upstream and downstream of the industry. This is highly recommended to maintain a supportable
and sustainable system.