WHY ARE CHINESE FIRMS SNAPPING UP ENERGY DEALS IN AFRICA?

Introduction
Chinese investment and interest in Africa has been well documented. The Sino-Africa engagement over the last decade has been so intense that some commentators have labeled it as a form of ‘neo-colonialism’, that is a new form of colonization to exploit Africa’s natural resources. Chinese-African trade stood at $12billion in the year 2000 but over a decade later, the figure rose to an astonishing $200billion a year.

 A look at the nature of the investments reveals that apart from infrastructure projects, which Africa badly needs anyway, there is a trend towards energy deals in the form of constructing energy plants with attendant supply terms favourable to China, to snapping up minority stakes in Western energy firms.

With a population of 1.6billion, the demands for petroleum and gas to satisfy its huge energy needs are immense. China rose to become the second biggest economy after the United States in the last five years. Backed by government funding, no expense is spared in securing deals to ensure regular energy supply and outbid Western companies, who formally used to dominate the hydrocarbon industry. A sample of some of the energy deals in selected countries reveals the true picture.

Ghana
Ghana discovered oil in 2007 in the Jubilee oilfield and in 2010 began commercial production of same. There are four Jubilee partners-Tullow Oil (British), Kosmos Energy (American), Anadarko (American) and Sabre Oil, Petro SA (now South African). There were no Chinese firms.
But the Chinese found other ways to join in the party. When Ghana wanted to build a new gas processing plant to increase the country’s energy supply, Chinese firm Sinopec won the $750million project. The funds will be supplied as part of a bigger $3billion loan to the Ghana government from the China Development Bank. Information published by local media show that part of that agreement includes Ghana supplying a certain quantity of the oil produce to China.

Ghana is also building a 400MW, $980million hydro-electric dam at Bui, in the Brong Ahafo region. It is being built by Sino Hydro, another Chinese company. Shenzhen Energy Group (SEG), the mother company of Sunon Asogli — an Independent Power Producer in Ghana’s power sub-sector, has announced it is to build a 700MW coal power plant in the country. Sunon has already built a 200MW gas plant in Ghana, together with a few private Ghanaian firms.

Nigeria
In December 2012, Nigeria signed a pact with Sinohydro-Cneec Corporation, a synergy of two Chinese firms (Sinohydro Corporation and China National Electrical Equipment Corporation), to build a 700MW Hydro Power station on the Northern Zungeru River, Niger state. The project is expected to be 163 billion Naira (about $1 billion).
In July this year, Nigerian president paid a visit to China and signed a raft of deals totaling $3billion. Part of the funds will be channeled into a new power plant.
China’s demand for crude oil produced in Nigeria is expected to rise tenfold to 200,000 barrels a day by 2015, according to information provided by a team accompanying the Nigerian president on that visit. A number of Chinese companies are already active in the Nigerian petro-chemical sector.

Kenya
Just last month, Kenyan president, Uhuru Kenyatta, who is snubbed by Western governments because he and the county’s Veep, William Ruto are under investigation at the International Criminal Court, visited China. He was welcomed with a red carpet and a 21 gun salute. Uhuru secured $5 billion (3.7 billion euros) of infrastructure deals with China and a statement by Kenyan officials said “the deals include a batch of energy projects”.
In another development, China Hydro-Power Company will next month, begin preliminary work for the construction of an electricity dam in Kenya.
The project, which is situated at Uasin Gishu county and cost an estimated Sh30 billion ($342 million), would help reduce high production cost in country, already East Africa’s biggest economy.

Uganda
In July ths year, Reuters reported that Uganda has awarded a Chinese firm a contract to build a new dam and power plant on the Nile. The latest 188-megawatt hydro-electric project, the Isimba hydropower dam, would be developed by China International Water and Electric Corporation (CWE) and China’s Export-Import Bank would give Uganda another loan worth $500 million, which would be on concessional terms.
Earlier in June, Uganda gave China’s Sinohydro Group Ltd a contract for the east African nation’s biggest power project yet, Karuma Hydropower, also on the Nile, at a cost of $1.65 billion, partly financed by a $500 million Chinese loan.
Uganda is due to start commercial production of oil in 2016.

Mozambique
Italian energy group, Eni, in July this year completed the sale of a 28.57 percent stake in its East African unit to China National Petroleum Corporation (CNPC).
Eni East Africa previously controlled a 70 percent stake in the Area 4 block of the Rovuma basin, in northern Mozambique, next to the Tanzanian border.
The 20 percent sale to CNPC is at a cost of $4.21 billion. While the Chinese group now has an indirect 20 percent stake in the oil block, the Italian company will remain as lead operator with a 50 percent share.

Egypt
Only last week, China’s state-owned oil major, Sinopec, acquired 33 percent of the Egyptian oil and gas unit of US-based Apache Corp for $3.1 billion, according to the Wall Street Journal.
“Through this partnership, Sinopec is able to enter the upstream oil and gas sector of Egypt for the first time and expand its international upstream portfolio,” Sinopec said in a statement.
The company said the transaction will see its production surge by 130 000 oil barrels a day, or 6.5 million barrels a year.

Conclusion
China became the third-largest investor in mergers and acquisitions in Africa, favouring the oil and gas sector, according to a report by international law firm Freshfields Bruckhaus Deringer that came out this month showed.
Well if the accounts from the various countries are anything to go by, the trend is set to continue.

Ghana's Supreme Court Election Verdict and Investor Confidence

Published August 29, 2013
 




Ghana’s Supreme Court this afternoon by a majority decision affirmed the December 2012 election of the country’s president, John Mahama. The presiding judge of the nine member panel said that “the first respondent (president Mahama) was validly elected”.

President Mahama, 54, of the National Democratic Congress, won 50.7 per cent of December’s vote, according to the Electoral Commission of Ghana, against 47.7 per cent for Mr Akufo-Addo – a difference of 325,863 ballots.

The opposition New Patriotic Party (NPP) led by its flagbearer Nana Akuffo-Addo had petitioned the country’s highest court to invalidate the win of John Mahama, claiming widespread irregularities. The party presented strong evidence from about 10,000 polling stations across the country to back its claim.

The petition which took over 7 months to be decided was for the first time broadcast live on television and radio, giving Ghanaians access to the proceedings in the court room. The petition hearing even took a professional twist when auditors, KPMG, were tasked to count and tally some ballot result sheets that were tendered in evidence by the petitioners.

This has been hailed as a rare feat in Africa, a region with many conflicts arising out of electoral disputes. Ghana’s neigbhour Ivory Coast experienced war when it went to the polls in 2011. In the end 3,000 people die with many injured.

Thus the peaceful and mature way Ghana has handled its electoral dispute in court and its subsequent verdict will be admired by many countries in Africa.

The country’s courts are noted for their independence, thus making it impossible to predict what the eventual outcome was to be. In the over seven month’s that the case has been ongoing, it has been reported that major investor decisions have been delayed-pending the outcome of the electoral petition.

Ghana, which is expected to grow at 7.8% this year, according to the IMF, has been affected by the long drawn court case. The Ghana Stock Exchange is up 65 per cent in 2013, but analysts say investors have delayed making decisions about projects.

“At the beginning of the year investors were carrying on as normal,” “but when people saw that a solid case was being presented, they put the brakes on,” said Kissy Agyeman-Togobo, partner at Songhai Advisory, a West African business intelligence consultancy in an interview with the Financial Times.

In May this year, when the election petition had gained momentum, Ghana’s central bank governor, Dr Kofi Wampah revealed that the economy had slowed down heightened by fears of a growth in inflation.

Indeed inflation which stood at 9% before elections in December last year, has risen to 11.8% by July 2013.

Wampah said the bank’s Composite Index of Economic Activity (CIEA), which measures the pace of economic activity, had declined by 0.6 percent in May after a 14.8 percent growth in March. The period also saw all the components of the CIEA recording negative yearly growth rates with the exception of tourist arrivals, domestic VAT and DMBs’ credit to the private sector.

“The pace of growth in credit to the private sector has also moderated, while the credit stance of banks has tightened,” Wampah said in his the monthly monetary policy report presented in May.

The Business Confidence Index declined to 99.0 in March 2013, from 104.1 in December 2012. Wampah attributed this partly to the energy crisis, which he said had lowered business confidence. “Similarly, the Consumer Confidence Index also fell to 96.1 in April, from 105.0 in January 2013,” he added.

However, the energy crisis has stabilized with regular supply of electricity, with businesses and the manufacturing sector heaving a sigh of relief. Ghana’s 400MW Bui Hydro dam which is under construction by Chinese, is expected to be ready by December, further increasing the electricity supply.

With the electoral petition out of the way, investor confidence is expected to return. Ghana went to the international markets last month to float a $1million Eurobond which was over-subscribed by $1.2 billion. The bond has been listed on the Irish Stock Exchange.

A similar local bond floatation last week was heavily oversubscribed by 17%, a further demonstration that confidence in the economy is still there.

Ghana, Africa’s second biggest producer of gold also saw decreased revenues in the first half of this year, due to the falling price of gold. However gold prices have slowly began climbing up. With an expected increase in oil production from the country’s Jubilee field together with the introduction of new taxes, the economy is expected to rally strongly by year end.

The government has hinted of possibly going to the international market to seek another bond by year end, to fund critical infrastructure projects.

This week, Mazars Limited, the world’s ninth biggest auditing firm, launched operations in the country. Many such companies, who had been waiting for the election petition outcome, are likely to follow suit.

Local Content in Ghana's Oil and Gas Industry: Which Way Forward?

A new wind of change started sweeping through Ghana when the country poured its first oil in the last quarter of 2010 from its Jubilee oil field. The oil field is estimated to hold 1.8 billion barrels. Initially it was planned that within the first year of production 120,000 barrels per day (bpd) was to be produced, with the production ramping up to 250,000 bpd at the production peak a few years later. It currently produces about an average of 110,000 bpd.

Many people predicted the involvement and participation of local businesses in this sector, as it would directly impact on the socio-economic status of Ghanaians. This dream has not been fully realised till date. Local content has become a daily public outcry.

What is Local Content in the first place?

Local content is defined as the development of skills, technology transfer, use of local manpower and local manufacturing. In other words it involves the use of Ghanaian local expertise, goods and services, people and business in the operations of the oil and gas industry.

Many countries which are into oil and gas production are setting up requirements for ‘local content’ into their regulatory frameworks. These requirements aim to create jobs, promote enterprise development and accelerate the transfer of skills and technologies. Local content has therefore become a tactical issue for the oil and gas industry—presenting both challenges and opportunities.
In local content policy formulation, there is a phenomenon called Margin of Preference. Margin of Preference refers to the extent to which a person or group is given favourable treatment over others with the rationale of making that person or group more competitive.

In May this year, the Ghana government approved a second oil field called the Tweneboa, Enyera and Ntome (TEN). The TEN oil project is expected to produce about 80,000 barrels of oil per day when production finally begins in 2016. The field is located on Ghana’s Deepwater Tano Block which according to appraisal reports contains over 200 million barrels of oil.

Partners in the TEN projects are Tullow, Kosmos Energy, Anadarko Petroleum, Petro SA and GNPC. These are the same partners operating Ghana’s Jubilee field.
On June 6th this year, the Ghana Cabinet approved a new Local Content Bill for the Oil and Gas sector. The Bill which is a Legislative Instrument (LI) has been sent to the country’s parliament for approval into law. Parliament is yet to approve it.

After cabinet introduced the bill, Ghana’s Minister of Information and Media Relations, Mahama Ayariga, outlined some of the highlights in the bill.
“The key highlights of the policy include; that priority should be given to Ghanaians in the granting of licensing and agreements in the petroleum sector in all operations, where foreigners want to be involved they must partner with Ghanaians who should carry at least a five percent equity interest and that is reviewable at the pleasure of the Minister given certain circumstances.”

“Also there is an elaborate reporting procedure which requires that the companies use local services and products manufactured by Ghanaian companies and they must also make investments in research and carry out programs aimed at technology transfer to Ghanaians,” he stated.

This week the Minister for Petroleum and Energy, Emmanuel Kofi Buah advised the partners operating in the TEN project to start rolling out local content projects immediately.

The Ghana National Petroleum Corporation (GNPC), a state oil exploration company that also licenses firms seeking to participate in oil exploration in the country, has set an ambitious target to achieve full local participation in all aspects of the oil and gas value chain of at least 90% by 2020.
The absence of the local content law could deny many local businesses from expanding and growing. For instance, Tullow Oil is reported to have abrogated its air transport contract with CityLink – a Ghanaian owned airline company – and opted for Noordzee Helikopters Vlaanderen (NHV) of Belgium for the transportation of personnel and cargo of the oil company to the offshore Jubilee platform. Citylink has ceased operations and is going through merger talks with EgyptAir. It is not clear whether Citylink’s loss of the Tullow contract has anything to do with the former’s struggles.

Indeed, in October 2010, the Ghana News Agency (GNA) reported that, oil riggers and offshore workers petitioned the GNPC against what it termed discrimination in the award of contracts for oil rig operations on the Jubilee oil field.

According to the GNA report, the oil riggers alleged that companies like Menergy Oil, O & L Trinity and Sea World which had been registered by the GNPC to employ artisans such as motormen, floor men, caterers, crane drivers, badge masters for oil rigs operating in the oil fields were rather employing foreign nationals; especially, Nigerians instead of local artisans who were equally qualified.
The Association of Ghana Industries (AGI) is on the heels of Government to cede some of the contracts in the oil and gas sector to local enterprises in order to promote the growth of the local industries. According to its President, Nana Owusu-Afari, the subject of local content in the oil and gas sector continue to be a very serious issue that government cannot ignore.

In all this, the question that needs to be asked is that, when given the opportunity, do Ghanaian locals, firms and businesses have the capacity to meet the challenge? The implementation of the local content bill must be gradual and collaborative, in my view, to lead to technology transfer and boosting of local capacity. Its pursuit should not be done in a blanket manner.

Tullow Ghana Sees Increased Revenue

Last week British independent oil and gas explorer, Tullow Plc released its half-year (H1) results for 2013 and it was a mixture of both good and moderate news.

Its subsidiary Tullow Ghana Limited is the lead operator in Ghana’s Jubilee oil field. The parent company, which also has operations in several African countries including Ivory Coast, Uganda, Kenya and Gabon makes headline news in Ghana due to the country’s vibrant media who take an interest in the oil and gas industry.

Tullow, whose Ghana operation contributes 40 percent to the group’s total production, saw a 15% increase in revenue to $1.5billion due to higher volumes. Operating cash flow before working capital movements exceeded $1billion in the first half of 2013. Tullow group’s average production was up 14% to 88,600 barrels per day (bpd) over the same period last year.

The first six months of the year has seen reduced imports from China, a major crude oil buyer as well as reduced oil imports by the world’s biggest economy, the United States, due to its increased production from shale gas (known as fracking) production. In the light of these developments, Tullow’s results make good reading.

However not all was rosy for the London, Irish and Ghana listed firm. The groups operating profit reduced by 40% in the first half of the year whiles profit after tax fell from $834m to $500m, a reduction of 45 percent. The statement explained that the reduction was partly due to increase in operating costs. Earnings per share also fell by 40% although a dividend of 4p per share was paid to shareholders, the same as H1 2012. The Tullow statement said the financial results “were in line with market expectations”.
When Ghana began oil production in commercial quantities in 2010, production was meant to be an average of 120,000 bpd but technical challenges with some oil wells in the Jubilee field meant that actual production was in the range of 80,000-90,000. Disappointing as it was to ordinary Ghanaians and officials, it helped to lower expectations about the country’s oil find. Many observers feared that an obsession with the oil sector will make the managers of the economy to neglect the non-oil sectors like gold, manufacturing and agriculture.

After Tullow Ghana and its Jubilee partners namely Kosmos Energy, Anadarko Corporation, Ghana’s state-owned GNPC and Sabre/PetroSA were able to fix the challenges with the oil wells, production inched up to 110,000 bpd. Although this production level is modest by African standards considering neigbhour Nigeria, Africa’s largest oil producer, pumps 2million bpd, Tullow production is still significant and a major foreign exchange earner for the country.

Ghana, Africa’s second largest producer of gold and the world’s second largest producer of cocoa (main ingredient for chocolates) experienced a budget deficit of 12% by the end of 2012. This was mainly due to high pre-election spending in the lead to national elections in December last year. The target of the state finance officials is to reduce the deficit to 9% by year end 2013.

New taxes have been introduced in the first half of this year and the country floated a Eurobond on the international market which raised $1million, all in a bid to reduce the fiscal deficit.
As a result, Tullow Ghana’s H1 results and increased revenue was welcome news to managers of the economy. Specifically, Dr Henry Wampah, the governor of the Bank of Ghana, the country’s central bank and regulators of the financial industry, announced last week that Ghana’s “oil exports increased by 47.7 percent in 2013 to US$2.0 billion as a result of increased production by the Jubilee Partners”.
For the second half of the year however, production is expected to reduce to an average of 95,000 because the company is due to shut down the FPSO Kwame Nkrumah in September to fix a problem identified with a pump on the FPSO.



“A recent water injection pump failure on FPSO, which will be replaced before year-end, and a decision to extend the planned maintenance shutdown period, will however have a short-term impact on production in the second half of 2013”, the Tullow statement explained.

In May this year, the Ghana government approved a second oil field-TEN- to be operated by Tullow and its partners. The company says the overall development cost of the field is $4.9billion and oil production should start from middle of 2016. The statement said it intends to “farm down its current equity in the TEN Development and Production Area in Ghana, in return for a development carry from the TEN Project”.
Already the company has awarded a contract to Japanese firm MODEC, to build a second FPSO for the TEN oil field.

Certain actions of Tullow show its commitment to the country in the long term. A new CEO to head its Ghana operations, Charles Darku, a Ghanaian will assume office in the middle of this month, replacing Dai Jones who is heading to the firm’s headquarters in London. The listing on the Ghana’s local bourse to allow citizens to own shares is another. Additionally, news is making rounds in the local media that Tullow is in negotiations with Ghana government to upgrade and operate a shipyard in the country’s main port of Tema on a build, operate and transfer (BOT) basis.

Ghana, a middle income country that contributes 40% to Tullow’s group oil production, has a promising hydrocarbons industry, as bright as the afternoon tropical sun.
Commenting on its H1 financial results, Aidan Heavey, group CEO of Tullow, said “I am confident we are well placed for future growth and value creation.”

Falling Gold Price Worries Ghana's gold Industry

Ghana last year produced 4.3 million ounces of gold in 2012, a record for the country. This led to increased profit for the 14 mining companies operating in the country, revenue to the government in the form of foreign exchange and taxes, and also contributed to economic growth as a whole. Of course this was when gold prices were on their longest surge in nine decades.

How a few months can change everything. Prices of the precious metal have taken a tumble on the international market. From a record $1,794 per ounce about a year ago to $1,323 last week, spot price of gold has lost a value of $471 in the last eight months, its worst run in over thirty years. This fall in price has hit hard economies that depend on the precious commodity like Ghana, which is Africa’s second biggest producer of gold, behind South Africa.

So what reasons account for this spectacular dip in prices? First is a slowdown in Chinese commodity imports specifically and the Asian nation’s economy in general. China is the world’s second biggest buyer of gold, only behind India. China is set to overtake India this year as the largest buyer of gold in the world, data from the World Gold Council reveals. China last month launched two gold Exchange Traded Funds (ETF), for investors to trade in paper gold.

China’s remarkable economic growth of over 10 percent in the last decade has been tied to the fortunes of commodity suppliers in Africa like Ghana, South Africa, Democratic Republic of Congo, Zambia and others. The International Monetary Fund (IMF) cut its forecast for China’s economic growth this year to 7.8 percent from 8.1 percent, and downgraded its GDP prediction for 2014 to 7.7 percent from 8.3 percent. This is mainly due to the new leadership in China’s desire to re-structure the economy from an export-driven one to a domestic consumption-driven model.

The slow recovery in the economies of the United States and Europe has also not helped. China typically imports raw gold, refines it into jewellry and other products and then exports them to these western nations. Slow demand for luxury gold items from these western countries has led to China also reducing its imports of the precious metal.

Global supply of the commodity has also outstripped demand and the consequence has been falling prices, just as global inflation has also reduced. Global reduction in inflation means gold’s value as a hedge against rising prices has also reduced.

All these global happenings have served to have a knock-on effect on Ghana’s gold sector. Mining is Ghana’s main foreign exchange earner and in 2012, contributed 27% to government revenues, according to the Alhaji Inusah Fuseini, the Minister for Lands and Natural Resources. The falling gold price is thus watched with depressing eyes by observers and stakeholders in Ghana.

It translates to revenue loss for the Ghanaian government in foreign exchange and taxes. Although Ghana, which is expected to grow at 8% this year, became an oil producer in 2010, gold is still the dominant earner for the West African country. The Monetary Policy Committee of the Bank of Ghana, the country’s central bank, last week released figures to show that export earnings from gold for 2013 was estimated at US$2.7 billion, compared to US$3.2 billion in the same period in 2012 due to lower prices and volumes.

The government’s fiscal budget deficit was 12% at close of 2012 and this year the finance ministry has set a target to reduce it to 9% by close of this year. The falling gold prices and reduced revenue from other sources forced the imposition of taxes on various sectors including banking, telecommunications, and agriculture and even on condoms (jokingly renamed as “Sex Tax” by sections of the local media).
In the budget statement this year, the government proposed a 10% Windfall Tax to be imposed on mining firms but the depressing gold prices is sure to make the government shelve the idea.
Additionally the government went to the international market to raise capital through a $1 billion Eurobond. It was over-subscribed.

The challenges in the local gold industry, which made international headlines most of this year for the illegal Chinese gold miner arrests and deportations is having other effects.
Johannesburg Stock Exchange-listed miner, Anglogold Ashanti, one of the largest in the country and largest employers announced in July it was laying off 430 miners in its Obuasi mine in the next three months. Mark Marcombe, Anglogold Ghana’s Senior Vice-President said it will be done with a human face.
“Extensive engagement and consultation is underway with the union, the workforce, the Government, and with the community”, he said.

Dr. Tony Aubynn, the president of the Ghana Chamber of Mines, an umbrella body representing all mining companies in the country, shared similar concerns.
“Most companies tend to review their strategies on staying viable and if the behaviour of the gold price does not improve, there could be cost cutting, which may affect employment in the sector as well”, Aubynn explained.

Goldfields Ghana Limited, another South African miner and one of the most profitable, last week appointed Mr Alfred Baku as its Head of West African Operations. He is the first Ghanaian to assume the position and will double as the group’s Senior Vice-President. West Africa contributes 40% to its group output. His appointment is seen as a way of helping to cool down tensions in its Ghanaian operations after workers went on strike this year, accusing the managers of racism, a report in South Africa’s Business Daily suggests.
But it is not all gloomy. Anglogold is set to invest about $200million this year in its Ghana operations which Mr. Morcombe said is intended to modernise the infrastructure and reverse rising costs and low production.

Experts have called for the country to also add value to the gold produced instead of just exporting it in the raw form. It was thus welcome news when it was announced that the continents only third gold refinery-Asap Vasa Company Limited- was seeing increasing activity. The company refines 100kg of gold daily. Although it is smaller in refining capacity compared to Sudan’s 900kg refinery and Randgold’s in South Africa, the indigenous firm’s owners have high hopes for the future.
Henry Vroom Parker, the CEO of Asap Vasa said the company, also refines silver, refined 45,000 ounces of gold last year and 60,000 in the first half of this year. On the company’s future plans, he said their vision is to “become the foremost West African supplier of refined gold and gold alloy products to local and international markets”.

In the 2013 ‘Ease of Doing Business” listings, Ghana was ranked the 64^th out of 185 countries in the World Bank’s index, making it the fifth easiest country to do business in sub-Saharan Africa. Despite lower gold prices currently, a stable government, and relatively skilled and cheaper labour costs mean investment in the country’s mining sector still holds very good prospects in the long term.