Thursday, September 14, 2017

Boakye Agyarko & K K Sarpong Save Ghana $1bn On LNG Deal

6:27:00 AM

The combined superior negotiation skills of Ghanas 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 Ghanas power supply.

The new GNPC LNG deal, involving the worlds 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 â€" 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 â€" 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 countrys 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 Ghanas 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 worlds 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

GNPCs liabilities to Gazprom are backed by a Single Standby Letter of Credit â€" approximately 25% of GNPCs annual take-or-pay liabilities. Gazprom provides a guarantee to underpin the terminals 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 fine 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 worlds largest gas producer and a publically traded company, with annual revenues in excess of $100 Billion â€"  more than twice Ghanas 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.

By Ghana Leaks Blog

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