Officials in Washington are in last-minute negotiations over a compromise deal on the terms of China’s multi-billion-dollar loan to Accra

The International Monetary Fund (IMF) looks set to bend its rules this month to accommodate Ghana’s rush to raise a US$700 million loan from China to build a gas processing plant and pipeline from the two billion barrel offshore Jubilee oil field. Work has to start quickly on the gas project, which has been held up by bureaucratic wrangling, if Ghana is to avoid technical problems with managing the gas from Jubilee.

China’s Sinopec International Petroleum Service Corporation, which is pre-financing construction and engineering work, will be the main contractor for the processing plant and pipeline, with France’s Technip and United States’ Intecsea in support. Engineers are due to start work imminently. The project would give Chinese companies the leading role in the development of Ghana’s gas industry and a guaranteed supply of low sulphur crude oil. This month, the IMF decides on the financing issue. As a condition of a $590 mn. extended credit facility from the IMF signed in July 2009, Ghana agreed to limit its commercial borrowings to $800 mn. a year. The Chinese gas loan would breach that ceiling. Unless Ghana can secure a waiver from IMF directors, it could face financial penalties on its loans with the IMF and the World Bank, which could spark a political row with Accra.

Communications Minister Haruna Iddrisu says the government could break with the IMF over the issue ‘because we are a sovereign country’. An official in Osu Castle says that President John Evans Atta Mills has told Finance Minister Kwabena Duffuor to do everything possible to ensure that Ghana secures the Chinese loan, even at the expense of IMF membership. Some in the governing National Democratic Congress (NDC) want to push ahead with an even bigger borrowing programme from China (see Box, A special relationship in the making).

The most likely outcome is that the $800 mn. ceiling on Ghana’s commercial borrowing will be adjusted to accommodate the Chinese loan, a senior IMF official told Africa-Asia Confidential, but ‘certain procedures would have to be followed’. Yet there could be legal problems if the government signs a final agreement for the loan – as some in Accra are advocating – before the IMF board decision.

Accounting for the gas
Officials from the IMF and World Bank will press for maximum transparency and accountability on the gas project. Both parliament and an independent Public Interest and Accountability Committee are pushing for greater oversight on the management of oil revenues. The Bank is encouraging the government to publish its Public Investment Plan and Medium Term Expenditure Framework, which estimate that some $24 bn. of investment will be needed over the next four years to meet Ghana’s development goals and calculates that much of that will be on commercial terms.

The proposed $700 mn. loan is part of a $3 bn. ‘Master Facility Agreement’ that Ghana secured from the China Development Bank (CDB). It was approved in principle by NDC members of parliament on 26 August. The opposition New Patriotic Party abstained from the vote, arguing the government had not produced enough detail about the projects that the loan is meant to finance. The argument over how to account for the $3 bn. Chinese loan has become a campaign issue a year ahead of Ghana’s national elections in December 2012. Finance Minister Duffuor says the time pressures on the gas project are based on well-founded technical rather than political reasons. But it will be important for  the government to show some benefits on the ground in the Western region, which hosts most of the oil and gas production.

IMF and the World Bank economists have been studying the terms of the $3 bn. loan after officials from Ghana’s Ministry of Finance asked them to assess the implications of the credit. In November, an internal Bank document seen by Africa-Asia Confidential reported that ‘the joint IMF-World Bank Debt Sustainability Analysis, based on critically conservative assumptions, concludes that Ghana’s economy could accommodate the CDB loan without aggravating risks of external debt distress but requires prudent fiscal policy.’ Although the loan would be partly repaid with oil exports, these would be at the prevailing market prices, according to the Bank assessment, and therefore would not be an extra cost on the loan.
 

The Bank report says the gas infrastructure project deserves the ‘highest and most urgent attention’. It adds that the gas, ‘which comes as a by-product to the extraction of oil, is currently mostly being re-injected to avoid flaring in large quantities. However, the capacity to reinject gas will be exhausted in about two years after which time oil production might have to be curtailed or flaring begun.’ The Bank analysts point to the opportunity cost should Ghana fail to process the gas and use it for local electricity generation. They conclude the justification for the gas project, whose full cost is some $1 bn., is sound but describe the timetable for its completion as ‘optimistic’. The acting Chief Executive for the newly formed Ghana National Gas Company, George Sipa-Adjah Yankey, says Ghana should have a pipeline and functioning gas processing plant at Domunli with links to the nearby Aboadze thermal power station by December 2012.
 

Financial returns, the Bank argues, would be much greater if the project included a plant for liquefied petroleum gas (LPG) production. This would generate income that would alone ‘cover 80%, in net present value terms, of the financial costs (interest and principal) to be incurred on the entire $3 bn. amount of the MFA [loan agreement].’ An independent consultant’s report sent to government, and seen by AAC, reckoned the value of LPG produced at Jubilee was about $200 mn. a year. More seriously still, the cost of the Takoradi/ Aboadze power station using oil (which it currently does) instead of gas piped from Jubilee is estimated at $350 mn. a year. This option will provoke substantive discussions, which will have to be taken into account as the government starts to negotiate gas supply agreements with the international oil companies operating in Jubilee. They want to know the price at which they can sell the gas, an increasingly important question with substantial new oil and gas finds in the area.
 

The start-up of the gas processing project is a top priority for the government. It is located near Takoradi, the capital of Western region, which will see one of the most closely fought contests in next year’s elections. The government has already had to scale back some ambitions for the gas project. The plan was to run a gas pipeline from Jubilee to Bonyere and build a processing plant (see Map) and a 200 MW-power station, around which a cluster of local industries would develop. An onshore pipeline was then to be laid from Bonyere to the 550 MW-Aboadze thermal power station, which will be converted to use gas as well as fuel oil.
 

Time pressures now mean the pipeline will run straight from Jubilee to a processing plant at Domunli, next to the Aboadze power station. The development plans at Bonyere will have to wait. Changing economics may dictate that only a power station, and not another gas processing plant, is built there. That will greatly disappoint the chiefs of the Western Region, who have been pressurising the government to maximise the job creation and industrialisation impact of the gas development plan.

Source: AFRICA-ASIA CONFIDENTIAL