WHY THE OIL SECTOR IS LOSING BILLIONS IN REVENUE DURING THE COVID-19 ERA
23 July 2020
The discovery of oil has often not only triggered jubilation rather but also igniting optimism for economic development in developing countries. In developing countries, where oil is produced, most of these countries are known to be oil-reliant countries. Being an oil-reliant economy indicates that oil is considered a significant contributor to economic development. However, the puzzling consequence is encountered in the exploration and production of oil in developing countries. Such puzzling consequence is ascribed to the fact that, despite the massive endowments in petroleum resources, some developing countries have invariably maintained either the same or a slight surge in gross domestic product. In the year 2020, a new puzzling pandemic (coronavirus) is affecting the world upstream oil exploration.
According to the International Energy Agency (IEA), global oil demand is projected to decline as a result of the coronavirus (COVID-19). The latest oil market forecast, which estimates annual demand at 99.9 million barrels a day in 2020, has experienced a decline in 90,000 barrels a day from 2019. The IEA’s scenario-based analysis on global oil demand indicates that, in a lower case scenario where global measures fail to contain the virus, oil demand will fall by 730,000 barrels a day in 2020. In a more optimistic high case scenario where the virus is contained quickly around the world, global oil demand will grow by 480,000 barrels a day.
Comparing these two scenarios with the real-world impact of COVID-19 on a global scale, it is obvious that the world is experiencing a low case scenario. Operating under the low case scenario connotes losing billions in oil revenues. Against this backdrop, it is not surprising that the novel COVID-19 has hit Ghana’s energy industry hard as Ghana’s oil sector contribution to economic growth is in steep decline.
The oil sector continues to suffer significant effects on the economy as well as work obligations and operations. Companies in the oil and gas sector had to devise a comprehensive plan to enable employees to work remotely. Recently, the petroleum commission has announced GH¢5.7 billion loss in revenue. Although the far advanced countries are also reporting a loss in revenues, Ghana needs assessment criteria on why the state is losing billions in revenues during the COVID-19 era.
A critical assessment of Ghana’s oil sector situation requires researching upstream oil explorations before and after the COVID-19 pandemic. It is against this backdrop, that the team of researchers at the Centre for International Maritime Affairs, Ghana (CIMAG) has identified two most important reasons for losses in oil revenues.
The postponement of the Pecan Development Campaign has had an adverse effect on Ghana’s revenue in the oil sector. Pecan oil field is an ultra-deepwater field to be developed in 2,667m-deep waters in the Gulf of Guinea, offshore Ghana. Pecan oil field is estimated to contain approximately 334 million barrels of oil-equivalent representing the biggest discovery in the deep-water Tano Three Points (DWT/TP) block within the Tano Basin. The deep-water offshore field is estimated to cost $4.4 billion, which is expected to bring on-stream in 2021. Aker Energy’s final investment decision (FID) for the Pecan field development project had been placed on hold, postponing the project with no new date set for recommencing. The postponement of the Pecan oil field development which is expected to boost oil production and exploration in Ghana has adversely impacted revenues generated from the oil sector.
The coronavirus pandemic and the collapse in oil prices have created a monstrous calamity for countries heavily reliant on oil production for their economic survival. Oil prices have seen wide price swings over the past decade, whether it is due to an apparent shortage, oversupply, or a pandemic. Oil prices have a key impact on trade for both import and export-driven economies.
The magnitude of oil prices’ impact on inflation, the balance of payments, investment, unemployment, etc., affects economic development positively or negatively. Thus, several general observations are required in the COVID-19 era. The COVID-19 era recently brought a fall in global oil prices. The recent fall in oil prices below US$30/bbl saw a drop in oil’s contribution to gross domestic product and government revenues. Major oil exploration players have either stopped or requested a postponement in operations. For instance, Aker Energy has requested a postponement in delivering their final Plan of Development (PoD) and have also cancelled some of their long lead development contracts. The current slow down of oil and gas operating activities has also adversely impacted oil revenues.
In conclusion, the global oil sector is experiencing turbulence. Oil industries in Ghana would require adequate regulatory and policy-driven support from the Government of Ghana (GoG). In the short-run mainstream oil companies would have to resort to cash reserves to curtail the financial turbulence they are experiencing.
Furthermore, as revenues from the oil sector are projected to decline in 2020, the GoG will have to channel investments in other sectors of the economy to recoup revenues to boost economic development. CIMAG projects that Ghana will continue to lose billions in revenues due to the COVID-19 pandemic thereby, pushing the oil industry to the Intensive Care Unit (ICU). Also, it is best if the Pecan Development Campaign aimed to boost oil production and its associated revenue recommences. Finally, during the COVID-19 and beyond, policymakers in the oil sector should devise systematic strategies to curtail any future pandemic that may affect the survival of Ghana’s oil sector.
ALBERT DERRICK FIATUI is the Executive Director at the Centre for International Maritime Affairs (CIMAG). He holds a bachelor degree in Integrated Development Studies from the University of Development Studies. He holds an LLB (Law) from the Mountcrest University College and a postgraduate certificate in Health Safety & Environment.
He holds a certificate of proficiency in customs procedures & port operations. Currently, Albert is a Director in charge of Business Development at the Logical Maritime Services Limited, a privately held global logistics company. With extensive research, policy and advocacy backgrounds', Albert serves on numerous boards within the maritime industry.
BISMARK AMEYAW (Ph.D.) is the director of research and advocacy at the Centre for International Maritime Affairs (CIMAG). He is a director of international relations and research development at the African Center for Strategic Business and Entrepreneurship Development (ACSBED).
He specializes in modelling and forecasting the dynamic links in energy, economics, and the environment. He also takes a keen interest in the Ghana maritime industry and entrepreneurship development. He writes, teaches, and consults on energy and maritime-related issues. He serves as an editorial board member and a reviewer for several Zone A academic journals.
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