A B&FT interview with Alex Mould

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In this question and answer session, Alex Mould, a former Chief Executive Officer of the Ghana National Petroleum Corporation and the Ghana National Petroleum Authority, explains the impact of the novel Coronavirus on Ghana’s economy, why consumers will enjoy cheaper fuel and how the country could make the most from the Heritage and Stabilisation Funds, among others.

B&FT: What do you make of the COVID-19 pandemic and its impact on the global oil market?

Mould: Before the intense spread of COVID-19 to the rest of the world, this year had already started as an interesting one for the oil industry. We observed a production war between Russia and Saudi Arabia-really a war between Russia and USA; which led to over-production and consequently, the immediate collapse of the oil price to as low as US$20 per barrel.

Now in the heat of its spread, the pandemic has effected a 2 percent slowdown in development of all economies globally – with of course, some countries being hit harder than others. Global consumption has dropped from a high of about 90 million barrels/day to less than 70 million barrels/day, which is a tremendous impact to the supply and demand curve guiding the oil industry.

This drastic slowdown of oil and gas demand, coupled with the impacts of a brutal price war among the powers that be, has the industry struggling to maintain the status quo in comparison to the recent past. There were calls last week for a truce between these producers which needed the Organization of the Petroleum Exporting Companies (OPEC members) to all agree on supply cuts. This seems to have been somewhat successful, as prices have risen to over US$30/bbl, and should remain in this range ($30-40/bbl) for the next 2 months should these producers adhere to the supply-cuts agreement. The rest of the world will have to wait and see if all parties in this cartel comply; something that’s very difficult to do.

In addition, the pandemic will lead to a recession of sorts in most countries, with the level of impact varying as a result of government’s ability to manage the economy while their countries lockdown, and stimulate the economy thereafter in the “new normal”.

The oil and gas industry like all others will have to patiently wait as demand begins to rise slowly as the world reopens and gains a foothold on managing the virus.

 B&FT: What are some of the implications of the current oil prices for Ghana?

Mould: Ghanaian consumers should see the price at the pump drop. I estimate that we could see the pump price go as low as GH¢3.50 per litre if oil prices remain in the US$20-25/bbl range and GH¢4.00 per litre if prices rise to US$30-35 range. However, all this is dependent on whether or not our cedi remains stable in the current fx range of GH¢5.5-5.8 per US Dollar.

On the oil revenue side, with an estimated production of 77m barrels of oil and 86,000m BTU of gas – which is equivalent to 14.4m barrels of oil – from our three producing fields, Ghana will likely see our oil revenue excluding corporate taxes (which itself will drop from approximately US$500m to less than US$100m) will drop from US$1.1bn to less than US$600m by the end of 2020. As a result, the net revenue to the Government of Ghana will be less than US$300m after GNPC pays for its share of development costs, ie Equity Financing Cost;

So, the oil contribution to the country’s GDP will drop by US$2.5bn this year and contribution to government revenue will also drop by nearly US$600m (approximately 50% of what was budgeted).

Also we have seen a slowdown in O&G activities (Rig count is at its lowest in 10 years) with some development projects delayed and some oil service contracts rescheduled or postponed.

In Ghana, with the airports shut to commercial airlines, special flight arrangements have to be made to keep our production FPSOs on our 3 oil fields manned.

Some major exploration players have stopped short of citing Act of God or Force Majeuer. Aker for instance, has requested a postponement to deliver the final Plan of Development (PoD) and has even cancelled some of its long lead development contracts.

We are bound to see a rising number of legal cases for compensation of these postponed or cancelled contracts.

B&FT: What lessons can Ghana take from the COVID -19 crisis and the current low oil prices?

Mould: This is a time to reflect on government revenue risk management with respect to our oil production.

There should be a policy to take out price insurance (hedge using financial derivatives) on a certain percentage of our oil using the benchmark price (floor price) as determined by our Petroleum Revenue Management Act (PRMA).

We need to review our stabilization and heritage funds. What are their objectives? Should more money be allocated to them? It is the perfect time to take a second look at restrictions on what instruments these funds can invest in; as we need to improve on our investment strategies. To do that means we need qualified fund managers and investment officers.

Take the Norwegian Sovereign fund for example, which is one of the world’s richest Sovereign Funds. Part of their funds are invested in local oil companies, and they actively trade and change its portfolio investments.

Yet in our case, due to the restrictions on the type of investments the Ghana Sovereign Funds are permitted to have, we have been averaging an investment return of between 0.5-1.25% per annum which is unacceptable. For instance, we are only allowed to invest in Organization for Economic Cooperation and Development (OECD) government financial instruments and cannot even buy our own Ghana Government Eurobonds which gave a yield (rate of return) of 8.5% when originally issued in January.

Our Eurobonds are trading at its lowest since issuance, at 70percent of the original price – which gives a yield (rate of return) of 12+% – so this is a good time to invest in them especially for the Heritage Fund as the maturities of these Eurobonds are 30+ years.

Another opportunity could also have been to take advantage of the 88percent drop in Tullow’s price which is the closest traded proxy to owning part of the oil fields in Ghana.  An investment of a portion of the Heritage fund in Tullow (and/or Kosmos) shares when the price fell to 10p would have yielded a 200percent return on investment as the share price is now above 30p, and far below the highs of £2.50 we saw a year ago.

B&FT: In your opinion what can be done to lessen the impact of low oil prices on the economy?

Mould: From a consumer perspective, low oil prices should translate to lower fuel prices, which then translate to reduced transportation costs, cascading to a reduction in the cost of goods and services i.e. food.

The good news for consumers of petroleum products is that we have seen prices drop from GH¢5.3 per litre in February to the current price of approximately GH¢4.3 per litre (April 2020).

The bad news though is that government, with oil prices below US$30/bbl, will experience a drop in oil’s contribution to GDP and government revenues. This slow down on the economy will severely affect government’s discretionary spending; and the impact will be felt on many of its infrastructure and capital expenditure projects e.g. roads. Which may in turn impact consumers’ costs, if not managed appropriately.

Hence, government will have to seek opportunities for strategic cost-management measures and enact them i.e. reduce its wage bill by rightsizing non-essential workers, as there has been a huge increase in the workforce especially in the parastatals. It also goes without saying that the large number of political appointees may have to be down-sized as well. Yet another cost-management opportunity for government is to rationalize all subsidies especially in the power sector.

B&FT: What do you make of government’s proposed utilisation of the Heritage Fund?

Mould: Touching the Heritage Fund should be the absolute last option, and every government should resist the temptation of doing so irrespective of the cost of raising money elsewhere.

Nonetheless, terms constituting such dire emergency situations to leverage the Heritage Fund need to be defined and agreed to, with a strong burden on government to prove beyond any doubt that they have exhausted all avenues to reducing costs and raising funds; only then should there be a national referendum to decide if these funds can be touched.

Presently with the situation of the COVID-19 pandemic, if all options to raise money are exhausted and government is in a total bind to save human lives in the midst of this crisis, then in my view, the Heritage Fund should only be used as a bridge financing facility or a temporary line of credit to government. This means that government must commit to, and replenish these funds within a clearly predefined repayment timeline with a dedicated source of funding– our future generations are counting on us for this.

B&FT: Would you say that the attempt to utilise the Heritage Fund shows that as a country we are highly exposed to shocks, or ill-prepared for tough times?

Mould: In my opinion, the Finance Minister’s mention of the drawdown of the Heritage Fund, was not genuinely intended to generate approvals/buy-in to touch the fund on an immediate basis. I believe he mentioned it to prompt a debate amongst our law makers, and to test Ghanaians’ response to a possible drawdown of the fund, if serious considerations need to be made as a result of financial hardship in the country.

When an institution (i.e. government) experiences a revenue shortage, the most prudent thing for the person in charge of finance to do, is to rally all the various heads of departments (in government’s case the Ministers), to review budgets and institute draconian cuts in expenditure. This must include recurring and discretionary expenditure. The government should focus more on operations and maintenance expenditure, and postpone all new infrastructure and non-core expenditure i.e. the nice-to-haves.

Since the government has not fully completed such cost-management activities there should be no mention, as yet, of utilizing the Heritage Fund. Any discussion, at this stage, of utilizing the Heritage fund denotes a fragile economy that is unable to withstand the stress tests of shocks to it.

B&FT: Alternatively, how could the government get funding to fight the virus?

Mould: My view is that there will be two economic phases to tackle, arising from this COVID-19 pandemic.

The first is to address the effects that a prolonged lockdown of approximately 2-3 months will have on families and businesses. Most individuals may be forced to expel their savings to survive in the lockdown period as their income and/or revenue dwindle.

Government will have to use part of the money raised from the US$3bn bond in late January to keep the economy in a holding pattern during the lockdown (i.e. 1st phase), to reduce its blowback on the aforementioned demographic.

Concurrently, government will need to seek funding from the multilateral development banks such as the World Bank, AfDB, and IMF to stimulate the economy post-lockdown (i.e. 2nd phase). Looking at the median spend by most countries this comes to about 1-2% of GDP; if we use the average of 1.5% of GDP this brings our required spend close to US$1bn.

Planning now for funding post-COVID-19 is essential, as demand is expected to be down for most discretionary spend sectors i.e. tourism (airlines, hotels), entertainment (restaurants), retail, etc. Also, we can expect lower than normal savings’ balances in the banks resulting in needed support from government in the form of reducing reserve requirements and injection of new money to achieve the liquidity needed for new loans.  Banks will have to provide the much-needed funds in the form of soft loans to qualified companies, small and medium enterprises etc. – including traders – who form the backbone of the informal sector.

B&FT: Any final comment(s)?

Mould: Government should resist the temptation to prematurely end the lockdown in haste; but must weigh both global and local conditions in order to make a well-informed decision for the long-term greater good of Ghanaians. In the interim, some interventions can be immediately implemented to improve the prevailing state of affairs.

For starters, the vulnerable- i.e. aged, distressed families, street children/hawkers, homeless etc.- in our society have to be catered for. One way this can be achieved is by providing financial support and funding to them.

As mentioned earlier, small and medium businesses particularly will be heavily hit; and thus require some much needed assistance in the form of tax reliefs, stimulus packages etc. to stay afloat, as they will most likely struggle to pay employees due to the COVID- 19 pandemic. Government can lend a helping hand by suspending payments of employee and employer social security and income tax of private companies, to allow them use the cash in other ways. Banks and financial institutions can provide qualified businesses with liquidity in the form of zero interest loans and “tide over” soft loans to encourage furloughing instead of outright layoffs; so they can protect jobs by keeping on as many staff as possible.

Additionally, government needs to immediately curb inflation and start planning for the post- COVID-19 recovery of the economy to avoid a recession. There is bound to be a logistics and supply chain gap to and from lockdown areas, which will consequently cause price hikes. Food security will come to the fore and of not tackled this could become a National Security issue; so, with respect to agricultural produce, the Ghana National Buffer Stock Company has a critical role to play in bridging this supply chain gap so as to ensure regular sustainable availability of food and more importantly keep inflation of food items at a minimum.

These supply chain challenges will not only be felt on the local front, but globally as well. How will our foreign supply chain be impacted? Importation will inadvertently be affected as there is a dependency on and preference for foreign essential goods over local goods. Government would therefore have to ramp up local manufacturing to meet demands. For instance, in the COVID-19 fight there has to be a local content re-alignment of businesses and infrastructure to meet human and medical needs. Local manufacturing of PPEs e.g. retooling seamstresses to make masks, carpenters to make beds for medical facilities etc.

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