The Ghana National Petroleum Corporation (GNPC) has, upon the approval of the board, concluded negotiations of a Gas Sale and Purchase Agreement (GPSA) with Gazprom.

The agreement is based on the supply of Liquefied Natural Gas (“LNG”), which will subsequently be converted to gas, through an LNG regasification facility located in Tema.

Gazprom is the world’s largest supplier of natural gas and the largest owner of gas-related infrastructure, with a turnover of $100 billion, double Ghana’s GDP.

The long-term supply contract is expected to significantly increase the country’s energy security, providing Ghana with 250 MMscf/d of competitively priced gas.

The contract volumes are sufficient to satisfy more than 1000 MW of thermal generating capacity and will go a significant step towards permanently removing the scourge of dumsor.

The commercial terms of the agreement will deliver approximately a $1billion in savings when compared to agreements signed previously.

Sources close to the contract disclosed to the GRAPHIC BUSINESS that following an open and transparent review of all proposals undertaken by the sector ministry, GNPC extracted further material value through direct bilateral negotiations with Gazprom.

In addition, the negotiated structure of the Gazprom transaction will remove the previous requirement for any capital from GNPC and the government of Ghana, while at the same time taking $2bn of risk previously held by GNPC.

The GRAPHIC BUSINESS understands that the review undertaken by the ministry and GNPC in its decision to award, also exposed some discrepancies in contracts of certain companies which contained $600m in unsupported profits.

Turn of events

The decision of the GNPC was premised on the acceptance of a proposal from the Consortium to provide lean gas to power the country’s energy sector.

This latest turn of events means that two other companies, Quantum Gas and WAGL, which proposal were earlier considered by the previous government, have been dropped, bringing to rest the long standing uncertainties about the next line of action for the provision of LNG to support the country’s ailing but promising power sector.

Findings of a special committee that reviewed a report by a team commissioned by the Minister of Energy that analysed the existing LNG projects as well as a proposal from the Ghana LNG Consortium (“the Consortium”) for an LNG delivery project in Tema (“the Project”) attributed its decision to accept the Consortium based on its; “Proven technology which is advantageous compared to the inherent risks in Quantum’s newer and unproven technological solution; and a relatively competitive contract price.”

Project structure

The project structure envisages a bundled LNG solution whereby the GSPA is to be executed between Gazprom (as the gas seller) and GNPC (as the buyer).

A Terminal Use Agreement (“TUA”) will govern a separate tolling arrangement between Gazprom and the Terminal Operator. Under this structure, Gazprom is to supply the LNG and convert it into gas through the terminal, on its own account, and then sell the gas to GNPC under the GSPA. Gazprom will be responsible for managing all of the technical risk associated with the Terminal.

The proposed technical configuration comprises a Floating Regasification Unit (FRU), Floating Storage Unit (FSU), and a pipeline connection to the existing grid. The proposed 250 mmscfd terminal capacity being offered is considered sufficient to power 1000MW of power and to meet Ghana’s 10-year average gas deficit.

Project justification

Commercial Basis –The recommendations of the Ministry’s committee to negotiate with the Consortium is primarily based on the proposed lower service and commodity costs offered, compared to the WAGL and Quantum projects, also proposed for the Tema enclave. This section compares the respective commercial proposals and concludes that the Tema LNG Project proposal is most competitive.

GNPC, in its negotiations with the Consortium, achieved even further benefits including cost savings as highlighted under the caption Negotiated Benefits. For ease of comparison, the report levelised the service costs of all the proposed projects over 10 years with an assumed terminal send-out rate of 250 mmscfd.

Regasification Tariff - On regasification tariffs, Table 1 below shows that whilst the Tema LNG Project proposed a tariff of US$1.38/mmBtu, WAGL and Quantum were US$1.50/mmBtu and US$1.68/mmBtu respectively over 10 years as reported in Table 1. These aggregate to US$1.33 billion pay-out to Tema LNG Project, against US$1.45billion and US$1.63billion for WAGL and Quantum respectively over 10 years as reported in Table 1 below. Thus, Tema LNG Project regasification cost is $116 million and $290 million less than WAGL and Quantum respectively. This excludes further savings of $105 million achieved by GNPC during negotiations with the Tema LNG Project sponsors, discussed later.

LNG Commodity Price - The Tema LNG Project maintains its competitiveness even in the case of LNG commodity price. Table 2 shows that LNG commodity from the Tema LNG Project is likely to be US$324 million cheaper over the 10-year period than WAGL, and US$972 million than buying from third party sellers in the case of the Quantum project.

Total Cost of Delivered Gas - In terms of total delivered cost, the report pointed out that the Tema LNG Project would charge US$7.7/mmBtu against US$8.19/mmBtu for WAGL and $9.34/mmBtu for Quantum.

“In aggregate over a 10-year period, the Tema LNG Project proposal is US$440 million cheaper than the WAGL proposal, and US$1.26 billion cheaper than Quantum’s.”

This results, the report noted, “excludes further savings of $91 M over 10 years ($105m over 12 years) achieved by GNPC during negotiations with the Tema LNG Project sponsors as discussed further in this memorandum. After considering the negotiated savings, the total cost of the Tema LNG project would amount to US$7,391 million. Consequently, the competitiveness of the Tema LNG Project improves by $91 million over each of WAGL and Quantum. Thus, the Tema LNG Proposal is US$531 million and US$1.353 billion cheaper than WAGL and Quantum respectively” it said.

Technical Solution - The proposed technological configuration comprising an FRU and FSU at the harbour, with a connecting pipeline to the delivery point is proven worldwide, according to the report.

It said the engineering concept has a good demonstrable safety record having been deployed in LNG projects in Holland, Indonesia, USA, Egypt and Angola. It works well in calm waters and will be suitable for Ghana’s terrain where a proposed breakwater is expected to create calm conditions within an exclusive zone.

“Quantum’s proposal was particularly challenging due to the unproven nature of their technology. Their FSRU was to be moored about 12km offshore, and the LNG carrier was meant to berth side-by-side the FSRU and discharge its cargo. In Ghana’s high swell waters, this ship-to-ship transfer in open waters posed significant technical challenge and serious risk of non-availability for about two-to-three months every year”, the cost and risk of unavailability being borne by GNOC. The report added that, “The WAGL proposal was largely similar to the Tema LNG Consortuim Project in terms of the technical solution. However, the structure of the WAGL project, which puts significant burden and risk on the GOG/GNPC with regard to building the receiving infrastructure, makes its implementation challenging.”

Economic benefits

It is expected that successful implementation of this Tema LNG project would yield the following economic benefits to Ghana:

Alleviating the perennial energy crises - The Tema LNG project would help bridge the gas deficit in the country, thereby ensuring stable supply of fuel for thermal electricity generation and eliminating the recurrent ‘dumsor’ problem. The 250mmscfd could generate about 1000MW on combine cycle power plants.

Offers Competitive price - The project offers a competitive gas price even when compared to the delivered price of gas through the West African Gas Pipeline (WAGP) of US$8.322 mmbtu. Over the long term, LNG is expected to bring significant cost savings for ECG as compared to Light Crude Oil (LCO), or Heavy Fuel Oil (HFO). Also, LNG is a more environmentally friendly option than LCO and HFO.

Allows for strategic allocation of gas - The project would effectively support the policy decision of dedicating cheaper gas sources (associated gas) as feedstock for strategic industries such as fertiliser. This will ensure that industries that are strategic, but lack the capacity to bear the higher costs, are supplied from cheaper sources for maximum economic benefit.

Negotiated benefits

With regards to the negotiated benefits, the report pointed to the fact that, “In the negotiations with Gazprom (LNG supplier) and BEM (Terminal Operator), GNPC managed to secure some additional benefits outlined as follows:

Connecting pipeline - The original proposal from Tema LNG Project included the requirement for GNPC/ Ghana to fund and construct the pipeline connecting the terminal and the delivery point of the gas in Tema. This would have cost between US$20 million and US$60 million. GNPC has succeeded in getting the Tema LNG Consortium to fully fund, build and operate this pipeline as part of their facilities. Thus, GNPC has avoided the financing, construction and operation risk associated with this piece of the infrastructure.

Reduction in regasification tariff - One key and strategic achievement with regards to the project was that the “GNPC negotiated a tariff reduction of US$0.10/mmBtu for regasifying the LNG.
This was from the original tariff of US$1.38/ mmBtu proposed by the Consortium and now the tariff has reduced to US$1.28/ mmBtu.

This, the report revealed “amounts to about US$8.76 million of annual savings to the Corporation, or $105 million in total savings over the agreed 12 years duration of the project. Together with the LNG commodity, the cost of delivered gas to GNPC assuming current Brent oil prices of US$53, would be US$7.74/ mmBtu.”

Sharing of fees for storage - GNPC, the report said, has also negotiated the right to share in the profits of any gas supplied by Gazprom through the terminal into other West African countries, thereby supporting the government’s goal of strategically positioning Ghana as the energy hub for ECOWAS. It noted that the GNPC would receive US$0.02 per mmBtu, in what is expected to be a US$0.05 per mmBtu profit margin. This could yield GNPC in excess of $95 million over the term of the contract.

Break bulk facility - On the break bulk facility, the report was emphatic that the project also presents new opportunities for break bulking which would make LNG more accessible to areas of demand beyond the coast, and even Ghana. It said, “Though LNG operation is not a high labour intensive venture, it is expected that development of the bulk breaking business would provide significant business and job opportunities for trucking and allied services in the country. This is a further business opportunity for earning revenue, to be covered under the Interface Agreement.”

Minimal credit exposure for GNPC - Regarding this, it was reported that GNPC's liabilities to Gazprom are backed by a single standby letter of credit (LC) - approximately 25 per cent of GNPC's annual take-or-pay liability.

“Gazprom is providing credit support to underpin the terminal’s liabilities. This is quite unusual for transactions of this nature, where a separate LC would be required to cover payment obligations for terminal services,” it said, adding that: “The structure, therefore, saves GNPC US$100 million in annual credit exposure and US$1.2 billion over the 12-year negotiated term of the contract.”
It further noted that “GNPC’s credit exposure in this transaction is to Gazprom, the world’s largest gas producer and publically traded company with turnover of over US$100 billion (more than twice Ghana’s GDP)”.

This pedigree, the report observed, was in sharp contrast to the counterparties in the other LNG projects, where for example, Quantum is a small, private company with no credit rating or requirement to publish accounts.”

Govt guarantee and cost of project to GNPC - With regard to government guarantees which is one of the many traps state institutions fall in when going into such contracts, the report noted that “Unlike the other proposals, the Tema LNG Consortium Project does not require any GOG guarantee.” It said “The project does not involve any direct infrastructure cost to GNPC. All infrastructure cost is borne by the Consortium,” in what is expected to bring some relief to many Ghanaians who are closely watching how this sensitive transaction will go.

Gazprom takes risk of terminal failure - Under the other projects, the report realized that the GNPC was required to assume significant liabilities in cases of terminal failure.

According to it, “This was particularly significant in the case of Quantum because of the proposed location of the FSRU and the associated risk of offshore sip-to-ship loading operations in open waters, approximately 12km offshore.”

“GNPC internal technical review indicated that during the period October to June, Quantum would fail to accept 15 per cent of cargoes delivered,” adding that, “This could rise to 50 per cent between June and September, periods of high swells. Were this to occur, GNPC would be forced to pay for both demurrage fees and the potential price differential between the contract price and the alternative destination of the cargoes. A conservative estimate of this risk comes up to approximately $140 million per year or $1.68 billion over the term of a 12-year contract.”

Meanwhile, it said in this transaction, the GNPC has negotiated for Gazprom to absorb the risks and liabilities associated with terminal failure. Gazprom's liability to GNPC (including for terminal failure) is backed by a corporate guarantee for a value of US$ 1.2 billion.

GNPC Right to Reduce Volume - Another interesting revelation from the report said the GNPC had secured the right in a year to take up to 10 per cent more (or less) of the annual contract quantity (subject to a cumulative maximum of 50 per cent of annual contract quantity), at no additional cost to the Corporation.

According to the report, “This is an unusual right to secure in an LNG sales agreement of this nature. This flexibility allows GNPC to mitigate the risk associated with fluctuations in demand for gas. The potential risk mitigation value is US$60 million per year or US$720 million over the 12-year contract term.”

The option to reduce take-or-pay liability, the report revealed, was not available in the Quantum agreement.

Take-or-Pay protection against terminal failure, force majeure - It was observed from the report that, if the terminal fails at start-up, GNPC can terminate the GPSA.

“If the terminal fails after start-up, Gazprom is liable to GNPC up to US$100 million. In both cases, GNPC has no take –or-pay liability”, it said, adding that “In addition, GNPC does not pay terminal fees (would only contribute nominal amounts to avoid terminal bankruptcy) where the terminal is facing a force majeure situation, including instances where GNPC’s downstream buyers are unable to accept gas. This is significant because it protects GNPC against the risk of power plant failures and recognises that in the event of limited demand, Sankofa gas, under the terms of its GPSA, has priority.”

Off-specification Gas

With regards to Off-specification Gas the report said Gazprom has taken liability and responsibility for the costs and risks associated with delivery of off-spec gas and the damage that this could potentially cause to downstream infrastructure, including the Terminal.

It noted that under the terms of the previously executed agreements with Quantum, GNPC was responsible for the cost associated with the repair of downstream by o power facilities impacted by off-spec gas and the terminal itself if a third party LNG supplier delivered off-spec gas.

“GNPC would also have been liable for the repair of Quantum’s FSRU if a third-party LNG supplier delivered off-spec gas into FSRU”, the report said, adding that “The total exposure could have exceeded US$750 million and led to the termination of the contract; Under this structure, Gazprom has sole liability for the Terminal facility and downstream infrastructure” a major achievement the report describe as “a significant and material risk mitigation”.

Transfer of Facilities- Another revealing aspect of the report was the issue of transfer of facilities at the end of the contract term.

It noted the “The Gazprom structure provides for the Terminal Operator to transfer GNPC/GOG, at the end of the contract term, the regasification and marine facilities”.

The report said it was anticipated that the residual value of the facilities at the end of the contract would be in excess of US$100 million with a remaining technical life in excess of 10 years.

 

 

The commercials

The source also indicated that Quantum’s initial proposal of$1.68/MMbtu was as requested and consistent with the other submissions, based on a contract commitment by GNPC of $1.8 billion.

Following the internal release of the committee’s drafted report, Quantum was reported to have submitted what the source described as “1.30/MMbtu. The change in value and the fact that the proposal came after the close of submission raised alarm bells within the committee.

According to sources, in the reality the proposal and figure of $1.30/mmbtu was based on GNPC committing to a 100 per cent increase in the minimum volumes passing through the terminal, an increase from 250MMScf/d to 500MMscf/d.

It claimed that this would have meant that GNPCs commitment rather than falling would have increased by $600 million to $2.4 billion.

The source were emphatic in their conclusion that the lesson to be learned from this process is the need to consolidate the expertise in the various state institutions.