What will oil mean for Ghana?

West African nation approves development of first major oil field

By Polya Lesova , MarketWatch

NEW YORK (MarketWatch) -- Oil has always loomed large in the fortunes of countries endowed with substantial reserves of it.

Some, like Norway, have managed oil revenues wisely.

Others, like Nigeria, are plagued by corruption, poverty and violence.

Soon, oil will start flowing in Ghana, the West African nation known for cocoa and gold that recently approved the development of its first major oil field.

Earlier this month, Ghana's government said the development of the first phase of the offshore Jubilee field can proceed. Discovered in 2007, the Jubilee is located in the Gulf of Guinea and is considered a world-class prospect. The first crude is expected in the second half of next year.

The International Monetary Fund estimates that oil and natural gas from the Jubilee field could bring as much as $20 billion to Ghana by 2030. In a country where a third of the population lives on less than $1.25 a day, that money can go a long way.

The oil revenues can help the government improve education, health care and public infrastructure. Much of the money will have to be used to plug the big budget deficit, but the indirect effect of the income will still be significant, lowering the need for outside financial help, increasing international confidence in its finances and potentially luring more foreign private investors to the country's markets and industries.

Reuters Ghanians are seen on the street during a visit by U.S. President Barack Obama in Accra in July.

"It's [oil] absolutely critical because if you look at the budget situation in Ghana over the last three years, the country has needed over $1 billion every year to stay afloat," said Sebastian Spio-Garbrah, analyst at Eurasia Group.

"In the case of Ghana you have a country that doesn't live within its means," he said. "Will the new oil revenues structurally change the budget situation in the country or are they going to add to current problems?"

Large budget deficit

Ghana's economy has grown strongly in recent years, but it faces significant challenges.

Rising food and fuel prices and a sharp increase in government spending ahead of last December's presidential election led to a budget deficit of 14.5% of GDP. International reserves declined, resulting in the sharp depreciation of the cedi, the local currency, against the dollar. On top of that, Ghana's headline inflation is currently around 20%.

To help Ghana, the International Monetary Fund pledged this month more than $1 billion in assistance. The World Bank has approved a $535 million loan.

With that aid, the government of President John Atta Mills is hoping to reduce the budget deficit to 9.4% of GDP this year. Ghana managed to finance its deficits over the previous two years by issuing Eurobonds and selling a 70% stake in Ghana Telecom to Vodafone Group for $900 million.

"Oil revenues that are expected to start in 2011 will create important new fiscal space and potentially bring Ghana close to middle-income status," Takatoshi Kato, deputy managing director of the IMF, said in a statement in mid-July.

Kato also warned against complacency, saying that "the horizon for oil production could prove relatively short, and it will be important that the new revenues be used wisely."

The operator of the Jubilee field, London-based Tullow Oil , estimates that the recoverable resources are over 600 million barrels of oil and could potentially be as much as 1.8 billion barrels. The field will be developed through a floating vessel that will deliver 120,000 barrels of oil a day.

Jacinta Moran, South Africa-based correspondent for energy information provider Platts, said Jubilee is "hugely significant" and further increases the prospects for Ghana to become a frontrunner in development in Africa.

"The biggest question is how much oil Ghana will actually end up exporting," Moran said in emailed comments. "Ghana says it is better equipped than some of its neighbors to avoid the pitfalls of oil wealth, pointing to a reputation for stability and sound economic management."

Managing oil revenues

"It is also important that the government does not become overly dependent on its oil revenue and continues to invest in commodities like cocoa, gold and other cash crops to diversify its sources of revenue."

Nana Appiah-Korang, Emerging Capital Partners

Ghana's national oil company GNPC has asked Norway for assistance in managing its petroleum resources. Norway is seen as an international example of how to handle oil wealth; the Norwegian government set up a fund in 1990 to protect the country against future budget deficits and to prevent oil revenues from negatively impacting the economy. The fund's value totaled $325 billion in 2008.

"Oil can lead to government corruption and waste if the revenues are not properly managed," said Nana Appiah-Korang, a director of Washington, D.C.-based private equity manager Emerging Capital Partners. "It is the government's intention to be responsible with this new source of revenue."

Appiah-Korang, a citizen of Ghana, said oil revenues are "vital" for the country's development, since they will strengthen the currency and reserves as well as attract foreign investment in the energy, transportation and infrastructure sectors.

"It is also important that the government does not become overly dependent on its oil revenue and continues to invest in commodities like cocoa, gold and other cash crops to diversify its sources of revenue," Appiah-Korang said in emailed comments.

Ghana is the world's second largest producer of cocoa after its neighbor Ivory Coast. It's also Africa's second biggest gold producer after South Africa. Other major exports include timber, diamonds, manganese, and bauxite.

With a population of 24 million, Ghana is often hailed as one of the few truly functioning democracies in Africa. Barack Obama visited Ghana in July on his first trip to sub-Saharan Africa as U.S. president, overlooking economic powerhouses such as South Africa and Nigeria.

"Prior to the discovery of oil, the country was moving in a really positive direction and setting a very good example for all of Africa," said Lawrence Speidell, chief investment officer of Frontier Market Asset Management, which invests in frontier equity markets, most of them in Africa.

"We now look at a country that has promising oil flows and has made statements that you'd hope to hear about their intent to avoid the curse and attain the blessings in the form of sovereign funds and careful control over who gets access to the flows," Speidell said.

He is also cautious, however, saying that the pace and ultimate consequences of oil production are "sheer speculation."

"Ghana is probably going to see this as a nice feather in their cap rather than becoming primarily an oil country," Speidell said.