Beware”: Oil Collateralized Loans (OCL)

The benefits of Oil Collateralized Loans (OCL) are obvious; easy to obtain and could

be cheaper in terms of interest rate charges. OCL can also provide immediate funds

to support developmental projects to spur economic growth in the shortest possible

time if funds are used judiciously. However, seeking a collateralized loan can also

be trickery and there are potential landmines that Ghanaians need to be aware of.

Technically, OCL is not any different from a securitized asset or traded derivative

backed by a substantial asset.

As starters, what if the price of oil falls? What if the projected oil reserve does

not pan out? To illustrate with basic assumptions about the recent Ghana oil find.

Let’s say the current international market price of crude oil is $ 80 per barrel and

the projected reserves is 2 billion barrels. GNPC and for that matter the government

of Ghana’s equity percentage in the Jubilee field is approximately 15% plus 5 – 10 %

royalty fees and when you add taxes payable to the government from OIC’s

(international oil companies) and other entitlements, the government has a combined

stake of approximately 50%.

Based on these facts, the government can seek a collateralized loan to the tune of $

80 billion if 100% of the projected reserves are collateralized. If you take the

conservative approach and collateralized only 25 %, it implies $20 billion loan can

be sought for infrastructural and other developmental projects. Lenders however may

take into consideration political, business and other risk factors and pare down the

loan to $ 15 billion with $ 20 billion collateral.

Now, if the world economics take a downturn and oil prices fall to say $60 per

barrel from the original $80 per barrel. All of a sudden, our $20 billion collateral

is only worth $15 billion to the lender or creditor, creating a shortfall of $ 5

billion. Our creditors could ask the government to provide additional collateral

(margin calls) to compensate for the shortfall. The additional collateral or margin

call ensures that the risk of the loan stays the same, as far as the down payment to

the amount borrowed.

Also, the Jubilee reservoir estimates are based on engineering calculations, and

the estimate could change. It could turn out that the reserves are only 1.5 billion

barrels of crude oil. This also means our $20 billion collateral is now $15

billion, and, again the government will be asked by our creditors to provide

additional collateral.

Ghana could face a double whammy of falling crude oil price and lower reservoir

estimates. The initial collateral of $20 billion could be pared down further to say

$10 billion. How would Ghana find additional funds to meet the margin calls or boost

the collateral?

The danger in the scenario depicted above is a real possibility. For example, two

years ago, the price of crude oil dropped to $33 a barrel, after reaching a high

$140 a barrel. The drop to $33 a barrel disrupted the budgets of major oil exporting

countries in Africa , because the cash flow projections were way-off. The Government

of Ghana can be very aggressive or be very conservative with its cash flow

projections. If the government does the unthinkable and aggressively collateralized

a higher percentage say 50% to 75% of the oil reserves, and an adverse scenario

occurs, the government will have to tap into other national assets, such as future

cocoa production to provide additional collateral. This may all seem surreal but it

happened in Angola , Nigeria and other oil producing countries.

To avoid such potential pitfalls and be caught in such financial and economic

quagmire, it is imperative that the government takes a deliberate and cautionary

approach in considering OCL as a means to finance developmental projects. It may

sound silly to some using the old cliché of counting our chickens before they are

hatched to describe the situation but truism of the cliché in this instance is not

far-fetched at all. OCL is always a viable option but the government needs to buy

some time before rushing to make such decisions. The Bible says “the debtor will

always be a slave to the master or lender”. Proverbs 22:7.

The timetable to start pumping the oil at the Jubilee field is around the corner and

it only make sense to initially build a nest egg, study and understand the industry

and operations a little bit longer before we tap into OCL funding. Accumulating oil

revenues for a year or so will give us a buffer or cushion to weather any

unanticipated eventualities when we decide to tap into OCL. As a matter of fact, it

will also be prudent for the government to see how the wells are performing and

study the production curve for a period of time to give us a better feel for the

actual versus projected production levels.

Waiting for a year or two prior to taking advantage of OCL will also give us an

opportunity to put together a comprehensive developmental plan to optimize the

economic benefits of such a plan. Yes, we need to catch up on infrastructural gaps

throughout the country but we don’t need to jump into a spending spree just because

OCL is available, only to second guess our decisions. It is almost like someone who

hits a lottery jackpot and without careful planning, rushes to fulfill his desires

and dreams and spends money without knowing what he/she REALLY needs.

In conclusion, oil prices can go up or down. Neither does the Government of Ghana

controls the price of crude oil nor can guarantee the reservoir estimates of the

Jubilee field. The government could be getting itself into a can of worms by

prematurely venturing into OCLs. At the appropriate time and situation we can always

revisit clause 5 of the petroleum revenue management bill, to tweak and amend it

appropriately. Let us put politicking aside and do the right thing for the country

to achieve a lasting solution to our current infrastructural gaps.

Yaw Owusu

Tennessee , USA