Oil And Gas Driven Industrialization

– Ghana’s Model Of Petroleum Resource Management by

Mohammed Amin Adam

Centre for Energy Economics and Policy (CEEP) Ghana (Lecturer in Petroleum Economics: Kings University College Postgraduate School) maadam@dundee.ac.uk

1.0. INTRODUCTION

The Government of Ghana announced in its 2010 Budget and Policy Statement the plan to develop an Oil and Gas Industrialization Plan as a sustainable model of managing her petroleum resources. The oil and gas driven industrialization is expected to make Ghana’s oil a blessing. For this reason, the government plans to use oil and gas resources to boost the manufacturing and agricultural sectors, through economic diversification, create jobs and promote private sector development.

The country’s current economic performance is mixed and characterised by low investments. The Global Competitiveness Report of 2008/9 ranked Ghana 102 out of 134 in global competitiveness, 127th in low productivity with poor infrastructure and human capital. This makes the proposed Industrialization Plan more imperative.

2.0. PROPOSED OIL AND GAS INDUSTRIALIZATION PLAN

The planned investment opportunities targeted by the government can be summarised as (i) petrochemical industry targeting plastic products and pharmaceuticals (ii) exploitation of important natural resources such as sea salt, iron ore, bauxite, limestone for cement, silica sand, methanol, ethanol, ammonia, urea for fertilizers and (iii) manufacturing including production of glass bottles, steel mills operations, aluminium smelting and rolling mill operations.

It must be noted that Ghana has implemented different models of industrialization since independence without the success of a transformed economy – from Arthur Lewis Dual Economy Model, Import-substitution Model to Export-led Industrialization Model and now to an Oil and Gas Industrialization Model. The reasons for the failure of previous industrialization programmes among others were poor planning and financial constraints.

The new model will be implemented through increased electricity generation capacity from natural gas powered turbines to fuel energy intensive industries and also by committing oil revenues to supporting industrial development. Other models of petroleum resources management which have been tested elsewhere with mixed results include Direct Distribution of Revenues to citizens, Target Revenue based on the principle of low absorbtive capacity, Intergenerational Equity based on the Permanent Income Hypothesis, Stabilization Funds to mitigate the effects of volatilities in oil prices and exchange rates, etc.

It is therefore important to scrutinize Ghana’s model of oil and gas driven industrialization to ensure a sustainable management of the petroleum resources for economic growth and development. This will also cover some critical issues of public policy and planning that need to be addressed. The proposed Industrialization Plan is very relevant for obvious reasons. It seeks to increase electricity generation capacity to 5000 MW or more within the medium term to power industrial operations. Also, apart from electricity, other critical infrastructure required for industrialization such as water, telecommunication, roads and rail lines will be developed.

It will also spread development to the most deprived areas of the country such as the Keta and Songhor Basins, Ada, Prampram,, Sekondi-Takoradi, Axim, Kibi, Nyinahini, Bupei, Yendi, Sandema, Opon Manso and Aboso which will be opened up for heavy industrialization. For instance, the Limestone at Buipe when processed in to cement will not only create jobs but will also reduce cost of housing and construction whilst the exploitation of urea for the production of fertilizers will enhance agricultural productivity and farm incomes.

3.0. OBSERVATIONS AND REFLECTIONS

3.1. Long Term Energy Security

Expectations about Ghana’s petroleum reserves against the ambitious industrial plan call for some caution. Gas is non-renewable and will finish one day. Moreover, the current estimates of oil and gas reserves are not significant by international standards. One then wonders what will become of the country’s industrialization, if she builds her industrial sector on the oil and gas resources. The adverse implications of future energy insecurity for such an Industrialization Plan can be attributed to poor planning. Ghana’s experience with VALCO has shown that power shortfall for its operations were unanticipated sooner although its contribution to the economy; effects of population and economic growth were well known. Thus the delayed development of an integrated aluminium industry in the country is due mainly to poor planning. In fact, the experiences of some of the most industrialized countries in the world will help an understanding of how long-term planning may ensure uninterrupted industrial development.

China was an oil exporter and actually exported to Japan for more than 25 years since 1974. But over the years, the level of her economic development through accelerated industrialization has led her looking elsewhere for energy resources. In particular the fast economic and technological growth due to its ‘Four Modernization Programme’ led her to become one of the biggest importers of oil in the world. It is on record that by the end of 2005, China’s net import of oil at 3.38 million barrels/day was two-thirds of Japan’s imports.

Similarly, the Japanese government is supporting Japanese oil companies to invest in upstream oil and natural gas sectors in foreign countries. This is to support Japan’s capital intensive industrialization programme. It is significant to note that Japan does not have significant domestic oil and gas reserves and due to this limitation, she has secured reliable supply sources which have made her the second largest importer of oil and the largest importer of Liquefied Natural Gas (LNG) in the world.

The United States and some European countries who have more oil and gas reserves than Ghana have followed the path of alternative energy sources to fuel their industries. The US especially is spending so much on energy diversification to reduce the share of oil and gas in their energy mix due to the fast rate of depletion of these resources in what has become known as ‘the peak oil theory’.

Therefore if Ghana is to develop petroleum driven industrialization, the energy needs of the country in the long-term and whether the reserves can sustain her requirements must be examined. Otherwise, she must begin to look for energy supply sources elsewhere or design future petroleum agreements to reflect domestic energy security for industrial development.

3.2. International Diplomacy

What is worrying about energy supply sources outside Ghana is whether her neighbours are not also developing similar ambitious industrial policies requiring the use of their energy reserves. Gas is a regionally traded commodity mostly through pipelines. The alternative is to transform it into LNG which may be too expensive for the country. Therefore the development of her natural gas must be integrated with the development plans of her neighbours which demands that Ghana maintains good diplomatic relations with them.

The country’s role in peace building in these neighbouring countries is quite crucial since supply disruptions and political instability in her future sources of energy may further compound her vulnerability. For instance, the delay in delivering natural gas from the West African Gas Pipeline has been due to violent disturbances in the Niger Delta leading to vandalization of some pipelines. In developing an industrial policy based on gas resources, Ghana must look at the industrial plans of her neighbours as well as their political stability in order to build an insurance against future shortfalls of gas. Her continued diplomatic relations with her neighbours cannot be compromised if the new Industrialization Plan is to succeed.

3.3. Limited Revenue Management

The reality also is that oil revenues may not be enough to finance the proposed Industrialization Plan. The IMF predicts that Ghana will gain US$1billion annually for 20 years from her oil and gas resources. This is lower than the budget deficit for the first three quarters of 2009 which stood at Gh¢2.2 billion. The oil revenues are therefore not going to meet the development budget of the country.

In addition, the inflows may not be consistent due to volatilities in crude oil prices. Therefore, annual revenues may not be US$1 billion. Fortunately, the government has acknowledged the inadequacy of expected oil revenues to finance expected industrial development by announcing in the 2010 budget its plan to conduct feasibility studies to ‘establish the commercial viability and funding mechanisms for investment in the strategic oil and gas opportunities’. It is expected that other sources of financial resources will be explored to finance the opportunities of an oil and gas economy. The worry now is that the announcement of such an ambitious Industrialization Plan is likely to increase the expectations of Ghanaians which is dangerous for the country. This therefore calls for greater moderation in the expectations about the oil and gas resources.

3.4. Spending Plan

The economic reality that will confront the country sooner is whether she has to spend all the revenues that come in annually or save some for capital accumulation. Due to the macroeconomic implications such as currency appreciation associated with capital inflows, which may lead to ‘Dutch disease’, it remains a matter of interest to see how the revenues from oil and gas will be applied to the Industrialization Plan. Unfortunately the government failed to announce how revenues will be deployed to finance its industrialization programme which therefore raises the following important questions.

i. Is the country going to establish a Stabilization Fund to ensure that revenue volatility does not affect funding to the industrialization programme?

ii. Are the funds from oil revenues to be invested abroad due to low local absorbtive capacity or invested locally and fuel inflationary pressures?

iii. How will the industrial programme be financed when the oil and gas are depleted? iv. Is the Industrialization Plan to be a special project funded outside the normal budget?

The answers to these questions will show how the country plans to deploy oil and gas resources. This is important because the solution to sustainable management of petroleum resources is not only in what to spend revenues on but also on how the spending and all processes involved in spending are well established.

3.5. Climate Change and the Environment

With such a massive Industrialization Plan, the country will be engulfed in environmental chaos if a comprehensive environmental plan is not integrated into the industrialization programme. The effects of carbon emissions on the environment and for that matter human health cannot be divorced from industrial activities particularly those reliant on fossil fuels. The subsequent heat generated around the world as a result of carbon emissions requires technologies to reduce the impact of heat on humans which needs colossal investments in energy resources to fuel new technology. Ghana does not have the resources to mitigate the cost of industry based emissions when she starts the industrialization programme.

The country must therefore learn from the actions of the heavy emitters such as the US, China and Brazil who have renewed their commitment to a low carbon world. The US and Brazil have made significant strides through fuel substitution in favour of non-conventional fuels. By integrating a n environmental programme covering decommissioning, gas flaring, CO2 emissions and water pollution, in her Industrialization Plan, Ghana will not only build environmentally friendly industries but also improve on energy efficiency. The plan should therefore be guided by the UN Framework Convention on Climate Change.

3.6. Governance and Institutional Capacity Most resource rich countries often formulate expenditure plans without regard to governance issues in the management of resource revenues. Sound governance requires high quality of government institutions and good public financial management. With increased expenditures arising from increased inflows, there are likely institutional capacity lapses which may question the ability of the public sector to spend effectively. The IMF observes a negative relationship between spending growth and government effectiveness. Thus, emerging resource rich countries with urgent development needs and expenditure pressure are also usually affected by poor quality of spending due to weak institutions. Therefore Ghana’s laws, organizations and public attitude must be reviewed to ensure transparency and accountability which are ingredients for industrial growth through the private sector.

3.7. Appropriate Skills and Local Content

Industrialization also requires skilled manpower and technology. This means that substantial investments are made in the education sector to expand educational opportunities, review curriculum, enhance research and train the critical mass of skilled personnel to work in the factories. To avoid the dominance of foreigners in the industrial sector, the technical and financial capacities of Ghanaians need to be supported. This is how the Industrialization Plan will succeed in providing indigenous solutions to development.

3.8. Candidate for ‘Dutch Disease’

Already there are symptoms of ‘Dutch disease’ in Ghana looking at the contribution of the mining sector vis-avis manufacturing over the last four years. The tendency for the new oil and gas sector to increase her candidature for the disease is even greater. First of all, the oil sector will soon overtake gold and cocoa in revenues which will inject more foreign exchange into the economy leading to possible local currency appreciation which may undermine patronage for locally manufactured goods. Second, the oil sector which has some of the highest levels of remunerations in the global labour market is likely to attract high quality human resources as it appears now (many professionals are doing oil and gas courses) at the expense of other sectors which may lead to reduced productivity in those sectors. But the most serious incentive for ‘Dutch disease’ will come from the proposed Industrialization Plan. If oil revenues are to be used to exploit other natural resources such as iron ore and others mentioned above, the country will only succeed is expanding the attention of the economy on the non-tradable resources sector at the expense of manufacturing and agricultural traded goods. This no doubt will deepen Ghana’s march towards the disease.

4.0. CONCLUSION

It is expected that the Industrialization Plan when implemented will push the country’s economic growth rate beyond 10% by 2020. She must however look beyond the medium term to sustain higher growth rates, create jobs and reduce poverty levels. In applying oil and gas resources to industrial development the tradable goods sector which actually reflects the level of domestic productivity and growth must not be ignored. Also, due to the heavy capital requirement of natural resources exploitation and with limited oil revenues, it will serve the country better if she focuses on the existing manufacturing sector, agricultural processing and petrochemicals which will constitute the foundation for long term industrial strategy rather than go after an unachievable over-ambitious development Plan as the proposal in the budget seeks to do.