GHANA’S LNG TERMINAL - COMMERCIAL AND OPERATIONAL ISSUES

In the January, 2019 issue edition of the Petroleum economist , under the headline “LNG-to-power a hard nut to crack in Africa “ the author of the article , Daniel Marks  highlighted a strong desire and interest across the industry in seeing LNG-to Power work in sub Saharan Africa . The author equally highlighted the development of LNG projects that have failed to take off in countries such as Ghana as well as problems. Since the publication of that article in the petroleum economist,  2 key LNG projects have been proposed(an ISO containers transferred to power plants on trucks for regasification , and the Tema LNG terminal project). The Tema LNG terminal has since commenced construction by gasfin underwritten by the long term LNG supply agreement between shell and the GNPC . There exists operational, commercial, and I dare say political discussions that serve as a challenge to any infrastructural project of this size ,but there also exists numerous opportunities that can transform the eastern part of Ghana, and specifically the Tema area into an energy/gas /bunkering hub .

In my assessment of economic/commercial appraisal of projects using sensitivity variables, looking at impacts of sensitivity variables on projects, as well as aligning objectives of host government (in this case ,the Ghanaian government objectives) with the commercial objectives of project developers, I identify 2 critical issues that will be of topmost concern to the Ghanaian government which are ; security of supplies of LNG and commodity price risk. These 2 issues, especially with the west African gas pipeline's difficulties in delivering required volumes and force majeure issues remain very important  and serves as a useful guide to global LNG traders to assure host government of their ability to source and procure LNG with little or no disruptions . In terms of price risks and the management of such risks, utilization of financial derivative instruments, hedging programs can be deployed such as fixed price/fixed price minimum contracts, swaps and collars as a tool to assure price stability, project margins and secure supplies at predictable price , manage cost and project margins of power end consumers remains important.

Given the commodity risk that project developers face in terms of buying LNG and selling gas, it will be commercially prudent if project developers looked into ensuring that the contractual terms of the various gas sales agreements entered into are back-to back with the terms on which project developers purchase LNG under the LNG sales and purchase agreement.

There are other real commercial issues also in terms of credit worthiness on the side of customers and gas aggregators , with concerns around Novation that requires mitigation by project developers .

Ashurst, a global law firm providing commercial solutions to clients highlights 2 other significant commercial/contractual issues that pose a challenge for project developers(and in the Ghanaian context , a challenge also for project developers) in the area of VOLUME AND TERM OF AGREEMENT  and the importance of negotiating contractual flexibilities around these 2 issues . For a greenfield infrastructure project of the scale and size as the Tema LNG terminal,the scope of which presents numerous construction risks, this flexibility becomes important especially with the LNG supplier in terms of commercial start-up date to handle delays. Indeed since full commercial operations takes quite some time to scale up, good negotiations for flexible provisions in the master sales and purchase agreement or LNG SPA to gradually scale up volumes of LNG bought will be important . Contractual flexibility will also be needed in respect of the annual contract quantity(ACQ) of LNG that the project is required to take as will be contained in the MSPA or LNG SPA with an increase or decrease adjusted flexibility to be discussed and built into the LNG SPA.

Operationally,asset management of the FSU/FRU to assure continued reliability of the storage and regasified unit will be crucial, so will sparing strategy , repair and maintenance of the FRU/FSU be important. Shipping from production areas to consumer hub in Ghana under optimal safety conditions , and in a timely manner also remain crucial. Other issues such as nomination schedules/procedures, vetting inspections as per OCIMF/TMSA guidelines and carrier /terminal configuration assessment, manning etc will be very important to the success of the Ghanaian LNG terminal .

In Ghana’s situation,looking at the scalability of the project and opportunities to create a hub for LNG break bulk activity for smaller LNG project across the region with potential upside advantage in becoming an LNG bunkering hub for IMO 2020 compliance cannot be overemphasized.

There will be challenges, but I am more optimistic about the numerous commercial opportunities since the commercial and project challenges can be addressed by putting in place the right structures.

I am more than confident that this LNG terminal project will succeed !