The Public Interest and Accountability Committee (PIAC) has joined a long list of advocates that have urged government to seriously consider restoring its hedging programme in order to cushion the country against the impact of oil price shocks on the state’s purse.
The advice of a Committee established by an Act of Parliament to provide oversight and monitor the management of the country’s petroleum revenue is considered by far the strongest voice that will set the Finance Minister pondering after other privately-established economic and energy think-tanks urged government to go back to its hedging programme following the collapse of crude oil prices.
According to PIAC, market conditions are right for government to take a cue from other oil operators to lock in the price of crude oil exports saying: “In order to help mitigate the impacts of the volatility of crude oil prices on the world market and following the successful hedging programmes being implemented by Tullow Ghana Limited and Kosmos Energy, the government should consider resuming its hedging programme on crude oil export.”
Hedging, a financial instrument used by government or the private sector to minimize the risk of exposure to commodity prices, equity prices, interest rates, and exchange rates, has recently gained significant traction in most African countries due to the volatile commodity market in recent times, affecting the revenue base of most of the countries.
The Ghana government first executed its hedging programme for crude oil exports in 2011-12 to protect the country against the volatile swings in crude oil prices.
However, the programme, considered by some policy think-tanks as a success, was abandoned by government in 2013 after crude oil prices recovered significantly above the hedged price of US$107 a barrel at a time the premium cost to hedge also went up to about US$7 million.
But the subsequent fall in crude oil prices on supply glut opened the government up to criticisms as the country’s expected revenue last year declined by about GHC2.7 billion due to the fact that the country’s share of crude is now sold at spot prices based on prevailing world market prices.
Among the ardent critic of the govcernment’s decision to abandon the hedging programme for crude oil is Prof. Newman Kusi, the Executive Director of the Institute of Fiscal Studies, an economic policy think-tank, who has consistently blamed the Finance Minister’s reluctance to hedge the country’s oil exports for the lost in crude oil revenue arguing that the Minister’s inaction “dangerously exposed the country to avoidable risks”.
However, the Finance Minister, Seth Terkper has explained that the decision to hedge crude oil was based on the fact that Ghana, which started commercial oil production in December 2010, was unclear of the direction of crude oil prices at the time but abandoned the hedging programme after the uncertainties were cleared as oil prices rebounded.
Historically however, Ghana has had a chequered history with hedging with popular opinion weighing against such a programme after the distasteful experiences at the Ghana National Petroleum Corporation (GNPC) and Anglogold Ashanti (formerly Ashanti Gold Fields).
In 1998, Anglogold Ashanti hedged 600 ounces of its 1.5 million annual production for 20 years, betting that the price of gold will continue to fall over this period. It turned sour as gold prices rather picked up. Presently, Anglogold gets US$615 for each ounce of gold, being the average of hedge and unhedged price while the market price stands atUS$850.
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