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As we move deeper into the 3rd quarter of 2012, there are two major risks to the 2012 budget that require urgent measures from the government�s economic management team. These two risks involve hefty shortfalls in the 2012 projected revenue figures. These shortfalls must already be affecting the country�s foreign currency holding position and must therefore be contributing to the fall in the cedi�s value. Left unchecked, the effects will compound, and then begin to undermine efforts to restrain inflation, stabilise the fiscal deficit and improve on our balance of payments. Below, we discuss the risks in detail. *Shortfalls in Oil Revenues* [All calculations are in June 2012 US dollars] A graph of oil output from the flagship Jubilee field shows declining productivity, a fact reflected in declining revenues into government kitty. In Q1 2012, total government take came to less than $60 million. As production continues to decline, projected total revenues for 2012 should come to less than $240 million. Because government budgeted for oil revenue of more than $650 million, the shortfall in the budget is correspondingly more than $410 million. The 2012 shortfall is nearly 3 times more than the 2011 oil-related budget shortfall of about $140 million. Apart from lower than expected production in the field, the government also budgeted to receive $200 million in corporate taxes from the oil companies but reports indicate that they are in no position to pay. The corporate tax dimension to the shortfall issue has not been clearly explained by the government. The productivity decline in Jubilee has been blamed on sand contamination of the flowlines that carry the oil from the underwater wells into the FPSO on the sea surface. Assurances have been given by Tullow, the field operator, that this problem is being resolved or has even been resolved. But it is the GNPC, the national oil company, that chairs the Joint Management Board (JMB) of the field. It should give Ghanaians its independent view, as must the industry regulator, the Petroleum Commission. We note that the problem of sand infiltration into flowlines is a fairly common one in the offshore oil industry with both detection and management systems having matured for more than two decades. One wonders whether the field has non-intrusive remote-monitoring of the flowlines in place and when precisely the discovery was made that the situation was critical enough to affect production. We know from industry literature that many fields have managed very high sand contamination (more than 500 pounds per thousand barrels in some cases) with no loss in productivity. What is the level of contamination in Jubilee�s case? Since the source of sand can be the sandstone reservoirs themselves, it is entirely likely that sand management may be required for the entirety of the field�s life. The cost per barrel of a continuing management program needs to be disclosed. The JMB also need to explain the basis for the failure of sandscreens in the subsea systems. Could this have something to do with the engineering specs of the project? Also of interest are the measures being taken to ensure the mechanical integrity of the field in case the reservoir itself is the challenge. If however drag forces generated by fluid production are responsible for the sand, and the fact that Jubilee oil is wet oil is compounding the challenge, then there is the added risk of surface erosion, among others. The information that has to date been made available does not engender reassurance. The situation can be anything, from mild to grave. There has been little by way of well uptime availability information, even though we have been told that some wells have been successfully engineered and that production is now occurring in 3 wells. Our own view, based on interactions with specialists, is that the overall Jubilee development project was based on overoptimistic technical assumptions. The simple fact is that there are just too few wells in production. The rush to start producing, and to cut corners in the name of cutting-edge technique, rather than mitigating financial risk, has ended up compounding the growing fall in competitiveness of Jubilee. By the time phase 1a is complete, *at least* $4.5 billion would have been spent on development costs. Yet, it is optimistic to expect production levels of more than 100,000 barrels per day. In particular, it is very optimistic to assume that by end of phase 1a the completed modules in the field will over their lifetime of 15 or so years produce at an average rate of 100,000 barrels a day (i.e. that recoverable assets from the completed modules are more than 550 million barrels). The finding and development costs are therefore in a region of between $8 and $12 per barrel, which is way higher than costs in comparable projects elsewhere. Since these costs affect the level and onset of taxation, it is important that the sector�s leadership explain to Ghanaians what their strategy to boost competitiveness is. A much more intuitive way to measure the competitiveness of Jubilee is to simply look at total capital expenditure and the resultant productivity of the field. With $3.4 billion *already* spent, output is still at a little over 60,000 barrels per day. BP, the British oil giant, has a development plan for its offshore Alaskan fields that will cost the company $7.2 billion with expected output of 1 million barrels per day. PetroBras� Roncador field was developed with about $2.2 billion and today it is producing about 460,000 barrels per day. Angola�s Girassol deepwater field was developed at a cost of $2.8 billion. Today, it produces about 250,000 barrels of oil a day. It is important to note that these fields are in a greater water depth than Jubilee and therefore more technically complex and demanding. Readers should note that the examples we have given are *4 to 8 times MORE competitive than Jubilee*. We have not even discussed production replacement and other core indicators of field performance, which judging by the current track record of Jubilee are likely to simply deepen the concern. In summary, there are serious issues within Ghana�s oil sector that are already producing some serious financial consequences. Government would serve Ghanaians better if it engaged in a more transparent way about how it plans to prevent the problems from becoming chronic. *The China Development Bank Loan* Most readers probably recall the controversy which was generated over our comments seven months ago that Government was being over-optimistic in anchoring its 2012 infrastructure plans on the CDB loans. The truth is that notwithstanding these warnings, government still went ahead to budget more than $632 million of the CDB facility as capital expenditure related revenue. The adverse implication of this decision is that the overall shortfall in expected forex inflows into the economy is more than ONE BILLION DOLLARS. No wonder the Cedi has taken such a hit from speculators, who in all probability expected a forex crunch somewhere along the line. As we suspected, the actually effective agreements have only now been executed. The government is in negotiations with the CDB about the disbursement procedure, with the CDB, in line with its prudency requirements, insisting on direct disbursements to contractors from overseas accounts instead of releasing cash to the Bank of Ghana. At any rate, none of the projects are actually ready to receive the disbursements. Apart from allocating about $12 million to the Ghana Gas Company for its set up, not much progress has been made in the construction of the Atuabo Gas Plant, which we were assured would be pre-financed by Sinopec. In fact, reports suggest that even sub-structural engineering works have yet to commence. A few weeks ago, the location for the project was said to have become waterlogged following the rains, notwithstanding the fact that flood risk management featured in the arguments over the location. The secrecy-shrouded Huawei-led ICT surveillance platform for the oil fields being developed for National Security is likewise unready. In fact one wonders what exactly the $150 million shall be used for. This is a lot of money. All the above notwithstanding, the CDB loan matter is by a wide margin the smallest of the two risks outlined above. So long as government is not pre-financing any of the activities, continued delays in disbursement should not pose great difficulties for the economy. Even the oil-related shortfalls should be manageable if the government sticks to fiscal prudence and reins in expenditure to keep the fiscal deficit to under 5% of GDP (the budget target is 4.8). If not, the deficit could easily exceed 7% this year, inching closer to the 2008 figure of 8.5% of GDP (new series) that caused so much panic and controversy a few years ago. So, in the end, government of Ghana still has the opportunity to prevent severe damage to the economy provided it steps up to the challenge.