Ghana to lose US$40b of oil revenue over bad contracts – Expert

A Scotland-trained Ghanaian oil and gas management expert Frank Toledzi has said Ghana needs to go for the production sharing agreement (PSA) rather than the hybrid modern concession one as far as contracts signed with international firms in the oil and gas industry are concerned, if the country wants to get the best out of its oil.

In his estimation, the country could earn US$40 billion more than the US$20 billion projected by the International Monetary Fund and the World Bank, to be earned by the West African country from its oil fields within 20 years.

PSAs are a common type of contract signed between a government and a resource extraction company or group of companies concerning how much of the resource–usually oil–each party will get after the extraction.

The principle of the concessionary license system is that the state transfers its ownership of resources in the subsoil to a commercial entity, often a partnership of companies. The companies obtain exclusive rights to extract crude oil and natural gas in a defined area for a limited time. If more than one company is assigned a license, the government will provide a joint operating agreement which states each partner’s equity share. One of the companies is often assigned the operator role, who carries out the actual work on behalf of the group.

According to Ghanaoilwatch, currently, there are over 80 oil and gas producing countries in the world operating under the PSA because it is the most equitable and fairer fiscal regime for sharing oil revenue with the foreign oil companies. “This guarantees them equally good returns on their investment, as well as equitable and fair share of the oil revenue to host countries.”

According to the Ghana Institute of Governance and Security (GIGS), under a PSA, the host government typically retains the right to the hydrocarbons in place. The contractor under a PSA normally receives a share of the oil produced to recover its costs, and it is also entitled to an agreed share of the oil as profit. The allocation of profit oil between the state and the contractors typically increases in favour of the state based upon agreed success factors.

It said examples of success factors include surpassing certain specified internal rates of return, production rates or accumulated production. Normally, the contractors carry the exploration costs and risk prior to a commercial discovery and are then entitled to recover those costs during the production phase. Fiscal provisions in a PSA contract are to a large extent negotiable and unique to each PSA. Contractors to a PSA are generally insulated against legislative changes in a country’s general tax laws.

In a September 2014 statement GIGS said: “If Ghana was operating under Production Sharing Agreement, the country would have earned over US$ 4 billion at the end of December 2013 and at the end of 31st March 2014, Ghana should have earned over US$ 5 billion.”

The procedure applies in Algeria, Angola, Azerbaijan Iran and Nigeria, South Sudan, Chad, Liberia, Niger among others.

The local think tank warned that Ghana stood to lose an estimated US$30 billion, in terms of revenue accrued from the exploration and production of oil, in the next 20 years, if Parliament went ahead to pass the Petroleum Exploration and Production Bill.

“…Under the Hybrid Modern Concession, Ghana, since oil exploration and exploitation started 3 years ago, has earned only US$1.8 billion while the foreign oil companies made away with US$7.590 billion . By March 31, 2014 Ghana earned US$2.089 billion leaving the foreign companies a whopping US$8.448 billion.

“If our political leaders and the technocrats were to throw away their self-interests and be bold enough to adopt the PSA, Ghana, with revenue accruing from the Jubilee Fields alone would experience a great transformation. Ghana would earn over US$50 in 20 years as against the US$20 billion and US$19 billion estimated by the IMF and the World Bank respectively.”

GIGS argued that the bill, would condemn the citizenry, particularly the future generation, into perpetual economic doom by denying the country a revenue shortfall of US$30 billion under the Modern Concession Agreement (MCA) contained in the 2013 Petroleum Exploration and Production Bill. Ghana’s adoption of the Modern Concession, GIGS argued, would make it difficult for her to derive the full maximum benefits from the oil and gas resources, if the bill was passed.

In GIGS’ analysis, the estimated value of the estimated 2 billion barrels of oil in the Jubilee Oil fields is in excess of US$160 billion, even though the IMF and WB have both projected conflicting figures of US$20.269 billion and US$19.390 billion, respectively as the estimated profits Ghana is expected to accrue in the next 20 years.

However, GIGS contended that Ghana can cut a far better deal, which, it said, could earn the country over US$50 billion within the same period, if the political leadership would opt for the Pure Production Sharing Agreement (PSA), instead of the current Modern Concession, which is a hybrid of concession and the PSA.

Senior Research Officer of GIGS Solomon Kwawukume repeated those same concerns when he appeared on the Morning Starr Wednesday on Starr 103.5FM to discuss the country’s oil and gas industry. Agreeing with him on the show was Mr Toledzi who said: “Production sharing agreement is the best form of oil contract agreement that we can have in Ghana, because if we had gone that direction, by now we should be earning over US$60 billion instead of the US$20 billion” which the Bretton Wood institutions have projected for Ghana in the next 20 years.

He said the hybrid modern system is “not going to help the country and we need to migrate from it.”

Credit:starrfm