Emerging Oil Countries in West Africa – turning the curse into sustained and inclusive development


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Mohammed Amin Adam, Executive Director, African Centre for Energy Policy

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Emerging Oil Countries in West Africa – turning the curse into sustained and inclusive development

  1. 1. Emerging Oil Countries in West Africa – turning the curse into sustained and inclusive development Mohammed Amin Adam Africa Centre for Energy Policy International Conference Emerging Oil, Gas and Mining Countries – Opportunities, Risks and Pitfalls
  2. 2. Introduction • Ghana discovered oil and gas in commercial quantities in 2007 and production actually commenced in 2010. • To date, more than 100 million barrels of oil has been produced and exported. • Oil is significant for Ghana in several ways – Ghana attained the status of a net exporter of oil in 2013 – Ghana has been the third largest recipient of FDI in Africa consecutively in 2011/2012 – In 3 years, Government has earned about US$1.7 billion as its share of oil revenues • Around Ghana, countries such as Liberia and Sierra Leone are showing promise in oil exploration which could eventually increase oil activities in these emerging countries. • As frontier countries, they are faced with challenges covering contract negotiation, capturing and collecting oil rent and efficiently investing oil revenues for inclusive development
  3. 3. Policy Options for Transforming Oil into inclusive and sustained Development Exploration policy Licensing regime Fiscal Contributions Revenue Management Policy Rent collection Investment efficiency Social and Environmental Policy Free Prior and Informed consent Environmental mitigation
  4. 4. Licensing Regime • Licensing is the first phase of exploitation of natural resources • The process must however be open and allow for public participation • Citizens rights of ownership and their rights to information • This must be expressed across the entire contract value chain. Thus, open contracting in the oil industry requires that: – The process for contracting/licensing of oil blocks must be open and competitive, – Contract disclosure must be mandatory, and – The products of Contracts (oil production data, sales price, revenues, costs) must not be held confidential. – Information on beneficial ownership must be disclosed – The National Oil Company must be regulated and have financial transparency – Citizens must be allowed to make public comments on contracts (citizens participation)
  5. 5. Ghana Procedure for Obtaining Petroleum Block – After Discovery Effective Petroleum Agreement Complete App Form to Minister Petroleum Commission Minister’s Negotiation Team Negotiated Draft PA to Minister Cabinet Approval Parliamentary Ratification (a.268(1), Constitution) Negotiation Team: MOE, GNPC, AG Department, GRA GNPC Evaluation: Financial, Technical, Work programme, Fiscal Package Performance Bond/Bank Guarantee if no strong financial capability
  6. 6. Ghana and contracting process • The licensing problem in Ghana – No open tendering process for oil blocks and companies and individuals awarded licenses through an administrative process – There is no mandatory contract disclosure – No requirement for the disclosure of beneficial owners in oil deals – Extensive confidentiality clauses in all petroleum contracts – There is no requirement for public comments on Contracts unlike the legislative process. • Ghana is developing a new Petroleum Law which attempts to address open licensing • Section 10(1) – open and competitive bidding • Section 10(2) – Minister can ignore outcome of open and competitive process and to adopt direct negotiation • Section 10(4) – Minister can start with direct negotiation
  7. 7. Sierra and Liberia show Good Examples in Open and competitive bidding and contract disclosure • Sierra Leone • There is requirement for open concession process • The condition under which an open concession process can be ignored - if: – the final terms offered are unfavourable to the state and if, – the reasons for tender process is unsuccessful. • These reasons must be published when a tender is cancelled. • Liberia • EITI regime provides for mandatory contract disclosure
  8. 8. Angola shows a good example in open and competitive bidding and direct negotiations • There is requirement for open concession process • The condition under which an open concession process can be ignored: • “When a proposal for direct negotiations is received, the Minister is required to declare it through public notice, and can commence negotiations with the company if, within fifteen days from the date of the notice, no other entity declares an interest in the area in questions. But if any entity declares an interest, a tender shall open for competitive process”.
  9. 9. South Sudan shows a good example in disclosure of beneficial ownership information • The Petroleum Act 2012 of the Republic of South Sudan provides one of the most progressive regimes. Section 79 of the Act states in part as follows: • “The Minister shall make available to the public, both on the Ministry’s website and by any other appropriate means to inform interested persons: • a. All key oil sector production, revenue, and expenditure data, petroleum agreements and licenses; • b. Justification of award of petroleum agreements, the beneficial ownership information for the contractor
  10. 10. Fiscal Contributions • Except in a few countries in the world, the State is the owner of natural resources in the subsoil. • Governments have responsibility and the right to maximize the benefits from the exploitation of these resources for the benefit of the state. • The contention over revenue capture versus investment attraction • In most resource rich countries including frontier ones such as. Ghana, Liberia and Sierra Leone, the race to bottom model which characterized their mining sectors some how influenced the oil sector – Supper attractive contracts. – Lower fiscal models. • These are still associated with frontier countries in search of upstream investments
  11. 11. Comparative Petroleum Corporate Tax in Africa (%) 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Nigeria Cameroon Angola Ghana Ivory Coast Uganda Frontiers Mature
  12. 12. Comparative Average State Participation (%) 0% 10% 20% 30% 40% 50% 60% Angola CameroonIvory coast Kenya Uganda Ghana Global Average Mature Frontiers Countries
  13. 13. Comparative Average Government Take in Africa (%) 80 75 75 66 60 60 54 50 49 0 10 20 30 40 50 60 70 80 90 Mature Frontiers
  14. 14. The case for fiscal benchmarking? • There is no international benchmark for determining fairer taxes in the oil and gas industry • Differences in Government Take depend on – Negotiation capacity – Stage of development of the industry (Frontier versus mature) – Geology or level of prospectivity • Fairer fiscal regimes can be measured by fiscal benchmarks
  15. 15. Resource Tax Dilemma • ‘’In matters of mining taxation, governments rarely believe that companies pay too much tax; companies rarely believe that they pay too little tax; and citizens rarely believe that they actually see tangible benefits from the taxes that are paid’’. (Otto et al., 2006: xi)
  16. 16. Rise of Oil Nationalism? • Now there is a cry to increase fiscal contributions. This has been described as the rise of resource nationalism – Changes in oil legislations – Ghana, Nigeria, Liberia. – Using bid system of new acreage to increase terms – Libya – Creating higher level of state participation – Sierra Leone, Ghana – Introduction of new taxes – Ghana (Capital Gain Tax), • Fiscal reforms described as ‘The rise of resource nationalism’’ – Economist – February 11, 2012
  17. 17. Turning resource revenues into long- term sustainable development ‘Someone… must always be taking the long view. They (sic) must somehow notice in advance that the resource economy is moving along a long path that is bound to end in disequilibrium of some extreme kind. If they do notice it, and take defensive actions, they will help steer the economy from the wrong path toward the right one’. Robert Solow (1974) “The Economics of Resources or the Resources of Economics” AER, Vol. 64(2)
  18. 18. Policy Options for transforming oil into Assets • Two policy choices – Spending of revenues from production • Spending on consumption (including direct cash transfers) • Spending on investment to build the infrastructure asset base of the country (capital stock) – Accumulating financial assets through Sovereign Wealth Funds 18
  19. 19. Some Challenges and Pitfalls Capacity to negotiate Oil Contracts Capacity to collect Oil revenues Capacity to spend efficiently
  20. 20. Contract Negotiation - Minnows Company Net Daily Production as at end 2013 AGM Petroleum Ghana No production history Cola Natural Resources No data available AMNI International 11,700 barrels CAMAC Energy 2,000 barrels • Ghana rushing approval of oil contracts to Minnows ahead of competitive regime (From August 2013 – March 2014). • This denies the country the benefits of competition such as “Money left on the table”, benefits associated with the “winner’s curse”, higher non-fiscal benefits, etc.
  21. 21. Recent Fiscal comparison – Case of CAMAC Energy • Ghana Contract – April 2014 Item Fiscal provision Block size 1,508 square kilometers GNPC Carried interest 10% GNPC Explorco 25% Add. Interest 10% Royalty 12.5% Minimum expenditure 30 million dollars Windfall profit Rate of return based on allowable thresh-hold of 17.5% rate of return Corporate Tax 35% Cost recovery limit Nil
  22. 22. Recent Fiscal comparison – Case of CAMAC Energy • Kenya Contract – Block 16 – 10 May 2012 Item Fiscal provision Block size 3,613.34 square kilometers Signature bonus 310,000 dollars 0-30,000 bbl/d 50% + tax included = share of profit oil Next 25,000 60% + tax included Next 25,000 65% + tax included Next 20,000 70% + tax included Above 100,000 78% + tax included Windfall profit Price based at 50/bbl threshold price Additional interest 20% Minimum expenditure 57.2 million dollars Cost recovery limit 60%
  23. 23. Capacity to collect revenues • Oil Companies undertake self assessment which are not subject to any serious audit and are just accepted by the Government for the purpose of determining their tax liability to the state. • Example of poor auditing in Ghana Year Royalties Participating Interest Surface Rental Corporate Tax Budget Actual Budget Actual Budget Actual Budget Actual 2011 134.2 122.9 297.2 321.2 0 0 402.5 0 2012 147.8 150.7 147.8 150.7 0 0.448 239.7 0 2013 143.7 149.0 143.7 149.0 0.422 0.798 55.9 172.2
  24. 24. Spending Revenues Projects %oil revenue Result implications Roads 40% 800km School blocks 20% 4000 3000 Tractors 20% 20,000 30% Fertilizer 20% 6m 4000
  25. 25. Capacity to spend - Spreading Oil money too thin SECTORS ABFA 2012 (16) ABFA 2013 (15) ABFA 2014 (6) Office of the President 65,000,000 20,000,000 Parliament of Ghana 5,000,000 Finance and Economic Planning 9,000,000 28,850,000 local government 15,000,000 5,000,000 Food & Agriculture 53,000,000 20,000,000 136,420,759 Lands & Natural Resources 33,840,000 Trade & Industry 13,040,610 5,000,000 59,574,431 Envir, Science & Technology 25,000,000 300,000 Tourism and Culture 5,000,000 Energy 130,000,000 130,000,000 430,951,887 Water Resources, Wrks & Housing 21,000,000 59517043 Roads and Highways 40,000,000 100,000,000 139,413,241 Transport 70,000,000 4 0,000,000 30,089,468 Education 20,000,000 1 0,000,000 103,510,325 Health 2 9,900,000 Employment & Social Welfare 10,000,000 300,000 Youth & Sports 22,000,000 Interior 25,000,000 2 3,000,000
  26. 26. Resource curse in Emerging Countries • It is too early to conclude that Ghana, Sierra Leone and Liberia will experience the curse of oil • However, two issues which are associated with these countries can facilitate their fast movement towards the curse – Governance curse – Poor institutions, poor regulatory environment, increasing vested interest – Economic curse – high fiscal deficits, wrong investment decisions (e.g spending oil revenues on office of the president), corruption (economic crimes)