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Is Current Petroleum Revenue Management System Fit for Onshore Oil and Gas Production?

  • SOURCE: reportingoilandgas.org | Gideon Ofosu-Peasah
  • Recent protests against the proposed exploration of oil in the Keta basin possibly calls for a second look at Ghana’s current petroleum revenue management act which in its current form, ignores allocation of revenues to resource hosting communities who are most directly impacted by resource extraction. This is crucial since there are potential reserves also in the Voltain basin, which unlike the current productions, are onshore.

    Drawing lessons from mining sector, the entry of mining companies into communities has often times truncated sustained livelihoods of local people who depended on such lands. This situation leads to rapid changes in the societal structures, loss of native knowledge, social cohesion and makes local people vulnerable to economic uncertainties as those who formerly owned lands and depended on them now have to look somewhere else to subsist. These occurrences are similar to onshore oil and gas activities where severe social, economic, health, safety, security and environmental risks exit as evidenced in resources rich communities in Africa like Nigeria, Sudan, Angola just to mention but a few. A key question is whether Ghana’s current revenue management system is fit for onshore oil and gas activities?

    Currently, Ghana operates a national revenue distribution method whereby petroleum revenues accrue to a holding fund with allocations made to Ghana National Petroleum Company, stabilization, heritage and annual budgetary fund. (see figure 1).

    Figure 1:  Allocation of Petroleum Revenue

    Source: PRMA 2011

     

    The government of the day spends from the annual budget on behalf of Ghanaians, based on its selected priority areas during its term in office.  But what have we got to show as a country with seven (7) years of practicing this system? How many citizens can testify benefitting from oil? While these issues may not generate so much tension in the context of offshore operations, the situation could be different onshore. Will the current system of central government spend on its selected priority areas inure to oil host communities? Regional and district allocation of oil funded projects also look problematic. Could this be the reason for recent protest in some communities within the catchment of the Keta basin, just because residents do not see benefits of already produced oil? What can be changed with the current revenue distribution model operated by government for offshore revenues?

    Oil production activities in the Niger delta, in neighbouring Nigeria has led to severe environmental damage, economic poverty and constant conflict in the region. The government and multinational oil establishments reap all the benefits while minorities in the region face poverty, intertribal conflict and arms proliferation.

    In Sudan, the “World Politics Watch” article in 2006 warned that oil and ethnicity clashes may threaten another surge in the conflict due to “unequal distribution of oil revenues, bungled oil contracts, and differences in ethnic power sharing” creating new grounds for conflict in the already divided country. The government of South Sudan in particular, accuses Khartoum of not channeling oil revenue to the regional communities and blames foreign companies of exploring oil resources illegitimately, further increasing tensions among Sudanese factions.

     

    Recent Ghanaian Experiences

    Not long ago, hundreds of residents of Anloga a town in the Volta Region protested against the proposed exploration of oil in the Keta basin on the conviction that it will deprive them of their sources of livelihoods mainly because they farmed on those lands and fished in the waterbodies. Thoughts of land masses to be covered by pipelines, pumpjacks, demarcated security zones, social and environmental problems, probably troubled them. They also might have nurtured fears of some sort of “militancy” a characteristic of onshore oil exploration activities.

    As evidenced in oil fringe communities in the Western region, prior to offshore petroleum exploration and production activities in Ghana’s coast, fisherfolks were assured of unimpeded fishing activities. But the story is now different because, fishermen in these communities have complained of the adverse impact of offshore petroleum activities on fish catch. Projects undertaken by oil companies impede livelihoods of fisherfolks in these communities.  For instance, offshore oil and gas operations are a leading loss of access to fishing grounds. Even though some Fisherfolks may be benefiting from oil company’s corporate social responsibilities projects, they lose an important natural asset (fishing grounds) to the oil and gas industry.Oil companies implement corporate social responsibility projects as an alternative to more sustainable oil and gas development projects identified during environmental and social impact assessments bringing into question the monitoring capacity of oversight institutions. The key question remains whether Ghana’s current petroleum revenue management system for distributing offshore petroleum revenues is fit for onshore oil and gas production?

     

    What options can we consider?

    We can learn from the mining sector, how it distributes mineral royalties to the subnational level. 80 % royalty goes to the consolidated fund to be spent through the budget, 10% to a Minerals Development Fund to address development challenges affecting mining communities and another 10% to the Office of the Administrator of Stool Lands(OASL) to stools, traditional council, district and municipal assemblies. (See figure 2 below).

     

    Source: GHEITI mining sector report,2014

    This can be done for petroleum revenues from onshore production but with improvement.  The subnational petroleum revenue distribution method shares national revenues with subnational governments, in our case regional coordinating councils, municipal/districts assemblies as practiced in Ecuador, Mongolia, Indonesia and Peru. This method allows allocation of a percentage of resource revenues to producing subnational or local government as a means to allow those most directly impacted by resource extraction to have enhanced revenue benefits. Even though this system has its unique challenges, this system may be a sure way to calm nerves when questions of alternative livelihoods emerge in onshore oil and gas activities.

    Also, Alaska and Mongolia practice the direct distribution system. This system allows governments to share revenue benefits directly to citizens via cash transfers. Proponents argue that this form of distribution increases citizens engagement, benefit the poor, elicit the support of the population and increase government accountability for the use of resource wealth. The extreme option of directly distributing all resource revenues to the population may however be problematic: the state would be left without adequate resources to carry out its core activities, increase consumption against investment and a neglect in addressing society’s intergenerational concerns. However, there could be merit in more modest schemes that either seek to replicate the Alaskan model or seek to develop (or expand) the system of cash transfers to the population.

     

    Conclusion

    Going forward, considerations should be given to the amendment of the current petroleum revenue management act to include provisions for subnational revenue sharing for onshore petroleum revenuesas in the case of mineral royalties. These provisions should allow statutory payments of a percentage of petroleum revenues by central government to oil hosting communities and should have an explicit revenue management structure at the subnational level.

    Developing a revenue distribution formula between the central government and producing communities,thatapplies revenues to high impact public investment projects at both levels is vital to mitigate inequalities between producing and non-producing regions.

    Transparency and consensus building between producing and non-producing communities are key to establishing the legitimacy of any revenue distribution method. This when considered will avert future protests and lead to better outcomes than to what pertains to mining.

    Gideon Ofosu-Peasah

    Gideon Ofosu-Peasah

    Policy Analyst at Penplusbytes
    Gideon Ofosu-Peasah is the Policy Analyst and Team Lead for the Extractives Department at Penplusbytes, where he provides insights, advice and leads in producing robust research backed projects for the team. He has over 7 years of experience in the Ghanaian oil and gas industry and has a number of scholarly research papers to his credit which have been published in the prestigious Social Science Research Network(SSRN) electronic journal and on reportingoilandgas.org. He holds an Msc in Economics with specialization in Energy and Natural Resource Economics from the Kwame Nkrumah University of Science and Technology.
    Gideon Ofosu-Peasah

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