Samuel Osei Bekoe, Africa Associate at the Natural Resource Governance Institute, considers the macroeconomic picture around Ghana’s oil industry…
Since first oil was drilled in late 2010, Ghana has produced over 161 million barrels from its Jubilee fields. With a total estimate of 732 million barrels of oil equivalent, the additional projects are likely to double the daily average production to 200,000 barrels per day. This sounds like good news: With oil prices still hovering around $50 per barrel, other countries have not had as much success in developing new oil and gas projects.
Public attention is gradually shifting towards these new discoveries, exploration and developments, but the oil price decline has given rise to difficult policy questions surrounding Ghana’s readiness to negotiate new agreements. Can the government obtain good deals while the companies have so much bargaining power? Are new licenses being awarded transparently? How much will new projects cost in the wake of low oil prices?
The opposition New Patriotic Party, for instance, has urged the government to renegotiate its agreement with ENI/Vitol on the Sankofa oil and gas project as NPP believes that prices agreed for gas from the project for domestic use are too high given recent declines in global gas prices.
Not that an increase in oil production will necessarily be a blessing. Despite the relatively recent commencement of oil production, Ghanaians have just suffered a severe economic crisis. The Ghanaian cedi was ranked one of the worst-performing currencies in Africa, with a depreciation of 31.2% in 2014, leading to an inflation spike of 17.2%, the highest in a decade. Ghana’s annual GDP growth fell from 14% in 2011 to 4.1% in 2015. And Ghana’s debt position has worsened, with net debt-to-GDP ratio increasing from 39 to 71% in a span of four years. The government went on to request an International Monetary Fund (IMF) bailout to help boost growth, jobs and economic stability.
Ghanaians are debating whether the fall in oil price was a significant contributor to the unsustainable debt crises and low growth. Finance minister Seth Terkper argued it was when he presented a mid-2015 budget review to parliament last year. But Ghana’s dependency on the sector is limited, unlike in neighbouring Nigeria, which is heavily dependent on the sector.
Even at the peak of oil prices in 2011, oil and gas contributed merely 7.2% of Ghana’s GDP, 13.1% of its total government revenue, and 28.2% of total exports. Many argue that the oil price fall was used as an easy culprit by politicians from both parties, who were actually responsible for the unsustainable increase in public expenditure since oil production. (Increased spending far outpaced the actual oil revenues accrued to the budget.)
The worst may be over. Having rated the government’s recent performance as satisfactory, IMF officials foresee a rosier picture in 2017, with growth bouncing back to 7.7% and inflation potentially reducing to 8.9%.
Will oil revenues contribute to the economic recovery and replenish the government’s coffers? Perhaps not in the short term, as the government needs to balance tax payments with the incentives required to promote new investment.
Companies should still be paying taxes. While prices are close to $50 per barrel, the Public Interest Accountability Committee (PIAC) estimates a reduction in the average operational costs in Jubilee from $11.59 to $11.04 per barrel, which should leave a comfortable operating margin.
However, companies have been allegedly deducting exploration and development costs from investments in the new fields against profits earned from Jubilee since 2011. With lower revenues due to lower prices, this has allowed them to minimise their tax bills in 2015 – an inducement that may be necessary to protect future exploration and production. PIAC’s 2015 report shows that corporate income taxes paid by companies operating in the Jubilee fields reduced from $284 million in 2014 to only $20 million in 2015, a reduction of approximately 93%.
With the new Income Tax Act (2015), a clear ring-fencing provision will prevent companies from making cost deductions across different projects.
Despite fewer discoveries in 2015 than in 2014, producing companies like Tullow and Kosmos remain committed to their current and upcoming investments. With polls coming up (both presidential and parliamentary) in December, and oil and gas (prices, policies and strategies) likely to dominate debate, Ghanaians should consider the following lessons:
– The government should ensure transparency of information along the entire industry decision chain, particularly with regard to contracts and disclosure of the identities of beneficial owners of companies operating in Ghana. This would help attract more competition from oil companies into new license allocations and guarantee Ghanaian citizens that the government is negotiating the best possible deals for the country.
– There is a need to define an appropriate and feasible fiscal rule to avoid ever-increasing fiscal deficits and public debt. This could be done by amending the Petroleum Revenue Management Act (2011) or by passing and effectively implementing public financial management legislation.
– To reduce the vulnerability of Ghana’s revenue to oil price volatility in the future, the country should have a clear plan to use oil revenues to diversify into other promising economic sectors. ■
Samuel Osei Bekoe