The Government of Ghana has signed an agreement with ExxonMobil in a move that will see increased activities in Ghana’s oil exploration activities. The Minister of Energy, Boakye Agyarko says the move will also increase government’s revenue from the sector to propel economic growth and transformation. ExxonMobil’s investment in the oil sector becomes the first major one in Ghana following the landmark ruling by ITLOS in the maritime border dispute between Ghana and Ivory Coast, in September last year.
“Exxon Mobil is coming in with the highest standard of safety, financial accounting and all that we need to get done as a country…we have received a lot of expression of interests from other major players; the BP, Shell, Chevron, among others. All of them are now coming to operate in Ghana,” he stated.
“In terms of local content policies, the laws have been strengthened the Petroleum Commission is at the forefront of enforcing the laws and we at GNPC have the sustainability and localization department which tries to make sure that we bring our partner’s attention to the mode of operation so that we take advantage to get benefits from our local people both corporate and individuals.”
The allocated block is situated in the Deep Water Cape Three Points area and was allocated through direct negotiation. The Minister for Energy has described the terms of the agreement as one of the best: “It is indeed the first time the public has been invited to witness the signing of an agreement so we can commend government for such great initiative “.
Parliament is expected to ratify the contract after an indigenous Ghanaian company has been found to take an assigned 5%;
The Contracting Process
The default position of the law in respect of licensing:
Section . 10(3) of the Petroleum Exploration and Production Act – Petroleum Agreement SHALL ONLY be entered into, after an open, transparent, and competitive public tender process;
However, Minister has discretion not to enter into a Petroleum Agreement after bidding round. The discretion is to be exercise on grounds of stated reasons.
Again, Section .10 (9) grants discretion to the Minister (in consultation with PC) to enter into Direct Negotiation where such approach represents the most EFFICIENT manner to achieve optimum returns or outcome. This can be subjective. Who defines efficiency? How do we measure efficiency?
The Minister served notice of intent to enter into Direct Negotiations with ExxonMobil, in accordance with the law, in October 2017, but the stated reasons were not convincing enough;
They included: the expertise, track record, technological acumen, financial capacity of Exxon Mobil, But these are requirements for entering into petroleum agreement (Section . 10.10) of Act 919. Besides, these attributes are shared by many including giants like Chevron, BP and Shell.
Having these attributes do not necessarily suggest that Ghana will get a great offer – it is only when these attributes are pitched against similar size companies, with capacity to work in ultra-deep waters, that they will offer greater value;
The notice, again, makes reference to an MoU signed on 30th April 2015 between the parties. The MoU in question committed the parties to negotiate an agreement over a period of seven months (Exclusivity period);
It is not clear what the reference to the MoU was supposed to achieve. Seems like a covert attempt to suggest that the negotiations pre-date Act 919.
Particulars / Parties to The Contract
GoG, GNPC (Ghana Group) – 15 percent carried interest. Upon discovery has option of taking up to 3 percent paid interest (additional) Art. 2.5 of Agreement (the Law does not provide threshold but defers the determination of the level of paid interest to the negotiating parties);
ExxonMobil – 80 percent interest holding; Yet to be identified indigenous Ghanaian company – 5 percent;
The assignment in respect of the local company is in keeping with Local Content Regulations 2204, 2013, which provides under: Interest of a citizen in petroleum operations, that:4. (1) An indigenous Ghanaian company shall be given first preference in the grant of a petroleum agreement or a licence with respect to petroleum activities subject to the fulfillment of the conditions specified in these Regulations;
(2) There shall be at least a five percent equity participation of an indigenous Ghanaian company other than the Corporation to be qualified to enter into a petroleum agreement or a petroleum licence;
(3) Despite sub-regulation (2), the Minister may vary the requirement specified in that sub-regulation, in circumstances where an indigenous Ghanaian company is unable to satisfy the requirement of the five percent equity participation.
(4) For the purposes of sub-regulation (2), the Minister shall determine the persons qualified.
Fiscal Provisions / Other Imposts In The GoG Exxonmobil Contract
Royalty – 10 percent
Corporate Income Tax (CIT) – 35 percent
AOE – Calculated monthly based on ROR and prevailing market price of crude
Export duty – 0
Import duty – 0
Acreage fees as provided in Petroleum law:
Total exploration period – 6 years
Initial exploration period (first 2.5 years) – US$50 / sq. Km
First Extension (succeeding 2 years) – US$100 / sq. Km
Second Extension (last 1.5 years) – US$100 / sq. Km
Dev’t & Production phase – US$200 / sq. Km
Is the Exxonmobil Contract the Best we’ve ever Signed, as the Energy Minister Asserted during the Signing of the Contract?
Some Worrying Provisions in the Contract
Provision of bonus payment (Sect.88 of the Act) was not invoked;
The Sankofa GyeNyame (SGN) Contract which was signed ahead of ExxonMobil has carried and Participating Interest totaling 20% while ExxonMobil said to be the best has 18% Carried and Participating Interest;
Art. 12.5 Which allows ExxonMobil to recover cost over 10 years appears to over-ride the provisions of Sect. 67(6) of the Petroleum Income Tax Law and its rationale;
Stabilization provisions create a one-way street. Sweeping nature of waivers: Tax liability waved on all export of petroleum from Ghana;
No duty or other charges shall be levied on such export, including vessels used in transporting the crude. Tax liability waved on all imports of plant, equipment and materials for the project. This is however on condition that GNPC shall have the right of first refusal for these goods;
Contractor’s VAT liability waved. Art.13.1 authorizes 100% repatriation of earnings
On the basis of the foregoing analysis one can conveniently, and without hesitation conclude that the Energy Minister’s suggestion that the ExxonMobil Agreement is Ghana’s best is highly contestable – the fiscals speak for themselves;
The practice of using contracts to re-write the law as in the case of exempting ExxonMobil from the provisions of Sect. 67.6 of the PITL, undermines the rule of law;
Going forward, it will be useful for an upstream cost/benefit analysis to compute or estimate the total tax expenditure as against revenue, in the various agreements to inform policy – We could be giving out too much;
The decision to assign training, as well as technical fees to the PC is a step in the right direction, as it will help enhance regulatory capacity at a time when the majors are coming in;
In the mining sector, companies have argued that even though the law allows them to repatriate all their earnings, in practice they return substantial portions of their earnings back to the country to pay salaries and finance their daily operations. It is therefore baffling that we continue to make such provisions as 100% repatriation of earnings in agreements.
Some Good Things about the Agreement
An Obligation has been placed on ExxonMobil to develop GNPC’s operational capacity within 4 years to meet its aspirations to achieve operatorship capacity.
There is a Commitment by ExxonMobil to fulfilling local content obligations imposed by LI 2204; There are Opportunities for GNPC to earn income by providing direct services to the project (Art. 2.8). The earnings will be either cash or credit against future cash calls;
There are also Clearly stated financial sanctions for non-compliance with minimum work obligation that is, stipulated minimum expenditure (US$20m / US$30m) less cost of actual work done shall be recovered by GNPC from a security to be posted ExxonMobil. there is a Commitment to best environmental practices and EP laws of Ghana;
There are also Emphasis on ‘No Gas Flaring’ policy (Art. 14.2). Consistent with Section . 33 of Act 919. An obligation has been placed on the Contractor to acquire approvals or waivers from relevant agencies and regulators like EPA, Fisheries, Navigation, Communication instructive.
Enhanced surface rental fee (Section. 86 of Act 919 subjects it to Minister’s discretion). Emphasis’s have been made on GNPC’s right of first refusal (this is in accordance with the provisions of the Petroleum law);
It insulates GNPC against decommissioning liability, where it elects to keep facilities and equipment in order to continue operations after expiry or termination of contract, the posting of decommissioning bond transferable to GNPC in the event of such occurrence. It affirms Ghana’s ownership right to associated gas (Art.14.0);
It stipulates that fiscal terms for crude will apply to non-associated gas. Such clarity is important to eliminate any ambiguity. Under Domestic Supply Requirement (15.1), the Ghana Group are under obligation to supply their respective entitlements for local consumption;
Again, Contractor and associates are under obligation (Art.15.2) to supply a volume of crude oil for local consumption, subject to being given 3 months prior notice (Consistent with Sect. 71 of Act 919);
Provides that, locally sourced goods and services can be up to 10% dearer and yet be considered / selected in a competitive tender (Art. 20.2).Allocation of US$2 million to PC as training allowance per contract year. Allocation of US$7 million to PC as technology support payment (one-off);
Interestingly, the two payments to PC are cost deductible.Responsibility has been placed on Contractor to train on the job a mutually agreed number of Ghanaians – cost to be treated as petroleum cost (Art.21.4);
Parties agree to subject contract to the laws of Ghana; it Provides that, changes in applicable laws, to the extent that they impact adversely on Contractor, could trigger renegotiation in good faith, to restore economic, fiscal equilibrium. If balance cannot be restored then the state will indemnify contractor through financial compensation or other means acceptable to Contractor.