Petroleum contracts fiscal regime: are we getting better with age?
Adnan Adams Mohammed
Since Ghana started commercial production of oil, the
expectations from most Ghanaians including economists, politicians, civil
society groups and ordinary citizens were that of high optimism. Some even thought
the country will be a ‘Dubai’ replicate of Africa using the earnings from the
oil.
But, after 11 years of exploration and production of oil and
gas from three oil fields (Jubilee field, TEN field and ENI field), there
appears to be a wide gap between reality and the expectations that people had. Admittedly
though, there is appreciative record of foreign direct investment (FDI) which in
2011 contributed to the over 14% growth of the economy and also contributing
over 80% to 8.4% GDP recorded in 2017.
The Finance Minister Mr. Ken Ofori Atta in last year’s budget
stated that, total petroleum receipts are approximately US$3.2
billion as at 2016, though this is additional money that was not available
to the country, people argue that Ghana could have gotten more if we negotiated
better.
The US$3.2 billion receipt is about 4 percent of Ghana’s
Gross Domestic Product (GDP). Although this provides an additional stream of
income for the government, it is relatively small compared to non-oil revenues
over same period, most of which come from the mining and agriculture sectors.
The US$3.2 billion can also be considered not significant
compared to the investment in the oil and gas sector in Ghana since exploration
begun over a decade ago, with many suggesting that Ghana could have gotten more
from the resource.
The excuse of attracting
FDIs
A look at the various petroleum agreements shows that a number
of incentives were given to the oil companies. Government argue that such
incentives were intended to attract the International Oil Companies (IOCs) as
Ghana was not a known oil producer. However, it is important to note that key
determinants of Foreign Direct Investment (FDI) inflow go beyond fiscal
incentives; they include maturity of geological basins, availability of
geological data, track record of exploration successes, skilled labour, level
of infrastructure development, and efficiency of the services sector. May be we
should pay more attention to these in order to have a stronger bargaining chip.
Like any FDI in all sectors of the
economy, any oil block or field signed brings jobs, tax revenue, crude oil and
gas sales, additional investments, which results in economic growth and maybe
economic development. But more importantly, the better the terms of the
agreements, the better the benefits derived.
Are we getting any
better with new contracts?
Granted that we were novice some ten years ago, how about
now? Experts say Ghana’s western offshore area has been de-risked after the
second oil field, TEN, commenced commercial production. Expectedly, the power
and skills of the national negotiation team for oil block contracts should improve
to secure better deals and draw in more revenue and benefits to the country.
However, a trend analysis of the various contracts signed does not suggest that
we have gotten better with experience.
The petroleum fiscal regime is a set of laws, regulations
and agreements which governs the economic benefits derived from petroleum
exploration and production. The regime regulates transactions between the
political entity and the legal entities involved.
The fiscal regime within the country’s petroleum sector include;
paid and carried interest, royalties, corporate income tax, surface rentals, income
tax (PAYE), bonus payment and Additional oil entitlement, property rates of
landed assets among others.
According to the International Monetary Fund (IMF), fiscal
regimes for countries vary greatly and a wide range of instruments being
used. “Country circumstances require
tailored advice, but a regime combining a royalty and a tax targeted explicitly
on rents (along with the standard corporate income tax) has appeal for many
developing countries”, Carlo Cottarelli of (IMF) Fiscal Affairs Department has
said.
Table of selected oil block contracts and their fiscal
regime is provided below:
Oil Blocks
|
Carried Interest
|
Paid Interest
|
Royalty
|
CIT
|
Surface Rental (US$/ per sq Km)
|
Capital Allowances
|
Import Duty
|
Export Duty
|
Jubilee Partners
|
10%
|
3.64%
|
5%
|
35%
|
30, 50, 75, 100
|
100% 5-year straight-line deduction
|
0
|
0
|
TEN
|
10%
|
5%
|
5%
|
35%
|
30, 50, 75, 100
|
100% 5-year straight-line deduction
|
0
|
0
|
ENI
|
15%
|
5%
|
10% @ 1,312 ft; 7.5% @
depth > 1,312 ft
|
35%
|
30, 50, 75, 100
|
100% 5-year straight-line deduction
|
0
|
0
|
Springfield
|
New - 11%
Existing 8%
|
New – 17%
Existing – 5%
|
12.5%
|
35%
|
50, 100, 100, 200
|
100% 5-year straight line deduction
|
0
|
0
|
ExxonMobil
|
15%
|
3%
|
10%
|
35%
|
50, 100, 100, 200
|
100% 10-year straight line deduction
|
0
|
0
|
From the table above; critical trend analysis of the fiscals
of the five selected oil block contracts depicts a mix judgement of improved
benefits to the country. With the Jubilee Field and TEN fields, their fiscal
terms in their agreement are almost the same with exception of Paid Interest
where that of Jubilee field is 3.64% and TEN field had 5%. Also, ENI field had
almost same agreement with both Jubilee field and TEN field but had their
Carried Interest of 15% while Jubilee and TEN Carried Interest were 10%.
Springfield contract, signed latter, offered Ghana a better
deal among the first four contracts (Jubilee, TEN, ENI). This showed an
improvement in the trend analysis of the fiscals. Logically, it was anticipated
that subsequent contracts will also indicate an improvement over the previous
ones. But that was not to be. The ExxonMobil contracts currently in public
domain, looks worse off than that of Springfield. This has been a shock to most
oil experts who were expecting that Ghana could have gotten a better fiscal term
than that of Springfield which was the latest before the negotiation and
signing of the ExxonMobil contract. It should be stated though that Government
has indicated that the ExxonMobile contract in the public domain is different
from what they are working with, although it has failed to produce what they
claim is authentic contract.
According to Dr. Steve Manteaw, energy policy analyst and Public
Interest and Accountability Committee Chair, ExxonMobil being allowed to
recover cost over 10 years appears to over-ride the provisions of Section 67(6)
of the Income Tax Law and its rationale. According to income tax law, financial
cost recovery is supposed to be 20% straight-line method which is five years
strictly.
Also, the sweeping nature of waivers in all the contracts
really disadvantage Ghana: Tax liability waved on all export of petroleum from
Ghana; No duty or other charges are 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 the
national oil company, GNPC shall have the right of first refusal for these
goods, yet this is not in the best interest of Ghana; and same as the Contractor’s
VAT liability waiver.
Again, authorization of 100% repatriation of earnings in all
the contract agreements is really a disturbing situation to the economy. It
affects the value of the local currency as well deprive the country of supposed
benefit of reinvestment of profits in other sectors of the economy to help in
the evenly growth of all sectors of the economy.
There are also instances where provisions in contracts
conflict and more often than not overrides the national laws. Dr Manteaw who
also serves as Co-Chair of Ghana Extractive Industry Transparency Index (GHEITI)
argues that this practice of using oil contracts to re-write the law of the
industry as in the case of exempting some companies from the provisions of Section
67.6 of the Income Tax Law, undermines the rule of law of the country.
He adds that, 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 and new
contracts, as he thinks, Ghana could be giving out too much to the investors.
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