Tuesday, 12 June 2018

Petroleum contracts fiscal regime: are we getting better with age?


Image result for Ken Ofori Atta AND BOAKYE AGYARKO

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 those 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 contributed heavily to the 8.4% GDP growth recorded in 2017.
The Finance Minister Mr. Ken Ofori Atta in last year’s budget stated that, total petroleum receipts were 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 began 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 argues 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 novices 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 with 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’s 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 abovea 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 the same agreement with both Jubilee field and TEN field but had their Carried Interest at 15% while Jubilee and TEN Carried Interest were both 10%.
Springfield contract, signed later, 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 the authentic contract.
According to Dr. Steve Manteaw, energy policy analyst and Public Interest and Accountability Committee Chairman, 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 for the economy. It affects the value of the local currency as well as deprives the country of supposed benefit of reinvestment of profits in other sectors of the economy to help in the even 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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