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 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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