Ghana's oil and gas agreements: the terrible sword of Damocles

Jul 17, 2010 02:00 AM

by Solomon Kwawukume

Since I posted the article, "Open letter to Parliament of Ghana", the press and media houses, civil societies, and think tank groups have not come out to make any comments. However, the article has generated a great lot of excitement all over the world, on many renowned websites.
The complete silence of the media, the press houses, civil societies and pressure groups at home has vindicated the former British Ambassador to Ghana, Mr Craig Murray's, assertion that there has not been a good public debate and discussion on Ghana's oil finds. What has happened, so far, was the heightening of public expectations, which officialdom has now realised was wrong, and saw the need to start playing down.

However, a lot of falsehood has also been told to the public through the regional tours, creating the impression that all was well with oil agreements Ghana was entering into with the Foreign Oil Companies (FOC).
One of such falsehood I heard on 21 March 2010 at the Accra International Conference Centre was Ghana has to go round the world begging the FOC to come into the country, that has warranted the signing of such agreements, giving in to the terms and conditions of the FOC, if not they would not come. The agreements are not being made public, because the Minister of Energy said on air that the FOC do not want them made public.

My contact and interaction with some friends and colleagues on 21st March 2010 at the Accra International Conference Centre (AICC), has made me realise that most educated Ghanaians have little or no knowledge about the oil and gas industry. They are completely ignorant; I do not blame them, because the industry is new to the country.
I am sure, and believe, this has accounted for the delay in having the legal regulatory framework which should govern the operations of the industry in the country in place. However, this cannot be an excuse if the proper acceptable worldwide practice now, in the oil industry was adopted. There are numerous modellegal frameworks on Production Sharing Agreements around to adopt, if Ghana has chosen that way. Nigeria is just close by.

The purpose of this article is to educate fellow Ghanaians about the various types of oil agreements and contracts, and to examine whether Ghana has chosen the right course.
Basically, there are four major types of contract types applicable and used in the oil and gas industry. They are Concessions, Joint Ventures, Production Sharing Agreement or Contract and Service Agreements. Each of these can be used to achieve the same results. However, the differences between them are in the levels of control given to the FOC, revenue sharing arrangements, and the levels of involvement by the government or the National Oil Company (NOC), GNPC in this case. All the above contract types fall under two methods of contracting -- bilateral negotiation and competitive bidding.

Of the two, a bilateral negotiation is the most dangerous, and is tinted with fraudulent, corrupt practices and arm-twisting by the FOC.
The FOC approaches the host government to apply for a concession for exploration, development and production of the oilfield for export. The FOC, in turn, pays royalties and taxes to the host government. Under competitive bidding, applicants are normally required to satisfy certain standards in order to qualify to be awarded the contract. These standards and requirements to be met by the FOC are backed by legislation already in place, therefore, any likely underhand dealings are minimised. Bids are normally sealed. The oil field blocks are put on tender worldwide.

Contract types
Kristen Bindemann described two of the contract types -- concession and joint ventures -- as bastard forms of oil agreements, because of the lots of problems and limitations associated with them. Of the two, however, contracts under concession are the most exploitative, fraudulent and are associated with corrupt practices, even in the developed world where the oil giants are based.
For example, USA courts are filled with cases filed against oil companies for under-payment of royalties to both states and federal governments. Judges deliver funny rulings against the government, because they have shares and stakes in the oil companies.

For example, when President Obama placed a cap on the ban he lifted on the exploration and development of deep water oil fields on the eastern Atlantic Coast, in the wake of the Gulf of Mexico BP oil disaster, a judge ruled it was illegal for him to do so.
Under the Concession, oil and gas discoveries became bonafide properties of the FOC. The host government, or the country, has no control over it. Contracts are signed to cover a long period of time with stabilisation clauses to protect themselves. The host country has no rights, apart from the right to royalties based on production, which are difficult to verify.

The royalties to be paid are normally dictated by the FOC based on posted or wellhead prices, which are very much below the prevailing market prices at the time of signing the contract. In the event of rising crude oil prices, the host country continues to receive the fixed royalties, if the contract has no clauses allowing for a revision.
Thus windfalls are enjoyed by the FOC alone. The USA Federal Government recently lost a legal battle between the oil companies, led by Anadarko, under similar circumstances. The USA Government is losing $ 53 bn for the next 25 years in royalties.

Expenses are gold-plated to reduce the amount of tax payable to the host government. Contracts also contain clauses protecting them from legal suits that are likely to arise from damages to the environment, and setting limits as to the level of compensation they would pay in the event of the mishap, if they want to be little generous.
Under the concession the FOC bears all the risks, the host country shares in the reward. However, that should not account for the massive exploitation of the host country's resources, which values cannot compare to the initial capital investments put in by the FOC. Saudi Arabia, other Arab countries, and the entire oil producing countries in the developing world have moved away from these unjust and inequitable types of oil contract agreements.

Joint venture agreement
The lesser of the bastards, as the name implies, is modelled on the basis of a partnership, whereby the host government and the FOC contribute towards the cost of bringing the oil field to production in an agreed proportions. The rewards and the risks associated with the project are shared in the agreed proportion.
However, in practice, most times the FOC bears all the financial risks. The host government pays back plus interest on its share of the contribution.

In addition to royalties, taxes and profit oil, the host government is entitled to a share of profits. Joint ventures also have their limitations, because the FOC are still the operators, therefore, there is a mutual suspicion between the parties as to whether things are being donecorrectly, especially with regard to expenses.
Joint Ventures are also associated with poor funding, especially from the side of the host government, leading to imbalances in the financial contributions and consequential loss of revenue to the government.

Production Sharing Agreement (PSA)
As the name implies, the PSA focuses on the sharing of the output of oil and gas operations in agreed proportions between the FOC, as a contractor to the government, and the national oil company, as the representative of the government interests in the project. This form of contracts originated in Indonesia in 1966, and was modelled along the lines of share cropping in agriculture, where the owner of the land grants a farmer the right to grow crops on his land, and shares the proceeds with the farmer, in agreed proportions after the harvest.
Under a PSA, the contractor, usually a FOC, bears the entire cost and risk of exploration activities, and only reaps the rewards after a commercial find.

In theevent of a commercial discovery, the FOC recovers its cost fully from the allocation of oil referred to as "cost oil". Allowance is also made from production for royalties, after which the remainder of the production, called "Profit Oil," is shared in agreed proportions between the FOC and the government.
The FOC thereafter pays income tax on its profits from the project. The oil and all the installations remain the property of the host government throughout the duration of the contract. Windfalls arising out of crude oil price increases are enjoyed by all parties.

The PSA model is what almost all oil producing countries in the world, except the USA and Western Europe, Malta exclusive, have adopted to overcome the problems, difficulties and inequalities associated with the concession and joint venture agreements.
There are various forms of PSA models currently in use, differing from one country to another. The differences are mostly in the area of incentives and tax regimes purposely to attract investors. In a study carried out by Kristen Bindemann, covering the period 1966 to 1998, 74 oil producing countries signed a total of 268 PSAs, including Ghana being credited with one agreement. In the study, Angola and India are said to have best and tough PSAs. Nigeria has moved away from the concession and joint ventures to the PSA because of the potentials and advantages it holds.

Service agreements
These are similar to PSAs, however, pure service agreement differs from the PSA. Under the SA, the FOC bears the financial risk and engages in exploration and development for an agreed fixed fee or other form of compensation. Under this type of contract, as the name implies, the FOC supplies services and know-how only.
The FOC has no equity interest in the project, however, the difference between the SA and PSA, the two contract forms are the remuneration of the contractor and the control over operations. In essence, some service agreements are disguised PSAs when it comes to the question ofownership of the oil and gas resources. This contract types is usually used by the Arab countries, and in the Middle East.

Choice for Ghana
Fellow Ghanaians, which of these contract types would you select for Ghana if you were placed to handle and take decisions on the newly-found wealth? Since the Minister of Energy publicly said on air that the FOCs do not want the agreements to be made public, one can only draw conclusions from statements and pronouncements made by public officials, as to what contract type our leaders have chosen for Ghana.
What do you make from these statements?

"Again, because of the risky nature of the exploration and production business, and the state's desire to avoid high exposure in petroleum exploration and production activity, it has adopted the Royalty Tax System instead of the Joint Venture System" -- GNPC (Daily Graphic of 10th July, 2008).
"This, he said, was because the government alone could not control large stakes in the sector as other oil producing countries were doing," Public Relations Officer, Ministry of Energy, Daily Graphic 24th July 2009.

My question is, what prevents Ghana from doing exactly what other oil producing countries are doing, if that is the right direction to go for the benefits of their countries?
Judging from the above two statements, one can conclude that our leadership has chosen for Ghana the most dangerous bastard of oil contract type -- concession. Are the Nigerians, Indonesians, Russians, South Americans, Central Americans, Libyans, Angolans, Eastern Europeans, Brazilians, Peruvians, North Africans, the Arabs in the Middle East, stupid and silly controlling large stakes in their oil and gas resources?

Why do our leaders have to take us 60 years back to a system Saudi Arabia, Indonesia, Iran, Iraq and Nigeria have left behind, because they found it not just, and not equitable, but rather exploitative? Why should our leaders take us into a system the USA, the giant of the whole world, is battling with in bothstate and federal courts, due to the underpayment of royalties by the oil giants in that country?
Why should our leaders adopt the concession contract type, Kristen Bindemann described a bastard of an oil contract? I cannot fathom any reason, but sheer greed and selfishness on the part of officials handling the oil contracts.

The rumpus between KOSMOS and the GNPC and the government would not have occurred if the PSA was adopted, because KOSMOS cannot make claims to any asset oil in this country.
What Ghanaians do not know is, even before the first barrel of oil is pumped, the FOC have made a super profit of $ 12.00 per barrel, should the crude oil price still hover between $ 72.00 and $ 75.00 per barrel. This is about 400 % more than the royalty of $ 3.00 per barrel Ghana is getting. The posted price published by GNPC is $ 60.00 per barrel, and by the terms, under a concession, this price would last through the contract period of 30 years.

This can only change if there is a provision in the contract allowing for adjustments in the event of rising crude oil prices. As earlier said, the USA government is losing $ 53 bn under similar circumstances, when it failed to provide a clause in a contract signed with oil companies to take care of adjustments, if crude oil prices increased.
Under the PSA, "profit oil" is what is shared, therefore, all parties reap and enjoy the windfall due to a rise in oil prices. What is the mad rush to award such a bastard contract type to cover all the coastline of Ghana, if not because of greed, corruption, and selfishness on the part of party officials, and officials handling the oil contracts?

The New Patriotic Party (NPP) administration awarded contracts in the Western part of Ghana under this bastard contract, and the NDC is also in hurry to award all the blocks in the Eastern part of Ghana where the largest deposits of Ghana's oil are.
The reasons the government gave for adopting the Royalty Tax System cannot stand the test of good reason and good judgment. If the government wanted to avoid all risks associated with oil and gas activities, but only wanted to take a reward, then the PSA was the best way to go.

A parliamentary delegation and officials from the GNPC, Ministries of Finance and Energy should go to Angola, India and Nigeria, and learn the right thing from them. To me, the Royalty Tax System the government is adopting under the concession contract type is being pushed by mere greed and selfishness on the part of party officials and technocrats on one part, and corrupt practices of the FOC on the other.
All the agreements and contract that the past administration, under leadership of President Kufuor, and the current administration of President Atta Mills, that Ghana had signed with the FOC are terrible swords of Damocles hanging over the neck of Ghana, in readiness to devour. The present and future generations would not forgive them, if more and more people begin to understand the workings of the oil and gas industry.

I am appealingto all Ghanaians to put their political affiliations aside, and rise up as the Indonesians did after independence in 1960, to free themselves from massive exploitation under this type of bastard contract. It is not too late yet.
Our gold, which has been taken away from our shores for over 500 years, and other minerals, diamond, manganese and bauxite close to 100 years, are mined under this obnoxious royalty tax system, and which is still going on. The royalty tax system was designed by our colonial masters to rob and rip us of our resources and wealth in the name of "we do not have the know-how." Ghanaians, do not allow our oil and gas resources to go the same way.

We should start the march now, the way the Indonesians did that gave birth to the Production Sharing Agreement to the developing countries. Without a change in the royalty tax system now, Ghana would never, never derive the maximum full benefits from the oil and gas. Arise, Ghanaians!!!
We have reached the crossroads. The status quo mustchange with the oil and gas resources.

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