Sat, 03 Dec 2022

Ghana's petroleum sector management is a mess: what's gone wrong?

The Conversation
04 Oct 2022, 04:39 GMT+10

After three decades of prospecting Ghana discovered commercially viable quantities of petroleum in 2007. Within 3.5 years, it exported its first barrels of crude oil. The progression from discovery to extraction and export was twice as rapid as the global average of six to seven years.

The record speed is indicative of the significant political interest in the sector relative to others such as agriculture and healthcare.

In the intervening years, oil has contributed in many different ways to Ghana's economy. Directly it has contributed over US$1bn annually to the gross domestic product of the country. This includes the royalties paid by multinational oil companies. Indirect benefits have included gas infrastructure, an expanded petrochemical industry and increased skilled employment.

The natural resource literature on resource rich developing countries equate such resources to a 'curse'. This is because the benefits are, in most cases on the continent, not enjoyed by citizens.

Does Ghana exemplify this?

In a recent paper, I investigated the political behaviour and institutional arrangements in the petroleum sector over three decades.

My view, based on my analysis, is that two factors - political disagreements and political considerations - supersede any predictable and clearly stated objectives in petroleum governance. This is despite enhanced checks and balances that civil society introduced after the discovery of oil in 2007.

The arbitrary and uncensored decision making have consistently cost the country - and particularly ordinary Ghanaian dearly. This continues to be the case today.

A history of mistakes

I identified three phases of petroleum governance.

The first - 1983 to 2001 - was the period when personal relationships determined who had power in petroleum governance. This period predates oil discovery and production.

The second - 2001 to 2008 - saw the sector change dramatically as clientelist political manoeuvres took over to attract foreign investments.

The third phase - from 2009 to the present - was the active involvement of civil society following the discovery and production. This offered some degree of checks-and-balances.

In 1983 the Ghana National Petroleum Corporation was set up as a national oil company. It was responsible for the sector emerging as a rent-seeking venture. This was because it hedged anticipated future petroleum revenues in the form of loans receivables to meet the country's petroleum import needs and to fund exploration activities.

This action was termed 'booty futures' - a situation where revenues from petroleum are collected several years before discovery and production.

The corporation had the mandate for petroleum exploration as well as imports of petroleum products for domestic consumption. Fiscal space was constrained at the time. One of the corporation's strategies was therefore to use anticipated proceeds from future oil production from some fields to hedge oil price hikes. It also used proceeds from the sale of cocoa on the world market to directly pay for imported crude oil without having to look for foreign exchange to cover the cost.

These kinds of derivative transactions cost Ghana millions of dollars due to ill-informed advice from its financial advisers.

In addition, the government demanded 65% of the profits. This was a high share for a nascent industry without certainty of discovery. This made Ghana unattractive to investors. The state continued to pump resources into exploration and incurred further financial losses.

Investors began to show interest in 2001 when a new government revised the profit-sharing terms to between 10% and 15%.

The petroleum sector continues to be manipulated by politicians. This is done through the indiscriminate removal and appointment of technocrats and executives. The Ghana National Petroleum Corporation has become notorious for being embroiled in several petroleum agreement scandals. Potentially these are costing the tax payer billions of dollars. Some misappropriation has been averted due to the vigilance of civil society groups. But there's still a lack of transparency and inadequate political will to propose and implement laws to the letter.

Petroleum itself is not the problem

The primary determinants of the quality of Ghana's petroleum governance are the political environment and the degree of engagement of civil society in governance.

Petroleum is not a problem, neither is any natural resource per se.

Instead, petroleum arrived at a time in which the country was beset by three fundamental structural problems.

First, political arrangement was characterised by political power influencing the disbursement of benefits to the elites. This arrangement was aggravated by the excessive power of decision making, appointment and resource disbursement at the hands of national level political actors.

In this context, there was subjectivity, secrecy, and lack of consideration for alternative and grassroot perspectives in governance in general.

These factors have cost Ghana several billion dollars. And continue to do so.

Recent revelations show that Ghana risks losing about US$1.5 billion annually due to a 2020/21 gas supply agreement. The agreement has seen Ghana selling gas at a needlessly discounted rate of 77% to a private entity.

Second, internal and external party-political disputes have shaped institutional quality and outcomes. For instance, the dismissal or reassignment of up to 90% of Ghana National Petroleum Corporation staff in 2001 due to a change in government created room for the government to pay an avoidable judgement debt of US$19.5 million to Societe General. The lack of coordination between the then Kufour government and the corporation due to competing political interests between the two main political parties in Ghana left room for Societe General to get away with a higher rather than lower negotiated judgement debt amount.

Similarly, tensions in 2014 between two leading members of the then ruling party - Tsatsu Tsikata and Kwesi Botchwey - derailed efforts to set up the necessary infrastructure, contributing to the flaring (burning) of gas in the initial stages of petroleum extraction. This disagreement had roots in the mid-1990s when Botchwey was the Finance Minister under Rawlings and vehemently opposed the indiscriminate infusion of public funds into petroleum exploration.

Third, all Ghanaian governments have shown a lack of political will to formulate and implement laws and other legal frameworks. Even where laws exist, they have shown an appetite to bypass them.

Options for strengthening petroleum governance

To ensure sustained confidence in Ghana's petroleum sector, I propose the following.

First, future legislation - or amendments to existing laws - must provide guidelines for dealing with sweat equity. Sweat equity is the equity that one gets in return for one's efforts in bringing petroleum investors to Ghana.

The EO Group and the AGM Petroleum Ghana Ltd are examples of Ghanaian entities that have benefited from this. Without any legislation governing this phenomenon, political actors have exploited it by allowing their cronies to bring preferred investors into the sector without going through competitive procurement processes.

Dealing with this loophole would ensure that profit sharing in petroleum agreements were discussed with the country's national interest in mind, not personal interests.

Second, Parliament must ensure that regulations are drafted and gazetted within stipulated periods after passage of laws. This will get rid of excessive political discretion in the implementation of laws.

Third, civil society groups, such as the media, should up the ante by making it politically unattractive for politicians to exploit petroleum governance. They can do this by vigorously informing electorates about how the sector is being run.

Fourth, political parties should build consensus to develop a long-term bi-partisan strategy to establish stability of staffing and appointments in the petroleum sector.

Author: Clement Sefa-Nyarko - Postdoctoral research associate, La Trobe University The Conversation

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