Feature Article of Saturday, 8 March 2014

Columnist: Kwawukume, Solomon

Three years of oil production in Ghana.

An overview of jubilee fields operations, 2013

The third year of oil production in Ghana, precisely in the Jubilee fields, has ended and the economy of Ghana is reeling with the Cedi in a free fall.
The economic consequences of this free fall are common knowledge, down to the common man in the street, because of the biting effects. However, one expects that with oil revenue flowing in, there must be some resemblance of stability by now, but it is not. With the publication of the Petroleum Receipt and Distribution 4th Quarter Report 2013 on 10th February 2014, one can now do some assessment of the 2013 operations to see how Ghana fared. The first part of this assessment will look at 2013 operations; the second part will deal with the cumulative operational results since inception all under the current prevailing system – Royalty Tax (Modern Concession). And, the last part, what Ghana’s position would have been by adopting pure Production Sharing Agreement which countries with lesser stature than Ghana are adopting.

Below is a Table of Operational Results for 2013.

Table 1.

Item…… ……Unit…..1st Quarter……2nd Quarter….3rd Quarter….4th Quarter...Total
Volume………. Barrels…9,941,523……8,812,157………*5,540,569……*5,002,217….29,296,416
GOG/GNPC…. Barrels...1,991,751……1,991,205………….994,966………..898,338…….5,876,260
FOC…………… Barrels.. 7,949,772.…..6,820,952……..*4,545,603.…..*4,103,879….23,420,206

GOG/GNPC.% of Share..
20.03%.....22.59%.............17.95%............17.95%.........20.05%
FOC………….% of Share.. 79.97%.....77.41%............82.05%.............82.05%.........79.95%

*The Minister of Finance concealed the total volume lifted by all the parties and the Foreign Oil Companies from the 3rd and 4th quarter reports, a departure from what was established from inception. However, it is easy to calculate what the FOCs were likely to have lifted and the total volume if there were no under declaration of production figures which is normally associated with Royalty Tax System or the Concession.

Production in the first half year totalled 18,753.680 barrels but dropped to 10,542,786 barrels in the second half year totalling 29,296,466 barrels worth US$3,139,423,203. Ghana had 5,876,260 barrels worth gross receipt of US$628,580.078 (See Table 2 below). The drop of 8,210,894 barrels in production has made Ghana to lose the much needed foreign exchange in the sum of US$171,213,512.

No one can be in doubt that the current crisis of the free fall of the cedi could have been ameliorated, in spite of the fall in gold prices the Minister of Finance claimed accentuated the crisis, had this fall in oil output not occurred. One of the biggest problems associated with the Concession/Royalty Tax System is FOCs can decide to cut back on production without notifying the host country, thereby denying the host government the needed foreign exchange, creating distortions within the economy and disenchantment against the government in power.

Table 2. Operational Results from Jubilee Fields, 2013
. ………………………………………………Barrels……………………………..US Dollar

Total Volume……………………………………29,296,466……………………………..3,139,423,203
Due to Ghana...
1) Royalties, Carried & Participation
Interest………..…………………………….5,876,260……….………………………..628,580,078
2) Corporate Taxes................................................................................163,833,472
3) Surface Rentals…………………………………………………………………………………….798,331
Total Due Ghana.................................................................................793,211,881
Net Due FOCs,…….…………………………23,420,206…….…………………2,346,211,322

Ghana earned a total of US$793,211,881 in 2013 from the Jubilee Fields Operations shown in the Table 2 above.
The payment of corporate tax of US$163,833,472 on the 3 years of operations meant taxable profits of US$468,095,634 was what was made. This is one of the drawbacks bedevilling the system Ghana is operating.

Table 3. Operational Results of Jubilee Fields from 2011 – 2013 under Current Prevailing System – Royalty Tax System (Modern Concession)
……………………………………………….Barrels……………………………..US Dollar
Total Volume Lifted…………………………….85,055,067…………………………...9,370,156,920
GOG / GNPC...
1) Royalties, Carried & Participation
Interest……………………………………….14,737,483………………………………1,614,328,537
2) Corporate Taxes...............................................................................163,833,472
3) Surface Rentals...................................................................................1,246,555
Total Due Ghana............................................................................1,779,408,564
Net Due FOCs,………………………………….70,317,584…………………...7,590,748,356

Table 3 above shows that Ghana earned a total of US$1,779,408,564 within 3 years of operation, while the FOCs earned US$ 7,590,748,356, an indication that the whole initial investment of about US$4 billion which they claimed they made, which Ghana also contributed to, have been fully recouped. IMANI Ghana raised questions and doubts about this figure, imputing likely bloating of it. The total earnings by Ghana in 3 years represent 18.99% which is 23.01% short of the “minimum government take” of 42% of production set by USA Government Accountability Office.


Table 4. Total Receipt from Jubilee Fields and others 2011 – 2013
………………………………………………………………………………US Dollars
Jubilee Fields……………………………………………….……….1,779,408,564
Others Royalties
Saltpond, Omikrom
Lushann 3%.....................................................................507,469
..
Total …………………………………………………….…..1,779,916,033.00
..
Transfer to GNPC..
..
Equity Finance…………………………………………..………….325,435,224
..
Carried & Participation ………………………………..…..…..335,800,414
Interest……………………………………………………….………661,235,638
Net Due to GOG……………………………………………...1,118,680,395

Out of the Net due to GOG, US$277,759,862 are in Heritage Fund and Ghana Stabilisation Fund as at June 2013, leaving a balance of US$840,920,533 for government to use. The break-down are US$200,793,508 in the Ghana Stabilisation Fund and US$76,966,354 in the Heritage Fund as at June 2013. Professor Paul Collier of Oxford University in his keynote address at the 2012 New Year School at Legon warned Ghana not to copy Norway blindly by setting up the Heritage Fund now. He said the funds could be used to improve upon our infrastructural deficits, with greater ripple off benefits, than investing them in low yield bonds.
Under the current prevailing system, virtually all the transfer to GNPC are paid back to the Jubilee Partners for participating in the Project as capital cost development and contribution towards daily operating costs. The capital development cost is normal, but contribution towards daily operating costs is a rip-off. GNPC has so far paid over US$140 million within the last 3 years and this is expected to increase to US$150 million per year over the next 10 years (Energising Economic Growth in Ghana 2013).
GNPC has become a waste conduit under the current prevailing system. The above situation is what the Draft (Exploration & Production) Bill 2013 has captured, and if passed into law would amount to enslaving present and future generations forever.
Ghana would be better placed, as illustrated in the tables below, without participating in the project by adopting the simplest Production Sharing Agreement, giving all the most attractive incentives one can find in the upstream industry to the FOCs. The most attractive incentives are import and export exemptions, unlimited cost recovering and long tax holidays. They are already enjoying the first two.
In the subsequent Tables 5 to 8 are presented what Ghana’s position would have been operating under the Production Sharing Agreement (PSA), and the losses therein suffered operating under current, prevailing Royalty Tax System (Modern Concession).
Table 5. Position Under Production Sharing Agreement
. …………………………………… Barrels……………………………….. US Dollar
Total Volume……………………………85,055,067………………………………….9,370,156,920
Less Royalty 5%..........................4,252,753……………………………………..468,483,270
Production Cost
(10,000 x 365 x 3 years)…………...10,950,000………………………………..1,206,252,000
Capital Cost Recovery
(10,500 x 365 x 3 years)……………11,497,500………………………………..1,266,564,600
Total Direct Cost of Production……26,700,253………………………………..2,941,299,870

Profit Oil to be Shared……………..58,354,814………………………………...6,428,857,050
...
Ghana 60%..................................35,012,888………………………………..3,857,314,230
Foreign Oil Companies 40%..........23,341,814..,..……………………………2,571,542,820
Total….……………………………………..58,354,814………………………………...6,428,857,005

Note: GNPC gave 10,000 barrels per day as production cost and 10,500 barrels as capital cost recovery or cash equivalent on 10th July, 2008.
If Ghana were operating under the Production Sharing Agreement, Ghana would have received a total of 39,265,641 barrels of oil worth US$4,325,797,471 within 3 years of operation. This amount is exclusive corporate taxes and surface rentals. (See Table 6 below)

Table 6. Total Due Ghana
…………………………………Barrels……………….US Dollars………..%
Royalty………………………………4,252,753…………....468,483,270
Profit Oil…………………………….5,012,888………….3,857,314,207
Total…………………………………39,265,641…..…….4,325,797,477………....46.14

The foreign oil companies on the other hand would receive 45,789,426 barrels worth UD$5,044,359,420 (see Table 7 below).

Table 7. Total Due FOCs
…………………………………Barrels……………….US Dollars………….%
Production Cost……………….10,950,000……………….1,206,252,000
Capital Cost Recovery……….11,497,500……………….1,266,564,600
Profit Oil………………………….23,341,926……………….2,571,542,820
Total……………………………….45,789,426……………….5,044,359,420……..,.53.84


Table 8. Losses suffered by Ghana operating under Current, Prevailing Royalty Tax System (Modern Concession)

…………………………………………………….Barrels……………………….US Dollars
PSA……………………………………………..39,265,641……………………….4,325,797,477
RTS……………………………………………..14,737,483………………………..1,77,408,564
Losses………………………………………….24,528,156……………………….2,546,388,913

For not operating under the Production Sharing Agreement, Ghana lost US$2,546,388,913 within three years (See table 8 above).

Ghana would continue to lose heavily every year when other fields come on stream. Ghana would lose between US$60 and US$80 billion on Jubilee fields alone.

All agreements signed in the past and presently to be backed by the fiscal provisions in the Draft Bill would amount to a sale of our sovereignty and economic independence of Ghanaians.

By: SOLOMON KWAWUKUME

Author: Ghana’s Oil and Gas Discoveries: Towards Full Maximum Benefits.
Fomer Snr. Accountant with Texaco, Ghana, and Lecturer in Oil Revenue Management and Petroleum Profit Taxation, Lagos State College of Science & Technology, Lagos, Nigeria