The management of Ghana’s oil sector is a mess: what’s wrong?
After three decades of exploration, Ghana discovered commercially viable quantities of oil in 2007. Within 3.5 years, it exported its first barrels of crude oil. The progression from discovery to extraction and export has been twice as fast as the global average of six to seven years.
The record speed is indicative of the high political interest in the sector compared to others such as agriculture and health.
In the years that followed, oil contributed in different ways to Ghana’s economy. Directly, it has contributed more than $1 billion a year to the country’s gross domestic product. This includes royalties paid by multinational oil companies. Indirect benefits include gas infrastructure, expansion of the petrochemical industry and increased skilled employment.
The literature on natural resources in resource-rich developing countries equates these resources with a “curse”. Indeed, the benefits are, in most cases on the continent, not appreciated by citizens.
Does Ghana illustrate this?
In a recent article, I studied political behavior 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 oil governance. This is despite the stronger checks and balances that civil society introduced after the discovery of oil in 2007.
Arbitrary and uncensored decision-making has consistently cost the country – and especially ordinary Ghanaians. This continues to be the case today.
A history of mistakes
I have identified three phases of oil governance.
The first – from 1983 to 2001 – was the period when personal relationships determined who held power in oil governance. This period predates the discovery and production of oil.
The second – from 2001 to 2008 – saw the sector change radically as patronage politics took over to attract foreign investment.
The third phase – from 2009 to the present day – has been the active involvement of civil society following discovery and production. This provided a degree of checks and balances.
In 1983, the Ghana National Petroleum Corporation was established as the national oil company. He was responsible for the emergence of the sector as a rent-seeking business. In effect, it has hedged projected future oil revenues in the form of loans receivable to meet the country’s oil import needs and finance exploration activities.
This action has been called “forward spoil” – a situation where oil revenues are received several years before discovery and production.
The company’s mandate was oil exploration as well as the importation of petroleum products for domestic consumption. Fiscal space was limited at the time. One of the company’s strategies was therefore to use anticipated revenues from future oil production from certain fields to cover increases in oil prices. He 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 currency to cover the cost.
These types of derivatives transactions are costing Ghana millions of dollars due to misinformed advice from its financial advisers.
In addition, the government demanded 65% of the profits. That was a high share for a nascent industry with no certainty of discovery. This has made Ghana unattractive to investors. The state continued to inject resources into exploration and suffered further financial losses.
Investors began to take an interest in it in 2001 when a new government revised the conditions for profit-sharing to between 10 and 15%.
The oil sector continues to be manipulated by politicians. This is done through the indiscriminate dismissal and appointment of technocrats and executives. The Ghana National Petroleum Corporation has become notorious for being involved in several oil deal scandals. These potentially cost the taxpayer billions of dollars. Some diversions have been avoided thanks to the vigilance of civil society groups. But there is still a lack of transparency and insufficient political will to propose and implement laws to the letter.
The oil itself is not the problem
The main determinants of the quality of petroleum governance in Ghana are the political environment and the degree of civil society engagement in governance.
Oil is not a problem, nor any natural resource per se.
Instead, oil arrived at a time when the country was plagued by three fundamental structural problems.
First, the political arrangement was characterized by political power influencing the disbursement of benefits to elites. This arrangement has been aggravated by the excessive power of decision-making, appointment and disbursement of resources in the hands of political actors at the national level.
In this context, there was subjectivity, secrecy and a lack of consideration for alternative and local perspectives in governance in general.
These factors have cost Ghana several billion dollars. And keep doing it.
Recent revelations show that Ghana stands to lose an estimated $1.5 billion a year due to a 2020/21 gas supply deal. The deal saw Ghana sell gas at an unnecessarily reduced rate of 77% to a private entity.
Second, internal and external conflicts between political parties have shaped institutional quality and outcomes. For example, the dismissal or reassignment of up to 90% of the staff of the Ghana National Petroleum Corporation in 2001 due to a change of government enabled the government to pay an avoidable legal debt of $19.5 million to General Society. The lack of coordination between the then Kufour government and the company due to competing political interests between the two main political parties in Ghana left the possibility for the Societe Generale to walk away with an amount of judgment debt traded higher rather than lower.
Similarly, tensions in 2014 between two leading members of the then-ruling party – Tsatsu Tsikata and Kwesi Botchwey – derailed efforts to build the necessary infrastructure, contributing to the flaring (burning) of gas in the early stages. of oil extraction. This disagreement had its roots in the mid-1990s when Botchwey was finance minister under Rawlings and vehemently opposed the indiscriminate injection of public funds into oil exploration.
Third, all Ghanaian governments have demonstrated a lack of political will to formulate and implement laws and other legal frameworks. Even where laws exist, they have shown an appetite for circumventing them.
Options for strengthening oil governance
To ensure lasting confidence in Ghana’s oil sector, I propose the following.
First, future legislation – or amendments to existing laws – must provide guidelines for dealing with fairness in the workplace. Equity is the equity that one gets in exchange for one’s efforts to attract oil investors to Ghana.
EO Group and AGM Petroleum Ghana Ltd are examples of Ghanaian entities that have benefited. Without any legislation governing this phenomenon, political actors have exploited it by allowing their cronies to attract privileged investors to the sector without going through competitive procurement processes.
Addressing this loophole would ensure that profit sharing in oil deals is discussed with the country’s national interest in mind, not self-interest.
Second, Parliament must ensure that regulations are drafted and published in the Official Gazette within the stipulated time after the laws are passed. This will eliminate excessive political discretion in law enforcement.
Third, civil society groups, such as the media, should up the ante by making it politically unattractive for politicians to exploit oil governance. They can do this by vigorously informing voters about how the sector is run.
Fourth, political parties should reach a consensus to develop a long-term bipartisan strategy to establish membership and appointment stability in the oil sector.