Public Interest Report No. 2

Transcription

1 Public Interest Report No. 2 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA Transparency without Accountability Mohammed Amin Adam (PhD) July 2014 Avenue D, Hse. No. 119 D, North Legon, P. O. Box CT2121 Cantonment, Accra Tel. : Edited by Kirsty Wissing

2 PUBLIC INTEREST REPORT No. 2 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA Transparency without Accountability Mohammed Amin Adam (PhD) July 2014 Edited by Kirsty Wissing Supported by:

3 i THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA TABLE OF CONTENTS List of Tables... ii EXECUTIVE SUMMARY... iii INTRODUCTION... 1 Section ANALYSIS OF PETROLEUM RECEIPTS Introduction... 4 i. Petroleum Receipts and Capital Gains Tax... 5 ii. Petroleum Revenues and Corporate Taxes... 6 iii. Surface Rentals... 8 iv. Expected Gas Revenues... 9 v. Redetermination and Petroleum Revenues Key Observations from Analysis of the Revenue Side Section ANALYSIS OF EXPENDITURE FROM PETROLEUM REVENUES Introduction How Much to Spend Where to Spend? Spending by GNPC Spending of the Annual Budget Funding Amount (ABFA) How Efficient to Spend? Spreading too thin? Section PERFORMANCE OF THE GHANA PETROLEUM FUNDS Introduction Effect of ABFA on the Ghana Petroleum Funds the role of selective interpretation of the law Section CASE STUDY RECONCILIATION OF CRUDE OIL LIFTING BY THE GHANA/GNPC GROUP Introduction What is Ghana s Entitlement from the Jubilee Field?... 39

4 ii THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA 4.3. Reconciliation of Crude oil Lifting i. Unaccounted Barrels ii. Spill-over Barrels Reconciliation of Petroleum Data between Government of Ghana and Accountability Institutions Section MAIN FINDINGS AND RECOMMENDATIONS List of Tables Table 1: Petroleum Receipts (US$)... 4 Table 2. Share of Petroleum by Jubilee Partners (%) Table 3: Amount of Petroleum Revenues allocated for Spending (US$) Table 4. Spending by GNPC (US$) Table 5. Commitment of Cash to Projects by GNPC (US$) Table 6. GNPC Costs Apportionment (US$ million) Table 7. Spending of ABFA by Priority Area Table 8: Road Infrastructure Investment from ABFA Table 9. Investment in Agriculture from ABFA Table 10. Allocation of ABFA by Ministries, Departments and Agencies Table 11: Road Investment from ABFA and Completion Stages Table 12. Allocation of ABFA by Ministries, Departments and Agencies (GHȻ) Table 13. Reconciliation of Data on the Ghana Petroleum Funds Table 14. Distribution of Petroleum Receipts (US$) Table 15: 2012 Variance Analysis of ABFA Table 16. Ghana/GNPC Group Entitlement in the Jubilee Unit Agreement Table 17. Ghana/GNPC Group Entitlement after Redetermination in October Table 18. Reconciliation of Crude Oil Lifting by Government Agencies Table 19. Data reconciliation between Government of Ghana and Accountability Institutions... 44

5 iii THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA EXECUTIVE SUMMARY Three years of Ghana s oil production has been very eventful. With more than 100 million barrels of crude oil already exported, oil has overtaken cocoa as the second largest export commodity of Ghana. Oil contributed to unprecedented growth in Ghana s GDP in 2011; whilst from Ghana was the third largest recipient of Foreign Direct Investment (FDI) in Africa largely on account of oil investment. Ghana has so far received over US$2 billion from its share of crude oil. But with production expected to increase as a result of new developments and new discoveries, experts and citizens are already looking back to how early oil revenues have been managed so far. On this journey of reflection, the (ACEP) in a new report titled Three Years of Petroleum Revenue Management in Ghana Transparency without Accountability, has explored a number of questions on how Ghana managed its oil money over the last three years. Whether Ghana so far received what is due it from oil? Whether the government has invested the oil money efficiently? And whether the Government complied with the strict restrictions on the utilization of oil money? The Report also covered key issues about petroleum revenue management highlighted in the 2011 and 2012 Reports of the Public Interest and Accountability Committee (PIAC); the 2010/2011 Ghana Extractive Industries Transparency Initiative (GHEITI) Reconciliation Report and the 2013 ACEP Report on Value for money of Projects Funded with Oil Revenues. The report concludes that Ghana s management of petroleum revenues has been characterized by greater transparency, but accountability remains very low. Specifically, this report found that: i. Ghana could have earned more from oil than it has done so far as a result of factors such as non-collection of capital gains tax on acquisitions in the Jubilee field projects, non-collection of corporate taxes, non-reporting of surface rental fees, non-realization of expected Gas receipts and redetermination of the Original Hydro Carbon in Place in the Jubilee Unit Operating Area.

6 iv THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA ii. The Ghana National Petroleum Corporation (GNPC) has weak spending capacity and some of the uses to which the corporation applied revenues ceded to it requires more explanation. These uses include its repayment of a facility from PNB Paribas for which there is no public information on the terms and use of the facility;; the sponsorship of Ghana s Black Stars participation at the World Cup; and the large amount of un-spent cash of about US$ million over the last three years in spite of parliamentary approval of the programmes which the money was meant for. iii. GNPC has been demanding to have control over its revenues from the carried and participating interest, to give it the leverage to raise its own capital to finance operations, but its current weak spending capacity does not support this demand. iv. There is demonstrated evidence of inefficiency in the use of petroleum revenues. Limited revenues have been thinly distributed over projects which has led to over-run timeframes and over-run costs. This has undermined value for money in projects funded with petroleum revenues. v. The Government of Ghana (GOG) has exploited weaknesses in the Petroleum Revenue Management Act (PRMA), 2011 (Act 815) to increase its spending of petroleum revenues meant for savings in the Stabilization Fund. The Minister of Finance capriciously exercised the provision that allows him the discretion to cap the Stabilization Fund in order to use excess revenue for debt repayment. The cap of US$250 million was without any basis except to deny the Fund money. vi. Government reporting on petroleum revenues is not adequate as data on annual stocks and spill-over barrels do not affect the determination of the benchmark revenue, nor is it considered in crude oil accounting. This has created room for potential under-declaration of crude oil produced in the previous year but lifted in the current year, and thereby undermines accountability. vii. There are discrepancies between Government reports on petroleum receipts and those of the accountability institutions such as PIAC and (GHEITI). These institutions should develop reporting structures that allow them to validate Government reported data through independent research/investigation.

7 v THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA To address the above issues, major recommendations on how Ghana could improve on crude oil and revenue accountability include but not limited to the following: i. Ghana should apply both the Petroleum Income Tax Law, 1987 (PNDC Law 188) and the Internal Revenue Act, 2000 (Act 592) in the oil industry. This calls for urgent harmonization of the tax laws to ensure Ghana maximizes revenues from the oil industry. ii. In approving the corporation s annual programme of activities, Parliament must seek evidence of efficient spending of previous allocations of petroleum revenues as a condition. Similarly, the allocation of revenues to the Ghana National Gas Company (GNGC, also known as Ghana Gas) should reverse from the Annual Budget Funding Amount (ABFA) to ceded revenues for the use of Ghana s national oil companies as prescribed in Act 815. However, like GNPC, Parliament must amend the Act to include a provision that requires GNGC to also submit its annual programmes to Parliament. iii. The use of petroleum revenues should be guided by development priorities, whilst project selection should be determined by the size of expected petroleum revenues and the extent to which those projects can add value to the economy. Government is encouraged to expedite the submission of the proposed Public Investment Management Bill to Parliament to pass into law, as it has great potential to address problems associated with project selection, timely delivery of projects and quality assurance. iv. The determination of the maximum cap on the Ghana Stabilization Fund should not be arbitrary. It should be based on benchmarks that help maintain strong liquidity of the Fund to enable it address the volatility effects of petroleum crude oil prices. This requires an amendment to Act 815. Also, any excess revenue over the cap should be applied to repaying debts that are specific and which have been evaluated to have greatly impacted on development of the country. v. Government must include reporting on annual stocks and spill-over barrels to enable citizens and accountability institutions to track revenues from the sale of crude oil. This also helps accountability institutions to reconcile Government data with other independent sources.

8 1 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA INTRODUCTION The discovery of oil and gas in the Jubilee Field in 2007 ended Ghana s long search for commercially viable discovery. With proven reserves of about 1.8 billion barrels of crude oil, Ghana was on its way to joining the league of oil producing countries. Commercial production of oil commenced in November 2010 and to date more than 100 million of crude oil has been exported from the Jubilee Field. Ghana has subsequently become a net producer of oil since Petroleum revenues have since 2011 become a feature of Ghana s annual Budget. The revenues have increased from US$444 million in 2011 to US$846 million in Thus by the end of 2013, Ghana earned a cumulative amount of US$1.8 billion. Following the commercial production of oil, Parliament passed the Petroleum Revenue Management Act 2011 (Act 815) to govern the management of petroleum revenues. The Act defines the framework for accounting for crude oil production, petroleum receipts and expenditure from petroleum revenues. It also provides investment and savings rules. In particular, the Act made provisions for financing the National Oil Company (NOC), for transfers to the Budget annually and for savings. The Savings Fund, called the Ghana Petroleum Funds (GPFs) consists of the Ghana Stabilization Fund (GSF) and the Ghana Heritage Fund (GHF), which are used respectively for the purpose of cushioning the Budget against oil price and production volatilities and for intergenerational equity objective. Since the commencement of the Act, the GPFs have been invested in qualifying instruments mostly in Euroclear Bank bonds. By the end of 2013, the total balance of the GPFs stood at US$609.9 million. Like every law, the implementation of the Act 815 has faced some challenges. These range from forecasting problems, interpretation of sections of the law, compensating errors, conflict of provisions and financing of the Public Interest and Accountability Committee (PIAC) a citizens based group providing independent oversight on the management of petroleum revenues.

9 2 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA The Government of Ghana announced its intention to review the Act three years into its implementation to address some of the challenges encountered over the period. A revised Bill is expected in Parliament for consideration of the proposed amendments later in the year Civil Society has doubted the good intentions of the Government by expressing fear the amendments would only loosen up the restrictions in the Act and create more room for Government to spend most of the revenues. It is in this spirit that a review of how the Government implemented the Act over the last three years has become more appropriate. This report which highlights the key issues that have affected the management of petroleum revenues will therefore bring to the fore the challenges as well as the opportunities for improving on the management of the revenues. Civil society groups and citizens generally could find this report very relevant in their advocacy for improved governance of petroleum revenues. Similarly, the Government of Ghana as well as other agencies of State that have mandate under the Act will appreciate independent perspectives of their stewardship so far and to apply the lessons in improving on their statutory roles. The report synthesizes different reports issued by the Government, the Bank of Ghana, the PIAC, the Ghana EITI and ACEP s Value for Money Report. In particular, the report covers the following: i. Analysis of data on crude oil production, petroleum receipts, expenditure from petroleum and the performance of the Ghana Petroleum Funds; ii. A review of findings from the reports outlined above and an assessment of the extent to which those findings have affected the management of petroleum revenues over the period ; iii. A review of the extent to which Government complied with the provisions of the Act 815; iv. There is also a case study on crude oil accounting. The Methodology used for this report was largely based on desktop analysis of various reports, analysis of the Government annual Budget and Policy Statements, and independent research. The report is largely qualitative with minor quantitative analysis. This was intended to make the report less technical for the understanding and use by civil society groups and citizens for advocacy.

10 3 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA Generally, the report found that Government has progressively improved on its management of petroleum revenues year after year; and has largely complied with provisions of the Act. There is evidence therefore of the application of the transparency principles in the Act which has ensured the timely publication of relevant data and information especially in However, there remain operational challenges that have undermined accountability of petroleum revenues, including for instance discrepancies in data published by the Government and the Accountability institutions, approval of Government s budget on petroleum revenues by Parliament without effective due diligence; poor resourcing of PIAC, lateness of the Ghana EITI Report of 2012 and 2013, misalignment between Petroleum Agreements and the Act 815 in terms of the revenue streams; and inefficiency in the spending of petroleum revenues; among others.

11 4 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA Section 1 ANALYSIS OF PETROLEUM RECEIPTS 1.1. Introduction Petroleum receipts in Ghana follow petroleum fiscal terms negotiated in the Petroleum Agreements between the Republic of Ghana and the International Oil Companies (IOCs). The fiscal terms which determine petroleum streams are defined in Section 6 of the Act 815 as follows: a. Royalties, additional oil entitlements, surface rentals, other receipts from any petroleum operations and from the sale or export of petroleum; b. Any amount from direct or indirect participation of government in petroleum operations; c. Corporate income taxes in cash from upstream and midstream petroleum companies; d. Any amount payable by the national oil company as corporate income tax, royalty, dividends, or any other amount due in accordance with the laws of Ghana; and e. Any amount received by government directly or indirectly from petroleum resources not covered by paragraphs (a) to (d) including where applicable, capital gains tax derived from the sale of ownership of exploration, development and production rights. Table 1: Petroleum Receipts (US$) Item Royalties Jubilee 122,941, ,642, ,006,213 Royalties Saltpond 0 104, ,276 Carried and Participating Interest 321,183, ,428, ,573,866 Corporate Income Tax ,985,498 Surface Rentals 0 448, ,332 Gas Receipts Total 444,124, ,623, ,767,184 Source: Various: Petroleum Annual Report, 2012, 2013; Reconciliation Report on Ghana Petroleum Funds, 2013.

12 5 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA From 2011 to 2013, the Government received a cumulative amount of US$1,832,515,649 being proceeds from its share of petroleum over the period. The following Table shows the contributions of the various revenues streams over the period. From the Table, there have been a number of gaps in revenue accounting which have affected the size of expected petroleum revenues. To date, Government s forecast of petroleum revenues have either exceeded or fallen short. Some of the factors that have accounted for these gaps are: i. Non-collection of capital gains tax on acquisitions in the Jubilee field projects ii. iii. iv. Non-collection of corporate taxes Non-reporting on surface rental fees Non-realization of expected Gas receipts v. Redetermination of the Original Hydro Carbon in Place in the Jubilee Unit Operating Area These factors have been explored in the following paragraphs: i. Petroleum Receipts and Capital Gains Tax An analysis of petroleum revenue streams for the period covering shows that the revenue streams recognised have wider scope than what is contained in the Petroleum Agreements signed with the oil companies before the commencement of oil production. For example, Section 6(v) of Act 815 recognizes capital gains tax derived from the sale of ownership of exploration, development and production rights. This however contradicts the negotiated terms in the currently producing Jubilee contracts which prohibit capital gain tax. Article 12.2(f) of the Petroleum Agreement on both the West Cape Three Points and Deep Water Tano Blocks provides that: Contractors shall be subject to.. taxes, duties, fees or other imports of a minor nature and amount in so far as they do not relate to the stamping and registration of this (1) Agreement, (2) any assignment of interest in this agreement or (3) any contract in respect of petroleum operations between contractor and any subcontractors. Accordingly, petroleum revenues declared by Government in 2011 and 2012 did not cover taxes on capital gained from the two main acquisitions over the period. On 26 th May, 2011, Tullow announced that it entered into a conditional agreement to acquire the interests of EO Group Limited for a combined share and cash consideration of US$305 million. The acquisition which was completed on 25 th July 2011, increased Tullow s interest in the West

13 6 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA Cape Three Points license offshore Ghana by 3.5% to 26.4% and increased the Group s interest in the Jubilee field by 1.7% to 36.5% 1. Similarly, the acquisition of Sabre Oil and Gas Holdings Ltd. received approvals by the Governments of Ghana and South Africa in February The prohibition of capital gains tax in the Petroleum Agreement is consistent with the Petroleum Income Tax Law, 1987 (PNDC Law 188) but inconsistent with Section 95 (1) of the Internal Revenue Act, 2000 (Act 592) which fixes capital gains tax at 10% of capital gains accruing to or derived by that person from the realization of a chargeable asset owned by that person. Although the Act 815 provides in Section 1(2) that where there is any conflict between the provisions of this law and (a) any other enactment, or (b) the terms, conditions and stipulations in a petroleum authorization, on the collection, allocation and management of petroleum revenue, the provisions of this Act shall prevail ;; both Government and industry have argued that negotiations of the producing Jubilee Agreements from which the acquisitions were made were governed by the Petroleum Income Tax Law (the industry specific tax law) and that these Agreements are protected by stability clauses. It is important to note that civil society actors drew attention to the conflict over capital gains tax between the Internal Revenue Act and the Jubilee Petroleum Agreements citing revenue losses of about $70 million 3. This sustained advocacy paid off as Government has now included it in recently negotiated Petroleum Agreements between the Government of Ghana and AMNI International and CAMAC Energy. This followed announcements by the Government that the capital gains tax as provided for in the Internal Revenue Act would apply to the petroleum industry 4. ii. Petroleum Revenues and Corporate Taxes Corporate taxes are charged on the profits of oil companies and are governed by PNDC Law 188. Profitability is determined by the difference between revenue oil and cost oil. Ghana s fiscal regime is a royalty/tax-based regime hence the corporate tax component appears to be a major source of petroleum revenues to the Government. In PNDC Law 188, the corporate tax 1 Tullow Oil Trading Statement and Operational Upates, 2011 (cited at 2 PetroSA PetroSA acquires stake in Jubilee oil field Cape Town, 9/20/2012 (cited at petrosa.co.za) 3 Public Agenda Newspaper, Friday 6 th August Budget and Policy Statement of the Government of Ghana, 2014, paragraph 991 which states that Mr. Speaker, it is proposed that provisions relating to the capital gains tax in the Internal Revenue Act, 2000 (Act 592) should now be applied to petroleum operations.

14 7 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA rate could go as high as 50% on profit oil. However, the Government has negotiated a rate of 35% in all Petroleum Agreements. Cost oil which reduces the tax base is also governed by PNDC Law 188 and requires an annual cost recovery of 20% of total cost oil for a period not exceeding 5 years. The major cause of revenue shortfalls over the last three years has been attributed to shortfalls in corporate taxes by oil companies. For the most part, Government did not meet its projections of corporate taxes. Only the projections in 2013 of US$55 million were exceeded and taxes totalling US$172,216,932 were collected as at September For 2011 and 2012, projected corporate taxes amounted to US$402.5 million and US$239.7 million respectively. However, only US$40 million was actually collected as taxes in respect of the 2012 fiscal year. The shortfall was blamed on carry-forward losses and lower than expected production volume. As already indicated, one of the causes of the losses carried forward to 2011 was the nonrealization of revenues in 2010, the year of commencement of crude oil production from the Jubilee Field. The Government of Ghana declared in its 2012 Petroleum Annual Report, a requirement by law, that crude oil lifting in 2011 was more than total production for the year because the lifting included two months of oil produced in November and December Thus the losses could be attributed to non-realization of revenues for 2010 in spite that it is the year of commencement of production. PNDC Law 188 provides that capital recovery starts from the year of commencement of production; hence the Jubilee partners were entitled to capital allowance of 20% of the total cost oil which was legitimately carried forward once revenues were not realized until The other reason for the losses was production decline. For example in 2012, the average daily production rate in 2012 was 71,998 barrels per day against the projected 90,000 barrels per day for the year due to the pre-mature decline experienced from November It is important to state that the Government of Ghana exposed its desperation for early revenues as was demonstrated in the 2011 Budget and Policy Statement of the Government. Government included corporate taxes in expected revenues for the 2011 fiscal year. This was 5 Crude oil production in 2011 was 24,195,895 barrels whilst oil lifting for the year was 24,451,452 barrels. Thus lifting was more than production for the year by 255,557 barrels. Revenues from the sale of the difference was realized in This accounted for the losses in 2010 which were carried forward to Ministry of Finance and Economic Planning, Petroleum Annual Report, 2012.

15 8 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA curious because at the time the 2011 Budget was presented, Government knew the implications of commencing production in November 2010 without realizing revenues, the result being declaration of losses and the legal requirement to carry the losses forward. Why it went ahead to project corporate taxes for 2011 remains a mystery. This had potential implications for the corporate image of the oil companies as there was the possibility of the companies being accused of not meeting their tax obligations to the State, a situation that could create mistrust between the citizens of Ghana and the oil companies. The incident also exposed the inexperience of the Government of Ghana in petroleum revenue accounting, a situation that mostly applies to frontier oil states. The bitter lessons learnt by Government translated into Government s adoption of a conservative approach to forecasting petroleum revenues as was exhibited in the significantly lower estimate of US$55 million in corporate taxes in 2013 against actual collection of US$172 million in the first 9 months of the year. Either way, forecasting of petroleum revenues remains and could significantly affect budgetary planning particularly when crude oil production increases in future. There have been arguments for the use of an independent state agency such as the Statistical Service of Ghana or a Committee appointed by Parliament to conduct crude oil price forecasting and introduce credibility into the forecasting process. Government has responded to this instead by inviting independent bodies like PIAC and the Bank of Ghana to participate in the forecasting process. iii. Surface Rentals Surface rentals do not form a significant share of petroleum revenues. However, Section 6 of Act 815 considers it as part of oil receipts. Except in 2011, the Government reported on surface rental fees paid by oil companies. By the end of 2013, a total of US$1,246,002 was received by Government as surface rentals. Government did not report on surface rentals in 2011 for two main reasons: First, the IOCs paid their rental fees for 2011 before Act 815 was passed. There was therefore no legal framework for accounting for rentals as petroleum receipts. Second, the Petroleum Holding Fund Account had not been opened before the IOCs were invoiced. Surface rentals received before the coming into force of Act 815 were paid into Government of Ghana s Non-Tax Revenue Account. The payment procedure was that the oil

16 9 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA companies were directed to make payment into a designated account at the time of invoicing. Prior to Act 815, GNPC invoiced the IOCs but the beneficiary account details on the Commercial Invoices stood in the name of the Government of Ghana. The PIAC first brought this issue to the attention of Government. PIAC for instance cited rentals from Salt-pond operations which were not reported 7. Consequently, Government started reporting on rentals paid by all oil companies in active operation. iv. Expected Gas Revenues In the 2013 projections for petroleum revenues, Government included gas revenues of US$9,760,000. However, this was contingent on the completion of the Ghana Gas Infrastructure Project at Atuabo in the Western Region. The project includes: the installation of offshore pipeline, onshore pipeline, a gas processing plant, a Natural Gas Liquids export system for the export of Liquefied Petroleum Gas (LPG); and an office complex. The project, which is being executed by SINOPEC, has failed to meet several completion dates. Indeed, the project has been delayed for four years as a result of funding challenges. Delays in disbursing a loan facility of US$3 billion sourced by the Government of Ghana from the China Development Bank to finance the project have largely been blamed for the non-completion of the project as scheduled. The project costing US$1 billion is funded with US$850 million from the US$3 billion facility. As of December 2013, about US$600 million was disbursed to SINOPEC from CDB. The loan facility has however become more costly than anticipated. In spite of the slow disbursement, the Government of Ghana has continued to pay a commitment fee of 1% of the undrawn and un-cancelled balance which has been reported to have claimed US$54 million already. Ghana also has an off-taker agreement signed between GNPC and UNIPEC to sell Ghana s share of crude oil to the Chinese and to use the proceeds to repay the facility. The agreement involved a cumulative supply of 750 million barrels of crude oil to China over 15 years. That is about 13,000 barrels a day. Frustrated by the delays in disbursements and the refusal by the Chinese to renegotiate the terms, the Government of Ghana announced its decision not to source US$1.5 billion of the original amount of the facility. Particularly, the Chinese insisted on paying for the crude oil at US$85 per barrel even though crude prices have remained a little above US$100 per barrel. If 7 Public Interest and Accountability Committee, Report on the management of petroleum revenues for the period 2011.

17 10 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA the Government of Ghana granted this, it would mean that at US$100 per barrel, Ghana would lose about US$25 on each barrel of oil totalling US$18 billion over the entire period. The delay in the completion of the gas infrastructure project has had two effects on petroleum revenue accounting. First, gas revenues have been delayed in spite of its inclusion in revenue projections for Second, delayed gas revenue as well as revenue losses from sale of processed gas have ensured that the Petroleum Holding Fund received relatively less revenues in the year under consideration. v. Redetermination and Petroleum Revenues Redetermination is a process by which owners in a unit agreement commit that at one or more dates in the future, they will revisit the unit interest due to information received from new wells or production data, and where appropriate, adjust the Tract Participations to reflect the proportion of the reservoir and associated hydrocarbons that underlies their participation arising from the new data. 8 The exercise of redetermination is provided for in the Jubilee Field Unitization and Unit Operating Agreement (UUOA). In October 2011, the Jubilee partners completed the first equity redetermination in the contract area effective from 1 st December Thus, tract participation of the Jubilee Field s Original Hydrocarbon in Place (OHIP) was realigned from a ratio of 50% each from the Deep Water Tano and West Cape Three Point Blocks, to a ratio of % for the Deep Water Tano Block to % for the West Cape Three Point Block. Article 5.5C of the Unitization and Unit Operating Agreement provides that Unit Interests and Paying Interest shall be automatically revised.upon a Redetermination of Tract Participants. Accordingly, this affected the interests of all the partners including the Government of Ghana s interest which reduced marginally from 13.75% to 13.64%. The downward shift in Ghana s interest was due to reduction in the tract participation of the Deep Water Tano in which Ghana has a relatively higher interest from 50% to %. In this case, crude oil lifting by Ghana for the 2012 reporting year declined and this had implications for the size of petroleum revenues to the Government. In spite of the relevance of the redetermination exercise, it was not until in 2013 that the Government of Ghana announced the marginal decline in Ghana s interest in the Jubilee Unit 8 Memory Bank (2010) Unitization and Redetermination: Winning the end Game.

18 11 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA from 13.75% to 13.64% 9. However, Government failed to provide explanation to Ghanaians about the circumstances that led to the decline in its interest. This should not be encouraged since information lag on petroleum revenue reporting could undermine accountability. The Table below shows the interests of all partners before and after redetermination. Table 2. Share of Petroleum by Jubilee Partners (%) Company Share before Company Share after Redetermination Redetermination GNPC % GNPC % Tullow % Tullow % Kosmos % Kosmos % Anadarko % Anadarko % Sabre % PetroSA % EO % - - Total 100% 100% Source: GNPC 1.2. Key Observations from Analysis of the Revenue Side From the analysis of petroleum receipts, a number of observations which highlights some of the challenges in petroleum revenue accounting have been provided as follows. a. Petroleum revenue streams include capital gain tax by law. However, petroleum revenues declared by Government in 2011 and 2012 did not cover taxes on capital gained from the acquisitions of EO Group limited by Tullow Oil and Sabre Oil and Gas Holding by PetroSA because the taxes are not allowed under the Petroleum Agreements. There is therefore a conflict on the scope of revenue streams between the Petroleum Agreements and Act 815. Thus it is likely that when many more blocks are bought on stream, the scope of revenue streams may differ by contract as a result of differences in negotiated fiscal terms. b. The major cause of revenue shortfall from 2011 to 2013 was corporate taxes as a result of carry-forward losses and production decline. The inclusion of corporate taxes in the Government s budget for 2011 and 2012 when the oil companies were not in tax paying positions did not only expose Government s desperation for early revenues 9 Republic of Ghana, 2013 Annual Report on the Petroleum Funds, pg PetroSA acquired the interest of Sabre Oil and Gas Limited. 11 Tullow Ghana acquired the interest of the EO Group.

19 12 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA from oil but also showed Government s weaknesses in forecasting and budgetary planning. c. Since the commencement of the Act 815, gas receipts have not yet formed part of petroleum revenues. This is due to delay in the completion of the Ghana Gas Infrastructure Project. Government s projections of gas receipts of US$9,760,000 for the 2013 reporting year was therefore not realized which again showed serious disconnection between budget and project planning. d. In October 2011 the Jubilee partners completed a redetermination of their interests in the Jubilee Operating Unit. This led to Ghana s carried and participating interest being reduced from 13.75% to 13.64%. However, although the redetermination took effect in December 2011, it was not until in 2013 that the Government announced the decline in its interest and this was without any explanation. Such information lag does not promote accountability.

20 13 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA Section 2 ANALYSIS OF EXPENDITURE FROM PETROLEUM REVENUES 2.1. Introduction Resource rich countries which are receiving resource revenues often seek to address three fundamental issues relating to the use and management of revenues. These are: a. How much to spend and save? b. Where to spend or invest? c. How efficient to spend or invest? Ghana s Petroleum Revenue Management Act 815 has important provisions that seek to address these fundamental issues. In this section, the report analyzes the size of spending as well as spending choices How Much to Spend The spending objectives of petroleum revenues as defined in Section 21(2) of Act 815 are to: a. maximize the rate of economic development; b. promote equality of economic opportunity with a view to ensure the well-being of citizens; c. undertake even and balanced development of the regions and The law further requires that decision on the size of spending shall be guided by a mediumterm expenditure framework aligned with a long-term national development plan approved by Parliament. The law prescribes two types of spend from petroleum revenues through the budget process. These are: i. Spending by the National Oil Company (NOC) ii. Spending by Central Government (Annual Budget Funding Amount (ABFA)) The following diagram illustrates the spending types and by how much spending is required under the law.

21 14 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA Figure 1. A Schematic Presentation of Spending Windows in the Petroleum Revenue Management Act 815 How much to Spend Petroleum Holding Fund GNPC Spending Benchmark Revenue ABFA Equity Financing =predetermined amount of gross interest GNPC spending Capital Spending Recurrent Spending 70% of ABFA Investments 55% of net interest Spending 30% of ABFA From the diagram above, we can deduce the following: i. Spending by the NOC is charged on the Ghana Petroleum Holding Fund whilst the Annual Budget Funding Amount (ABFA) is charged on the Benchmark Revenue. ii. The size of the NOCs spending is dictated by the size of its equity financing requirement in producing blocks plus a proportion not exceeding 55% of the net carried and participating Interest (i.e total carried and participating interest less equity financing cost). iii. The size of ABFA is determined by an amount not exceeding 70% of the Benchmark revenue 12. Benchmark revenue is the estimated revenue from 12 The exact amount of ABFA as provided by Section 18(2) of Act 815 shall be guided by a medium term development strategy aligned with a long term national development plan, absorptive capacity of the economy

22 15 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA iv. petroleum operations expected by the Government for the corresponding financial year. It does not include the share of petroleum revenues ceded to the NOC. The ABFA can be used for capital spending (a minimum of 70%) and the balance for recurrent spending. Over the period , the total amount of petroleum revenues allocated for spending are presented in the following Table: Table 3: Amount of Petroleum Revenues allocated for Spending (US$) Spending Type Total % Transfer to GNPC GNPC Equity Financing 132,484, ,630,628 68,319, ,435,225 23% Cost GNPC share of Net Carried 75,479, ,319, ,101, ,900,419 24% and Participating ABFA 166,955, ,554, ,197, ,707,095 52% Total 374,919, ,504, ,618,983 1,388,042, % % 27% 37% 36% 100% Source: Various 2012 and 2013 Annual Reports on the Petroleum Funds published by Ministry of Finance; and 2013 Reconciliation Report on the Ghana Petroleum Holding Fund. From the Table above we deduce the following: a. Total allocation to GNPC for the period for equity financing amount to US$325,435,225, about 23% of total spending allocation for the period.. b. Total allocation for the period for GNPC s investments in non-jubilee projects amount to US$335,900,419, being 24% of total allocation for spending. c. A total of US$726,707,095 being 52% of total allocation for spending over the period was allocated as ABFA. Thus, more than half of total allocation for spending for the period was committed to spending on development projects through the annual budget process. d. Even though 2013 had the highest petroleum receipts (See Table 1), the highest share of revenues allocated for spending was recorded in 2012 (See Table 2). This means that a substantial amount of petroleum receipts in 2013 was saved in the Petroleum Funds. This was also based on projections of petroleum revenues. Government s projections of petroleum revenues in 2013 were grossly understated, resulting in a and the need for prudent macroeconomic management. This shall be reviewed every three years (Section 18(4) and the review shall take into account development needs, absorptive capacity of the economy and the need to maintain macroeconomic stability (Section 18(5)); and any changes resulting from the review shall be ratified by a resolution of Parliament supported by not less than two-third majority in Parliament (Section 18(6)).

23 16 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA significant amount of excess revenues over the projected ABFA. Thus transfers to the Ghana Petroleum Funds in 2013 were US$351,048,145, much more than ABFA for the year at US$273,197,567. Therefore in line with Government s obsession for spending, the Minister of Finance has commenced action to amend the Petroleum Revenue Management Act 815 in its three years of experimentation to create room to increase the spending space. This defeats the purpose of the restrictions in the law and as a result, the potential for fiscal indiscretion is very high with serious implications for fiscal discipline Where to Spend? Spending by GNPC The Figure below shows the allocation of petroleum revenues to GNPC. Figure 2. Allocation of Petroleum Revenues to GNPC Allocation of Petroleum Revenues to GNPC (US$) 250,000, ,949, ,964, ,000, ,000, ,484, ,630, ,319, ,000,000 75,479, ,421, ,101,633 68,319,783 50,000, Transfer to GNPC Equity Financing share of net participating interest Source: Various 2012 and 2013 Annual Reports on the Petroleum Funds published by Ministry of Finance; and 2013 Reconciliation Report on the Ghana Petroleum Holding Fund. GNPC s share of petroleum revenues over the period totalled US$661,335,644 of which US$325,435,225 was for equity financing in the Jubilee project and US$335,900,419 was the corporation s share of net carried and participating interest which is applied to investments in non-jubilee projects and for administrative and operational expenditure. The trend in the allocation of petroleum revenues to GNPC shows that whilst its share of equity financing is declining, it has received more for non-jubilee investments as a result of higher net participating interest. Thus, unless new investments are required in the Jubilee

24 17 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA contract area, the corporation is near retiring its equity financing requirement and as a result, it will have more revenues for other investments. This raises the concern about the corporation s capacity to spend as it has not demonstrated such capacity yet. As at 31 st December, 2013 the corporation s cash balance (cash yet to be spent) stood at US$ million. Table 4. Spending by GNPC (US$) RECEIPTS FROM JUBILEE PROCEEDS Equity Financing 132,484, ,630,628 68,319, % of Net Carried and Participating 75,479, ,319, ,101, Interest Total Amount Received 207,964, ,949, ,421, Expenditure Jubilee Equity Financing Cost 132,484, ,824,747 76,268, Acquisition & Processing of 2,612sq km of 3D plus other related G&G studies 30,315,185 Reservoir Characterization; Voltaian Basin 10,784,028 project expenses; ICT Upgrade & Organizational Development Commitments for Projects other than 61,674,215 9,922, Jubilee TEN Project Cost 3,027, Gas Project-Related Costs 28,119,624 5,587,779 Staff Cost 7,661,475 9,013,162 9,695, General Operational & Admin. Capital expenditure 9,383,204 16,269,839 9,819,888.5 PNB Paribas 31,337, Amount Appropriated by Bank of Ghana as 1,796,156 2,323, charges Total Expenditure and Commitments 207,964, ,949, ,393, Cash yet to spent 80,027, Cash brought forward ( ) 61,674,215 Total Cash Available 141,701, Source: Reconciliation Report, 2013

25 18 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA From the above table, three important issues deserve attention. i. An amount of US$31 million was spent out of the 2013 allocation for GNPC for repayment of a facility from PNB Paribas. However, there is no publicly available information on the terms of the facility and what it was used for. ii. GNPC has not yet provided detailed information on the utilization of US$8,921,473 reserved since 2012 for corporate investment projects. It is suspected part of this money went into the sponsorship of the Ghana Black Stars preparation and participation in the 2014 World Cup in Brazil. The sponsorship also allegedly covered some 40 staff workers of GNPC and their families who were sent to Brazil to watch the tournament. GNPC in a statement has denied this and argued that the 40 staff workers travelled on a charter plane without their families; and that the families of their workers joined them on a commercial flight which was not sponsored 13. The statement also states that the workers were in Brazil to promote its brand. Whilst it is ostentatious for the corporation to sponsor 40 workers abroad to promote its brand, the transparency and accountability concerns relating to the sponsorship is even more serious. The corporation is yet to provide information on the cost of the chartered plane used by its workers, the cost of hotel accommodation and living expenses for each worker. Much more, information on the total package of the sponsorship is yet to be revealed. iii. The amount of unspent cash from the allocation to GNPC is quite large and demonstrates GNPC s lack of spending capacity. Such practice has often led to NOCs becoming slush funds for Governments and this could happen in Ghana. The case of unspent cash further confirms the argument by the World Bank that GNPC was given more money than it required. To illustrate this further, the Table 4 below provides the projects to which the unspent cash was to be applied. For instance, about US$61.8 million was committed to various projects listed below other than Jubilee projects in 2012 whilst another US$9,922, was committed to the same projects in It is curious why the US$61.8 million committed to projects was not disbursed as at end of 2013 since no explanations have been provided by the corporation. There is also no budget for the unspent US$80 million allocated to the corporation in spite of the fact that Parliament approved the corporation s annual programme to warrant the allocation of the unspent cash. 13 MyjoyOnline.com GNPC denies sponsoring staff and families to Brazil, 7 th July 2014 (cited at

26 19 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA Table 5. Commitment of Cash to Projects by GNPC (US$) No Project North & South Tano Petroleum Projects 17,817,385 1,267,581 2 Tweneboa-Enyenra-Ntomme (TEN) project 16,736,362 3 Voltaian Basin Petroleum Projects 3,090,224 1,305,036 4 South Deepwater Tano Petroleum Projects 7,227,672 1,894,356 5 Reservoir Characterisation 687, ,728 6 ICT Upgrade & Expansion 2,591, ,006 7 Data Centre Upgrade 1,000,000 8 R&D Laboratory Upgrade 1,500,000 39,994 9 Organisational Development Project 2,102,500 44, Reserves towards Corporate Investment Projects 8,921, Hess Block 3,024, Ultra Deep Water Keta 411, Petroleum Project Consultancy 332, Maritime Boundary Special Project 1,154, Total Commitment to Projects 61,674,215 9,922,975 Source: Reconciliation Report, 2013 The Petroleum Revenue Management Act 815 requires the corporation to submit its annual programme to Parliament, which is expected to inform allocation of the petroleum revenues from the net carried and participating interest to the corporation. The basis for allocating 40% of the net carried and participating interest (the equivalent of US$154,101,633.02) by the Minister of Finance and approved by Parliament remains a mystery. iv. GNPC applied part of its share of petroleum revenues to repay debts in respect of advances made to it by the Jubilee partners to finance its paid-interest. This followed the

27 20 THREE YEARS OF PETROLEUM REVENUE MANAGEMENT IN GHANA decision of the Government to exercise its option of taking additional interest upon declaration of commerciality by the Jubilee partners. The repayment of the debts from advances is governed by both the Petroleum Agreements and Act 815. The Petroleum Agreements (West Cape Three Points and Deepwater Tano Blocks) prescribe that in the event that GNPC defaults in its cash calls, the contractors are expected to prefinance GNPC s costs, which will be reimbursed at a later date. However, if the corporation defaults in paying back, the contractor would recover the default amount from GNPC s future share of crude oil with interest. Under this circumstance, GNPC will receive oil to reimburse its production cost whilst the contractor receives the remaining oil until the default amount is fully reimbursed with interest. The prescription by the Petroleum Agreements is supported by Section 7(2)a of Act 815, which specifies that: The payment into the Petroleum Holding Fund shall be net of the equity financing cost, including advances and interest of the carried and participating interests of the Republic In this case, the advances are considered as debts on GNPC and collateralized on GNPC s share of oil and therefore are required to be serviced from the proceeds of Ghana s share of oil. In 2011, GNPC commenced repayment of the debt once petroleum revenues started flowing in. The following Table 5 presents the break-down of cost in respect of the advances to GNPC. Table 6. GNPC Costs Apportionment (US$ million) Jubilee Cost Balanc e End of 2010 Addition s 2011 Total Cost Interes t Int. (%) Total Cost & Int. GNPC Paymen t Closing Balance 2011 Productio % n Cost Developme % nt Cost Total % FPSO Cost (13.74) Jubilee Partners *The figures are approximated to decimal points 33.31