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Haggle over type of oil contracts delays E&P bill

  • SOURCE: | qwesa2big
  • oilfunnelA disagreement over a suitable fiscal regime for the petroleum sector has delayed the passage of the new exploration and production (E&P) bill, which was drafted in 2013.

    This is because the country is yet to reach a consensus on whether to abandon the Ghana Hybrid System of licensing oil blocks and go for Production Sharing Agreements (PSAs).

    While the Ministry of Petroleum and the Parliamentary Select Committee on Mines and Energy have recommended the hybrid system, some civil society organisations (CSOs) have proposed PSAs, citing the former’s limitations with higher revenue benefits to the country.

    As a result, the CSOs, led by the Ghana Institute of Governance and Security (GIGS), have petitioned the President, the Speaker of Parliament and the Select Committee, seeking an amendment to that section of the bill.

    “At the last moment, when everything was almost done and the bill was being prepared to be laid, they GIGS came in again with their petition, alleging fraud and all manner of things,” a deputy Minister at the Petroleum Ministry, Mr Benjamin Dagadu, told the GRAPHIC BUSINESS on March 4.

    The petition forced the representatives of the committee, the Petroleum Ministry, the Ghana National Petroleum Corporation (GNPC) and the Petroleum Commission (PC) to meet with members of the GIGS on February 20, which ended inconclusively.

    Earlier calculations by the institute showed that the country lost over US$6 billion in five years under the hybrid system, making it possible for the likes of Tullow, Kosmos and Vitol to take away US$19 billion – over 80 per cent of total production within the period.

    High public interest

    The new bill is expected to make sweeping changes to and replace the 32-year old law currently governing operations in the upstream petroleum sector.

    It was sent to Parliament in 2014 and has since attracted high public interest.

    As of December, last year, more than 150 individuals, CSOs, oil companies and other stakeholders had made representations and proposals to Parliament, seeking amendments to portions of the bill.

    “It is one of the bills that has attracted a lot of public interest and that is the thing delaying the passage,” Mr Dagadu, who is in-charge of Petroleum, said.

    The delay has forced the government to continue to rely on the existing E&P Law, 1984 (PNDCL 84), which has been criticised as outdated and, therefore, inimical to the budding petroleum sector.

    Ghana hybrid verses PSAs

    The choice of a licensing regime is critical to the country, given that it has direct implications on the amount of revenue and investments Ghana will gain from oil. So far, the country has raked over US$3 billion in taxes, royalties and dividends over the last four years, an amount proponents of PSAs say could have been three-times higher if the country were operating such agreements.

    Unlike the concessionary system, where a sovereign nation often transfers its ownership of the resource to the licensee and mostly gets less than 25 per cent of total revenue accrued, the PSAs mostly vest ownership on the state and could give a country over 50 per cent of the accrued money.

    Although the two systems have their primary challenges, the concessionary system is mostly used by countries still struggling to develop their petroleum sectors, given its investor-friendly nature.

    The PSAs, on the other hand, are fancied by developed oil economies, whose petroleum sectors are versatile and could boost of more than five projects at a time.

    As of December, last year, about 81 oil-rich countries were practising PSAs, of which 34 are said to be in Africa.

    Financial gains

    While admitting that PSAs guaranteed higher returns, the deputy minister said the infant nature of Ghana’s oil industry made it unwise for the country to abandon the hybrid system for production sharing.

    “The merits of the hybrid are always considered against that of the PSAs and what we realise is that there is no pure PSA anywhere in the world; every country adopts a system that they think gives them financial advantage and that is what we have done.

    “We should also know that we have only one producing field. People who can opt for pure PSAs have more than one producing fields because they can leverage those ones to attract investments. In our case, we do not have that leverage,” Mr Dagadu said.

    Ghana’s petroleum sector is five years old and has one project, the Jubilee Fields. Development works on two other projects, the Tweneboah-Enyera-Ntoumme (TEN) and Sankofa-Gye Nyame projects, are currently on course for production to begin in mid-2016 and 2017 respectively.

    Impact of delay on investments

    The deputy minister admitted that the delay had repercussions on the industry but said it was needed to streamline stakeholder concerns before the bill becomes a law.

    “We do not like the delay either because we are also aware of the implications on investments but we need to address the concerns to be sure we do not pass a law that some people have reservations about. Some civil society organisations (CSOs) think that we should adopt PSAs but we (in the Ministry of Petroleum) believe that the hybrid, modern concessionary system, is good for the industry,” Mr Dagadu added.

    An economist, who commented on anonymity, said it was unlikely that the delay had brought “any significant” effect on investments in the sector.

    “It is not a law that is needed because there is non-existing; it is a law that seeks to improve upon the existing legislation and plug any loopholes or lacuna. If the intention of the law is to ensure that we get more from new fields that will be developed, then the delay will imply that we are losing money,” the source added.

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