Legal disputes threaten sustainability of oil production – Experts warn

The spate of legal tussles within the petroleum upstream industry poses a real threat to sustainability of the nation’s oil production, say experts.

The experts, including Chief Executive Officer of the Ghana Upstream Petroleum Chamber, David Ampofo, and Executive Director of the Institute for Energy Security (IES), Nana Amoasi VII, caution that if standoffs with major international players become a permanent feature of the domestic scene it could drive away potential investors, which could lead to multi-billion dollars’ worth of petroleum assets being stranded – especially as the world switches to renewables.

Speaking to the B&FT following Tullow Ghana’s decision to file a request for arbitration at the International Chamber of Commerce in London against the Ghana Revenue Authority (GRA) over tax disputes, Mr. Ampofo expressed concern over the frequency of such impasses.

While calling for circumspection as the matter is still before the court, he said: “Disagreements are bound to happen in the space; however, the goal should be that they are resolved as seamlessly as possible… failure to do that distracts from the core business and burdens everyone involved, almost unnecessarily.

“As we know, the companies have petroleum agreements they have signed with government which clearly spell out the rules of engagement. It is extremely important that government actions are carried out in a manner which conveys an appreciation of contract sanctity. This is crucial in any and every business relationship,” he said.

“Despite the international arbitration, Tullow and GRA are in search of a mutually acceptable settlement,” he explained, adding that the Chamber is in support of a swift resolution.

The two disputed tax assessments concern the disallowance of loan interest deductions and proceeds from Tullow’s corporate business interruption insurance policy for the years 2010-2020. The assessments amount to US$387million plus penalties, which Tullow argues violates its rights under its petroleum agreements.

This comes after Tullow received a revised corporate income tax assessment for US$190.5million from the GRA, as well as a new assessment and demand notice for US$196.5million relating to proceeds received during the fiscal years 2016-2019 under Tullow’s corporate business interruption insurance policy.

Furthermore, Tullow had previously filed a request for arbitration in respect of a separate assessment for branch profits remittance tax of US$320million in 2021, and a hearing is scheduled for October 2023.

The development comes at a time of lowered oil production, with Fitch Solutions warning that the lingering impasse between Aker Energy and Lukoil over development of the Pecan Oilfield leaves the nation’s oil production with an uncertain outlook.

Aker Energy, operator of the field, has been hesitant to submit an updated plan for development and commit to a final investment decision (FID) due to the involvement of Lukoil, which has a 38 percent stake in the project.

The risk of sanctions against Russian oil and gas companies has limited Aker’s ability to work with Lukoil. Aker has suggested that Lukoil divest its stake to overcome this issue.

However, Mr. Ampofo said these developments are turning the upstream sector into a tricky area for investors.

Describing Pecan as ‘crucial’ to development of the nation’s oil sector, he said: “Pecan is crucial and has been on the shelf for years. It is the country’s best hope of getting a new floating production storage and offloading (FPSO) vessel into our waters and starting production. That is why we have had a dip, because we have had to rely on old and depleting wells.

“Significant development and appraisal needs to happen before we can find anything commercial in other blocs, and it will take years; but Pecan has had work gone into it already.”

He said with economic uncertainty across the globe, investors will be seeking more stability – especially from a legal standpoint – to allow for proper planning; adding that since the sector requires a lot of investment, with no guarantee for short-term returns and with public debt currently at unsustainable levels, the state should do more to court big-ticket investor participation.

Similarly, IES’s Nana Amoasi VII emphasised the Pecan Field’s importance in reversing Ghana’s consistent decline in oil production since 2019.

“The Pecan as we know can produce up to 110,000 barrels per day in the long-term. This 110,000 barrel per day rate represents almost 80% of today’s Ghana’s oil production per day rate,” he stated.

He added that Fitch Solution’s concerns regarding Ghana’s declining oil production are valid, and said the industry needs to bring new fields onboard as soon as possible.

The IES had sounded warnings that mishandling the highly-publicised Eni/Springfield impasse could impact investment in the petroleum upstream industry.

Consequently, Nana Amoasi VII said: “Certainly, the developments at Pecan Field and the Eni/Springfield impasse could have long-lasting implications for investments in Ghana’s upstream oil sector”.

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