Oil Revenue Challenges Ghana

Fri, 20 Nov 2009 Source: Oxford Analytica

Can the country avoid the pitfalls other African nations have faced?

Although the deleterious effects of oil wealth in such countries as Angola, Equatorial Guinea and Nigeria are frequently noted, there are a number of other developing countries such as Botswana, Chile and Indonesia that have managed their resource wealth wisely. Ghana is an important test case of the prospects for resource-led development because on many institutional governance measures it scores lower than Botswana but higher than other African oil producers.

Discoveries. Within the Gulf of Guinea region, Ghana did not attract much attention until Kosmos Energy in June 2007 announced the discovery of a "significant oil accumulation" at its Mahogany-1 well. Two months later, Tullow Oil found another significant discovery at its Hyedua-1 well. Subsequent discoveries in four different offshore blocks suggest that Ghana might possess up to 2 billion barrels of oil reserves. Ghana's share of the anticipated revenues could reach or exceed $1 billion per year. The IMF has predicted that cumulative oil and gas revenues from the Jubilee field--where the largest discoveries have been made--could reach $20 billion over its estimated 20-year lifespan.

Management challenges. Ghana has much experience managing gold revenues. However, such revenues amount to tens of millions of dollars annually, while oil revenues will be measured in hundreds of millions or billions of dollars--a management challenge of much greater magnitude than anything Ghana has handled before.

Chad-Cameroon precedent. The experience of the Chad-Cameroon pipeline project highlighted the challenges that arise when oil revenues arrive more quickly than institutions designed to manage them successfully can be developed--setting a precedent Ghana's leaders want to avoid:

--Ghana's existing petroleum legislation dates from the mid-1980s, and is outdated and lacking in detailed coverage on many important issues.

--Ghana also lacks effective oversight measures to track oil revenue and systematic anti-corruption measures to discourage graft.

--The country has yet to establish either a savings or a stabilization fund to manage its influx of oil wealth.

There is widespread awareness of these problems in Ghana. However, the financial pressures the country faces from its large fiscal and current account deficits create significant pressure to spend oil revenues, and militate against careful deliberations.

Reasons for optimism. Nonetheless, there are at least three reasons to believe that Ghana can avoid the "resource curse" that has plagued other African countries:

1. Offshore deposits. First, the country's oil deposits are overwhelmingly offshore. This minimizes--though does not preclude--the potential for conflict with local communities.

2. Extractive experience.Ghana may be new to oil, but it is not new to resource wealth--in 2007, it was the world's 10th-largest gold producer. From 1990-99, mining accounted for 34% of Ghana's exports.

3. Governance.Ghana has now held five free and fair democratic elections and peacefully transferred power from one party to another twice. Further, Reporters without Borders ranked Ghana as the 27th best country in the world for press freedom in its 2009 report--and the highest in Africa. Finally, Transparency International's 2009 Corruption Perceptions Index ranks Ghana 69th--below Botswana (37th) but well ahead of other Gulf of Guinea oil producers.

Outlook.Ghana's current legislative and institutional framework is inadequate for its future as an oil exporter. Managing oil wealth presents the country's recently elected leaders with a number of complicated challenges. However, the country appears well-placed to avoid the oil curse, given its comparably favorable track record on democracy, press freedom, combating corruption and general government effectiveness.

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Columnist: Oxford Analytica