Open Letter To Parliament Of Ghana

P. O. BOX 8662 TEMA

6th March, 2010

Open Letter To Parliament Of Ghana

Dear Honourble Members of Parliament

Is Ghana losing or gaining on the Oil and Gas?

As you are all aware, Oil and Gas are the most volatile commodities sought after by every country in the world. Countries in which they are found try as much as possible to protect their interest and control over it so as to maximize benefit from it for economic growth, enhance developmental agenda to transform their countries towards reduction of poverty.

Protecting and controlling one’s interest for the purpose of achieving these benefits is determined by the laws and fiscal arrangement put in place by Parliament.

Very soon the Draft Bill on the Petroleum industry will be placed before your Honouable House to deliberate upon and pass into Law.

A law which will determine the path and destiny of the present generation and the future ones to come after us. A law which will affect the very spinal cord of Ghana-that is the economy.

A law which determines and shapes the type of contracts and agreement we enter into with investors.

A crucial and important part of this Draft Bill is the fiscal arrangements in it, because it will determine whether as a country we are getting a fair and equitable share of our own wealth. We have lost on gold and other minerals. Do we have to lose on Oil and Gas too? The answer lies with this Honourable House.

To be honest and truthful to you Honourable men and women, Ghana is losing on the Oil and Gas too by adopting the Royalty Tax System of sharing the oil revenue instead of the Production Sharing System which is used by almost all oil producing countries. I must admit that the Royalty Tax System could work in our favour provided the tax rates are not low as in the present case of Ghana. There must also be an effective and efficient tax machinery to monitor activities of the oil companies.

In August 2009 I wrote to the Office of the President and copied the Majority and Minority leaders in Parliament and others alerting them of the dangers ahead of Ghana losing on the oil and gas after I have analyzed all the data and information put in the public domain by GNPC in July 2008. This was at the time the Draft Bill “Ghana Upstream Petroleum Authority Act” was not out. The Draft Bill is now a public document and the Fiscal Arrangement in it cannot make Ghana derive her maximum benefits from the oil and gas. The group going around in the country soliciting views on how to spend 5 billion dollars from the first phase of five years production is only drawing the wool over the eyes of Ghanaians.

Oil and gas products are used by every sector in this country; this I need not emphasize. Therefore, any Fiscal Arrangements in the law must holistically take into cognizance the needs and the requirement of the country from the on set of production but not to shift this too much into the future. This is exactly what the Fiscal Arrangement in the Drift Bill seeks to do.

I am aware that at the on set of production, production levels would be low, therefore expected revenue accruing to the country would be low as well. However, as long as Royalty Tax Rates are low, entrenched in the law, revenue accruing to the country even if production levels are high in the future, the maximum benefits would never be realized by Ghana.

Since I do not want to carry you through a maze of calculations, I shall only produce a summary tables of what Ghana’s position would be after 15 years of production taking into consideration Ghana’s oil requirements within the same period under the Royalty Tax System against the position of the foreign investors. I shall also produce summary tables of Ghana’s position under the Production Sharing System for comparison and the decisions are yours to make.

GHANA’S POSITION UNDER THE ROYALTY TAX RATE METHOD-2010-2025 Table A

Estimated Barrels US Dollars Total Out 912,500,000 54,750,000.000

Ghana share 348 657 125 38.20% 20,919,427,500 Production cost 91 250,000 10% 5,475,000,000 Capital Recovery 95 812 500 10.50% 5,748,750,000 Investors 376 7880 375 41.30% 22 606 822 500

912 500,000 100% 54,750,000,000

Table B

Ghana Total Oil Requirement compared to share of oil 2010 – 2025

Barrels US DOLLARS Requirement 374,125,000 22,447,500,000 Ghana’s share of oil 348 657 125 20 919 427 500

Shortfall/Deficit 25 467 875 1, 528,072,500

Table C

Position of investors 2010 – 2025

Barrels US DOLLARS Capital Recovery 95,812,500 5,748,750.000 Share of Oil 376 780 375 22 606 822 500

472,592,872 28,355,572,500

At the end of 2025 under the Royalty Tax Rate method the foreign investors would be carrying away from the country 28,355,572,500 dollars while Ghana would be looking for 1,528,072, 500 dollars to be able to finance her Oil bill under the Fiscal Arrangements contained in the Draft Bill.

GHANA’S POSITION UNDER THE PRODUCTION SHARING METHOD -2010 – 2025

Estimated Table A

Barrels US Dollars Total Output 912 500,000 54750,000.000

Less production cost 91250,000 5,475,000.000 Capital Recovery 95 812 500 5 748 750 000

187.062,500 11 223 750 000

Net to be shared 725 437 500 43,526,250 000

Table B

SUGGESTED SHARING RATIOS

Barrels % share of total US DOLLARS Revenue Ghana 60% 435 262 500 47.70% 26,115,750,000 Investors 40% 290,175,000 31.80% 17,410,500.000

725 437 500 43,526,250,000

Table C

Ghana’s total Oil requirement compared to share of Oil 2010 - 2025

Barrels US DOLLARS Ghana’s share of Oil 435262,500 26115 750 000 Requirement 348 657 125 20 919 427 500

Surplus 86,605,375 5,196,322,500

Table D

Position of foreign investors 2010 – 2025

Capital Recovery 95,812,500 barrels 5,748 750 000 Share of Oil 290, 175, 000 barrels 17,410,500,000

Total 385 987 500 23,159,250,000

Source of Data and information for computations is from the Daily Graphic 10th July 2008. “The Upstream Petroleum industry in Ghana”

Under the Production sharing method Ghana would earn a surplus of 5,196,322,500 dollars over the period which can be invested into the Heritage Fund for future generations. Under this method Ghana would earn 2,956,500.000 dollars more than the investors as a premium for being owners of the Oil and gas resources.

The Production Sharing method is more equitable and fairer than the Royalty Tax system which is colonially oriented and exploitative. The Production Sharing method is easier, flexible and transparent to operate than the Royalty Tax Rate system which can be subject to manipulation and corruption.

The production sharing method makes forecasting of expected revenue for a particular year more reliable for purpose of Budgeting and Planning.

Lastly, the method makes control over own resources possible than the Royalty Tax Rate system. The production sharing method is the more appropriate method to be implemental now if as a Nation we want to derive the maximum benefits from the Oil and gas finds. Section 141 subsection 4 of the Draft Bill must be passed to affect all previous contracts and agreements signed before this bill becomes a law.

Dear Honourable Men and Women of this honourable and august House, I have exposed the truth and the dangers ahead of Ghana behind the fiscal arrangements in the Draft bill which is yet to come before you for your consideration. It is now left to you to help Ghana commit an economic suicide by hanging the hangman’s rope around the neck of Ghana, passing the draft bill as it is. Or, save Ghana by rejecting the Fiscal Arrangements contained in the Draft Bill.

I am surprised a law has been drafted to nail the coffin on the dangers and the sordid state of affairs I have alerted the President and all those who needed to be informed as far back as 6th August, 2009.

Gold experts say Ghana’s gold resources would be depleted in about 30-40 years time and cocoa production would be declining and cease completely in 80years time, due to climate change. Food production would equally be affected. Water would become scarce. We will not be alive to meet those conditions but our children and grandchildren would, so let us help to prepare the grounds for them to meet those challenging conditions, so that we escape their curses while lying in our graves. Oh! I would not be in the grave; my ashes would be floating over the Atlantic Ocean.

Thank you for reading.

Yours sincerely,

SOLOMON KWAWUKUME