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Opinions Wed, 28 Jul 2010

Royalty Tax System vrs Production Sharing Agreement

Ghana’s Oil Revenue Sharing:

Royalty Tax System vrs Production Sharing Agreement – The Dialogue

At long last, I have had a response from a top personality to this very important and critical national issue, which has almost turned me into a sole crusader. This top personality, I first met briefly some seventeen years ago when he delivered a brilliant lecture to members of professional groups in Tema. I have since respected him for that lecture. He is currently a Member of Parliament. His identity I cannot disclose, because I have not sought his permission to do so. Below is the dialogue.

Thank you very much for your response.

It is heartwarming to read from you that the dialogue continues at an octave level. Secondly, I am glad you requested I do a recalculation on government take using all the parameters.

With due respect judging from your short response, I do not want to believe that government is settled on the royalty tax system. If, indeed it is, then it is a disaster for Ghana. I am not a prophet of doom, but want to be a rationalist in my outlook, assessment and judgement of all the information so far gathered about the royalty tax system.

As you are aware, I am sure you are! the concession contract type under which the royalty tax system operates was the earliest in the oil and gas industry. Saudi Arabia was the first to kick against it as far back in 1950, when she realized its limitations. Other Arab countries followed, eventually leading to complete nationalization of the oil industry throughout the Arab world in the 1960’s.

When Indonesia had independence from the Netherlands, the whole country rose up against these types of contract, because they realized they were being exploited, not getting an equitable share of their resources. They faced tough resistance from the oil giants but they stood their grounds and eventually won. Thus the Production Sharing Agreement (PSA) was born. Indonesia currently takes more than 60% of “profit oil”. The first PSA was signed in 1960. Nigeria our neighbour has since moved away from concession and joint ventures to PSA.

With the formation of OPEC and the success of PSA in Indonesia, coupled with the desire to have control over own resources, all oil producing countries in the developing world have adopted PSA.

Sir, if there is no significant differences between benefits accruing under PSA and the royalty tax system, why did this revolution take place in the industry except in the USA and Western Europe?

Is Ghana, a novice, in the oil and gas industry wiser than over 80 countries that are producing and using PSA?

Arguments raised by few individuals placing royalty tax system over PSA are highly debatable and are mostly in favour of the Foreign Oil Companies (FOCs). The argument that Royalty Tax System (RTS) enhances investments in the host countries, bringing in needed foreign exchange is an old thought and outmoded. The arguments do not discuss how unjust and exploitative the system is, but only say the FOCs deserve the returns they make, because of the risks they take.

Under the PSA, the FOCs are still taking all the risks and reaping good returns on their investments. The sheer volume of oil contracts signed since 1960 under the PSA is an indication that the system is far, far better than the RTS.

Sir, if there are other arguments in favour of RTS over PSA, please do me a favour, by directing me to the sources for my study.

At the Accra International Conference Centre (AICC) on 21st March, 2010, the Advisor to the Minister of Finance tried to rubbish my 38.20% effective percentage share of total revenue. I arrived at this figure using the parameters published by GNPC in the Daily Graphic of 10th July, 2008. The parameters given are Royalty 5%, Carried Interest 10%; Addition Oil Entitlement 3.75% and Petroleum Income Tax 35%.

In fact, I was the first to come out with this figure of 38.20% to the public. GNPC or the Ministry of Energy, I do not know which one of them, later came out with 53.75%, adding up the raw parameters, but it did not last long in the public domain having realised the public was being deceived.

The Advisor to the Minister of Finance gave out 42.20% as the effective percentage share of total revenue that would accrue to Ghana, including GNPC’s share. I shall therefore, use the 42.20% for my analysis.

Table A

Ghana’s Position under the Royalty Tax System. 2010-2025

Estimated Barrels Estimate Value (US$)

Total Output 912,500,000 54,750,000,000

Ghana’s Share 385,075,000 42.20% 23,104,500,000

Production Cost 91,250,000 10.00% 5,475,000,000

Capital Recovery 95,812,500 10.50% 5,748,750,000

Net Due FOCs 340,362,500 37.30% 20,421,750,000

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

Under this method Ghana would be earning US$23,104,500,000. This amount would include Royalties, carried interest, additional oil entitlements, GNPC’s share and petroleum income taxes.

Table B

Ghana’s Position Under Production Sharing Agreement. 2010-2025

Estimated Barrels Estimate Value (US$)

Total Output 912,500,000 54,750,000,000

Less Production Cost 91,250,000 5,475,000,000

Capital Recovery 95,812,000 5,748,000,000

187,062,500 11,223,750,000

Profit oil to be shared 725,437,500 43,526,250,000

Suggested Sharing Ratios

Ghana 60% 435,262,500 26,115,750,000

FOCs 40% 290,175,000 17,410,500,000

725,437,500 43,526,250,000

Under some newly signed PSA’s, royalties and petroleum income taxes are granted as reliefs for a period agreed upon, to make the package attractive to FOC’s. However, most countries insist on the royalties and forgo the petroleum taxes. Under this calculation, both are not included; therefore, the US$26,115,750,000 is strictly Ghana’s share of the profit oil.

Assuming, Ghana insists on the payment of royalties of 5%, then the situation would be as follows:-

Estimated Output Barrels 912,500,000

Less Royalties 45,625,000

Production Cost 91,250,000

Capital Recovery 95,812,000

232,687,000

Profit oil to be shared 679,816,000

Ghana’s share 60% 407,889,600

FOCs 40% 271,926,400

679,816,000

Total due to Ghana

Royalties 45,625,000

Profit oil 407,889,600

453,514,600 $60

US$27,210,876,000

Sir, do you consider the differences between US$26,115,750,000 and US$23,104,500,000 or US$27,210,876,000 and US$23,104,500,000; US$3,011,250,000 and US$4,106,376,000 respectively insignificant?

The absence of proper public discussion on the national oil policy or the legal regulatory framework which should be in place before the awarding of contracts in the country, have led to all these things, which would eventually land Ghana in danger. The case of Kosmos is only a tip of the iceberg. The cart has been placed before the horse.

Ghana would become a laughing stock before the eyes of oil producing countries in the developing world, while the USA ‘Americans’, the British and few Ghanaians who helped in functioning out these bastard contracts would be popping champagne if the Bill before Parliament is passed in this state. The fiscal arrangements in the bill must be looked at critically, alongside the ownership of the oil and gas resources.

I would definitely honour your invitations.

Thank you.

Solomon Kwawukume

Solomon.kwawukume@yahoo.com

Columnist: Kwawukume, Solomon