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Opinions Sat, 22 Jan 2011

Socio-Economic Benefits Of Adopting Production Sharing Agreement

Judging from all indications, Ghana’s economic emancipation and economic independence is being led forever to the economic guillotine to be sacrificed by the political leadership and the technocrats handling the oil and gas issues.

The economic destiny of this country, the present and the future, is being shackled in chains, the same way the powerful in the past collaborated with the Europeans and Americans to shackle in chains their own into slavery. I have said over and over again that the adoption of the Royalty Tax System is not in the best interest of Ghana, but nobody seems to listen. Ghana would be suffering the same fate Nigeria suffered in the past when operating under the Royalty Tax System. During the oil boom days of 70’s the windfalls went to the oil companies alone; Nigeria reaped nothing but debts.

The political leadership, the officials of Nigeria National Petroleum Corp. and other individuals in the pockets of the oil companies or connected to the power elite were the only beneficiaries of that country’s oil boom at the time; a similar process which is emerging in Ghana too, with some few already multi-millionaires before the first barrel of oil was lifted. Nigeria has learnt bitter lessons under the Royalty Tax System and therefore had shifted to the Production Sharing Agreement (PSA). Ghana MUST NOT be led to travel that perilous road, now that it is established that oil deposits exist in Ghana. Ghana can choose and pick who invests in our oil industry and on our own terms.

Ghana’s adoption of the Royalty Tax System would make it difficult for her to derive the full maximum benefit from the oil and gas. Nobody should deceive you.

Ghana would be receiving between US$ 22.92 and US$ 25.32, for every barrel of oil lifted. This amount includes royalties, carried interest, additional oil entitlements, petroleum profit taxes and GNP’s shares. This calculation is based on wellhead price of US$ 60.00 per barrel published by GNPC. The implication is Ghana would then have to look for between US$ 67.00 and US$ 70.00 to be able to buy a barrel of oil for her domestic consumption.

Therefore, in case of rising crude oil prices on the world market, Ghana cannot have any cushion or cover against domestic price increases of petroleum products.

This is the most dangerous disadvantage of the Royalty Tax System apart from losing on the windfalls. The constraints this would have on the national budget and the allocation of resources for the massive infrastructural development the country needs cannot be understated.

If our political leaders and the technocrats handling the oil and gas issues should throw away their self-interests and be bold enough to adopt the Production Sharing Agreement, Ghana within the first 15 years of the Jubilee oil Fields would experience a great transformation. Ghana would earn about US$ 38.53 billion made up of profit oil and royalties US$ 27.20 billion and US$ 11.33 billion accruing from windfalls in rising crude oil prices. Under the PSA Ghana would be earning between US$ 15.40 and US$ 17.60 billion over the Royalty Tax System. These are conservative forecasts and estimates holding the price at US$ 60.00 per barrel over the 15 years period and the current market price of US$ 85.00 per barrel and not factoring in future discoveries.

However, crude oil price would hardly fall below US$ 60.00 per barrel over the next decades. Predictions from the commodities market say oil price would be between US$ 90.00 and US$ 100.00 per barrel as from the year 2011 onwards.

On the average, Ghana would be earning around US$ 2.56 billion per year over the 15 years period instead of the US$ 800 million per year projected by the Ministry of Finance under the Royalty Tax System. What insanity is preventing the political leaders and technocrats from adopting the PSA system then, one may ask?

Under the Production Sharing Agreement Ghana’s entire domestic requirement for oil and gas will be met during the production life of the Jubilee Fields alone, which is expected to last between 25 – 30 years, leaving a surplus for export, which funds could be invested in the Heritage funds. This is a true financial projection or forecast taking into consideration current market prices but not conjectures under the Production Sharing Agreement.

As a result of adopting PSA with its additional revenue accruing to Ghana, government would have enough resources to undertake the massive infrastructural development the country needs; instead of telling us that we should not expect any big gains from the oil and gas exploitation.

Provision of potable water to every community, construction of all-weather motorable roads, provision of classrooms and educational facilities, affordable rentable accommodations, extension of health facilities and all other things that would impact on the social well-being of the Ghanaian would not be a problem to government.

Government can afford to reduce the level of taxes on all commodities including petroleum products. The multiplier effects of reducing petroleum taxes alone would be tremendous.

However, the reduction in the level of all taxes would enhance the standard of living of Ghanaians, taking us to the promised land of good social and economic well-being. All that seems like a mirage now but it can be real. Let us adopt the PSA system!

Author: Solomon. K. Kwawukume, Solomon.kwawukume@yahoo.com

Columnist: Kwawukume, Solomon