Ghana’s tight oil tax regime not attractive for Investors

Ghana: Having a Tight Oil Tax Regime and Expecting Increased Investor Presence Are Mutually Exclusive

Oil drilling platform Shengli No.4 is in the midst of shipment at the outer anchorage of a port in Yantai, east China’s Shandong province, Feb. 8, 2018. The Shengli No. 4 and the New Shengli No.1 will be sent to Nigeria for oil exploration services. (Photo by Chu Yang from CFP)
Oil drilling platform Shengli No.4 is in the midst of shipment at the outer anchorage of a port in Yantai, east China’s Shandong province, Feb. 8, 2018. The Shengli No. 4 and the New Shengli No.1 will be sent to Nigeria for oil exploration services. (Photo by Chu Yang from CFP)

Ghana’s expectation of increased investor presence in its upstream oil and gas industry to propel exploration and development cannot be maintained in conjunction with a tight petroleum tax regime which has the potential to squeeze the profits made by multinational oil corporations operating in the sector.

Investors are mulling whether to continue operations in expensive jurisdictions, while others are seeking to avoid jurisdictions that will drain their revenues altogether as the sector remains riskier amid the ongoing energy transition. More to the point, Ghana’s oil resources are in deep-sea zones which require huge investments to engage in exploration and development.

Upstream operators such as Tullow Oil are now aggressively using their existing resources to increase their portfolio of assets instead of resorting to the international capital market to raise funds. In the recent announcement of exercising its pre-emptive rights in Kosmos Energy’s purchase of Oxy’s stakes in the Deep Water Tano Block, the company considered a purchase of stakes of $150 million from its own resources, likely due to dwindling investor sentiments over fossil fuels.

Oil Revenue Projected to Reach Over $1 billion

According to the 2022 Budget Statement, Ghana is expected to rake in total petroleum revenue of US$1.006 billion in 2022. Out of the total, participating interest from crude oil will accrue $537.61million, corporate income tax will accrue $261.13 million, royalties from crude will be $238.1 million and surface rentals $0.9 million.

Even, in 2019, when calls for disinvesting in global fossil fuel production were very minimal, crude oil revenue generated was US$947.67 million. Thus, this projection of a billion dollars is very ambitious, given the ongoing energy transition and the fact that, the country has not made any significant changes to its fiscal regime to increase the attractiveness of its upstream oil and gas sector.

This projection is compared with that projected in the 2021 budget Statement, during which the government of Ghana projected approximately US$886 million as petroleum revenue expected to be realized. This included royalties of US$201.0 million, carried and participating interest of US$524.9 million, corporate income tax of US$158.5 million and Surface Rentals of US$1.30 million.

Ms Phoebe Afful of the Petroleum Commission is cited to have said that:

“Ghana’s upstream petroleum sector presents one of the best opportunities in the sub-region to investors. Reserve replacement and investment attraction continued to remain a priority for government as part of the drive towards sustainability.

“Sustained investor attraction must focus on promotion of Ghana’s sedimentary basin, planned further licensing rounds and direct negotiations for open acreage.  We also need new policies and guidelines on local content and participation.”

Meanwhile, the ongoing energy transition from fossil fuels, continues to shrink the possibilities of sustaining a vibrant oil and gas industry, the earlier the realities are clearly seen, the better.

In fact, the fall out of the COP26 presented a grim outlook for Ghana and Africa’s hydrocarbon resources. The region’s call for its fossil fuel resources to be spared from the transition fell on deaf ears.

The region’s three point address: soliciting compensation from the West for being complicit in causing climate change; calling on the West to be the first movers in abandoning their hydrocarbon resources; and being excused from abandoning its fossil fuels were all ignored. What was clear after the COP26 was the fact that the intense pressure mounted on African economies to quickly jump on the energy transition train has not receded.

Making Upstream Oil&Gas Sector Attractive

Quite recently, Julian Popov, a Fellow of the European Climate Foundation, Chairman of the Building Performance Institute Europe, former Minister of Environment and Water of Bulgaria, in a publication indicated that the talk about gas as a transition fuel is an irony; “Gas as a transitional fuel is the primary justification for allowing countries to build gas power plants under the so-called DNSH (Do no significant harm) principle.”

Therefore, even the debate on natural gas is gradually changing. As he indicated that the role of gas in the energy transition is not that of a transitional fuel but could be better described as a fuel of last resort.

Such insinuations present major problems to countries in the African region that have vehemently underscored the use of natural gas as a fuel that will drive the future growth of their economies.

Besides, with Omicron variant spread gaining momentum across the globe, the price of oil is likely to continue on a downward curve, as countries gradually impose restrictions, thus impacting demand which has been favourable throughout the year.

The radical phenomenon of halting investments in hydrocarbons has not spared oil giants in the region. The West Africa region’s oil producer, Nigeria, experienced a decline in rig counts in November 2021 by about 38 per cent to 80 compared with 129 rig counts in the same period in 2020, even when Covid-19 affected the country’s oil production. For Nigeria, its new Petroleum Industry Act is expected to re-ignite the attractiveness of the country’s oil and gas industry.

Likewise, Senegal’s government is set to revise its petroleum fiscal regime to increase the attractiveness of its nascent oil and gas industry. Its Sangomar oil field and Greater Tortue Ahyemi (GTA) oil fields are the country’s newest discoveries in 2014 and 2015 respectively. The country intends to relax the rules of its fiscal regime to avoid a resource curse that has plagued many oil producing countries in the region.

Currently, Ghana’s average daily production of Jubilee, as of November 2021, is 74,000 barrels per day (bbld). In the same month, the Jubilee field had 642 recoverable million barrels per day (mmbbl). Since the beginning of production to November 2021, it had produced 337mmbbl of crude and 528 billion of standard cubic feet (bscf) of gas with  173 bscf of  gas exported.

The country’s fields continue to be these three: TEN, Jubilee and Sankofa fields, thus indicating that the upstream oil and gas requires new discoveries to replace the already drilled fields which are fast depleting.

However, to fast-track exploration and ensure investments are growing in the country’s upstream oil and gas industry, the country should follow the footprint of countries that are positioning themselves to attract potential investors and ramp up investment in the sector.

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