The Economic Prospects of the Oil Discovery to The Nation
SPEECH BY NANA ADDO DANKWA AKUFO-ADDO
2012 PRESIDENTIAL CANDIDATE OF THE NEW PATRIOTIC PARTY
AT THE 39TH FACULTY WEEK CELEBRATION OF THE FACULTY OF SOCIAL SCIENCES, KNUST, KUMASI , 6TH. OCTOBER 2010
The national discourse on the economic and social impact of oil discovery in the country is very opportune at this crucial moment when the industry is emerging. This is the time that the Ghanaian people in the oil and gas industry, including its government and public authorities, should position ourselves to shape the emerging industry rules which will form the basis of the culture and character of the industry. I therefore commend you for providing this platform for this great discussion and congratulate you on your anniversary. But before I turn directly to the topic, let me share with you how in my mind's eye the economy of Ghana should look like in the next decade.
The economic goal that I envision for this country is one that will shift focus away from what I have described as the “Guggisberg economy”, that is a raw material producing and exporting economy, to a transformed economy that is based on the production of value-added goods backed by knowledge and technology-driven service industries. I will like to see a complete overhaul of our economy from one in which we rely on the vagaries of nature and commodity markets for its survival to a modern economy that has industrialization as its hallmark. By industrialization I mean the establishment of factories to manufacture basic goods such as clothes, furniture, shoes, plastic goods, consumer electronics and home appliances for the regional ECOWAS and African continental market. This is the only way that we can win the war on poverty and provide the broad masses of our people with decent and dignified standard of living.
The primary development objective for the Ghanaian economy must therefore be a single-minded focus on its structural transformation. Such transformation must be supported by an educated and healthy labor force and a first class network of infrastructure. I therefore see the oil discovery as yet another resource that will support this industrial transformation effort. The economic importance of the oil find is that it must help in such a structural transformation and get us to move away from the production of yet another raw material – oil. This means that we must as a matter of policy and conscious effort see to the processing of our crude oil through its various stages of value addition. It is when the related industries of refining, plastics, and petrochemicals have been fully developed and when the impressive stream of oil revenues have been invested in developing our manufacturing base and in building our national economic and social infrastructure such as education, health care, roads and communications that we as a nation can be satisfied of having benefitted from the oil find.
It is within the context of this economic goal that this speech will discuss the economic prospects of the oil discovery to the nation as an important means for financing the modernization and structural transformation of the Ghanaian economy.
The discussion will begin with a description of the nature of oil and gas, position the oil discovery in Ghana within its historical context by giving you a short chronology on oil exploration, and discovery in the country; focus on economic prospects of the oil discovery; high-light possible pitfalls ahead; discuss the way the current administration is managing the process, and offer some alternative approaches that will enable our nation avoid the pitfalls and maximize the advantages associated with the discovery.
THE NATURE OF OIL AND GAS AND THE OUTCOMES OF DISCOVERY
The inherent contradictory outcomes in oil discoveries are well documented. Oil discovery can be a blessing and it can also be a curse for the citizens of societies in which the discoveries occur. This proposition is a truism that depends to a large extent on how the resource is extracted and how the revenues accruing from the discovery are shared and used for the benefit of the people in the society. The extraction, revenue sharing and utilization process can have positive or negative social and economic consequences for the people and the nation. However, the positive effects can be accentuated while the negative effects can be mitigated if there is a conscious effort by leaders of the country to ensure that the method of production and the management of the resources take due cognizance of the peculiar nature and character of the oil and gas industry.
First, oil and gas resources are depleted over time and are non-renewable. This requires that policy makers are very strategic and future oriented in the decisions relating to extraction, revenue sharing and revenue utilization. Second, the resource is very scarce and of high intrinsic value. As a result it commands high returns to national treasury and can overshadow the resource mobilization efforts in traditional sectors of the economy. The attractiveness of the oil and gas industry, due to the associated high returns, can entice a large number of citizens away from traditional sectors. The attraction to the citizens in combination with the sector's huge contribution to national treasuries can undermine the development of other sectors of the economy, inhibit economic diversification and make oil producing nations highly dependent on the commodity.
SHORT CHRONOLOGY OF OIL EXPLORATIONAND DISCOVERY IN GHANA
Exploration of oil and gas in the country began in 1896. However, the first commercial discovery was in 1970 by Signal/Amoco Group during the Progress Party Administration under Prof. K.A. Busia. This was the Satlpond Oil Field located 12 kms offshore the Saltpond Basin in the central region of Ghana. The estimated recoverable reserves were put at 4.9 million barrels of oil. The field started production in 1978 by Agripetco producing at the rate of 4,800 barrels per day (bpd). This field was shut down in 1985 when production dropped to 580 barrels per day. Production resumed in 2000 by a company known as Saltpond Offshore Production Company (SOPC). Now it produces about 600 barrels per day.
Active exploration started early in the 1980's when the Petroleum Department of the Ghana Supply Company was hived off to form the Ghana National Petroleum Corporation (GNPC). The GNPC was to rely on government funding to finance exploration and for government to own the fields when discoveries were made. This state-led exploratory approach was not sustainable because of the high cost of exploration. To raise internally generated funds to supplement government subvention the GNPC diversified into areas such as telecommunication, gold mining, salt winning, and crude oil imports to the neglect of its core function of prospecting for oil.
In 2001 during NPP administration under President J.A. Kufuor there was a major shift away from the state-centric exploration approach to a market oriented approach that encouraged private sector participation. The old fiscal regime which sought to obtain state share of net-oil of between 65% and 55% was considered by experts as too harsh and a disincentive to private sector participation. This was replaced by a new fiscal regime that reduced the government share of net oil to between 55% and 45%. In addition the GNPC was refocused to keep to its core function of facilitating the search for commercial hydrocarbons in the country. The change in the fiscal regime which took place in the second quarter of 2003 resulted in active interest by private capital in oil exploration and led to the signing of several agreements including Kosmos in July 2004, Tullow in July 2006, Hess in July 2006, and Gasop in July 2006. With this level of incentive and interest coupled with a refocused and retooled GNPC it did not come as a surprise when in 2007 Kosmos and Tullow made two separate discoveries of oil in commercial quantities jointly referred to as the Jubilee Field. This field contains “expected recoverable reserves of about 800 million barrels of light crude oil with and upside potential of about 3 billion barrels”. The discoveries also include significant quantities of associated natural gas. Indeed other discoveries have since been made and are yet to be developed. Many more exploratory agreements have also been signed between The Government and several contractors.
It has to be noted that the details of the terms of each agreement reflect factors such as the risks, returns, geological challenges and availability of data. For instance, the government took 2.5% additional paid interest in Kosmos but 5% in Tullow because Tullow's block had 3D data whereas Kosmos had only 2D data. Furthermore, the details of the terms of the agreement also depend on the timing. The agreements with companies before the Jubilee Field discovery were more liberal than the terms of post discovery agreements. This is because it was necessary to provide maximum incentive to attract investors pre-discovery when we were not sure of commercial discovery.
THE ECONOMIC IMPACT OF OIL DISCOVERY IN GHANA
The effects of oil discovery on the Ghanaian economy can be both positive and negative. There is therefore the need to put in place prudent management processes and a regulatory environment to ensure that the positive outcomes are maximized and the negative impacts mitigated. The immediate and head-line economic impact of the find will be the effects on the macro-economy.
First, the Jubilee field is expected to produce for a start 120,000 barrels per day increasing to about 240,000 barrels per day and yielding on average about $5 billion worth of crude oil and gas as an addition to our national product. This will increase our GDP from about $18 billion in 2010 to about $23 billion in 2011, quickly pushing our GDP growth rate up by as much as 28%. With a population of about 23.4 million this will mean that our per capita GDP will increase from about $769 in 2010 to about $982 in 2011 due to the oil discovery.
Second, the oil discovery will positively affect our external position. The foreign exchange that will be made available directly to the nation through government share of the oil revenue will be $1 billion. There will be additional foreign exchange that will be brought back into the country by the drilling companies to pay for local expenses such as labor costs, energy cost, and other purchases that they may make. These transfers will boost foreign exchange availability and help reduce the perennial foreign exchange shortages and the associated depreciation of the cedi, and usher us, for better or for worse, into a regime of regular exchange rate appreciation of the cedi against the currencies of our major trading partners. The availability of foreign exchange can also help reduce our current account deficit and improve our overall balance of payments position significantly.
On the fiscal side, it is estimated that about $1 billion of revenue will accrue to Government chest from the Jubilee Field. The improved revenue inflow will expand the fiscal space and allow for increased spending on development programs and projects without necessarily compromising macroeconomic stability. Furthermore, it will help reduce government borrowings from banking and non-banking institutions. The reduction in government borrowing will make more loanable funds available to the private sector thus making it more vibrant and help maximize the sector's contribution to the growth effort.
These positive macro-economic impacts, notwithstanding, there can be serious negative effects if the revenues are not properly managed. First, the oil income can have a devastating impact on monetary management. The sudden, significant availability of foreign exchange can result in an out-of-control appreciation of the cedi over the medium to long-term period. This can result in a situation where the cedi price of our exports such as cocoa, pine-apples, tuna and other non-traditional export products will be so low as to discourage farmers and other exporters. This phenomenon is referred to in the literature as the “Dutch Disease”. If such a situation is not managed properly it can destroy our agricultural and non-traditional export industries.
Second the increased capital inflows and the associated increase in spending levels can lead to higher levels of inflation and lower levels of domestic savings in the economy.
At the micro level of the economy, the impact of oil discovery may also be positive or negative. First, there will be direct and indirect creation of businesses and their associated employment effects. Some Ghanaians will be directly employed on the rigs themselves even though that number may not be substantial. That is not the full level of Ghanaian engagement that we seek. We should also encourage active participation by Ghanaians in the emerging industry, especially in the areas of exploration and production. Initially, that participation may be small because of the level of capital and risk associated with oil exploration and production. A start, however, has to be made if we are not to suffer the same fate in the oil industry as we have suffered in the gold industry, which is notable for the absence of Ghanaian participation at the formal industry level. Instead of chastising Ghanaians who are risk-takers and entrepreneurs in the oil sector, we should promote more such entrepreneurs. The politics of envy as we are seeing cannot help us build the new Ghana. Second, there is the tremendous potential for down-stream businesses such as refineries and petrochemical industries. Third there is the potential for allied businesses such as salt manufacturing. Fourth, there exist enormous potential for the creation of new businesses to service the industry such as boat and air transport services to carry people to and from the rigs. There is the potential for new and expanded real estate businesses to house the employees in nearby towns. There is also the potential for new restaurants, vendor shops, and banking services to provide the relevant services to the workers and the new companies that will emerge. The multiplier effects of the new businesses to the economic vibrancy of towns and villages near the rig site and indeed to the entire nation will be tremendous. However, these potentials need to be nurtured carefully in order for our people to benefit from their realization. For instance, the entire job creation and downstream business potential for the oil discovery can be limited by the choice of production method. For example, the choice of Floating Production Storage Offloading System (FPSO) as a production method can limit the development of downstream businesses such as refinery and other petrochemical industries thus limiting the value addition and employment creation potential.
The positive impact of the oil discovery in Ghana as has been spelt out can be tremendous. However, the negative effects can also be devastating if the resources are not managed prudently. As you all know the process of passing the law to regulate the management of the oil revenue is underway. The bill was laid in Parliament just before the Parliamentary Recess. It was referred to the joint committee on finance and energy. The bill will be debated when parliament resumes later in October. The idea of providing such a bill began in 2008 immediately after the discovery under the NPP Administration. The efforts were aimed at maximizing the positive economic and social impact of the discovery and to minimize its negative impact. The efforts sought to look at international best practices while adapting them to local Ghanaian situation. Consequently, various models from countries that have performed well and even those of countries that have performed badly were studied and used as input in the preparatory discussions. While the noble principle underlying the preparatory work in 2008 is ostensibly the same principle underlying the bill submitted by the Mills administration, the details need to be properly reviewed and debated to avoid pitfalls that can lead to the feared resource curse phenomenon and help make the oil discovery a blessing to Ghanaians.
THE CURRENT PETROLEUM REVENUE MANAGEMENT BILL
The current Petroleum Revenue Management Bill before Parliament is replete with clauses that need to be reviewed carefully to avoid traces of possible pitfalls embedded in them so that we can completely stave off the slippery slope towards making the discovery a curse. The entire nation must be involved in this debate to ensure that together we make this discovery a blessing.
First, clause 19 of the Bill states that beginning from the year 2011 the Annual Budget Funding Amount from petroleum revenues shall be set within the range of 50 to 70 percent of the benchmark revenue. It also states that the exact percentage of the benchmark revenue allocated for spending shall be approved by Parliament as part of the national budgetary process. The budget process for 2011 has begun earlier in the year and as we speak with about one month left for the budget to be read, the major components of the statement including the revenue forecast and the percentage of the benchmark revenue to be spent have been decided upon by government. Meanwhile, the law that ostensibly governs the disbursement of the revenue is yet to be debated and passed in the House. This means that the exact proportion of the oil revenues to support the budget and how the amount should be allocated have been done well ahead of the law that is expected to govern the process. The upshot of this is that whether we like it or not the content of the draft bill will inform the allocation of the oil revenue that will accrue in 2011.So the utilization of the oil revenue that will accrue in 2011 and the percentage of the benchmark revenue that will be allocated for spending in 2011 have already been embodied in the 2011 budget statement which will be presented to Parliament in November 2010.
But more importantly, in order to give the impression that the allocation is governed by law, the majority leadership in Parliament will have to rush the bill through the House with little time for debate. This will mean that the people of Ghana and their elected representatives will not be given the chance to debate effectively and indeed understand the law that will govern the utilization of the oil revenues. The speed at which this bill will be passed with little due diligence will undermine the need for transparency in the choice of a revenue management model.
Clause 22 prescribes how the annual budget funding amount should be utilized. It states that the revenue, its use and expenditure must be part of the national budget and subjected to the same budgetary process that are necessary to ensure the efficient allocation and monitoring of its use. The clause also lists about 11 sectors of the economy where the resources should be spent mostly. This part of the bill is what is likely to put us in trouble. Up to 70% of the oil revenue will be put into the consolidated fund and its use left in the hands of bureaucrats and politicians. Considering how the budget is drawn, it will be treated as usual government revenue used for public investment and other expenditures. It may even be used when things get tight for recurrent expenditure. Thus the resource may likely be dissipated without much attention to the finite and non-renewable nature of oil. Furthermore, the eleven sectors identified to be given priority in funding are too many and will result in spreading the revenue thinly and without any appreciable positive impact on the economy symptomatic of our regular appropriation process.
The bill provides for the establishment of a Petroleum Account at the Bank of Ghana into which all the oil revenues shall be paid into and from which between 50% and 70% of the amount shall be transferred to the consolidated fund for direct budget support. The excess of the total (benchmark) oil revenue over and above the Annual Budget Funding amount (which is about 30% to 50% of all the oil revenue depending on the exact amount earmarked for budget support and paid into the consolidated fund) shall be transferred to the Ghana Petroleum Funds. The Ghana Petroleum funds will be separated into the Ghana Heritage Fund and the Ghana Stabilization Fund. The Ghana Heritage Fund will then receive 30% of the amount in the Ghana Petroleum Funds and the Ghana Stabilization Fund will receive about 70%.
First, this formula for disbursing the funds is not sufficiently clear and lacks parsimony which is essential for transparency and accountability. The lack of clarity of the formula requires that Parliament is given enough time to do due diligence to the Bill and should not be rushed through the House.
Second, the principle underlying the Ghana Heritage Fund is welcomed. However, there is a school of thought that argues that such a fund is inappropriate for Ghana at this time and at our current level of development. In these times that we go globe-trotting looking for loans to build houses, to build schools, to build roads, to build almost every thing at high interests rates, paying high management fees, paying high arrangement fees, paying cantankerous insurance coverage upfront, and even mortgaging our sovereignty to private companies, it is argued that it does not make sense to turn round to decide that the paltry sum of revenue from our local resources should be put into savings accounts in foreign countries from whom we may be borrowing for them to use our funds for their own development. They may even turn round to lend our own money back to us for us to pay interest on. This, it is argued strongly may be unacceptable for the nation at this time of our development.
It is the contention of this school that current generation and generations yet unborn will be happier if we bequeath to them a transformed economy, with good roads, good human capital, good health care system, good drinking water, and good standard of living than to leave them with an unspecified amount of money stashed in a bank somewhere from which bureaucrats and politicians will be feeding on. In this era of financial meltdowns there is no guarantee that these moneys will be there 10 or even 5 years from now when the wells dry up. Such a heritage fund was good for Norway because they were already a developed nation and did not have to struggle with the development issues that we face currently. We should not adopt blindly we should adapt wisely to suit our circumstances they opine.
Third, the principle underlying the stabilization fund is also good. However, we have to be careful about the use of the resources kept in the fund. It should not be seen as moneys for making up the shortfalls in the entire budget whether it is caused by fall in oil revenue or not. It should be made explicitly forbidden to use the fund to make up for non-oil revenue short-fall in the budget otherwise it will discourage traditional revenue mobilization efforts of government and breed complacency in our fiscal policy management process that can feed into our dependence on oil revenue.
At this point let me share with you a few of my ideas on what can be done to maximize the benefits and minimize the woes. But before I do that let me say that while the potential economic impact of the oil discovery will be tremendous if managed properly, we should not over-blow its relative importance. We should continue to fortify the coca industry and encourage the exploration, production, and value addition to the traditional non-oil minerals such as gold, diamonds, and bauxite. The agricultural and non-oil mineral wealth of this nation will for a long time continue to be the backbone of our economy.
Now, the resources from the oil discovery should not be used for frivolous investments but for investments that will take cognizance of the finite nature of oil and gas to ensure that when the wells dry up a new industry can help sustain the economy. This means that the fund should be used to support the process of transforming the economy from one reliant on agricultural production or on oil or on other minerals and raw materials to an industrial economy. An industrial economy that does not need to survive under the mercy of nature, or commodity markets outside Ghana. We must take cue from what is going on in the Arab world where the Emirates, for instance, are using their oil revenues to create competitive advantages in the Airline industry and in tourism. We must use our oil revenue to develop our industrial base for the production of light industrial goods for the ECOWAS regional market and as an imperative for securing a competitive advantage in the continental market.
In order to succeed in the industrial transformation we should pay attention to education, health, and infrastructure development. In this regard, the oil revenue should be kept in a separate account at the Bank of Ghana and not to be used for general budget support. That will be the best way of preventing corruption and unfocussed use of the oil revenue.
Four separate special purpose funds are to be created to draw from the separate account at the Bank of Ghana. These special purpose funds are:
1. The Education Fund;
2. The Health Fund;
3. The Infrastructure Fund; and
4. The Industrialization Fund.
The purpose of the Industrialization Fund should be for the structural transformation of our economy. This will be used to increase access to capital at a cost that is affordable to local businesses to facilitate the establishment of light industries. The Infrastructure Fund should be used to provide the necessary infrastructure in roads, railways, waterways, energy, and water to facilitate our efforts towards the industrial transformation. The Education Fund should be used to provide quality education and train our people at affordable costs while the Health Fund should be used to provide quality and affordable health care for our people. The Health and Education Funds are necessary for the full development of our human capital to support our industrialization efforts.
Fellow members of this noble fraternity, I think we are in times of great expectations. We are at the crossroad of our nation's history when we need purposeful leadership. Leadership that is ready and willing to make correct but difficult decisions. We need leaders who will have the political will to carry out these bold decisions to build a free, productive, and prosperous nation so that we can bequeath to our children and their children a nation that they can be proud of.
Thank you for listening. May God bless this fraternity, may God bless this university and may God bless this Republic of Ghana.
Disclaimer: "The views/contents expressed in this article are the sole responsibility of the author(s) and do not necessarily reflect those of Modern Ghana. Modern Ghana will not be responsible or liable for any inaccurate or incorrect statements contained in this article."