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09.01.2018 Feature Article

Why Norway benefits from its oil and why Ghana has not benefited from its gold

Why Norway benefits from its oil and why Ghana has not benefited from its gold
09.01.2018 LISTEN

Gold and Crude Oil are two of the world’s strategic resources. Both are in high demand in the world because they are critically important for the global economy. Both are used in several devices. Crude oil is important for the automobile industry, aviation, construction and the petro-chemical industry. Gold for instance is used as a reserve currency. Many investors turn to gold during global financial and economic crises to protect them from risks. Gold enables wealthy people, countries and companies to protect their wealth against global financial turmoil. These attribute of gold and crude oil also mean that if you are one of the few lucky countries to produce them, it should change the fortunes of the country and its people as well as the geopolitical position of the country i.e. the influence of the country in global economic and political affairs. While Norway has benefited from its oil, it is not so for Ghana.

The reasons why Norway has benefited from its oil while Ghana has not benefited from its gold include the following. Ghana government shares in the companies operating in Ghana are very small not more than 15%, Norwegians have 50% shares in the oil companies that operate in the country and hence receive huge dividends from oil activities compared to their Ghanaian counterpart. Taxes in Ghana are very very low so what companies pay are nothing compared to what they take home. In Norway, the companies pay huge percentage of their profits as tax. In 2017, Norway’s tax revenues from petroleum activities was estimated to be around $8.8 billion. The net cash flow from direct ownership in oilfields was $11.3 billion in 2017. Norway's government also invest in technology and skills so they are able to take part in the oil activities thamselves, in Ghana however, government has almost completely withdrawn from gold production and hence rely heavily on the small taxes and royalties it receives from the foreign companies. Lastly, Norwegians have directly benefited from their oil because the government has incentive to invest in education, healthcare, infrastructure, transport and telecommunication. Politicians and cilvil servants in Norway have not siphoned the oil wealth into their personal accounts. In other words they have not put their own interests above that of their country. The opposite is true in Ghana where politicians and civil servants work for themselves and put their own interests above that of their country. In other words they do not understand the concept called National Interests.

Ghana is one of few countries in the world where gold has been produced continuously for more than 100 years. Between 2011 and 2015 Ghana produced 437,548 kilograms of gold. That is an average of 87,509 kilos a year, which places Ghana among the top 10 gold producers in the world [1]. For several years, Ghana has been the second most important gold producer in Africa after South Africa. But when you visit gold producing districts and communities such as Tarkwa, Dumase, Atoabo, Prestea, Ntotroso, Kenyasi, Obuase, Anwiam, Anyankyerem, Akatakyieso, Amamom, Enchi, Wassa, Akyem, Ahafo nothing shows that huge proportion of wealth is being produced in such communities. The roads are bad. Water supply is absent. School infrastructure remains in pre-modern state with pupils studying under trees, and having no access to electricity, and computers. Healthcare infrastructure is inadequate. Expectant mothers have to be carried long distances in rickety cars to access healthcare. The only benefit mining communities seem to get from gold is the environmental cost associated with gold production: air pollution, land degradation, water contamination, and deforestation among others.

Top 10 Gold Producing Countries in Kilograms (Source: US Geological Survey (2017))

Ranking Country 2011 2012 2013 2014 2015
10 Ghana 82,598 86,972 89,224 90 90,754 88,000
9 Mexico 88,648 102,802 119,773 117,717 134,759
8 Uzbekistan 91,000 93,000 98,000 100,000 102,000
7 Canada 102,624 107,498 124,054 151,472 152,747
6 Peru 166,187 161,544 151,486 140,097 145,031
5 South Africa 180,293 155,286 160,016 151,622 144,515
4 Russia 199,642 217,800 299,982 249,100 252,000
3 United States 234,000 235,000 230,000 210,000 214,000
2 Australia 260,000 252,000 268,000 273,963 277,800
1 China 362,000 405,000 430,000 450,000 450,000

If gold is so important and Ghana produces so much, why are gold-producing communities and districts in Ghana so poor? The answer is simple: Ghanaian leaders do not think or act in geopolitical or geo-strategic terms. They have no understanding of the geopolitical importance of gold that is how to use the metal to benefit its people and the country’s economic position. They think gold is just one of the products produced cheaply around the world. They just allow gold to be exported immediately it is produced without thinking of adding value to it or transforming it into many uses. Furthermore, while Ghana’s untapped gold reserve is about 1,200 metric tons of gold reserves, most of the concessions to mine gold are controlled by foreign companies such as Newmont, and Anglo Gold Ashanti with the Ghanaian government holding negligible mostly about 10% shares in those companies. Because the concessions are in the hands of foreign companies, they are the ones that take the lion share of profits with Ghanaians only getting the crumbs falling from the tables of the foreign companies.

According to the United Nations Conference on Trade and Development (UNCTAD), in 2003 for example, gold and other minerals exported from Ghana generated $893.6 million but Ghana got only $46.7 million or just 5% while the companies took the remaining 95% or 846.9 million [2]. Similarly, The UK based The Economist magazine reported that: “Gold accounted for 40% of [Ghana’s] exports in 2008, with a value of $2.2 billion. But the government received only $116m in taxes and royalties from mining firms” while the companies took more than $2 billion [3].

In 2003, the World Bank (which pushed Ghana government to sell its shares) acknowledged that Ghana has not benefited from gold mining activities in terms of revenue, employment, infrastructure development and environmental sustainability and urged Ghana’s leaders to take steps to reverse the trend but nothing happened. World Bank wrote that:

“It is unclear what gold mining true benefits are to Ghana. Large scale mining by foreign companies has high import content and produces only modest amounts of net foreign exchange for Ghana after accounting for all its outflows. Similarly, its corporate tax payments are low due to various fiscal incentives necessary to attract and retain foreign investors. Employment creation is also modest given the highly capital intensive nature of modern surface mining techniques. Local communities affected by large scale mining have seen little benefits to date in the form of improved infrastructure or services provision because much of the rents from mining are used to finance recurrent, not capital expenditure. A broader cost-benefit analysis of large-scale mining that factors in social and environmental costs and includes consultations with the affected communities needs to be undertaken before granting future production licences” [4].

Ghana is not benefiting from her gold deposits because of the poor understanding the leadership in the country have about the role and value of gold, particularly how to manage it to benefit Ghanaians. Hence they failed to design and implement any comprehensive policy to ensure Ghanaians become the ultimate beneficiaries of gold.

Compare Ghana’s position to Norway which started producing oil in the 1960s. The Norwegian government understood in the 1960s that oil has significant geopolitical role in the global economy and made effort to control how it was exploited and how the benefits generated were used to benefit every citizen. For example, the Norwegian government awarded exploration licenses to several private companies but stipulated that 50% of whatever was discovered would go to the state.

“In October 1962, Phillips Petroleum sent an application to the Norwegian authorities requesting permission for exploration activities in the North Sea. The company asked for a licence for the parts of the North Sea that were in Norwegian territorial waters and that were or might be designated as part of the Norwegian continental shelf, and offered US $160 000 per month. This was regarded as an attempt by the company to obtain exclusive rights. The authorities decided that it was out of the question to hand over the entire continental shelf to one company…In May 1963, the Norwegian Government proclaimed sovereignty over the Norwegian continental shelf. A new act was adopted establishing that any natural resources on the shelf belong to the Norwegian state, and that only the King (in practice the Government) has the authority to award licences for exploration and production….Just before Christmas in 1969, Phillips informed the Norwegian authorities of the discovery of Ekofisk, which turned out to be one of the largest offshore oil fields ever discovered. This was when Norway’s success story started in earnest. Production from the field started on 15 June 1971. A series of major discoveries was made in the next few years” [5]

“In the early days, foreign companies dominated exploration activities, and they were responsible for developing the first oil and gas fields. Norwegian participation gradually increased as Norsk Hydro became involved. Saga Petroleum, a private Norwegian company, was established in 1972. Statoil was also established in 1972, with the Norwegian state as sole owner. Norway also established the principle that the state was to have a 50 per cent ownership interest in every production licence… Petroleum activities have played a key role in the development of today’s welfare state in Norway. When the first production licences were awarded in the mid-1960s, hardly anyone realised what a huge impact the industry would have on the Norwegian economy. Fifty years later, it is more important than ever. Figures for the petroleum industry’s share of total value creation, investments, exports and revenues over the years show this very clearly” [5]

One of the overall principles of Norway’s management of its petroleum resources is that exploration, development and production must result in maximum value creation for society, and that revenues must accrue to the Norwegian state and thus benefit society as a whole. The main reason for this is the extraordinary returns that can be obtained by producing petroleum resources. Since these resources belong to society as a whole, the Norwegian state secures a large share of the value creation through taxation and the system known as the State’s Direct Financial Interest (SDFI) in the petroleum…The industry plays a vital role in the Norwegian economy and the financing of the Norwegian welfare state. The oil and gas sector is Norway's largest measured in terms of value added, government revenues, investments and export value. Long-term perspective in the management of the government's petroleum revenues ensures that they benefit Norwegian society as a whole, and that future generations will benefit from Norway’s petroleum wealth. This has been a key principle in developing the financial and legal framework for the sector” [6].

Norway has reaped huge financial benefits from its oil and gas resources. As the government’s notes: “Since production started on the Norwegian continental shelf in the early 1970s, petroleum activities have contributed to about [$1.6 trillion] or NOK 13,500 billion in current NOK to Norway’s GDP. This does not include related service and supply industries. Yet so far, under half of the estimated recoverable resources on the Norwegian shelf have been produced and sold…The government’s total net cash flow is expected to increase in 2017 compared to 2016. Current assumptions on the government's total net cash flow from the petroleum industry, including tax, dividend from Statoil and various fees, is estimated to NOK 180 billion or $22 billion (2018-NOK). The more than 40 % increase in revenues is due to higher revenues following higher oil and gas prices…Norway’s tax revenues from petroleum activities are estimated to around NOK 72 billion [$8.8billion] in 2017. The net cash flow from direct ownership in fields through the SFDI system is estimated to NOK 92 billion [or $11.3billion]. The government has additional income from fees and Statoil dividend. Estimated total net cash flow from the petroleum industry in 2017 is NOK 180 billion (2018-NOK)…Government revenues from petroleum activities are transferred to the Government Pension Fund Global, which at the end of 2016 had holdings with a total value of NOK 7,510 billion [$924billion]. Under the fiscal rule, transfers can be made to the fiscal budget from the Fund to finance important public goods without drawing on the Fund’s capital. In 2017, about one in seven NOK spent over the fiscal budget will come from the Government Pension Fund Global” [6].

Norway has been able to save more than $924 billion from the export of petroleum resources. When the global financial crisis hit in 2008, the country used part of it to acquire assets all over the world.Unfortunately for Ghana it has no such reserves.

Notes
[1] US Geological Survey (2017) ‘2015 Minerals Yearbook’ October 2017, pp.31.13 - 31.14

[2] UNCTAD (2003) ‘Economic Development of Africa: Rethinking the Role of Foreign Direct Investment’ http://unctad.org/en/Docs/gdsafrica20051_en.pdf (see page 50)

[3] The Economist (2010) ‘Carats and sticks: mining in Ghana’ The Economist, 3 April 2010.

[4] World Bank (2003) ‘An assessment of the performance of Mining in Ghana’; http://lnweb90.worldbank.org/oed/oeddoclib.nsf/docunidviewforjavasearch/a89aedb05623fd6085256e37005cd815/$file/ppar_26197.pdf (see page 23)

[5] Norway Petroleum (n.d) ‘Norway Petroleum History’ http://www.norskpetroleum.no/en/framework/norways-petroleum-history/

[6] Norway Petroleum (n.d.) ‘The Government’s Revenues’ http://www.norskpetroleum.no/en/economy/governments-revenues/

By Lord Aikins Adusei
09 Jan 2018

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