Governance of the Petroleum Sector in an Emerging Developing Economy

Kwaku Appiah-Adu

• Publisher: Routledge
• Year: 2016
• ISBN:
  9781317125822
• Edition: 1
• Topic: Business
• Subtopic: Corporate Governance
• Index: Business

Oil exploration in the developing world has been and continues to be a high profile and high risk activity attracting media coverage and stimulating much debate. In Governance of the Petroleum Sector in an Emerging Developing Economy, Professor Kwaku Appiah-Adu has assembled an edited volume that provides insight into critical aspects of this highly sensitive activity. Professor Appiah-Adu's starting point is Ghana, where he has been closely involved in national policy-making. The book makes comparisons between that African country and others as diverse as Trinidad and Tobago, and Norway. The contributors, global experts in their respective fields, explore five critical themes and propose strategies for progress in each. You will find an in-depth analysis relating to: turning oil and gas wealth into sustainable and equitable development; entrenching transparency and stakeholder engagement; effective management of the oil and gas sector; and safeguarding security and the environment. Finally, country specific models and lessons, particularly for Ghana and other African oil producing nations, are offered. This book serves as reference for business practitioners, policy makers, scholars, students and anyone interested in gaining insight into the oil and gas sector, particularly as it pertains to Ghana and other African petroleum producing nations, with lessons drawn from the global arena and international best practice.

1
Introduction

Kwaku Appiah-Adu

The purpose of this book is to examine governance issues relating to Ghana’s petroleum sector. Against the backdrop of global developments and experiences as well as within the national context, measures that are critical to the realization of optimal benefits to Ghana’s economy are proposed. The book covers a number of pertinent themes considered by petroleum sector experts to be essential in assessing the appropriateness of policies and strategies as well as the effectiveness of their implementation. Five broad themes are addressed.

Thematic Areas

• turning oil and gas (O&G) wealth into sustainable and equitable development;

• entrenching transparency and stakeholder engagement;

• effective management of the O&G sector;

• safeguarding security and the environment;

• country-specific models and lessons for Ghana and other African oil-producing nations.

Turning Oil and Gas Wealth into Sustainable and Equitable Development

This theme is covered in chapters 2, 3, 4 and 5 and provides the opportunity to consider the contribution of O&G to economic growth in terms of Ghana’s development based on strategies and experiences (positive and negative) across the globe. It reviews approaches necessary to achieve this both in terms of principles of sound management of public finances (revenue and expenditure) and specific instruments including petroleum revenue funds that have been developed to support this. The basic essentials of petroleum resource management are explored. Clearly, the operation and management of O&G resources in a company or government organization is no doubt a difficult and sophisticated undertaking. It usually entails a myriad of factors, uncertainties and risks. Decision-makers’ options are contingent on the various conditions and limitations covering local–global, technical, commercial and social issues. Moreover, approaches necessary to achieve sound management of public finances (revenue and expenditure) and particular instruments that have been developed to support this, including petroleum revenue funds, are presented. At the nascent phase of the O&G industry, Ghana’s petroleum reserves are expected to be modest by international standards. However as the industry grows and more oil is discovered, the impact of petroleum activities on the economic development of the country will depend on how transparently and efficiently oil revenues are managed. To ensure sound and prudent revenue management, Ghana’s parliament has passed a Petroleum Revenue Management Act. An assessment of the nature and the eventual impact of public participation in the formulation of the law is undertaken to address the revenue management challenges, and explain why the law potentially represents an important step towards effective management of Ghana’s petroleum resources. Furthermore, owing to the growing importance of gas as a source of power in Ghana, an effort is made to examine risks associated with gas-power project financing.

Entrenching Transparency and Stakeholder Engagement

This theme is covered in chapters 6, 7 and 8 and examines the role of transparency, accountability and stakeholder engagement in developing and implementing good extractive industry policy, using examples from Ghana and elsewhere. The respective roles of parliament, the judiciary, electorate, special agencies and the media in ensuring transparency and accountability are thoroughly investigated. A specific chapter focuses attention on the influence of civil society on the evolution of norms and procedures for oil sector management, both at a national and international level, and identifies emerging issues and tactics that civil society groups are beginning to utilize as their approaches continue to grow more nuanced. Additionally, the standards and processes that would ensure peaceful coexistence with various communities cannot be overemphasized, and in this respect, the roles of government as well as international and national oil companies in establishing stakeholder engagement are thoroughly explored. The main findings are presented for the key players and stakeholders so they can work together efficiently to ensure that the petroleum sector functions effectively to the benefit of all parties involved. Furthermore, an exhaustive analysis of how Ghana can avoid the resource curse is undertaken to guide policy makers and stakeholders from ‘catching’ the Dutch disease which so many oil-producing developing countries have grappled with.

Effective Management of the Oil and Gas Sector

Details revolving around this theme can be found in chapters 9, 10, 11 and 12 where the laws, contracts and regulatory institutions examined can be used to provide effective management of O&G exploration and production in order to achieve maximum benefits for Ghana. This includes discussions of licensing and negotiations, fiscal terms and the roles of the regulator and national oil company, using examples from Ghana’s own recent experiences with regulatory reform and examples from around the world. Detailed analyses of fiscal regimes for the O&G sector in Ghana are undertaken with a discussion of the subject of petroleum economics, focusing on Ghana’s petroleum tax regime and its strategic implications for the effective management of the O&G sector. Furthermore, the review assesses local content and its building blocks, participation aspirations, policies and strategies for the O&G sector. The role of government in creating a level playing field is highlighted alongside pitfalls to be avoided by host countries. Within the context of value addition, the utilization of natural gas as a source for downstream industrial development is addressed. Gas-based petrochemical projects for both in-country use and exports are explored, along with a clarification of gas contract terms and their associated arrangements. The concept of gas project management is investigated in cases where there is need for a major petrochemical project to pass several tests in order to secure project financing. To this end, the importance of a sound, credible, feasibility report that underpins the financial/economic viability of the project is underscored. In the same vein, various funding sources are presented against the backdrop today’s credit squeeze in the financial markets. Also discussed is project insurance, an interesting adjunct that is usually provided through multilateral insurance schemes. Finally, for large gas projects, light is shed on provisions to guarantee specific performance criteria, covering areas such as managerial, operational and financial performance.

Safeguarding Security and the Environment

The penultimate theme is covered in chapters 13 and 14 and explores best practice experience to ensure thorough examination of both security and environmental issues relating to the O&G industry and appropriate safeguard measures suited to Ghana and the best means for their implementation. While Ghana may have adequate experience in designing the necessary environmental policies that are expected to guarantee safety from activities that may be hazardous to the environment, the current activities regarding oil discovery transcend the environment. There are other issues of health and safety standards as well as community engagement and expectations and how to manage all this in a manner that engenders added benefits that petroleum brings to a developing country. Concerning security, the dynamics in Ghana are changing with increasing influx of people and growing crime. Moreover, the Gulf of Guinea is registering increasing piracy activities, the use of the region as transit point for the transfer of illicit substances and other emerging threats. Also of equal concern is the insecurity in some of the countries in the region and the likely spillover effects if the security agencies are unable to cope. It is proposed that all actors be engaged with early warning systems designed to ensure the safety and security of personnel and installations of oil companies, safety of communities and engagement with all whose livelihood can be lost in the event of an oil spill. More importantly, it is suggested that Ghana would need to develop excellent relations between the various security sector institutions and local communities for effective response to emergencies should they occur.

Country-specific Models and Lessons for Ghana and Other African Oil-producing Nations

The final theme is captured in chapters 15, 16 and 17. Under this theme, two country models (approaches) and the pertinent lessons that Africa can learn from their experiences are discussed. One of these countries discussed in this book is Trinidad and Tobago (T&T). It is considered that to a large extent, what the world sees in the T&T Model and wants from it is the outcome. But not just that – how did T&T do it, what are the pieces of the energy eco-system that T&T built, what were T&T’s successes and failures, what lessons can African host nations learn from T&T’s experiences and, can T&T hold their hands in this process? The other country is a highly developed economy with well-established and effectively functioning national and petroleum sector institutions, namely, Norway, which is hailed as a country that has managed its petroleum resources with distinction and whose approach to governing the sector is worthy of emulation.

In the case of T&T, the model and best practice examples for Ghana and other African oil-producing countries are explored. It is intriguing to see how T&T’s focus in the energy sector has evolved over the last four decades. In the 1970s a deliberate decision was made to convert some of the windfall from oil production and high prices to development of the natural gas industry. As the gas industry grew and prospered in the 1990s and beyond, another calculated strategy was implemented to build human capacity. In the 2000s, as the world has moved on from an industrial society to a knowledge society, T&T has shifted its focus to one of exporting energy expertise.

With respect to the Norwegian Approach, one chapter provides the essential elements of the model and a different chapter focuses on the lessons that Ghana and other host nations could learn from Norway’s experience. Together, the contributions highlight areas where Ghana and other African oil-producing countries would do well to apply specific lessons in their quest to ensure that petroleum resources become a blessing and not a curse. A variety of subjects are covered including legislation, national participation, petroleum administration, licensing, petroleum agreements, the fiscal regime, transparency and accountability, national skills development, health, safety and environment, community relations, oil recovery and natural gas utilization.

In order to obtain in-depth analyses of the thematic areas presented above, specific chapters were written by global experts in their respective fields. In effect, the book is presented as a compendium of works that would serve as reference material for business practitioners, policy-makers, scholars, students and all persons interested in gaining insight into the O&G sector, particularly as it pertains to Ghana and other African petroleum-producing nations, with lessons drawn from the global arena and international best practice.

PART I
Turning Oil and Gas Wealth into Sustainable and Equitable Development

2
Managing the Extractive Resource

Stephen K. Donyinah

Abstract

Ghana is endowed with abundant natural resources; from minerals to raw materials from forest and agricultural products, and has mined gold for centuries, but is still grappling with prudent management of resources. While we can highlight ‘the Norwegian Model’ in the case of oil and gas (O&G), nothing can be said about the Ghanaian model in the management of resources. Sadly, despite an abundance of natural resources, Ghana has nothing to show in terms of development as a result of the improper management of the income generated from the sales of raw materials. For example, there is a lack of value added to commodities before sale and Ghana is still practising the old ways of merely selling raw materials to traditional partners without the additional value that can generate extra income. It is the aim of this chapter to outline the effective ways of managing Ghana’s natural resources prudently in order to obtain optimal value from its natural resources. It is believed that if Ghana’s natural resources are well managed, its economy will improve and great development will be realized. The issue of resource management is critical at this point in the country’s history, given that it is now counted among petroleum-producing countries. Ghana cannot afford to make mistakes in this sector as witnessed in other commodities over the years. This chapter recounts the history of resource exploitation in Ghana, issues that were not properly managed, and subsequently discusses the way forward. The Norwegian Model for managing petroleum resources, which has a successful story worthy of emulation as far as petroleum production is concerned, is presented and the key points elucidated. Advice on the prudent management of Ghana’s natural resources and the concluding remarks with regards to the benefits to be derived from the abundant raw materials are finally presented.

Introduction

Given Ghana’s endowment with a wide array of abundant resources, the country would have been prosperous and would have attained a high level of development if there had been proper management of its natural resources. The need for an effective management of its resources is therefore important, especially with the advent of the discovery of oil in commercial quantities, and it is the hope of many in the country and across the African continent that Ghana’s efforts to manage its O&G resources will be a success. There is therefore the need to develop a model in the management of the natural resources of the country.

This chapter therefore focuses on the ways and means of producing a management model for Ghana’s natural resources. This assertion could not have been better put than the Financial Times’s (FT) prediction that Ghana’s economy will be the best on the African continent if the petroleum resources of the country are managed prudently. In a special edition dedicated to Ghana, the FT expressed the view that Ghana had the potential to become ‘an emerging black power, rather than an aid-dependent African reformer, collecting World Bank stars’ (Financial Times, 2011).

Despite centuries of gold mining and other mineral extraction in Ghana, it is perceived that the prospects of these mineral resources have not left any identifiable blueprint for ensuring sustainable development and poverty alleviation. Though mining constitutes the largest source of foreign direct investment (FDI) and minerals are the leading export earner, the sector has not helped to reduce poverty and tackle other development challenges. With the influx of multinational mining companies, the result has been development that largely benefits these companies to the neglect of people and the economy at large. Despite a boom in the demand and prices of minerals, the woes of people and countries on the African continent, particularly Ghana, keeps deepening with no end in sight. The searching question to pose is – what operational shortfalls in the mining industry bring about the untold hardship of citizens within countries whose natural resources are exploited?

Natural Resources of Ghana

The natural resources of Ghana include gold, industrial diamonds, bauxite, manganese, fish, hydropower, petroleum, silver, salt and limestone. Agricultural products include cocoa, timber rubber, coconuts, coffee, pineapples, cashews, pepper and other food crops. Ghana’s industries are dominated by mining, timber and processing, light manufacturing, fishing, aluminium production and tourism (CIA World Fact Book, 2011). The country has a long history of gold mining and exploration. Gold represents Ghana’s major export commodity, providing approximately 50 per cent of gross domestic product (GDP). Ghana is the world’s tenth and Africa’s second largest producer of gold, with current production estimated in excess of 2.4 million ounces (Moz) per annum. High gold prices have resulted in a recent significant increase in expenditure on gold exploration in the country. Ghana is also the third largest African producer of aluminium metal and manganese ore, and a significant producer of bauxite and diamond. In addition, Ghana has produced a number of industrial minerals, which include kaolin, limestone, salt, sand and gravel, and silica sand on a small scale.

Discoveries of More Minerals

The interesting thing is that more new and precious minerals are discovered from time to time in addition to the already known ones. According to the Government (Ministry of Lands and Natural Resources), Ghana has made more discoveries of mineral deposits which are expected to boost the country’s economy and development. The deposits include copper, phosphate, nickel, chromium and uranium. The Ministry made this assertion at the opening of the third West African Mining Summit (www.ghanaweb.com, November, 2010). T...