Oil Must Benefit Ordinary Ghanaians 41


Ghana’s discovery of major oilfields is set to transform the country. But there has been little public debate on the fundamental effects that this will have, or even on upcoming short term government decisions that will have a major impact. So I contribute a few thoughts to encourage debate with my Ghanaian friends.

So far, there has been more interest in the international media than in the Ghanaian media over the question of whether the Ghanaian government will allow Kosmos Energy to sell its stake in Ghana’s bonanza Jubilee oilfield to Exxon Mobil for over 4 billion dollars, as Kosmos and Exxon Mobil have already agreed.

But Ghanaians should be very keenly aware of what is happening. The issue raises complex questions which go to the heart of the future of Ghana, a future that will be radically influenced for good or for ill by Ghana’s new position as an emergent oil rich state.

It may help to isolate and consider the following issues involved in the case, each of which is both critically important for Ghana, and a vexed point of dispute in Ghana’s vibrant political culture.

So let us look at Kosmos in the context of:

Property rights and state interference in the economy

Benefit to Ghanaians from Ghana’s mineral resources

The struggle between China and the West for influence in Africa

Environmentalism

Corruption

Property rights and state interference in the economy

To start with property rights, it has been put to me by Western diplomats in Accra that the government interference in Kosmos’ desire to sell its shares to Exxon Mobil is a signal that the NDC has not changed its spots, and is still a statist party opposed to free enterprise. But I am not sure that is fair on the NDC. Oil and gas concessions are not simple property rights. They are governed by long complicated contracts setting out many and onerous obligations on the owner of the concession, including for example obligations to carry out agreed exploration programmes.

A senior government minister has told me that Kosmos’ contract includes a clause giving GNPC a right of first refusal should they decide to sell, and that Kosmos agreed a deal with Exxon Mobil in breach of that clause. If that is true, then it is Kosmos, not the government, who are in the wrong. I would stress that I have not myself seen the contract and this is the province of the lawyers. But there are plenty of legitimate reasons why there should be such a clause. For example, it would be most undesirable if a single company were to buy up all Ghana’s hydrocarbon assets, establish a local production monopoly, and become an overwhelming power in the state.

Equally, the state would not wish concessions to go to a company who were interested in shutting down Ghanaian production to boost the oil price from their production elsewhere, were technically incapable of production, or were funded by drugs money. I hope that those examples illustrate that there can be a legitimate role for state intervention: the question is whether such intervention should be exercised in this case.

But the right that Kosmos do have is to receive the fair market price for their share. That must be at least what Exxon Mobil have offered. The Ghanaian government do not have any right to force Kosmos to sell to another buyer for less than the 4 billion dollars. That would indeed constitute an unfair infringement in property rights. But the right the Ghana government does have is to impose tax on the transaction.

Benefit to Ghanaians from Ghana’s mineral resources

Which leads us to the question of how ordinary Ghanaians will benefit from the oil. Here, there is one remedy that requires instant governmental action: whoever Kosmos sell to, the transaction must be heavily taxed as a massive capital gain.

An investor deserves their profit. Kosmos have bought their share of the concession, and had exploration expenses. Let us estimate that Kosmos expenditure at a generous 500 million dollars. The price they agreed with Exxon Mobil is reported variously at 4 or 4.5 billion dollars. To take the lower figure, that leaves them with a capital gain of at least 3.5 billion dollars.

The taxing of that 3.5 billion dollars must be the first major benefit to Ghana from its new oil industry. Ghana must here and now set down a marker that it is not, on oil, going to be ripped off to little general benefit, as it has been by the gold industry. The necessary amendment to the oil law must be rushed through so that Kosmos’ super capital gain is taxed at a minimum of 40% – whoever they sell to.

It is well established internationally that tax rates can be varied, windfall taxes can be imposed, and that national taxation approved by the legislature cannot be deemed limited by prior contract. Kosmos would complain, but a complaint that they only pocketed 2 billion dollars, not 3.5 billion, should be given limited sympathy. The tax should have to be paid by the purchaser direct to the government of Ghana, with Kosmos paid only the net sum after tax.

An empty government Treasury has added to the problems of the.world economic depression to make life very difficult for people in the Ghanaian economy this year. That tax money – around 1.5 billion dollars – should be pumped into programmes which boost employment and economic activity. I would prioritise social housing and water, both of which need urgent attention in Ghanaian cities.

As a side issue, with gold at over $1,000 an ounce, I would strongly recommend the Ghanaian government to slap an immediate windfall tax on the gold producers.

You cannot consider the question of how ordinary Ghanaians will benefit from the oil, without looking at the terrible warning of Nigeria. The country has become a byword for corruption, fraud, thievery, drugs and violence. It may not be politically correct to say it, but we all know it is true. Because of Nigerian oil, Ghana is theoretically up to now a much poorer country than Nigeria, but in fact ordinary Ghanaians have a much better living standard than ordinary Nigerians (and yes, I have lived over three years in each country). Nigeria’s institutions have collapsed – to give just one example, Ghana’s universities thrive whereas even the great University of Ibadan is a literal wreck.

How does Ghana avoid becoming another Nigeria and escape the “Curse of oil”?

When Nigeria started pumping oil, its currency appreciated dramatically (and was kept artificially still higher). It became cheaper to import food than to grow it. Nigeria’s agriculture and rural economy collapsed. For example, in just ten years Nigeria went from being the World’s largest exporter of palm oil to being the world’s largest importer of palm oil. With the rural economy shattered, there was a massive population influx to the cities. But the oil wealth was monopolised by a small elite, and the majority found only squalor and degradation.

The first economic priority for Ghana once the oil starts flowing must be to keep the Cedi value low. Very low domestic interest rates, and the discipline to isolate a healthy amount of oil revenue in offshore development funds, will be an essential part of this strategy. At the same time, revenue must urgently be directed to rural infrastructure, to increasing farm prices and developing agro-processing industry, on a scale not previously attempted. Ghana already has a major problem keeping young people in farming. Think how much this will worsen when oil starts to flow. If the rural economy collapses, much of the weft of Ghanaian society will go with it, such as meaningful chieftaincies.

Plans to increase electricity generation and replace and extend Ghana’s aged electricity distribution network are an essential part of a policy to encourage economic activity and production throughout Ghana, not just in the oil centres. The failure of NEPA to provide a reliable nationwide electricity supply has been one of the chief causes of Nigeria’s failure to win economic development from oil.

Tax and royalties from oil production alone, nor the economic activity generated by offshore oil production and downstream industry, will generate the government revenue required to achieve all these things. For that reason, my answer to the Kosmos conundrum would be for GNPC itself to purchase the shares, at the price that would have been paid by Exxon Mobil. Hugo Chavez, while I am sceptical of his democratic credentials, has shown what a determined government can do for social equality with oil money. GNPC has offers on the table from major banks to fund the acquisition.

The struggle between China and the West for influence in Africa

China has an active policy of seeking to extend its influence in Africa, at the expense of Western influence. The Kosmos deal, and indeed the development of Ghana’s petrochemical resources, has become mixed up in this. As known to the Western embassies in Accra from their government contacts, rather than Exxon Mobil, the Ghanaian government wishes the stake to go to the Chinese National Offshore Oil Corporation.

That has made international news headlines, as a competition for an African mineral resource that pits China and the USA in head to head conflict. The US Embassy in Accra and the Obama Adminstration certainly see it that way. I suspect the Chinese Embassy do too.

Having just come back from Washington, I would assure you that the Americans are going to be very unhappy with Ghana if Exxon Mobil are blocked by the government, just in order to give it to the Chinese instead. If the Ghanaian government forces the sale to the Chinese for less than the Americans were prepared to pay, that would cause widespread outrage in the international community.

The clue is in what I just wrote: “Competition for an African mineral resource”. Those who kid themselves that either side is in this primarily for altruistic reasons, are easily deceived. Outsiders want African resources; that has been the truth of African contact with the rest of the world for centuries. That is not to say that there is no altruism in the relationship. From the West, I think of it as guilt money for slavery and colonialism. But whatever the motivation, the truth is that Ghana has over the years received hugely more free aid money from the UK and US than it ever has from China – totalling billions of dollars – and that it will do so this year too.

When asked by Ghanaian friends about .the relationship with China. I always tell them that, if offered genuinely free money, they should certainly take it. Equally, if these Chinese buses are reliable (time will tell) and cheap with good credit terms, certainly buy them. But the much vaunted billions in Chinese aid for Ghana is not readily apparent. Have you seen it? There are some football stadia – not a huge economic driver. The Bui project is a soft loan, not a gift, and the capital price is inflated.

Aspects to the Chinese way of doing things come with what aid there is. In particular the importation of low level Chinese labour, including convict labour, rather than giving jobs to local people, and some very unfortunate Chinese attitudes to employee relations and to Africans in general.

The government is working on a plan whereby the Chinese would get Kosmos’ part of the Jubilee field in exchange for building undersea gas pipelines, and the Chinese would also develop the onshore storage facilities, and perhaps refining and downstream industry too.

The problem with this plan is that that the Chinese do not want to pay 4.5 billion dollars upfront for the Kosmos concession. But if not they, who would pay Kosmos? Kosmos can certainly be taxed. Kosmos can within reason be controlled over to whom they sell. But the absolute right which Kosmos must retain is to sell their share at the market price.

The sums of money involved are mind boggling – that a share of less than a quarter in just one field is selling for over 4 billion dollars, shows how the economics of oil will dwarf the rest of the Ghanaian economy. That is why so many companies are anxious to be involved. That goes not just for the production from fields, but for all the downstream activity too. What worries me is that there appears a government determination to hand control of the bulk of Ghana’s nascent hydrocarbon related development to the Chinese, rather than deal on the basis of fair and open competition.

To say that there is a lack of transparency would be an understatement. A convoluted deal with the Chinese over Jubilee, pipelines, processing and downstream is being put together without anyone else being invited to tender. As far as I can see, it would give the Chinese Kosmos’ stake in the Jubilee field, with the Chinese paying much less than it is worth.

I may be wrong. It may well be that the Chinese proposal genuinely involves a huge aid component, or is of high quality and competitively priced. But in that case, they would only benefit from an open process.

Environmentalism

There is no such thing as an environmentally friendly hydrocarbon industry. Production is messy, and use of the end product pollutes and causes climate change. There is no point in pretending otherwise.

But Exxon Mobil’s record on controlling local pollution effects at the point of production is abysmal. Their record in Nigeria (and Alaska) is appalling from the point of view of environmental degradation, community relations, repression and major corruption. They have a reputation as the most irresponsible polluting oil corporation in the World – with the exception of the Chinese National Offshore Oil Corporation, who are even worse.

It is worth a note in praise of Tullow Oil, partners and operators in the Jubilee field. An Irish company, their commitment to Ghana and to local employment and procurement has been exemplary.

It is vital for the future that a large part of the energy generated by hydrocarbons, and the resulting revenue, is devoted to funding the industrial development of renewable energy technologies. Ghana has great potential for wind energy, solar energy and above all wave and ocean current energy. Major projects in these areas should be developed with oil revenue.

Corruption

Those Ghanaians who have been fortunate enough to acquire stakes in Ghana’s oilfields, are set to become the richest people in the land. Their families may be in a dominant position in Ghanaian society for generations. There is an understandable concern for who those Ghanaians are, and how they acquired their stakes. That seems to me a perfectly legitimate area for investigation, perhaps initially by the parliamentary energy committee.

Many government ministers are at least partly motivated in their opposition to the proposed Kosmos/Exxon Mobil deal by a belief that those close to ex-President Kuffour own a share in Kosmos, with the inference that the share was corruptly obtained. I do not know if that is true. I have not seen any evidence. If there is evidence, let it be properly investigated and acted on. If there is no evidence, forget it. But do not let us have policy in the most vital area dictated by partisan rumour.

Strangely, it is bipartisanship which is most worrying me. I pray that Ghana will never become corrupt at all levels like Nigeria, even though we know that oil brings that tendency. Yet there appears to be very little vigour in investigating and prosecuting corruption.

Both President John Kuffour and President John Atta Mills, on coming to power after defeating the previous government in election, appear to have taken the same view. As I see it, they judged that in Ghana’s new democracy, it is essential that when the government changes, it should be seen by all that vindictive action is not pursued against members of the other party. Only a very small number of middle ranking figures have suffered from anti-corruption action.

These were the actions of wise and generous hearted men. But the danger is that this forbearance can result in a toleration of corruption. A situation can even arise where the political class as a whole see the public purse as something they can loot, with the parties taking turns as they go in and out of power, and all the politicians agreeing not to pursue each other for corruption.

I am not saying that Ghana has reached that stage. I am saying that it is a danger and that you can be too tolerant. I first became known in Ghana when I warned of increasing corruption in the last years of the Rawlings administration. The same thing happened, only on an even bigger scale, in the last two years of the NPP government.

Let me put that in perspective: Ghana’s governance is still great compared to any other African country, and a huge amount of development has been achieved by generally first class government in the last decade. Corruption flourishes everywhere, including the UK. But it must be fought with more single-minded purpose than I see at present. With oil revenue coming, it is essential that the line against corruption is now drawn.

Let me conclude by saying that I offer these opinions simply as a friend of Ghana. They are entirely my personal view. Now that I am retired I can give an honest opinion without reference to the British government, IMF or World Bank ?” all of which would disagree strongly with many of my views here. Ghanaian policy is of course for Ghanaians to decide. I merely hope that I may provoke some thoughts useful to that purpose.


41 thoughts on “Oil Must Benefit Ordinary Ghanaians

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  • kwamex

    Very interesting article and good analysis indeed. I believe one aspect of the box you didn’t discuss in detail is Ghana nationalising its asserts and also establishing its own oil refineries in every region of Ghana. As someone mentioned, this has been done very well in Norway and indeed Venezuela and is a model that seems to both maximize wealth distribution and minimize corruption. I also believe you should provide your contact details for further discussion.

  • Ken Atta-Boakye

    Food for thought:

    The point that we want to dwell on is the fact that Ghana must benefit from the oil discovery. From the prespective of Craig, Ghana is not the first to discover oil in Africa or anywhere else. We need to take a critical look at how the other nations have benefited from their oil find and follow their footsteps. It is much easier to copy than to be a pioneer. Thus we need people with integrity to manage the oil find. President Obama said those who take public office should underestand what it takes to hold such position. That is what is lacking in Ghana leadership. We need the right leaders to manage the oil find and all the good things Craig mentioned will fall to place.

    Good luck to Ghana in the search for people with integrity to manage the oil money. Thank you Craig for the inciteful article.

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  • Frank Amankwah

    How could you make valid points and then counter each one of them with such anecdotal stories? Quoting unidentified ministers as well as making references to drugs and an entity’s intention to increase oil price by shutting down another plant, were all very difficult to swallow…..Talk about pulling facts from 1900 archives: Most Ghanaians are peasant farmers????? How many seconds would it have taken you to research this, if you really wanted to put out facts?

  • Nana

    I think your personal views were totally devoid of facts. There is nothing to take away from this article other than the same old generalistic views.

  • John Agbozo

    Well, some bystander analysis on the goings-on in Ghana. A lot of food for thought though but I think Craig dwells on too much anecdotal evidence. Take his corruption analysis for example. I wonder who gave that impression that there is some gentleman’s agreement to take turns on the public purse and avoid predecessor prosecutions? And what evidence of corruption in the last two years of the last government does he have to make such categorical statements? Craig also retains the view of his contacts who argue NDC has not changed its spots by being “statist.” Now that is laughable. Craig is a brilliant mind but his grasp of the real intrigues of Ghanaian politics need some serious education.

  • charles wereko-brobby

    Craig,

    good to know you are still rooted to your Ghanain roots. We need to share this with as many Ghanaians and friends of Ghana as possible. there is a general complaint here that no one knows what is going on, and this is coming from the Chair of parliament’s Energy Select committee

  • nicholas

    ghanian leaders are corrupt and for that reason it is going to be very deficult to sit down think critically about this important aticle.i do not think they will listen to we those who are living in the western world right now all what they aretalking about is how to share the oil money among them selves.may GOD put a little compasion in there hearts to remember the needy

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