FAIR OR UNFAIR ?

BY KWAME MARFO

In June 2007, Kosmos Energy discovered oil in its Jubilee Field, the largest oil find in the last decade in West Africa. It is estimated to contain north of 2 billion barrels of low-sulphur, light sweet crude (which are easy to refine and command a premium price on international markets). There has been a great deal of confusion on the Ghanaian government’s share of oil revenues from the Jubilee fields. According to Kosmos, Ghana will earn between 53.75% and 63.75% of revenue before other taxes such as VAT and NHIL. (See table I for break down).

In addition, the country will earn $800 million in gas generated from the fields. Is this a fair deal?

Kosmos argues it took a chance on Ghana when most of the oil majors had given up. Since Ghana is new to the oil industry, Kosmos indicates it had to “develop” the industry from scratch, bringing personnel, supplies, machinery and rigs from different parts of the world. They also note that “operating the rig, could cost up to $1m per day. Drilling a single well could cost up to $100m considering the fact that they are drilling in 1500m of water with wells extending up to 3km below the earth’s crust into reservoirs that are 90 million years old. At a depth that is too cold for divers to operate, a remote-controlled vessel is the eyes of the rig on the ocean floor.” Also they obliged to Ghana’s government’s request for early production in a “record-breaking” three years (as compared to the norm of up to seven years). Excessive royalties and taxes, it is argued will discourage further investment in the oil sector.

However, this argument rings hollow when you compare agreements between foreign companies and other African countries. Under current joint venture terms, Nigeria government earns 90% of oil revenue (Wood Mackenzie, 2009). Companies in Angola pay income taxes on their share of oil profit at 50% before an alphabet soup of other taxes (IMF, 2004). Botswana was able to negotiate a 50-50% deal with South African mining company, De Beers for its diamonds (vs. 13.75% by the Ghanaian government)(Hillbom 2008).

Admittedly, the government was able to extract a far better deal than it has in the past such as in gold where it collects a paltry 3% in royalty (recently increased to 5%) (Economist, 2010).This explains why Ghana, which is Africa’s second largest gold producer and has one of the oldest richest goldmines in the world (Bio et all, 2006) earned only $116m in revenue from $2.2 billion in gold exports in all of 2008 during a time of record gold prices.

So was this a fair deal? Your guess is as good as mine.

Table 1

Copyright 2011 (March) Neo-African Consensus

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3 Responses to FAIR OR UNFAIR ?

  1. Ebo Turkson says:

    Kwame, it might seem we did not get a good deal but at that time could we have obtained a better deal? These explorations cost a fortune and very risky so we had to accept that deal to get the Cosmos guys to find the oil. We might be licking our wounds now that we know we had huge reserves but the COSMOS guys deserve to benefit for taking that risk. Maybe if there is a clause to renegotiate which I believe we will, then we can ask for a better deal as other have. After all if these COSMOS guys had not found it the oil would have been deep down untapped. In any case, as an economist I fully endorse a higher return to be paid to investors that decide to venture into risky- growth-enhancing investment opportunities in Ghana.

  2. Ebo Turkson says:

    Kwame, it might seem we did not get a good deal but at that time could we have obtained a better deal? These explorations cost a fortune and very risky so we had to accept that deal to get KOSMOS to find the oil. We might be licking our wounds now that we know we have huge reserves but then KOSMOS deserve to benefit for taking that risk. If there is a clause in the agreement to renegotiate then we can ask for a better deal similar to what other African countries have. After all if KOSMOS had not found the oil. it would have been deep down untapped. In any case, as an economist I fully endorse a higher return to be paid to investors that decide to venture into risky- growth-enhancing productive activities in Ghana. After all, KOSMOS dared where eagles dare

  3. Ollie Ogunmokun says:

    By all appearances, Ghana got a really bad deal. It all boils down to a bad negotiation on the part of the last government, nothing more or less. What were they thinking!? Maybe this will be a lesson for the future, and next time, they will either approach this by sharing in the cost of exploration, or just adding a clause that they can incrementally adjust the tax rate on “special” exports bi-annually.

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