Ghana lost US$50M in taxes through “deficient” ring-fencing laws…Guyana moves to first oil without any safeguards

Mar 03, 2019 News

By Kiana Wilburg

As Guyana prepares for first oil, international observers continue to the call for key laws to be strengthened.
Oxfam America, a transparency advocate for the extractive sector, has said that robust laws pertaining to ring-fencing are critical if countries are to have a fighting chance against oil firms and their manipulative tactics. (When ring fencing provisions are in place, the oil company cannot offset costs incurred in contract one area/project against the profits made from another area/project.)
To prove its point, the firm showed how Ghana lost US$50M in taxes because the nation’s laws on ring fencing were “deficient.”

Petroleum Advisor to Govt., Matthew Wilks

Oxfam America noted that UK oil firm, Tullow has multiple oil projects in Ghana’s world class Jubilee Field.
Two of these were the Deepwater Tano (DWT) and the Tweneboa Enyenra Ntomme (TEN) Oil Field. After conducting an audit on Tullow’s costs, it was discovered by Ghanaian authorities that the company was transferring its exploration and development costs from the TEN Field to the DWT. This move by the oil firm resulted in Ghana losing US$50 million in taxes.
Of course, the African state tried to recover the money. The country’s Revenue Authority argued that Tullow had to pay up since its ring fencing laws prevents costs from being transferred from one project to the other.
But Ghana’s Revenue Authority had it all wrong. Its Petroleum Income Tax Law said that oil companies could not transfer costs accrued under one oil contract to another. Nothing in the law said that costs could not be transferred among multiple oil fields owned by an operator.
After paying the price for this deficiency in its law, Ghana’s Revenue Authority revised the law to ring-fence by field rather than by Production Sharing Agreement (PSA).
Considering the aforementioned, Oxfam America noted that Ghana could have averted the ring-fencing problem by amending the law or issuing guidance on its interpretation. In the absence of doing so, the transparency advocate said Ghana’s government was unable to stop its revenues from being deferred by Tullow.

Ringfencing prevents costs being transferred from one oil field to the next

To avoid being caught in the same trap, first time producers like Guyana are being urged by Oxfam America to have a clear definition of ring-fencing be put in the law. It said, “How tight to draw the ring-fence is ultimately a policy choice…”
In addition, Oxfam America said that governments should publish guidance on aspects of the petroleum fiscal regime that are likely to be misinterpreted, such as ring-fencing.
Oxfam said, “It is necessary to have a good grasp of the issues from the beginning to avoid making mistakes that may be used against the government in future.”

THE WAY FORWARD
In early February, the Energy Department said that tight ring-fencing provisions will be one of the critical features in the nation’s new template for Production Sharing Agreements (PSAs). Speaking to this matter in particular was Petroleum Advisor to Government, Matthew Wilks. He did not provide the media with an idea of what these provisions might say.
More importantly, ring-fencing laws remain off the government’s legislative agenda. Guyana is poised to be an oil producer by the first quarter of next year.

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