Civil Society Group shows how Ghana lost US$882M on 14 oil contracts

Jan 08, 2023 News

Kaieteur News – The Africa Centre for Energy Policy (ACEP), a non-profit energy think tank working with technical partners around the world, produced an investigative report on Ghana which shows that it lost over US$882M on 14 petroleum contracts since regulators failed to be vigilant.

In its report, ACEP reminded that after the commercial discovery of oil in 2007, Ghana was projected to rise as a key player in Africa’s oil and gas industry. The country had signed 16 Petroleum Agreements (PAs) with multi-national oil companies for the purposes of exploration and production of petroleum.

Despite the number of available active contracts inked in 2007, ACEP found that the country’s hydrocarbon potential was seriously underexplored partly because not all companies were performing in accordance with the minimum contractual obligations in the PAs. Such a state of affairs had significant implications for Ghana’s expected revenue inflows, and even deprived the State of much needed resources.

To better understand how deep the problem was, the Africa Centre for Energy Policy teamed up with experts attached to the Strengthening Action Against Corruption (STAAC) programme, a UK-funded initiative.

STAAC was instrumental as it provided the non-profit with financial and technical support to investigate and monitor the performance of all existing Petroleum Agreements that Ghana had entered into since the discovery of oil in 2007.

In 2017, they joined forces and examined companies’ performance and compliance with contracts from 2016 to 2020.

In their findings, the investigative group outlined that the 16 contracts it examined, were signed between the period of 2006 and 2019 and included specific deliverables to ensure that companies did not merely hold onto the blocks but instead proceeded to exploration and production. The PAs gave companies between 6-7 years for exploration, with this time frame divided into three stages. It was also noted that a company is supposed to meet the minimum requirement for a stage as a prerequisite before moving to the next phase. Failure to perform minimum obligations incurs a sanction in a form of payment to the State.

As of the time when ACEP and STAAC began their intervention, this was not being enforced by state institutions mandated to do so. Further to this, the PAs also imposed obligations on the companies with set benchmarks for performance, which include payment of taxes including surface rentals, royalties, corporate income tax and capital gains tax.

Unfortunately, as ACEP investigated and kept looking for available information (a significant challenge in itself), there emerged a deeper pattern of non-compliance in meeting the minimum contractual obligations enshrined in the PAs. The failure to deliver as stipulated in the Pas, required the activation of sanctions against those companies. In contrast, ACEP said some of the companies received extensions without paying any penalties for the inactivity of their blocks. In addition to this, surface rentals which were supposed to be paid to the State under the PAs were defaulted by some of the oil companies without enforcement of the necessary sanctions.

The non-profit’s report explained for example that the investment requirements for just 14 active PAs sum up to a total of US$923 million. For companies whose initial period has expired, they should have invested about US$750 million in exploration. ACEP said the limited activity points to less than 2% of the required minimum expenditure over the period, leaving Ghana losing out on over US$882M.

The civil society group said the implication of poor contract management is that the country also loses on potential revenues from early discovery and its attendant benefits such as employment, linkages with the rest of the economy.

According to the group’s report, the lesson to be learned is that “Contractors and companies often cut corners when weak contracting systems are in place. Without going through the necessary due diligence and processes for strong contractual obligations, corruption risks are far higher.”

ACEP said it also learned that there was a capacity gap in monitoring contracting – neither state institutions nor civil society had the capacity to deeply understand contracting, the loopholes and gaps in the contracting process, and how to monitor the performance of companies holding contracts. To be effective in contract monitoring, the civil society body said the capacity of relevant institutions must be built first.

ACEP’s experience with the GRA and other state institutions it partnered with revealed that they generally need the support of independent non-state actors. It said, “State institutions are sometimes unable to act or work the way they should due to actual or potential political interference.”

As a result of its study, advocacy and engagements with Government, ACEP said it was able to get the Petroleum Commission of Ghana to make it mandatory for oil companies to submit yearly and quarterly work plans as a way of monitoring performance of the oil companies.

Oxfam America– which had been working on natural resources and advocacy in Ghana – partnered with ACEP, the Petroleum Commission, and the Upstream Chamber to monitor company performance, developing a framework to measure performance going forward.

ACEP has also collaborated with the Ghana Revenue Authority to draw up plans to recover all unpaid taxes and royalties owed by companies operating in the petroleum sector. Through the evidence submitted by ACEP, the GRA was able to identify the defaulting companies and began the process of recovering unpaid funds.

ACEP said its approach is a clear indication of civil society providing advisory support to the Government while still holding the authorities accountable for their actions.