By Fawan Issa IDDI
Ghana’s petroleum sector, once hailed as a great pillar of economic promise following significant discoveries like the Jubilee field in 2007, is now at a crossroads. Despite its potential, the sector has witnessed a worrying exodus of international oil companies (IOCs) and a stark reduction in exploration and production activities.
According to the 2023 annual report by the Public Interest Accountability Committee (PIAC) on the management and utilization of petroleum revenue, Ghana’s crude oil production experienced a 6.78% reduction in 2023, contributing to an average yearly decline of 9.2% over the last four years. This trend is largely attributed to increasingly unfavorable investment conditions, particularly high taxation and regulatory uncertainties, which are steering potential investments towards more attractive jurisdictions such as Namibia and Côte d’Ivoire.
The deteriorating investment landscape
Between 2010 and 2020, Ghana’s oil production showed promising growth, peaking at approximately 200,000 barrels per day in 2019. However, recent years have seen a marked decline, with production dropping to around 170,000 barrels per day by 2023. This decline is symptomatic of deeper issues within the sector, including fiscal policies and the regulatory environment, which have not evolved to meet the competitive demands of the global oil market.
The PIAC report also revealed that Ghana produced 48,247,036.61 barrels of oil in 2023, down from 51,756,481 barrels in 2022. This decline continues a trend from the peak production year of 2019, when 71,439,585 barrels were produced. Production fell to 66,926,806 barrels in 2020, representing a 6.32% decline.
This downward trend continued with 55,050,391 barrels in 2021, a 17.75% decline; 51,756,481 barrels in 2022, a 5.98% decline; and 48,247,036.61 barrels in 2023, a 6.78% decline. The 2023 production figures represent the fourth consecutive year of reduction in annual production volumes since 2010, the report noted. This sustained decline in oil production underscores the urgent need for Ghana to reassess and reform its fiscal and regulatory frameworks. Without significant changes, the country risks losing further investment to more competitive jurisdictions, exacerbating the downturn in production and negatively impacting the broader economy.
Taxation: A major stumbling block
One of the critical areas where Ghana falls short is its taxation regime. The oil and gas industry in Ghana is subjected to a variety of taxes and levies, which include a 35% corporate income tax, a surface rental fee, and a royalty rate ranging from 5% to 12.5% depending on the field’s production level. In comparison, Namibia’s corporate income tax rate for petroleum companies is 32%, which is lower than Ghana’s 35%, providing better financial returns for investors. The royalty rate in Namibia is a flat 5% of the gross value of petroleum produced, offering stability and predictability compared to Ghana’s varying rates of 5% to 12.5% depending on production levels. Furthermore, Namibia does not impose a surface rental fee, which reduces initial exploration costs and is particularly appealing to new entrants and smaller independent companies. These fiscal advantages make Namibia a more attractive destination for oil and gas investments, drawing interest from international investors seeking favorable terms and a stable regulatory environment.
Regulatory challenges and bureaucratic delays
The regulatory framework in Ghana has also been criticized for its lack of transparency and predictability. The process for awarding blocks and negotiating terms has been noted for its protracted bureaucratic delays. For example, following the 2019 licensing round, several blocks remain undeveloped due to stalled negotiations and contractual disagreements. This uncertainty deters investment, as companies allocate their capital to regions with more streamlined and predictable regulatory processes.
Some Statistical Overview and Impact
The impact of these unfavorable conditions is statistically significant:
- From 2018 to 2023, exploration activities in Ghana have reduced by over 40%, with only a handful of new wells being drilled.
- Investment in Ghana’s oil sector dropped from $3 billion in 2015 to around $1 billion in 2022.
- The Ghanaian government’s revenue from the oil sector has fluctuated, with a notable decline from $980 million in 2019 to approximately $830 million in 2022, despite relatively stable global oil prices.
These figures underscore the urgent need for reform if Ghana is to retain and attract oil and gas investment.
Policy Recommendations for Revitalizing Ghana’s Oil Sector
- Tax Reforms: Ghana must consider revising its tax policies to make them competitive on a global scale. Currently, Ghana’s corporate income tax rate for the oil and gas sector stands at 35%. This rate is comparatively high, especially when benchmarked against neighboring countries like Côte d’Ivoire and Namibia, where the corporate tax rates are 25% and 32% respectively. To attract and retain international oil companies (IOCs), Ghana should consider reducing its corporate income tax rate to 25%.
Implementation Approach:
- Legislative Amendment: Amend the Income Tax Act, 2015 (Act 896) to reflect the new corporate tax rate for oil and gas companies.
- Phased Reduction: Implement the tax reduction in phases, reducing the rate by 2% annually over five years until the 25% target is achieved. This phased approach allows the government to adjust to revenue changes gradually.
- Monitoring and Evaluation: Establish a monitoring committee within the Ministry of Finance to evaluate the impact of the tax reduction on investment inflows and government revenue.
Removing VAT on Exploration Inputs
Exploration is a high-risk activity with no guaranteed returns. Imposing VAT on exploration inputs increases the cost burden on companies, discouraging investment. Ghana should remove the 12.5% VAT on exploration inputs to make the sector more attractive.
Implementation Approach:
- Policy Directive: The Ministry of Finance should issue a directive exempting exploration inputs from VAT, aligning with the existing zero-rated VAT for exports.
- Amendment of VAT Act: Amend the Value Added Tax Act, 2013 (Act 870) to include a provision exempting exploration activities from VAT.
- Stakeholder Engagement: Engage with key stakeholders, including the Ghana Revenue Authority (GRA) and oil companies, to ensure smooth implementation and compliance.
- Incentive Framework: Introduce an incentive framework that clearly defines eligible exploration activities and the process for claiming VAT exemptions.
Introducing Tax Holidays for Early Production Phases
To encourage the rapid development of new fields, Ghana should offer tax holidays during the initial production phases. A three to five-year tax holiday can significantly reduce the financial burden on companies during the early stages of production.
Implementation Approach:
- Tax Holiday Legislation: Draft and pass legislation providing a three-year tax holiday for new oil and gas fields, with an option to extend to five years based on specific criteria such as field size and investment scale.
- Eligibility Criteria: Define clear eligibility criteria, including the requirement for new fields to commence production within a specified timeframe to qualify for the tax holiday.
- Revenue Impact Analysis: Conduct a detailed analysis to project the short-term revenue loss against long-term gains from increased production and investment.
- Sunset Clause: Include a sunset clause that allows the government to review and adjust the tax holiday policy based on economic conditions and sector performance.
- Regulatory Efficiency: Streamlining regulatory procedures and ensuring transparency in the licensing process will help reduce uncertainties that currently deter potential investors.
Firstly, Ghana should establish a one-stop regulatory body that consolidates all the necessary permits and approvals for oil and gas operations. This body, possibly an enhanced version of the Petroleum Commission, should be empowered to handle everything from exploration licensing to environmental permits.
By centralizing these processes, the time required to secure all necessary approvals can be significantly reduced. Currently, companies may wait up to two years to complete the licensing process due to bureaucratic inefficiencies. Reducing this to a maximum of six months would make Ghana a more attractive destination for investment.
Secondly, the introduction of a transparent, digitalized licensing platform would enhance transparency and accountability. This platform should provide real-time updates on the status of applications, requirements for each stage, and clear timelines for decision-making. The system should also allow for public access to information regarding awarded licenses, terms, and compliance status of operating companies. Transparency in these processes is crucial; it reduces the risk of corruption and increases investor confidence. For instance, Norway’s Oil Directorate provides a model of a transparent and efficient digital system that Ghana can emulate.
Lastly, implementing a performance-based regulatory framework would incentivize timely project execution and compliance. This framework should include clear milestones and penalties for delays or non-compliance, balanced by incentives for early or on-time project completion. Regular audits and public reporting on the progress of oil and gas projects would ensure accountability. Additionally, establishing a feedback mechanism for investors to report challenges and suggest improvements can help the regulatory body remain responsive and adaptive to industry needs.
- Incentives for Exploration: To stimulate renewed interest in Ghana’s underexplored oil basins, introducing a series of targeted incentives for exploration is essential. These incentives should be designed to reduce the financial risk and enhance the attractiveness of investment in the sector.
Firstly, Ghana should introduce tax credits specifically targeted at exploration activities. For instance, offering a 20-25% tax credit on exploration expenditures can significantly lower the financial burden on companies during the high-risk phase of their operations. This tax credit should be applicable to seismic surveys, drilling of exploratory wells, and geological studies. Given the high costs associated with these activities—often ranging from $30 to $50 million per exploratory well—such tax credits can make a substantial difference in investment decisions.
Secondly, implementing a royalty relief program for new exploration projects can provide additional financial relief. This program could offer reduced royalty rates of 3-5% during the initial production years, compared to the current rate of 10%. For example, if a company discovers a new field with an initial production of 50,000 barrels per day, at a market price of $70 per barrel, the reduced royalty rate could save the company up to $91 million annually, making the project significantly more attractive.
Furthermore, Ghana should consider offering accelerated depreciation for exploration and development costs. Allowing companies to fully depreciate their capital expenditures over a shorter period, such as five years instead of the usual ten, can improve cash flow and enhance the project’s net present value (NPV). This incentive is particularly effective for capital-intensive activities like offshore drilling, where development costs can exceed $1 billion.
Another effective measure is the introduction of a risk-sharing exploration fund. This fund, possibly established in collaboration with international financial institutions, could provide low-interest loans or partial grants to cover a portion of the exploration costs. For example, a fund with an initial capital of $500 million could support multiple projects, with the government covering up to 40% of the exploration costs for each project. This approach reduces the financial risk for companies and encourages more aggressive exploration activities.
Lastly, establishing a clear and stable fiscal regime is critical. Investors need certainty regarding the fiscal terms governing their investments. Therefore, Ghana should commit to maintaining stable tax and royalty structures for at least 15-20 years for new exploration projects. This long-term stability can significantly enhance investor confidence and attract more significant investments.
Conclusion
To transform its oil and gas sector and address the challenges it faces, Ghana must urgently revamp its fiscal and regulatory frameworks. The nation’s current taxation and bureaucratic hurdles have hindered its ability to attract and retain international oil companies, leading to a decline in production and investment.
By implementing competitive tax policies, removing bureaucratic red tape, and ensuring transparency, Ghana can regain its status as a top destination for global oil investments. This transformation will not only rejuvenate the oil and gas industry but also stimulate economic growth, create jobs, and increase national revenue.
As the global energy market continues to evolve, it is crucial for Ghana to leverage its natural resources strategically, ensuring a sustainable and prosperous future. The moment for decisive action is now, and with strategic reforms, Ghana has the opportunity to lead Africa in a new era of energy development and prosperity.
The writer is Energy Analyst at the African institute for strategic energy policies and environmental sustainability.
