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Advice Ghana Government on Oil Price Volatility - Panellists tell PIAC

Dr Kwadwo Asenso, Ministry of Finance,  PIAC Chair, Prof. P. K. Buah-Bassuah and Dr Steve Manteaw

Participants at a-day’s roundtable discussion on falling oil prices and its impact on Ghana Government’s revenue and the national budget have tasked the Public Interest and Accountability Committee (PIAC) and its stakeholders to come out with a position paper to advise government on the way forward in the face of continuous falling oil prices.

 This, they agreed will not only alert, but also assist government to take the necessary measures and policies to contain the effects of the phenomenon on the budget and government programs. The discussion brought some of the relevant stakeholders together to “brainstorm on the effects of falling oil prices on Ghana’s domestic revenue vis-à-vis the national budget”.  

 Organized by PIAC with support from the Natural Resource Governance Institute (NRGI) and UKAid, the Roundtable sought to advise government to take precautionary steps in times like this. Indeed, all stakeholders were unanimous that there was no clear cut solution to the “plummeting oil prices on the world’s market”.   Currently a barrel of oil sells at US$38 on the World market.

Panellists were also of the view that a policy paper or an alert could help manage if not reduce citizens’ expectations of oil revenue and make the public aware of the implications of a reduced income from oil revenue on the 2016 budget and the economy as a whole. In addition, panellists were also hopeful that it could also assist Government devise timely response policy outcomes to revenue shortfalls.

The Public Interest and Accountability Committee (PIAC) is established under Section 51 of the Petroleum Revenue Management Act (Act 815) with the objectives of monitoring and evaluating compliance with the Act by the Government and other relevant institutions in the management and use of petroleum revenues, providing a platform for public debate on spending prospects of petroleum revenues in line with development priorities and providing an independent assessment on the management and use of revenues.  The Committee is mandated by the law to publish a semi-annual and an annual report by the 15th September and 15th March each year.

Price volatility

Production from Ghana’s oil and natural gas fields in the Gulf of Guinea has steadily been increasing since 2010, reaching 102,033 barrels of oil per day in 2015.The petroleum revenues from these productions have become a major source of finance to the Government, contributing to gross income of US $144 million in 2011, $ 541 million in 2012, $713 million in 2013 and $700 million in 2014 to the state.

Giving an overview of the situation, a panellist explained how the volatility had led to a drop of $263 million in government’s revenue projections. This is evident in 2015 when Government’s estimated Benchmark Revenue for the year was revised down from GH¢4.2 billion to GH¢1.7 billion and domestic revenue projected to be GH¢27.1 billion, resulting in a shortfall of GH¢3.1 billion. This is expected to repeat itself in 2016.

Effect on Domestic Revenues

Mr. Dennis Baidoo from the GNPC in his submission highlighted the impact of falling crude prices on government revenue adding that the phenomenon was a sad story. From a trend analysis of total revenues (on lifting basis), Mr. Baidoo said revenues had increased from $447million in 2011 to $541 million in 2012, $730 million in 2013 and slightly declined to $700 million in 2014 and more drastically declined to $263 million as at November 2015. He said Ghana could not expect to get more than $400 million by the end of 2015.  Government needed to cut down on its expenditure. Hedging which had been put on hold but it is required urgently to guarantee oil revenues. The formula for benchmark revenue should also be reviewed to get a more realistic structure for revenue estimation. 

Suggestions

Drawn from the Petroleum Commission, Ghana Revenue Authority, Institute of Economic Affairs, Civil Society Platform on Oil and Gas, African Centre for Energy Policy (ACEP) and PIAC, and other think tanks, discussants suggested that one sure way out of this is for government to reduce expenditure.   Another measure is that government should go “back to hedging which could guarantee a certain quantum of revenue flow” and “as a way of salvaging the oil price fall impact on Ghana’s fiscal policy”.

Taking his turn, a panellist, Dr Steve Manteaw submitted that hedging amounted to gambling and suggested a look at the “Stabilization Fund which does the same work as hedging without the associated risks”. He also called for the creation of a commodity Fund which can cushion the state any time there is a fall in price.

Contributing, Mr. Dominic Naab from Ghana Revenue Authority (GRA), said there was too much focus on corporate taxes while other sources of revenue are not attended to and also as a natural resource we have not done a detailed analysis between its production and the option of buying refined oil products.

Impact  

The representative from the Finance Ministry outlined various developments within the oil industry that have accounted for the production glut. The use of unconventional methods like directional drilling which was uneconomical, when oil prices were below US $35 has now become profitable. The oil sands in Canada and the US shale oil became economically producible when oil prices rose above US $70. These developments coupled with new discoveries in the Gulf States have increased supply of oil in the market. On the demand side, China’s shrinking economic growth had led to low demand for oil. He re-iterated the point that falling oil prices had created disconnect between bench mark price and market price. Parliament eventually approved an alternative bench mark determination based derivatives. He said the situation was aggravated by the falling prices of other commodities and that there was a positive correlation between Gold prices and the US dollar. Ghana gets a minimal share of revenues from Gold and so oil is a more reliable source of revenue for the budget. For this and other reasons, he indicated that Ghanaians needed to be concerned about falling oil prices.

George Addy Morton from the Petroleum Commission explained that one of the possible effects could be capital flight from the Industry as low level prices will not be beneficial to investors. A situation, he said was not good as the industry needs heavy investments such as new wells. It emerged that halting production until such time that prices recover cannot be considered at all, as investors have tied in capital spanning from 10 to 20 years. Similarly, no contract can be abrogated no matter how low the price of oil goes down.  Participants noted the complex and dynamic nature of the industry.

Taking his turn Kwesi Jonah of the Institute of Democratic Governance (IDEG) wanted to know to what extent the Ministry of Finance was prepared to face these commodity crises as prices keep changing. Responding the Head of Oil and Gas Unit, the representative of the Finance Ministry said the Ministry had its own models in times like these which are home-grown, that look at revenue streams but as acknowledged by Mr Jonah, the industry is too volatile. He averred that the forum should not be looking at the declining prices of oil alone but also cocoa and gold as well and that calls for expenditure cuts. He agreed that diversification is a major solution to these crises as it affects not only oil but cocoa and gold as well.

Possible Outcomes/Follow-up of the roundtable discussion

  • There has been a huge mismatch between market price and benchmark price used to estimate benchmark revenue with calls for review of the formula for estimating benchmark revenue.
  • Falling oil prices is not entirely negative for the Ghanaian economy as Ghana is a net-importer and therefore low refined product prices could have positive effects on inflation, government expenditure on fuel, transport fares, prices of food, utilities and the exchange rate.
  • Oil revenues (on lifting basis) is expected to fall below $400 million in 2015
  • Use of hedging seen by its proponents as a better means of guaranteeing oil prices in the wake of oil price volatilities.
  • Government under current circumstances is expected to cut down on expenditure and ensure fiscal discipline in the management of government purse.
  • There is a need to conduct a full scale impact of falling commodity prices on the economy possibly in another roundtable discussion.
  • There is also a need to analyse in detail whether hedging is the appropriate strategy for dealing with volatile oil revenues in addition to the use of provisions for transfers from the Stabilisation Fund.

Twenty Seven (27) participants drawn from the membership of PIAC and its secretariat, Ministry of Finance, Ghana National Petroleum Corporation (GNPC), Petroleum Commission (PC), Ghana Revenue Authority (GRA), Institute of Financial and Economic Journalists (IFEJ), Institute of Economic Affairs, Civil Society Platform on Oil and Gas, African Centre for Energy Policy (ACEP) and African Centre for Economic Transformation (ACET) were present for the discussions. The activity was chaired by PIAC Chairman, Prof. P. K. Buah-Bassuah and funded by NRGI/DFID.

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