OIL and GAS—REVENUE MANAGEMENT

AND COORDINATION

A Strategic Cross-Cutting Issue Discussion

Presented at the 2011 Annual MDBS Workshop

Accra May 16 -18, 2011

Introduction

• Oil and gas discoveries could lead to important economic transformation.

• First oil revenue landed in GOG accounts in April 2011• Resource-rich countries have had varied experiences

with economic growth.• Ghana’s unique opportunity as late entrant. Lessons

from other countries can help Ghana in mitigating the negative effects and ensuring that petroleum revenue can fuel economic development and contribute to prosperity for both current and future generations.

Introduction contd.

• Act has been passed by Parliament, representing the people of Ghana

• Result of broad consultation• One of the most extensively discussed

revenue Act• Not every recommendation taken on board• Need for compromises• Extensive discussions have taken place

Introduction (contd.)

• Ghana has received significant support for the sector from development partners, notably: Norway, the World Bank, GIZ, USAID, SECO and DFID. Support so far has included capacity building programmes and technical assistance covering such areas as revenue forecasting, revenue management, resource management, oil and gas tax administration, local content, EITI, and environmental governance.

• Presentation highlights the main provisions of the Act and considers the readiness of key institutions and is intended to stimulate discussion on coordination and revenue management.

The Petroleum Revenue Management Act—Act 815

• The Petroleum Revenue Management Act (PRMA) was passed by Parliament and assented to by the President of the Republic of Ghana in April 2011.

• It provides the legal basis for how the future petroleum revenue of the country shall be managed.

• Provides a framework for the collection, allocation and management of petroleum revenue in a responsible, transparent, accountable and sustainable manner for the benefit of all citizens of Ghana.

• The Act comprises provisions in line with best international practice and provides a good basis for compliance with the internationally agreed principles for Sovereign Wealth Funds; the General Accepted Principles and Practices (GAPP), otherwise known as the Santiago Principles.

Key Principles in Act 815

• The petroleum revenue shall be coherently integrated into the budget process.

• The assets of Ghana Petroleum Funds shall be prudently managed and invested offshore.

• The management of petroleum revenue and savings shall always be carried out with the highest internationally accepted standards of transparency and good governance.

Key Features

• The Act establishes a Petroleum Holding Fund (PHF) at the Bank of Ghana to receive and disburse petroleum revenue due the Republic of Ghana

• Annual Budget Funding Amount (Clauses 19-23)Up to 70% of the annual revenue receipts may be transferred to the Consolidated Fund and spent through the State Budget.

• Benchmark Revenues (Clause 18, First Schedule).Prior to determining the Annual Budget Funding Amount the Government is required to estimate the petroleum receipts, defined as Benchmark Revenue in the Act.

Key Features (contd.)

• The Ghana Petroleum Funds (Clauses 10-15, 21, 26-27, 43, Second Schedule). The petroleum receipts not included in the Annual Budget Funding Amount shall be transferred to Ghana Petroleum Funds, which consists of a Stabilization Fund and a Heritage Fund.

• Investment Strategy (Clauses 28-29).The Ghana Petroleum Funds shall be invested in qualifying instruments as defined in the Act. The range of qualifying instruments is limited to bonds issued by sovereign states, the IMF, the World Bank and cash deposits and bonds issued by Central Banks, Bank for International Settlements and the European Central Bank, provided that the instruments are denominated in foreign currencies and that both the instruments and the issuers have an investment grade rating.

Key Features (contd.)• Investment Advisory Committee (Clauses 31-42) An Investment Advisory Committee,

comprising of seven members, shall advise the Minister on the investment policy and monitor the performance of the Funds. The Minister shall not make any decisions in relation to the investment strategy or management of the Funds without first seeking advice from the Investment Advisory Committee and the Governor of the Bank of Ghana.

• Transparency (Clauses 8, 16, 30, 44-52, 60-61). According to the Act, the management of petroleum revenues and savings shall always be carried out with the highest internationally accepted standards of transparency and good governance and extensive and detailed transparency requirements are embedded in the Act.

• Public Interest and Accountability Committee (Clauses 53-59). A Public Interest and Accountability Committee shall be established in order to monitor and evaluate the Government’s management of the Ghana Petroleum Funds, facilitate public debate and provide an independent assessment about the use and management of the petroleum revenues, in particular to ensure that the petroleum revenues are used for the benefit of both current and future generations.

• Collaterisation. The Act permits the use of the ABFA as collateral for debts and other liabilities of Government for a period of not more than 10 years after the commencement of the Act. On the other hand, the Act prohibits every form of borrowing against the amount in the PHF earmarked for transfer into the Ghana Petroleum Funds

Institutions Involved in Oil Revenue Management

• Parliament. The Parliament has adopted the Petroleum Revenue Management Act, which sets the overall framework for petroleum revenue management in Ghana. Parliament decides each year how much of the petroleum revenues to be spent through approving the ABFA as part of the national budgetary process.

• The Ministry of Finance and Economic Planning. The Ministry overall responsibility for the petroleum revenue management . shall estimate the Benchmark Revenue. shall propose to Parliament how much of these revenues that shall be transferred to the Consolidated Account for budgetary purposes, also called the Annual Budget Funding Amount, and how much that shall be saved in the Ghana Petroleum Funds. Ministry shall develop the investment policy of the Ghana Petroleum Funds, upon advice from the Investment Advisory Committee, and be responsible for the overall management of the Ghana Petroleum Funds.

Institutions Involved in Oil Revenue Management (contd.)

• Ghana Revenue Authority Petroleum revenue shall be assessed, collected and accounted for by the Ghana Revenue Authority. Petroleum revenue shall be deposited in the Petroleum Account before it is transferred to the budget and the Ghana Petroleum Funds.

• The Bank of Ghana. The Petroleum Account shall be held and managed by the Bank of Ghana and transfers to the budget and the Ghana Petroleum Funds shall be made upon request by the MoFEP. The Bank of Ghana is responsible for the operational management of the Ghana Petroleum Funds and shall implement the investment policy that the Minister determines.

Institutions Involved in Oil Revenue Management (contd.)

• Ghana National Petroleum Company (GNPC). GNPC shall pay any amount payable as corporate income tax, royalty, dividends or other amounts due in accordance with the Petroleum Revenue Act. In case a payment is made with petroleum instead of cash, GNPC shall be reimbursed for the marketing costs.

• The Auditor-General. The Auditor-General is responsible for the external audits of the Petroleum Account and Ghana Petroleum Funds. In case the audit is delegated to another entity, the Auditor-General is responsible for the procurement process. The Auditor-General shall submit an annual audit report to Parliament.

• The President of the Republic. The President of the Republic shall appoint the members of the Public Interest and Accountability Committee.

Disbursed into ABFA, SF &

HF

MoFEP reports on ABFA & receipts in

gazette, dailies

BoG quarterly reports on SF

& HF to Minister

IAC submits analysis on

BoG report to Minister

BoG publishes semi-annual

report on funds

PETROLEUM REVENUE REPORTING SCHEDULE

ABFA - Annual Budget Funding AmountAG - Auditor-GeneralBOG - Bank of GhanaGRA - Ghana Revenue AuthorityHF - Heritage FundIAC - Investment Advisory CouncilMinister - Minister of Finance & Economic PlanningMoFEP - Ministry of Finance & Economic PlanningPHF - Petroleum Holding FundSF - Stabilization Fund

MoFEP reports on receipts in

gazette, dailies, website

Minister submits report on account &

funds to Parliament

BoG submits internal audit

report on funds to

Minister & AG

BoG submits annual

statements, relevant docs to AG for audit

AG receives statements,

audits & submits report to Parliament

AG publishes 30 days after submission to

Parliament

AUDITING

PETROLEUM FUNDS

PETROLEUM RECEIPTS

GRA Assessment

Paid into PHFGRA

Verification & Reconciliation

Preparedness of Key Institutions to Implement the Provisions of the Act

• Establishing the Benchmark Revenue - The Ministry of Finance and Economic Planning (MOFEP)– According to Clause 18 of the Petroleum Revenue

Management Act the Minister shall estimate and certify the Benchmark Revenue no later than September 1st using the formula set out in the First Schedule. The expected revenue from crude oil is the product of the oil price and production quantity.

– To carry out this mandate, MOFEP has pursued several activities:

Determination of Crude Oil Price• The price of a specific crude oil depends on its quality. The most important quality

measures are API gravity and sulphur content. Light crude oils (i.e., those with higher API gravity) command higher prices because they yield a greater fraction of high value products (gasoline, diesel, etc.) when refined. “Sweet” crude oils, those containing less than 0.5% sulphur, generally command higher prices because they can be processed easily without expensive treatment facilities.

• As shown in Table 1, Jubilee is slightly heavier than Brent, the relevant benchmark for West Africa, but considerably sweeter. Pricing for Jubilee should be similar to Brent, although some light sweet West African crudes such as Nigerian Bonny Light trade at a premium to Brent. MOFEP has developed a data set to track the historical prices of relevant crude oils and this data set will be useful in forecasting future differentials to Brent.

• In preparing the 2011 Budget, MOFEP assumed a conservative price of US$70 per barrel, which at the time was lower than the prices in the IMF’s World Economic Outlook. Since then, however, prices peaked to US$120 per barrel before falling but still remains in the neighbourhood of US$100 per barrel.

Quality of Oil Benchmarks and Jubilee Oil

Oil Sulphur Content API Gravity

WTI 0.24% 39.60 Brent 0.37% 38.060 Dubai 2% 310 Jubilee 0.25% 37.60

Determination of the Quantity of Crude Oil

• GNPC has provided MOFEP with projections of oil production for the next several years. For the 2011 Budget, Jubilee production was estimated at 29.2 million barrels, an average daily production rate of roughly 79,900 barrels per day.

• Going forward GNPC will be required to provide historical production data as well as different production forecasts for the current and subsequent years to the MoFEP. These production forecasts would include Low Production, Expected/Base Production, and High Production Scenarios which are common in the oil business.

Determination of Expected Revenues

• MOFEP has developed long-term and short-term forecasting models to translate assumptions about prices and volumes into estimates of government revenues.

• The short-term model used for 2011 calculated the various elements of government revenue as follows:– Royalties – 5% of gross crude oil produced;– Carried and Additional Interests – 13.75% of Revenues net of royalties and

current operating costs; and– Income Tax – 35% of revenues net of royalties, carried and additional interest,

operating costs, capital allowances and losses carried forward from prior years.

• The 2011 budget implicitly assumed that 30 percent of total oil revenue would be saved in the Stabilization and Heritage Funds, and 70 percent would be used to fund the annual budget and activities of GNPC.

• The functions will be carried out by the Petroleum Units in two Divisions:

– The Customs Division

– The Domestic Tax Revenue Division

GHANA REVENUE AUTHORITY ROLE IN PETROLEUM REVENUE MANAGEMENT

CUSTOMS DIVISION• FUNCTIONS

– Monitoring of imports– Monitoring of Production– Monitoring of Exports

• PROCESSES– Electronic Seals have been placed on the export pipelines to

ensure that no export is made without Customs authorisation– Flow meters have been installed to measure the quantum of

production and exports– An officer has been stationed on the FPSO for physical

monitoring

DOMESTIC TAX REVENUE DIVISION

• FUNCTIONS– Assessment of petroleum revenues– Collection of petroleum revenues– Accounting for petroleum revenues

• PROCESSES– Monitoring of production and exports to determine volumes and

values for determination of revenues due to the State– Receipt and analysis of returns for the determination of liabilities of

the companies– Monitoring and collection of payments due to the State– Preparation of reports and reconciliation of revenues due to the

State

COMPUTATION OF PETROLEUM INCOME TAX

Petroleum income tax is computed at 35% of the taxable income derived as follows:Gross Income Less: Allowable expenses Capital allowances Losses carried forward

NOTES 1. Capitalised Pre-production costs and annual capital costs are spread over a five

year period2. Allowable expenses include: Petroleum royalties Contributions to a decommissioning fund Rentals Interests fees and charges on sums borrowed for petroleum operations

Establishment and Management of Funds: Bank of Ghana (BOG)

• The Bank of Ghana is responsible for the day-to-day management of the Petroleum Holding Fund and the Ghana Petroleum Funds under the Operations Management Agreement.

• The accounts for these designated funds have since been opened at the Bank of Ghana. – The Treasury Department is responsible for the

offshore accounts while Banking Department is responsible the onshore accounts.

– The entire process is handled by 4 key departments: Banking, Treasury, Finance, and Audit.

Bank of Ghana (contd.)The BOG has the following in place: • A committee to examine all matters relating to BOG’s

responsibilities under the Act 815 on receiving the petroleum revenues into the Petroleum Holding Funds and subsequent transfers into the Petroleum Funds after the Budgetary allocation has been disbursed;

• Operational management guidelines in terms of Investing the Petroleum Funds among others and advise Management accordingly.

• A desk at the Treasury Department to handle the day-to-day offshore aspects as well as management of the Petroleum Funds within the context of the PRM Act.

Audit of Petroleum Funds: The Ghana Audit Service (GAS)

The PRMA mandates the Audit Service to conduct annual and special audits of the Petroleum Funds, including the Heritage and Stabilisation Funds.

• The Audit Service has established a Committee to advise the Auditor-General on all issues pertaining to its role in the Petroleum Sector.

• The Auditor-General has existing structures by which he audits and reports on the Bank of Ghana’s Foreign Exchange Receipts every six months to Parliament.

• The Auditor-General has also put in place, a plan to establish a unit to be responsible for auditing oil and gas operations.

• The ongoing capacity building interventions are therefore aimed at strengthening the service’s position to conduct regular and special audits, and hence deliver on its mandate in accordance with the Constitution, The Audit Service Act 2000, (Act 584), the Petroleum Revenue Management Act and any other relevant legislation.

Ghana Extractive Industry Transparency Initiative (GHEITI) Secretariat

• Although the Ghana EITI Secretariat does not have a role prescribed in the Act, the Government of Ghana's decision to extend the Extractive Industry Transparency Initiative (EITI) to the oil and gas sector means there will be EITI reporting on petroleum receipts.

• As a requirement for the EITI implementation, EITI implementing countries must report on revenues from the extractive sector to ensure transparency and accountability.

Ghana Extractive Industry Transparency Initiative (GHEITI)

Secretariat (contd.)• GHEITI Secretariat and the National Steering Committee

have developed a draft reporting framework for capturing all payments made by the Oil and Gas companies and receipts by Government.

• The reports which reconcile actual company payments with actual government receipts and are based on the audited accounts will be published annually.

• The GHEITI Auditor/Aggregator checks the appropriateness or otherwise of the payments and receipts. Where discrepancies are identified, some recommendations are made to the appropriate agencies and institutions affected to explain those discrepancies.

Impact of Oil and Gas Revenue on Debt Sustainability

• Provision for collateralization of oil revenues is spirited to offer security of development financing. Collateralization may provide more quality security and therefore relatively better pricing for borrowing.

• A recent Debt Sustainability Analysis (DSA) shows significant improvement in export and revenue (expected revenue and export from oil and gas) giving rise to remarkable improvement in the principal debt indicators

• External debt indicators would remain well within their respective vulnerability thresholds, while the overall public sector debt outlook is sustainable.

Debt Sustainability (contd.)

• Improved ratios creates more fiscal space or borrowing space, indicating that more could be borrowed to accelerate infrastructure development.

• Investors develop much appetite for the sovereign papers due to the improved financial outlook as a result of improved macroeconomic stance. GoG envisages that enhanced public revenue and sovereign credit profile will improve risk premium and thus gives better credit quality and pricing for borrowing thereby reducing the cost of borrowing.

• While these developments provide a strong incentive for GoG to borrow in the near term, it is important for government to ensure borrowing is maintained at sustainable levels.

Issues and Challenges• Establishing Benchmark Revenue

– The actual spot price is normally not a good estimate of the future oil price. In order to forecast petroleum revenues in the future, options could be explored while the capacity for forecasting is greatly enhanced.

• Revenue Collection and reporting– The flow meters installed by the operator are not

functioning properly– There is the need to place more than one officer on the

FPSO for effective monitoring– The GRA needs to communicate with its officer on FPSO

independently, – Real-time transmission of data from the electronic seals on

the FPSO to GRA on-shore centres is not yet fully achieved.

Issues and Challenges (contd.)

• Need for frequent meetings and sharing of data and other information

• The calibration of the measuring instruments on the FPSO needs to be confirmed by the Ghana Standards Board.

• There is the need to speedily build up the capacity of officers of all the agencies involved—GRA, MOFEP, BOG, Standards Board, to enable them carry out their functions efficiently and effectively

• Logistical support in terms of office accommodation and equipment also need to be enhanced.

Conclusions• The Petroleum Revenue Management Act has benefitted greatly from

inputs of the Civil Society Organizations, Development Partners, and the general public.

• The passage of the Act gives Ghana a strong legal basis to regulate the receipt and expenditure of its petroleum revenues.

• It should be mentioned however that now that the Act has been passed, several activities have to take place.

• Some regulations as well as committees and procedures need to be put in place quickly. – The Investment Advisory Committee which will advise the Minister of Finance.– The Public Interest Committee which will inter alia, monitor compliance with

the Act by Government and other relevant stakeholders.– Establishing an Operations Management Agreement between MOFEP and

BOG– Procedures for providing forecasts of cash requirements quarterly and a

schedule of timing and amount of withdrawals from the Stabilization Fund

Conclusions (contd.)• Unique opportunity to learn from the experiences of

other oil producing countries as reflected in the PRMA• Effective coordination between the various

government institutions• A strong political will on the part of government• Continued support of development partners • Vigilance of civil society • The above, backed by sound macroeconomic

management, improved public financial management, good governance, Ghana can have a good chance of mitigating the excesses and maximizing its oil and gas for development.

Thank you !!