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The Optimal Petroleum Fiscal Regime for Ghana: An Analysis of Available

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Article  in  International Journal of Energy Economics and Policy · September 2014

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International Journal of Energy Economics and Policy
Vol. 4, No. 3, 2014, pp.400-410
ISSN: 2146-4553
www.econjournals.com

The Optimal Petroleum Fiscal Regime for Ghana:

An Analysis of Available Alternatives

Dankwa Kankam
SDC Finance and Leasing Company ltd,
Brokerage Services ltd., Accra, Ghana. Email: [email protected]

Ishmael Ackah
Department of Economics and Finance,
Portsmouth Business School, University of Portsmouth, UK.
Email: [email protected]

ABSTRACT: Ghana became an oil producing country in December 2010. This development renewed
the expectation of the citizenry as to the revenue that will accrue to the state and its direct effect on
standard of living. The purpose of this study was to evaluate the Ghanaian upstream petroleum fiscal
regime, including state and investor shares, and to compare it with petroleum fiscal regimes of some
six other oil producing African countries. The qualitative assessment compared the regime on general
taxation and petroleum taxation in particular. The traditional Discounted Cash Flow (DCF) method
was used in the quantitative assessment of the regimes. Out of the seven regimes used in the
quantitative analysis, the Ghanaian regime ranks sixth in terms of government take. It also ranks
second with 31 months investor payback period based on post-tax discounted cash flow. Though the
Ghanaian fiscal regime appears to be progressive; thin capitalisation, royalty rate, and cost recovery
limits withholding taxes on interest. Therefore tying of additional oil entitlements to profits are
recommended in future reviews of the Ghanaian fiscal regime. It appears from the study that the
Ghanaian regime is not optimal and the recommendation provided would help improve upon it.

Keywords: Petroleum fiscal regime; oil revenues; taxation

JEL Classifications: H29; Q33; Q38

1. Introduction
Exploration for oil in Ghana goes as far back as 1896 with drilling activities around Half-
Asini following oil seepage at onshore Tano Basin in the Western Region (Tullow, 2012). Petroleum
production started in the mid 1970s when Signal-Amaco Consortium discovered the Saltpong field.
Having started production in 1975, Signal-Amaco abandoned the field as non commercial in
December 1979. It has since been changing operators; Agripetco (1979-1984), Primary Fuel Inc
(1984-1985), Ghana National Petroleum Corporation (GNPC) and Lushann Eternity Energy Limited
(2000-date).
Until December 2010, the Saltpong Field was the only producing block in the country. More
exploration work resumed in early the 2000s involving International Oil Companies (IOCs) such as
Hess Corporation, Tullow, Kosmos Energy, Afren and Norsk Hydro Oil and Gas. Hydrocarbons in
commercial quantities were discovered in 2007, which coincided with Ghana’s 50th independent day
celebration; hence the renaming of the field as Jubilee Field. Over thirty more discoveries have since
been made.
The discovery in the jubilee year of commemoration of independence made the citizenry
believe that it is the blessings of God which the state should exploit to the advantage of the nation; an
idea worth pursuing. However, the approach to achieving this worthwhile project is of paramount
concern as this can make or mar decisions of investors. This is more so as the state needs to rely on
International Oil Companies to develop this strategic natural resource. As the state considers taking so
much benefits from the resource, it should bear in mind the French finance minister, Jean-Baptiste

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The Optimal Petroleum Fiscal Regime for Ghana: An Analysis of Available Alternatives

Colbert’s assertion that the act of taxation consist of plucking the goose to obtain the largest amount of
feathers but with the least possible of hissing (Stiglitz, 1999).
Most economic decisions in an economy are influenced by government fiscal policies. Tax
rate can either increase or decrease the level of investment within a country. Taxes are raised in order
to encourage or discourage activities in certain areas of the economy. Mineral taxation can be used to
attract more investors or discourage them to exploit the natural resources. Economic problems such as
the “resource curse” or “Dutch Disease” (Asafu-Adjaye, 2010); where the increased revenue from the
mineral resources exported has the effect of raising the price of domestic goods relative to foreign
goods (Osei and Domfe, 2008). It is also used to correct balance of payment problems as it raises high
income. A caution should however, be given here that petroleum taxation alone cannot be used as a
tool for macroeconomic policy, as it forms just a fraction of public sector financing. “Taxation has a
very significant effect on the management of resources, including the timing of exploration and
development and the sequencing of production” (Cairns, 1985).To ensure purposeful usage of
resources, taxes are applied. Petroleum taxation in oil producing countries are set not only for the
above purposes but also to discourage waste of the scarce resource as it does happen in some Middle
East countries to the extent that Iran could import petrol and petroleum products. This is one of the
reasons for which OECD countries have high taxes on petroleum products. Green Taxes, as they are
called are used to discourage the use of fossil fuel which produces CO2 emissions. This in no doubt
increases the prices of energy products. Governments are therefore entangled with the difficulty of
imposing additional tax which would eventually increase the cost of energy products for especially the
poor and vulnerable in society that the government might want to protect. Green taxes have been
criticised as being punishment for use of fossil fuels. Those against green taxes believe that energy
efficiency should be encouraged rather but one should also not lose sight of the “rebound effect”, a
tendency in which consumers use an appliance more because it uses less energy thereby eroding
benefits gained through efficiency.
A new approach to green taxes is carbon trading; an administrative approach of using “cap
and trade” to control GHG by offering economic incentives to firms for engaging in reduction of
emissions. The citizenry demands government accountability when an oil producing country imposes
too rigid and complex tax regime on the people. This usually results in wide spread unrest and protest
across the nation as occurred in March 2012 in the Peoples’ Republic of Nigeria. When people show
general discontent it may worsen the tax system of the country. On the other hand, if the government
of an oil producing country focuses too much on the oil revenue, it may not tax the ordinary activities
of the citizenry.
It is in the light of the foregoing that this paper is being developed to assess the impact of state
take on investment in the upstream sector and in particular whether the taxation regime is optimal for
the economic development of Ghana. Evaluate the existing petroleum taxation (both theoretically and
practically); calculate how much the state obtains from the production of oil and compare it with the
investor take. It will also be used to determine the investor payback period. Apply (Study) petroleum
fiscal regimes of other countries to ascertain how the Ghanaian regime compares with other regimes as
far as sharing the petroleum wealth between the investor and the state is concerned. Assess the
possibility of the state changing the existing regime and the impact of such a decision. This research is
coming at a time when production at the Jubilee Field is still in its early years and more and more
discoveries are being made. This study is important for several reasons. It will enable the state and the
investor to evaluate the current regime at the Jubilee Field. It will suggest areas for consideration for
fiscal policy design and formulation for the new discoveries and the investors to assess investment
implications with regards to cost and profit. Oil as a strategic commodity, has special features such as
exhaustibility, high exploration risk and price volatility; these characteristics should be factored into
any fiscal system. In most oil producing economies, oil contributes significantly to the economy and
so if properly managed, can help develop the Ghanaian economy.
This study seeks to evaluate the existing petroleum taxation (both theoretically and
practically) and calculate how much the state obtains from the production of oil and compare it with
the investor take. The study further aims to assess the petroleum fiscal regimes of other countries to
ascertain how the Ghanaian regime compares with other regimes as far as sharing the petroleum
wealth between the investor and the state is concerned. Assess the possibility of the state changing the

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International Journal of Energy Economics and Policy, Vol. 4, No. 3, 2014, pp.400-410

existing regime and the impact of such a decision and provide recommendations on the way forward
based on the aforementioned.

2. The Ghana Upstream Petroleum Fiscal Regime

The first law, PNDC Law 84 (1984), establishes the upstream fiscal regime comprising
royalty, rent and income tax. It, however, gives GNPC, the national oil company, the mandate to
determine the nature of the fiscal regime. In the case of the Jubilee Field, the GNPC adopted the
Royalty/Tax System which is also a hybrid in disguise. The regime has a typical element of a
concessionary system as it is made up of royalties and taxes with state participation and so profit
sharing. The Ghanaian regime is assessed based on the general principles of taxation and petroleum
taxation in particular. The table 1 itemises the main strengths and weaknesses in use Jubilee field
fiscal regime as assessed. This assessment is based on the regime’s effectiveness in sharing the
economic rent accrued from the resource between the state and the investor. It should however be
noted that the strengths and weaknesses might not necessarily be advantage or disadvantage to either
party (That is, the state or the investor).
a) Royalty
Royalty is on gross production of crude oil and does vary on each block depending on depths of water;
ranging from 5% - 12.5% oil extracted. However, the royalty for gas is 3% regardless of the water
depths.
a) Carried Interest
The state is entitled to 10% interest in each block should a find be made without any payment to the
investor by the state. The state is ‘carried’ during exploration and development stages.
b) Additional Interest
The state can opt for additional interest in each block if a commercial discovery is made but is charged
with the cost of development and production prorated. The state through GNPC waves its right to
additional interest if GNPC fails to notify the contractor of its intention to acquire additional interest
within sixty (60) days of commercial discovery. Additional Interest varies from one block to the other
and in the Jubilee Field, the state has 3.75%.
c) Income Tax on Petroleum
The Petroleum Income Tax Law provides a maximum of 50%. Nonetheless, it can be altered by the
contract. The Jubilee Field has the rate of 35%.
d) Additional Oil Entitlements (AOE)
This entitles the state to additional payment if the post tax rate of return exceeds a specified level.
AOE is on the basis of after royalty, after tax inflation adjusted Rate of Return (RoR) which a
contractor has achieved thereby achieving some level of progressivity. The following rates were set;
12.5%, 17.5%, 22.5% and 27.5%.
e) Other Taxes
These include surface rent, training fees and withholding taxes.
f) Cost recovery, Deduction and Containment
 Unlimited carried forward of losses under the Petroleum Income Tax Law (PITL)
 The law prohibits depreciation but grants Capital Allowance (CA) over 5 year period covering
cost of petroleum exploration and production and other capital expenditure
 The Internal Revenue Act (IRA) Act 592 has provision to prevent transfer pricing, though the
PITL contains no such provisions
 The PITL places no limits on the extent to which interest expense is deductible and neither
does it charges Withholding Taxes (WHTs) on interest and dividend payments
 Closely related to the above is the waiver of WHTs on subcontractor companies that are
affiliate for the main contractor though it allows for deduction of WHTs on both resident and non
resident subcontractors
 The PITL excludes capital gains tax
 Both the PITL and the IRA has provisions for ring fencing
 None of the two has provision for decommissioning expense
g) The Petroleum Agreement for the Jubilee Field has a stability clause to protect the tax system
Table 1. highlights the strength and weaknesses of Ghana’s fiscal regime.

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The Optimal Petroleum Fiscal Regime for Ghana: An Analysis of Available Alternatives

Table 1. The strengths and weaknesses of the Ghanaian Fiscal Regime.

Strengths Weaknesses
a. Up-front payment: The regime does not a. Thin Capitalisation and Non-Capping of
require up-front payments in the form of bonuses interest expense: The failure of the PITL to cap
and major stock takes. Therefore the state share interest expense would lead to thin capitalisation.
arrived at from streams of payment. Surface rental By this investors can siphon funds away under the
and training cost are too insignificant to be described cover of interest thereby reducing chargeable
as such. Osmundsen (2008) holds that ‘The major profit. Though the IRA has a clause to stripe
challenge in attracting petroleum investments is the companies, Amoako-Tuffour & Owusu-Ayim
high level of front end loading of investments’. (2010) asserts that that clause is not applicable to
b. Royalty: a rate of between 5% - 12.5% is petroleum and again it has not been enforced in the
provided depending on the water depths. The Jubilee mining sector.
Field has a rate of 5%. The royalty enables the state b. Withholding Taxes (WHTs): The problem of
to also get early cashflow. thin capitalisation above is made worst by the fact
c. State Participation: participation through that interest expense and dividends are not subject
Carried and participating interest makes the state to final WHT. The PITL puts the state in a double
part owners though it does not share in exploration jeopardy by the waiving of WHTs on work or
risk and development risk (in case of the CI) but services rendered by affiliate companies. In as
does share in both production and commercial risk much as the IRA can reset the price of work done
with investor. State interest ranges from 12.5% to to prevailing market values; it can scarcely do so
30%. Jubilee field has 13.75%. for management services rendered by an affiliate
d. Unlimited carry forward of Losses and non- company. The most contentious of the WHTs issue
capping of the exploration and development cost according to Amoako-Tuffour & Owusu-Ayim
recovery: This element of the regime makes it more (2010), is that WHT on individual income tax is
investor friendly allowing for Corporate Income tax subject to the individuals contract especially as
only after deduction of allowable expenses. expatriates will earn high incomes if employed.
e. Additional Oil Entitlements (AOE): AOE c. Transfer Pricing: This involves the pricing of
enables the state capture more of the economic rent goods or services supplied by a subsidiary
as it focuses on additional profit over and above the company too low or too high in order to move
investor’s RoR. It enhances neutrality and profit from higher tax bracket into a lower tax
progressivity of the regime. bracket. But in petroleum IOCs uses this ploy to
f. Standardisation Clause: The standard clause move profit from one tax jurisdiction to another
is set to protect investor’s investments. It is used to usually across borders which denies the host
prevent legislative intervention in a negotiated country its revenue in terms taxes. The PNDC law
contract (Faruque, 2006). Hence, the Ghanaian (PNCL 84) which seem to deal with this is weak
system insulates the investor and makes the regime and might not be able to deal with the issue
more stable at least for signed contract. objectively.
d. Ring Fencing: The ring fencing being
applied in the PITL will delay cash flow to the state
as it allows cost from other fields being explored
by the same company to be deducted from a
producing field by the same company. On the other
hand, this would encourage more exploration and
development which could yield more future cash
flow.

3. Method
This section sets out the analytical structure to determine quantitatively the state and investor take in
the Jubilee Field having gone through the details of the Ghanaian regime in the preceding chapter. It
provides quantitative evaluation using the Ghanaian fiscal regime. It then tests how the share of each
of the partners (state and investor) would be by applying other regimes from other Sub Saharan
countries. The chapter begins by describing the life cycle of petroleum field. This is to enable the
reader appreciate the problems associated with oil taxation and the complications involve in sharing
the wealth the natural resource creates. It then deals with the methodology in employed in the analysis;
the traditional Discounted Cash flow (DCF) method.
3.1 The life cycle of a Petroleum Field
Tordo (2007) describes a typical petroleum field life cycle as follows: Licensing: This is the
first stage of the life cycle of a petroleum field. Usually license or a lease of the area to be explored for

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International Journal of Energy Economics and Policy, Vol. 4, No. 3, 2014, pp.400-410

oil and gas is granted or where the state enters into a contractual agreement with an investor (could be
group of companies) for exploration and production of oil.
1. Exploration: An oil company proceeds with geological and geophysical survey after acquisition
of license to operate a field. This may involve the use of seismic or core boiling survey. Exploratory
drilling are then embarked upon should the results from the survey proved promising.
2. Appraisal: A successful exploration is followed by appraisal of the field to determine the size,
structure and quality of oil. This reduces the risk of technical uncertainty. The decision to produce the
oil discovered is usually taken here taken at this stage when other factors are taken into consideration
especially the estimated future oil price that the oil from field would be produced.
3. Development: When commercial viability of a field is ascertained the through the appraisal, the
next step is to determine the strategy and techniques to employ in production. The petroleum act in
Ghana provides that the investor submits a detail production plan to the minister of energy on how the
field is to be produced. It also involves obtaining approval for their environmental impact assessment
plan from the appropriate agency of state, development drilling and building of transport facilities.
Cost to this stage is usually capitalised and expense over a period of time when production
commences.
4. Production: Project is said to have come ‘on stream’ when the first production well is drilled and
facilities commissioned. More production wells are drilled to increase production in the projected
level.
5. Abandonment: This stage comes in when the project reaches its ‘economic limit’ (Tordo, 2007). A
project is said to have come to its useful life when cost of production is equal to its revenue and so a
decision is made to abandon the field thereby ushering in decommissioning.
The understanding of the project life is the first step to the formulation of policies governing
petroleum production and investments. By their nature, petroleum projects have long lead times from
exploration to production and production also take long years. It is capital intensive with more initial
investments that can only be recouping when commercial discovery is made. Besides, the uniqueness
of this industry is in its high risk and uncertainties which includes exploration risk which could be non
commercial discovery or a dry hole, political risk, commercial risk and price uncertainties. To enhance
international competitiveness of a field, a fiscal regime should be tailored to take into account these
features to provide incentives at the various stages of a project.
A model to evaluate the Ghanaian regime and six other Sub-Saharan African countries namely,
Nigeria, Cote d’Ivoire, Congo, Cameroon, Equatorial Guinea, and Uganda is discussed below in Table
2.

Table 2. Details of fiscal regime for oil producing countries in Africa

Nigeria Cote D’ivorire Congo Cameroon Guinea Uganda

Sign Bonus $25m $12 - - $1.5m $0.5
Prod Bonus 0.1% <200mbbl $12m - - $5m -
Royalties 8% - 15% 12.5% 13% 12.5%
State Varies 10% initial + - Carried - 20% initial +
Participation 10% AI interest Interest 50% 15% +
@ LIBOR + 1% interest @
LIBOR
Cost Exploration & Cost Recovery 70% cap No limits on No limits on 60% limit on
recovery and Dev. Cost cap 80% of on cost cost recovery cost recovery cost
other invest 20% uplift on gross recover recovery
incentives CAPEX in production
year of
acquisition
Tax 50% on capex - - - - -
Allowance
Income Tax 65.75%, 85% 27% 35% 57.5% / 35% 30%
petroleum 48.65%
profit tax
Split of Split of Profit 20% >20,000 Split of Profit Split of Profit Split of Profit

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The Optimal Petroleum Fiscal Regime for Ghana: An Analysis of Available Alternatives

Profit Oil Oil with State bpd Oil with State Oil with State Oil with
with State 30% 50% State
Additional 35% 46% 50% - <30% RoR -
Oil @ 0%
Entitlement
(AOE)
Others: - - - -
Rentals
Source: Data taken from Amoako-Tuffour & Owusu-Ayim (2010) with adjustments to reflect the characteristics
of the Jubilee Field. Ernst & Young (2011), Global Oil & Gas Tax Guide, EYG no. DW0092.

3.2 The Discounted Cash Flow Model (DCF)

This method is employed to determine the Net Present Value (NPV) of the field’s
profitability. The author has taken into account criticisms against the use of NPV particularly that of
Dixit & Pindyck (1994) by providing for the opportunity cost of the investment. Nakhle (2008) states
that a study by Siew in 2001 indicates that the method is widely used for evaluation of projects by
99% of oil Companies.
This model was chosen against models such as such as Modern Asset Pricing (MAP),
Geometric Brownian Motion (GBM), Geometric Mean Reversion (GMR) models because it is fast,
simple and relatively easy to use. It is also takes into consideration the time value of money. Nakhle
(2008) states that a study by Siew in 2001 indicates that the method is widely used for evaluation of
projects by 99% of oil Companies.
However, the DCF model has the following limitations; First, it does not take into account
relative riskiness of projects. In addition, the value of waiting1 and the need to use different discount
rates with costs and revenues.
The Net Cash Flow (NCF)
The post tax cash flow under the Ghanaian regime
NCFt = Rt – ROYt –Ct – TCt – SRt – CTt
Rt = Qt Pt
Royt = Royr Rt
Post-royalty revenue is:
Rt – Royr Rt
Ct = CAt + OEt + CLt-1
Assessable Profit
Πt = Rt – ROYt –Ct – TCt – SRt
CTt = CTr Πt
Profit Oil (Profit after tax)
Πt – CTr Πt
Total State Take
STt = Royt + TCt + SRt + CTt +AOEt + Share of Profit + Ct (State share)
Total Investor Take
ITt = Share of Profit + Ct (less State share)
Investor Payback Period K
<
The DCF or NPV is determined by;
NPV =
The Discount Factor (DF)
DF = t

Discounted State Take

Total State take * DF
Where Qt quantity of oil produced in year t
Pt oil price in year t
Rt Oil revenue in year t (Rt = Qt Pt )
DC Exploration & Development Cost

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International Journal of Energy Economics and Policy, Vol. 4, No. 3, 2014, pp.400-410

CEt Capital Expenditure (CAPEX) in year t

OEt Operational Expenses (OPEX) in year t
OC Opportunity Cost
OCr Opportunity Cost Rate
CAt Capital Allowance for year t
Ct Total Cost in year t (Ct = the allowed portion of CAPEX and the OPEX)
CLt Carried Over Losses from previous year
SB Signature Bonus
SRt Surface rent in year t
PBt Production Bonus in year t
Royt Royalty for year t
Royr Royalty rate
AOEt Additional Oil Entitlements in year t
CTt Corporate Income tax in year t
CTr Income Tax rate
TCt Training Cost
SR Surface Rent
Πt Assessable Profit for year t
AT Πt After Tax Profit
STt Total State Take
ITt Total Investor Take

3.3 Assumptions
This section deals with some important assumptions made that are critical to the study. It is
assumed that the six other countries selected have similar circumstances as Ghana such as social-
cultural, political, level of economic development among others. The nearness of the Jubilee Field to
Cote d’Ivoire and the fact that Uganda is just emerging as oil producer make their selection in addition
to the other four who have already been established as producers make the study all involving and
informative. In addition to the above the following assumptions were made in applying the model;
1. It is assumed that a single company is operating the field this eliminates complications in both
Capex and Opex recovery and determining the rate of return.
2. That all the fiscal regimes are applicable to the Jubilee Field under the same cost and field
technicalities.
3. It is also assumed that the Jubilee is ring fenced.
4. The discount factor is assumed to be 19%
5. Finally, cash flow is calculated annually on cumulative basis.
The above model has been applied under three scenarios and results presented in table 4. Table 4
presents State Take while table 5 is for investor take.
1. Scenario I is the main forecast, scenario I and II are for the lower band (That is, scenario I less the
Standard Error) and upper band (That is, scenario I plus the Standard Error) respectively. Oil prices for
20 years (Bolton, 2012), starting 1991 were used to forecast for the next 20years. However, actual
prices were used for 2010 & 2011. Capital expenditure (PIAC, 2012) was the budgeted 2012 less the
cost of the FPSO which is a one off item. This was used to estimate for 10 years by giving 5%
inflation every 3 years. The result was then used to forecast for 20 years. Similar exercise was done for
operational expense (PIAC, 2012). All the forecast were ran on stamp software by providing for a one
year lag.
2. The value of waiting or the option value considers the benefits that will accrue should the decision
to explore today or leave the oil in the ground as the Saudi King Abdullah once ordered that new oil
finds be left for their children in the future.
3. A document on Tullow on licensing of block 3A of Uganda indicates a rate of return of 14%. The
agreement on the Jubilee field allows 5% for inflation. This brings the DF to 19%. The state take of
the different countries is discussed in table 3 whilst investor take is discussed in table 4.

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The Optimal Petroleum Fiscal Regime for Ghana: An Analysis of Available Alternatives

Table 3. State Take under each scenario

Ghana Nigeria Cote Congo Camero Equatorial Uganda
$M $M d’Ivoire $M on $M Guinea $M $M
$M
StateTake NCF 40,531 58,192 52,118 55,565 68,210 45,204 39,298
(ST scenario I) 40.03% 57.47% 51.47% 54.88% 67.37% 44.64% 38.81%
NPV 8,128 11,201 10,558 11,272 13,939 9,316 8,183
35.72% 49.04% 46.24% 49.35% 61.03% 40.79% 35.49%
(ST scenario II) NCF 35,583 50,766 48,369 48,169 60,834 40,052 34,793
38.86% 55.44% 52.64% 52.60% 66.43% 43.74% 37.99%
NPV 7,141 9,922 9,780 9,790 12,477 8,292 7,296
38.86% 47.40% 46.73% 46.77% 59.61% 39.61% 34.46%
(ST scenario NCF 45,475 65,617 56,113 62,963 75,587 50,356 43,802
III) 40.99% 59.15% 50.58% 56.76% 68.14% 45.39% 39.48%
NPV 9,1115 12,481 11,347 12,755 15,401 10,341 9,079
36.95% 50.43% 45.86% 51.51% 62.23% 41.78% 36.37%

Table 4. Investor Take under each scenario

Ghana Nigeria Cote Congo Cameroo Equatori Uganda
$M $M d’Ivoire $M n $M al $M
$M Guinea
$M
Investor NCF 60,723 43,063 49,136 45,689 33,044 56,050 61,957
Take 59.97% 42.53% 48.53% 45.12% 32.63% 55.36% 61.19%
(IT scenario I) NPV 14,629 11,640 12,277 11,569 8,902 13,525 14,873
64.28% 50.96% 53.76% 50.65% 38.97% 59.21% 64.51%
Investor NCF 55,991 40,807 43,369 43,404 30,740 51,522 56,781
Take 61.14% 44.56% 47.36% 47.40% 33.57% 56.26% 62.01%
(IT scenario II) NPV 13,707 11,010 11,147 11,142 8,455 12,640 13,874
65.75% 52.60% 53.27% 53.23% 40.39% 60.39% 65.54%
Investor NCF 65,460 45,318 54,821 47,972 35,348 60,579 67,132
Take 59.01% 40.85% 49.42% 43.24% 31.86% 54.61% 60.52%
(IT scenario III) NPV 15,552 12,269 13,397 11,994 9,349 14,409 15,885
63.05% 49.57% 54.14% 48.46% 37.77% 58.22% 63.63%

In this section we dealt with the stages of project life cycle in petroleum production, NCF and DCF
model. The model was applied to six other regimes in addition to Ghana on the Jubilee Field and the
results presented. The next chapter will discuss the results and present the findings of the study. It will
provide analysis of the seven regimes tested on the Jubilee field. Policy makers and investors will find
that chapter very useful.

4. Results and Discussion

The previous chapter showed the methodology and applied the model to the Jubilee Field
based on the fiscal regimes of the seven countries including Ghana. Assumptions made in the
calculations were also given. In this chapter we do a detail analysis of the results, to show how
benefits from the oil are shared by various regimes. Among others, the regimes are ranked to see
which provides more to whom and they are also ranked according to investor payback period under
three scenarios (ie business as usual (BSA), lower band-BSA less standard error and upper band-BSA
plus standard error discussed in chapter four foot notes). The results for which the analysis is made are
based on scenarios selected and as such may change should the scenarios change.
4.1 Sharing the Wealth – State verses Investor
This model shows (Table 5) that for four out of the seven countries, the state takes above 50%
of the oil revenue while the remaining three had around 40% on all scenarios. It is worthy to note that
Ghana and Uganda that are new producers have shares that are below 40% of the revenue. The
question is ‘is it a deliberate attempt by Ghana and Uganda to attract investors or a mere lack of good
bargaining power on the side of state’? The Ghanaian regime ranks 6th out of seven in terms of

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International Journal of Energy Economics and Policy, Vol. 4, No. 3, 2014, pp.400-410

percentage state take. Ghana comes 2nd in terms of investor take with 60.04% following Uganda with
61.24%. Cameroon comes last providing 32.69% this is the reverse of table 5.

Table 5. State Take

Country Scenario I (%) Scenario II (%) Scenario III (%) Average
(Business as usual (Lower Band –BSA (Lower Band – (%)
– BSA) less Standard Error) BSA plus
Standard Error)
Cameroon 67.37 66.43 68.14 67.31
Nigeria 57.47 55.44 59.15 57.35
Congo 54.88 52.60 56.76 54.75
Cote D’Ivoire 51.47 52.64 50.58 51.56
Guinea 44.64 43.74 45.39 44.59
Ghana 40.03 38.86 40.99 39.96
Uganda 38.81 37.99 39.48 38.76

4.2 Field Profitability

Field profitability can be measured by the payback period. Investor payback period is the
period it takes for the investor to recoup its initial investments after production starts. It takes a
minimum of 24 and maximum of 31 months for an investor to recoup its initial investment when post-
tax cash flow is not discounted. When time value of money is considered (discounted cash flow) it
takes 29 to 45 months for the investor to get his money. It makes the Jubilee Field very profitable as
its finding cost of US$6.92 is about a third of the world average of US$18.31 (PIAC, 2012). Tables 7
and 8 provide the post-tax payback period of the Jubilee Field as per the selected regimes.
The Ghanaian regime comes first together with Uganda by providing the shortest payback period of 24
months for undiscounted Cash flow and 2nd with 31 months when cash flow is discounted. Cameroon
comes last with 31 months and 45 months for post-tax undiscounted and discounted cash flow
respectively.
As a result of its profitability the tax system can be adjusted to increase the state share and yet
remain attractive to investors. Table 6 discusses the undiscounted cash flow whilst table 7. Discusses
the discounted cash flow.

Table 6. Undiscounted Cash flow Payback Period

Country Scenario I Scenario II Scenario III Average
(Business as (Lower Band – (Lower Band –
usual – BSA) BSA less Standard BSA plus
(Months) Error) Standard Error)
(Months) (Months) (Months)
Uganda 24 24 23 24
Ghana 24 25 24 24
Guinea 25 26 24 25
Cote D’Ivoire 25 27 24 25
Congo 26 27 26 26
Nigeria 25 27 25 26
Cameroon 31 30 31 31

4.3 The Fiscal Regime

The regime seems progressive. Its progressiveness is in its back-end loaded taxes1. The 5%
royalty rate is low compared to the world average of 7% without signature and production bonuses.
The Additional Oil Entitlements (AOE) helps the state take more of the economic rent. Nigeria and
Guinea’s oil tax regimes are more progressive. However, Cote D’Ivoire’s regime is regressive.
Flexibility of the Ghanaian regime is in the AOE. It enables government to take more of the rent when
prices go up and reduces when prices fall. The AOE comes in only when a project attains cumulative
cash flow. Flexibility is very vital in oil industry.

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The Optimal Petroleum Fiscal Regime for Ghana: An Analysis of Available Alternatives

Table 7. Discounted Cash flow Payback Period

Country Scenario I Scenario II Scenario III Average
(Business as (Lower Band – (Lower Band –
usual – BSA) BSA less BSA plus
Standard Error) Standard Error)
(Months) (Months) (Months) (Months)

Uganda 29 30 28 29
Ghana 31 32 30 31
Guinea 32 34 31 32
Cote 34 36 32
D’Ivoire 34
Congo 35 36 35 35
Nigeria 34 36 32 34
Cameroon 45 47 43 45

In terms of sharing of risk, the state takes more of the risk. Although the government is carried
through the exploration and development phases, it allows the investor to recoup all accumulated cost
with no cost recovery ceiling when production starts. The investor therefore receives early cash flow
thereby shifting most of the risk unto the state which can be done through thin capitalisation, transfer
pricing and cost manipulation hence Amoako-Tuffour and Owusu-Ayim’s (2010) assertion that
“Purely back-end loaded taxes may not be ideal as they transfer too much of the risk to the
government”.

5. Conclusion and Policy Implications

This study was conducted in order to evaluate the Ghanaian upstream petroleum fiscal regime;
determine the state take and that of the investor; and compare the regime with regimes of Uganda,
Nigeria, Cote d’Ivoire, Cameroon, Equatorial Guinea and Congo. The following are the main findings
from the study;
First, the state obtains 39.96% on the average when cash flow is not discounted. However, the
State share falls to 37.18% when cash flow is discounted which means that early cash flow from the
project flow to the investor whose undiscounted cash flow of 60.04% increases to 62.82% when cash
flow is discounted on the average. The investor obtains a post-tax undiscounted cash flow payback
period of 24 months and 31 months when discounted cash flow is applied.
Secondly, it was found that the Ghanaian regime ranks sixth in terms of state take when
compared with the six other regimes which also mean that the Ghanaian regime gives more to the
investor placing second on table of investor take.
Finally, it can be seen that the investor share in the current regime is higher than the state
share it is however, unwise for the state to unilaterally change the existing regime to increase the state
share due to the stability clause. Such an action (if taken) will lead to litigation between the state and
the investor and might also affect investor confidence not only in the hydrocarbon business but the
economy at large.
The aforementioned make it appear that Ghana is not optimising her benefits under the current
regime in terms of sharing the economic rent from the oil. However, it should be noted that this is not
as a result of the type of regime being used; rather it might be the combination of tax instruments
being employed under the regime. Recommendation to enhance this is provided in the next section.
Ghana share in the oil wealth is low as compared to its peers in the region. This might have
evolved partly because it was a risky endeavour for the early investors and so the state opted for a
lower share to attract investors. However, the discovery of more oil makes Ghana no longer risky and
therefore Ghana can aim at taking more of the economic rent vis-à-vis being investor friendly.
The current regime for the Jubilee Field though can be altered by the state to increase the state
share, it must be noted that any unilateral action by the state might not be a wise decision as it might
breach the existing agreement based on the stability clause. The flexibility clause also gives the
discretion for change majorly to the investor thereby making it more difficult for the state to increase

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 International Journal of Energy Economics and Policy, Vol. 4, No. 3, 2014, pp.400-410

its share. Nevertheless, the state can increase its share of the economic rent by adopting some of the
following measures in any new contract;
Royalty Rate: Ghana’s royalty rate is the lowest among the sample regimes. Though royalties
are regressive, increasing the rate into a range of 8%-10% will ensure early cash flow to the state and
ensure equitable sharing of the risk. This range will let it compare well with its peers in the sub region.
The Additional Oil Entitlements: This should naturally make the tax system progressive. But
that of Ghana is not progressive enough as it is base on RoR alone. The AOE should tie to profitability
if it is to help make the tax system progressive and ideal.
Cost Recovery: Cost recovery limits should be set to control early cash flow. Thin
Capitalisation and Withholding Taxes (WHTs) on interest income: Thin capitalisation should be
avoided by specifying the required level of capitalisation in the agreement to prevent payment of
excessive interest. Again, deduction of WHTs should be allowed on interest income. A range can also
be set for interest rate on debt capital.
Transfer Pricing: The current law leaves room for its manipulation. Steps should therefore be
taken to state clearly the rules on transfer pricing. Regrettably payments to overseas subsidiary are not
subject to WHTs tax under the existing regime. The agreements should provide for deduction of
WHTs on any such payments.
Stability clauses: These should be set based on external environmental factors such as price
and should not be left in hands of a single party’s discretion. Further research in future should use
other methods such as Modern Asset Pricing (MAP), Geometric Brownian Motion (GBM), Geometric
Mean Reversion (GMR) models among others are recommended alternative methods for assessing the
fiscal regime. These methods will provide a holistic view of the regime in the mix of risk and
uncertainty. Also, regimes for specific fields from the countries selected should be taken for the
application of the model just as the regime for Ghana is for the Jubilee Field. This will enhance the
comparison and make the analysis more interesting.

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