What it takes to be a Petro-State: Enough Lessons for Ghana

The oil industry considering its benefits and costs has come into the international limelight. The importance of oil has gained prominence in international news headlines with regards to the quantum leap of economies that were in unsavoury reputation. A country in question is Equatorial Guinea that was, hitherto, described as an African backwater but has transformed herself into one of the world's fastest growing economies with the sole reason of discovery of oil and gas. The prosperity and rapid makeover of United Arab Emirates from a backward desert region to one with a booming economy has been made possible by revenues from petroleum production.

These situations in many other countries provide Ghana a point of reference and as such enough lessons to follow suit pertaining to good policies and practices and evade similar mistakes in its quest for economic and human development and growth. The atmosphere in Ghana is filled with much expectation of enormous gains from the oil that was discovered in June 2007. Former President, John A. Kufuor, has said that the country's new 'black gold' will be the boost that Ghana needs to become an 'African tiger”. The oil was also the subject of campaign messages especially in the Western Region. Nana Akufo-Addo, Ghana's foreign minister under President Kufuor and the NPP's presidential candidate during the 2008 campaign has estimated that the government could earn $15 billion during the first five years of oil production. (Ghana's Jubilee moves ahead, “International Oil Daily, Oct. 10, 2008” cited in Oxfam America/ISODEC Report on February, 2009).

Ghana has made strides and set the pace in its democracy and believe it or not, the emergence of the oil industry will be the greatest ever litmus test to her good governance hailed by international bodies and agencies and countries. An Oxfam America/ISODEC Report on “Ghana’s big test: Oil’s challenge to democratic development” reveals the truth behind this argument.

Will the line of operations of other oil producing countries as in benefits and social and economic upheavals be enough to serve as lessons that will direct and guide Ghana in her oil and gas production?

The Underlying Issues: Impact of Oil

In the making of a petro state brings a lot of factors into play to constitute a better realization of the benefits and costs of oil. This includes both the benefits and costs in a right and strong legal and regulatory framework and competent institutions to bring checks and balances. The importance of oil to the economies of many countries cannot be underestimated. Oil provides a wide variety of purposes which include transportation, heating, electricity and industrial applications, and is an input to over 2000 end products (International Labour Organization, 2002. Oil and Gas Production; Oil Refining as cited by D O’Rourke and S Connolly in “Just Oil? The distribution of environmental and social impacts of oil production and consumption (2003))”. Roughly two billion dollars a day now changes in worldwide petroleum transactions. It is the world’s first trillion-dollar industry in terms of annual dollar sales.

This presents Ghana the opportunity to gain a lot from the oil to overhaul its economy to prosperity. But this is possible only when the right and prudent policies are formulated taking into consideration institution building and firm and comprehensive legal and regulatory framework governing the petroleum industry. However, it is relevant to disclose the aspects of oil production that results in ‘resource curse’ that can plunge the country into awkward and unmanageable situations.

Political Impact

The successful operations of the oil industry in terms of exploration, production and exports depend heavily on the political set up that exist in the country with the reserves.

It is worthy of note that, oil revenues makes it possible for an economy to be less reliant on foreign aids as compared to non-oil rich states. This is because the actual oil revenues are much larger that the foreign development assistance. Less reliance on foreign aids enables proper budgeting of projects and programmes in the various sectors of the economy as the source of revenue is certain. This helps in preventing unnecessary budget deficits that causes retardation of a country’s economy.

The factors that could plunge an economy into disaster (the ‘resource curse’) are important to be revealed. The most sensitive issue is the likely upheaval of multi and bilateral relations. Oil revenues are capable of reducing the aids and development assistance from international donors and agencies like the World Bank and International Monetary Fund (IMF). This is because an atmosphere of self-sufficiency is created where the country sees itself as capable of financing expenditures in a fiscal year. This is dangerous because it causes economic and social upheavals for future generations when the oil reserve runs out in supply. The World Bank and the IMF have had only limited involvement in Equatorial Guinea until recently since the beginning of the oil boom. A health improvement programme was the last and major programme funded by the World Bank’s International Development Association (IDA) which was closed in 1999 and since then there have been no significant new Bank lending programme for the country. This happened to Equatorial Guinea and being aware of the future social upheavals (distortions in foreign technical assistance that is regarded as a means of improving the functioning of a state), President Obiang is making effort to establish a firm bilateral relations. The president appealed personally to the British government officials for the establishment of a permanent ambassador in the country and expressed interest in the Extractive Industries Transparency Initiative/EITI (a British government initiative to increase transparency over payments in mining and oil companies to host governments).

It is important also to reveal that, the prospects of future oil revenues paves way for the government to obtain oil-backed loans; which are loans against future oil output. This means it is impossible to receive or get the loan without the potential oil revenue. It is reported that, China and Angola would soon seal a $1 billion deal and it had already receive $5 billion oil-backed loans from China since 2002 (Business News, Monday 16 February 2009). Also, GEPetrol’s ability to negotiate a $400 million oil-backed loan from a syndicate led by Deutsche Bank (Equatorial Guinea. Deutsche Bank’s advisers’, African Energy Intelligence, 26 November 2003. The loan was intended to fund the government share of the LNG plant). According to the Oxfam America/ISODEC Report in February 2009, one aspect of the recommendations stated that oil-backed loans should be prohibited knowing its negative implications to the economy of Ghana. This is a guide and good direction given to the National Oil Company, the Ghana National Petroleum Corporation (GNPC) and the Government of Ghana as part of the efforts of civil society organizations (CSOs) to ensure sustainable and transparent operations in the oil industry.

The most central of these issues is the corruption canker associated with the management of oil revenues among public/government officials. The revenues of oil can be channeled from improving the economy to satisfying the selfish ambitions of government officials. A case is that of the US Senate Report in 2004 that found that Riggs Bank helped top officials of Equatorial Guinea steal hundreds of millions of dollars in oil revenues. The issue of corruption by top officials in government is so much so that it has raised the concerns of many international agencies and institutions like the World Bank and countries including the United States. It is recorded that Equatorial Guinea government leaders siphon oil revenues to account set up for them in Washington. The oil revenue is neither for the government nor for any public officials but for all Ghanaians. Let’s strengthen the practices of accountability and transparency to ensure prudent management of the oil revenues in order to avoid what is happening in Chad (loopholes in the management system of oil revenues because of inapplicable transparency).

This shows what His Excellency President John Evans Atta Mills said which all Ghanaians are entitled to. This is therefore the assurance we have as Ghanaians with regards to benefitting from the emerging oil industry.

According to Ross, Michael Lewin, 1961 in his ‘Does Oil Hinder Democracy’ identifies three major areas under political negative impact. The first is the Rentier effect which suggests that resource-rich governments use low tax rates and patronage to dampen democratic pressures. The second is the Repression effect that holds that resource wealth enables governments to strengthen their internal security forces and hence repress popular movements. The last he made is the Modernization effect that implies that growth that is based on the export of oil and minerals will fail to bring about the social and cultural changes that tend to produce democratic government. Which of these effects is possible in Ghana with the existing legal and regulatory framework in the petroleum industry? We trust that the government will provide and strengthen the necessary institutions capable of averting this situation and as such the efforts and effective roles of civil society organizations (CSO) will help in this regard. The major force behind transparency and accountability is strong CSOs that will keep government officials and petroleum companies on their toes with regards to their expected roles and responsibilities specified by the laws of the land.

Socio-economic Impact

With regards to its importance, it is an established fact that oil stands as the linchpin for the economy of many growing economies including Saudi Arabia, Iran, United Arab Emirates, Equatorial Guinea, Qatar, to mention but a few. For many of these countries, oil is crucial to national economic viability, accounting for upwards of 80% of total national exports for Libya, Iran, Kuwait, Saudi Arabia and Venezuela (Energy Intell Group.

2003. Polity Score and Reserves Table cited>http://cited>www.energyintel.com/grounds/tables.htm cited by D O’Rourke and S Connolly in “Just Oil? The distribution of environmental and social impacts of oil production and consumption (2003)).

The first benefit to be identified is the fact that, oil boom in a country can turn that country to be a larger recipient of foreign direct investment (FDI). FDI creates a lot of benefits including capital and infrastructure development, job creation and access to foreign aid to finance developments. Equatorial Guinea has turned into one of the largest recipients of foreign direct investment in Sub-Saharan Africa (about US$5 billion invested in 1998-2003). Up to 3,000 American expatriate workers live in Equatorial Guinea today and the United States re-opened its embassy in the capital Malabo in late 2003 (Max Liniger-Goumer, Small is Not Always Beautiful: The story of Equatorial Guinea (C. Hurst and Company, London, 1988), pp 89-90). According to IMF figures, the inflow of oil revenues helped to raise Equatorial Guinea’s GDP from 39,500 million CFA francs  in 1990 to 1,509,800 million CFA francs in 2002, a 38-fold increase (IMF, International Financial Statistics, various.). This reveals clearly the importance of the oil industry. It provides jobs, profits and taxes. The International Labour Organization (ILO) says that the oil industry directly employs more than 2 million workers in production and refining (Int. Labour Org. 2002. Alternative Energy Sources: Oil Refining). The ILO further estimates that each job in oil production or refining generates one to four indirect jobs in industries that either supply needed inputs or benefits from value added activities. Oil revenues have resulted in proportionate growth and developments of salient sectors of the economy including education, health and manufacturing which Ghana can take advantage of.

There exist also available funds for welfare improvements in education and health sectors of the economy. If the available oil revenues are channeled to the development of education and health sector, the impetus for accelerating economy of the country is provided that will increase the standards of living of the local people. However, investment in wasteful projects and infrastructure cannot help in the realization of this goal. In Equatorial Guinea, the government has generally been slow to invest the rising oil revenues in areas of health and education while allocating millions of dollars for projects such as a new capital, Malabo 2, new roads and two new ports (Luba Freeport and K-5).Â

Oil, also, obviously creates significant and varied negative impacts and cost to the economy of the host country. One effect of oil boom in a country is the appreciation of the exchange rate rendering most other exports noncompetitive, phenomenon known as the ‘Dutch Disease’. The phenomenon distorts growth of services, transportation and construction as well as discouraging some industrialization and agriculture (An Oxfam America/ISODEC Report, February 2009 “Ghana’s big test: Oil’s challenge to democratic development”).

The development of the oil industry is capable of shifting concentration from other sectors of the economy due to the huge benefits accruing from the oil sector. This can result in a lopsided development that can create a lot of tensions in the sector under much consideration. The available labour force will focus to seeking employment in the oil industry to the neglect of other sectors especially agriculture. In Equatorial Guinea, despite the oil boom, basic foodstuffs are now imported from Cameroon. Can once an agrarian economy fall into a situation of even importing simple agriculture products? We hope that the Master Plan pending implementation would cater for all these minor but critical issues.

Another significant issue that can arise is the migration of people to the place of production for many purposes basically for employment. This situation can put pressure on existing facilities in parts of Western Region as population increases. This consequently leads to its peculiar problems including increase government expenditure in attempts at providing infrastructure for the increased population and vast social vices (prostitution, armed robbery). This is the situation that if measures are not put in place can erupt into rebel groups that usually call themselves ‘freedom fighters’ all in attempt at improving their standards of living.

The Environmental Justice Framework

According to D O’Rourke and S Connolly in “Just oil? The distribution of environmental and social impacts of oil production and consumption, 2003” reveals this framework that is effective and efficient for successful management of the oil and gas industry.

This review presents existing data and analyses of the global distribution of the impacts of oil. The framework is used in describing and evaluating the environmental, social and health impacts of oil extraction, transport, refining and consumption. This perspective seeks to provide a lens through which to examine the distributional and procedural impacts (and inequities) of oil extraction, transport, refining and consumption in communities and groups of people concerned. The framework seeks to analyze whether existing regulatory systems adequately protect impacted communities at each stage in the life cycle of the oil. There should be extensive regulations that govern oil exploration and refining.

A careful consideration of this policy direction would raise questions about the situation where IFC should approve loan to Kosmos Energy and Tullow Oil ($215 million) when these companies had not receive permit from the Environmental Protection Agency (EPA) as an exploration license to start production. Â The respect and due recognition of the fact that there should be free, prior and informed consent of communities in the Western Region before any licenses for onshore exploration are given. This would cater for the welfare of the people when the necessary environmental impacts are identified. It is dangerous when the same impact faced by people in the mining communities is repeated.

The fact that the Extractive Industry Transparency Initiative (EITI) has not yet been extended to include the oil industry leaves much to be desired. This situation is possible to repeat the transparency loopholes that exist in Chad. According to the report by Catholic Relief Services (CRS) and the Bank Information Center (BIC) in February 2005, one of the most serious loopholes in Chad's oil revenue management system is the failure to apply requirements regarding transparency, accountability and pro-poor expenditures to all oil developments in the country. Are we as Ghanaians going to sit down unconcern and allow the similar situation to happen to our dear country? Let’s hope not so as we trust the government and the petroleum authorities to put the necessary measures in place and avert this unpleasant situation.

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With regards to the State of the Nations address by President John Evans Atta Mills as quoted

“The government has directed the GNPC to exercise its option to acquire a unitized paid interest of 3.75% in the Jubilee field venture. The value of this share is $161 million. In addition to establishing a regulatory framework for managing revenues for the benefit of Ghanaians, GNPC will also focus on expense management for the Jubilee project to ensure that development costs are fair and reasonable. GNPC will enforce local content policy where Ghanaians will be able to participate significantly in oilfield support services towards the development of the Jubilee field and other new prospects.

Revenues from oil and gas will be used to address challenges of poverty in Ghana through expenditures in priority areas of education, health, rural development, infrastructure, water and sanitation. Other priorities will include investment in physical and social infrastructure within communities close to the oil and gas production activities, investment in a Future Generation Fund to ensure sustained well being into the long-term and investment in technical training, scientific research and development” (GHP on ghanaweb.com), we hope that the best thing will happen to the improvement in the living conditions of all people in the country.

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The oil revenues should help the effort of the country to achieving the Millennium Development Goals by 2015 and as such attaining a middle-income country. Let the EITI be made to cover the oil industry before significant operations begin.

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Conclusion

In conclusion, there is no way to dispute the fact that oil can have adverse effect on the growth of an economy. It is therefore prudent that the situation is nipped in the bud in our quest for development and growth. The challenges in this sector are deep and broad and should be tackled by the smooth implementation of the Master Plan. This country would be the biggest flop in development efforts if with this several lessons in the African Continent, allows the same situation to happen.

We can make it happen in Ghana and set example for other countries to follow as we have done in governance. Let's disprove and make void the ‘paradox of poverty in the midst of plenty’. Â

The author, Stephen Yeboah is in Department of Planning, Kwame Nkrumah University of Science and Technology (KNUST), Kumasi.

Email: [email protected]