SOME ISSUES IN GHANA OIL & GAS LAW

KOJO BENTSI-ENCHILL,

Snr. Partner,Bentsi-Enchill Letsa & Ankomah,

8TH MARITIME LAW SEMINAR FOR JUDGES OF THE SUPERIOR COURTS OF GHANA COCONUT GROVE REGENCY HOTEL, ACCRA OCTOBER 11 -12, 2012

Overview

Ghana Petroleum Industry? Maritime Boundary Dispute with Ivory

Coast. Stabilisation Clauses Petroleum Commission Regulatory Consents: Law of

Unreasonable Withholding of Consent Petroleum Revenue Management Act Environmental Issues

Ghana Petroleum Industry? Ghana has not ‘found’ any oil.

Ghana does not have an oil industry in the sense of indigenous capacity to produce petroleum. (Ghanaian-owned Texas-based Saltpond Offshore Ltd)

Oil - discovered developed and produced in Ghana by foreign companies registered in Ghana as external companies under PAs that reserve to Ghana a share in the petroleum produced.

There would be no oil industry if these foreign companies were to walk away from Ghana tomorrow. Subject to rules about decommissioning, handing over of equipment to GNPC, there would be some equipment, a lot of data, but no oil industry.

Ghana Petroleum Industry?

Ghana owns the oil in its natural state.

Title to most oil produced belongs to the Contractor, after royalties (PA Art. 19 and 10).

Ghana may develop an oil industry by contracting petroleum companies to explore develop and produce oil for a fee and in that sense Ghana would have an oil industry but we lack the resources to pay for $1m/day rigs and other costs.

Ghana Petroleum Industry?

Some on-shore exploration agreements of this nature have been negotiated, but they give the foreign companies a right to production sharing contracts in the normal model.

The only extraction Ghana is involved in is the extraction of as much of a share in the foreign-owned petroleum industry as we can through production sharing, royalties, taxation , the development of local content and miscellaneous fees.

Ghana Petroleum Industry?

Tendency exists to underrate the entrepreneurialism, the risk-taking of the Jubilee Field contractors that discovered significant quantities of oil in 2007. SFO :-

GNPC (TT) knew where the oil was all along. Kosmos just had to come and dig it up.

Tendency to ignore the terms of the petroleum agreements of yester-year with their stabilization clauses (PA Art. 19) and reinterpret them as we would like to do today. Petroleum Commission :

only the fiscal clauses of the petroleum agreements are sacrosanct, everything else is subject to such new regulations as PC the first true regulator of the Ghana petroleum industry may promulgate.

Ghana Petroleum Industry?

There has been a tendency to lose sight of the true character of these early PAs as investor-friendly packages negotiated under an investor-friendly law executed and enacted at a time when no-one was seeking to explore for petroleum in Ghana.

Sometimes suspicion of corruption has been retroactively visited on lawyers in the A-G’s office that were involved in negotiating these early PAs.

Ghana Petroleum Industry?

A fundamental legal issue is the extent to which Ghana is going to respect

these agreements as it develops more sophisticated petroleum regulation, and

The extent to which contractors under PAs are prepared to accede to new laws and regulations regardless of their strict contractual rights.

Ghana Petroleum Industry

Saltpond – discovered in 1970 by the Signal-Amoco Consortium

2007ff Kosmos & Tullow discovered oil in commercial quantities Several important subsequent strikes in the

Jubilee Field Original estimated reserves 600m bbl Estimates now range from 3 to 5 billion bbl

(kosmosenergy.com). (bloomberg.com).

Ghana Petroleum Industry

Other Strikes

Dzata-1 discovery by Vanco and Lukoil, Feb. 26, 2010

Hess – a find equal to Jubilee in Deepwater Tano / Cape Three Points area

Eni – 5000 bbls/day (flow rate was constrained by inadequate surface infrastructure)

Ghana has 22.65 billion cubic meters proved reserves of natural gas (CIA World Factbook)

Ghana Petroleum Industry A small industry

90,000 barrels per day by the end of this year. Bank of Ghana Report, August 2012.

Compare Nigeria: 2,485,000 bbl per day

Huge impact on Ghana:

accounting for 6% of revenue in 2011

The projection of total oil receipts for 2012 is GHc 1,239.82 million. The 2012 gross national revenue (including grants) is GHc 15,614.3 million. The Budget Statement and Economic Policy of the Government of Ghana for the 2012 Financial Year, p. 42

Ghana Petroleum Industry

The proportion is going to rise fast, as Jubilee Field ramps up, other fields, Hess, eni, start producing in 3-4

years time Gas is harnessed to enhanced power production

and derivative industries sprout The Gas Story - Causing financial loss to the

state?

What is ‘Ghana’? Land boundaries not in dispute.

- Question: is Ghana ready for onshore petroleum operations? - what is the appropriate fiscal regime for onshore petroleum?

Exclusive economic zone also undisputed.

“exclusive economic zone” means that area beyond and adjacent to the territorial sea which does not extend beyond two hundred nautical miles from the baseline from which the breadth of the territorial sea is measured; (Constitution Article 4(2); Maritime Zones (Delimitation) Act 1986 (PNDL 159) s.5(1)Fisheries Act, 2002, Act 625 s. 140;

What is ‘Ghana’? – Maritime Boundary Dispute

Ivory Coast has made claim after Dzata-1 discovery by Vanco and Lukoil on Feb. 26, 2010. (Bloomberg)

Both countries had previously submitted routine documents to the UN Commission on the Limits of the Continental Shelf in 2009, stating that there was no set maritime border.

Petition has been submitted to UN to complete demarcation of maritime border days after discovery. (Ghana Business & Finance)

Ghana established a Boundary Commission to investigate the matter.

Two countries in dialogue with no agreement yet.

What is ‘Ghana’? – Maritime Boundary Dispute

Public sentiment in Ivory Coast that Ghana is sucking oil from its waters

Fiscal implications :- national budgetary and development planning in disarray.

Security implications:- Militarization of the maritime boundary? possible war;? Potential meddling by Oil companies and their national governments in the

dispute;

liability for misrepresentation:

In petroleum agreements, Ghana represents and guarantees that the Contract Area is wholly within Ghana’s territorial waters and is not subject to any dispute. Article 26.1 of PA:

Stabilisation vrs Regulatory Progress & Resource Nationalism

A fundamental issue is

the extent to which Ghana is going to respect these agreements as it develops more sophisticated petroleum regulation, and

The extent to which contractors under PAs are prepared to accede to new laws and regulations regardless of their strict contractual rights.

Stabilisation Clauses in PA

The State, its departments and agencies must support the Petroleum Agreement, and take no action to prevent or impede the rights and obligations of the Parties. (Art. 26.2)

The State guarantees stability for all the Petroleum Agreement’s terms and conditions, and fiscal and contractual conditions. (Art. 26.2)

Modification of PA terms may only be made in writing on agreement of the Parties. (Art. 26.3)

State administrative or legislative action purportedly varying PA terms constitute a breach of the Agreement.

Stabilisation Clauses in PA

Where a new income tax rate is enforced due to changes to the Petroleum Income Tax Law (“PITL”), the Contractor may opt to apply the new rate, or remain under the PITL, 1987. (Art. 26.3)

A Party affected by significant changed circumstances which alter the original economic balance of the PA, must notify the other Parties in writing. (Art. 26.4)

Notified Parties have three (3) months from receipt to respond to such notification in writing. (Art. 26.5)

Stabilisation Clauses in PA cont.

If significant changed circumstances are established, Parties must negotiate and effect such changes necessary to restore the relative economic position of the Parties at the date of the Agreement. (Art. 26.5)

Oil Companies & StabilisationClauses

On the basis of these stabilisation provisions, some oil companies are completely opposed to all and any changes.

Thus Petroleum Revenue Management Act

Prevails over the provisions of all previous legislation, petroleum authorisations or contracts inconsistent with its provisions. (PRMA 2011, Act 815, ss.1, 61.)

Edict that all petroleum revenue must be paid into the Petroleum Holding Fund (Act 815 ss.2(2), 4, 6, 14, ) deemed to be a breach of provisions in petroleum agreements that require payments to be made to GNPC, e.g. payment of annual rent, Article ( ).

Oil Companies & StabilisationClauses – Mining Industry

In strict logic, this is of course true.

As a practical matter, is a Contractor going to insist on paying rent to a GNPC that has been stripped of its regulatory function?

Or, in a more extreme case, had GNPC been abolished would the contractor insist on paying rent as provided in the PA to a non-existent GNPC?

Absurd? Oil companies’ view: the principle of sanctity of contracts must never be compromised; it is important to fight against each breach to preserve an environment of respect for the contract.

Ghana & StabilisationClauses – Mining Industry

On the other side, Ghana evinces very little respect for stabilisation clauses.

No legislation explicitly excludes stabilisation agreements E.g. 2012 budget,

announcement of ring-fencing, increase in corporate tax rate to 35%, windfall tax;

plus formation of re-negotiation committee to review the legality of stabilisation clauses!

It was left to mining companies having stabilisation clauses in their mining leases to push back.

Ghana & StabilisationClauses – Mining Industry

Previously, adoption of a flat 5% royalty in place of previous 3-6% range:

Mining companies having stability agreements successfully pushed back and caused government to acknowledge they are exempt.

Ghana & StabilisationClauses – Petroleum Industry

Petroleum Commission declaration cited above:

only the fiscal clauses of the petroleum agreements are sacrosanct, everything else is subject to such new regulations as PC the first true regulator of the Ghana petroleum industry may promulgate.

This is a bold misreading of the stabilisation clause which certainly does not focus on fiscal provisions alone but on all the rights and obligations & terms and conditions of the Parties. (Art. 26.2)

Ghana & StabilisationClauses – Petroleum Commission

Petroleum Commission on basis that it has a regulatory carte blanche has:

Exponentially increased registration fees payable by different classes of contractor.

Requires all immigration applications to be first submitted to it;

Demanded re-registration by petroleum companies, regardless of existing GNPC registrations;

Issued notices emphasising Ghana’s foreign exchange regulations

;

Stabilisation Agreements and Regulatory Develoment

Ghana Shipping (Protection of Offshore Operations and Assets) Regulations, 2012 (L.I. 2010)

  Regulation 1 : Minster may establish safety zones around an offshore

installation to protect the installation the sea bed within Ghana's maritime jurisdiction

  Regulation 2: prohibits a ship, vessel or person from entering a safety zone

notified in the Gazette without the written consent of the Director-General, unless

(a) it is engaged in constructing, repairing or servicing (i) the floating or fixed installation; (ii) a submarine pipeline connected or to be connected to the floating

installation; (iii) facilities associated with the floating installation or the pipeline; or

(b) it is a tanker authorised by the operator of the installation to enter the zone to load crude oil or other petroleum products.

 

Stabilisation Agreements and Regulatory Develoment

Regulation 8 prohibits  any person from operating or locating a mobile offshore drilling unit in Ghana's maritime jurisdiction unless that person:

(a) obtains a mobile offshore drilling unit safety operating permit from the Ghana Maritime Authority, and

(b) complies with the design, construction and equipment requirements of (i) the Code for the Construction and Equipment of Mobile Offshore

Drilling Units, 1979, (IMO Resolution A.414 (XI) as amended by MSC/Circ. 561); (the 1979 Mobile Offshore Drilling Unit Code) and has in force a Mobile Offshore Drilling Unit Certificate (1979); or

(ii) the Code for the Construction and Equipment of Mobile Offshore Drilling Units, 1989, (IMO Resolution A.649 (16) as amended by MSC/Circ. 561 and Resolution MSC.38 (63); (the 1989 Mobile Offshore Drilling Unit Code) and has in force a Mobile Offshore Drilling Unit Certificate (1989).

 

Stabilisation Agreements and Regulatory Develoment

Under regulation 9 a person who seeks to operate a mobile offshore drilling unit must apply in writing for a safety operating permit addressed to the Director-General and supported with the relevant documents.

Sensible regulations. Fees are reasonable provided they fund security

infrastructure. Is a contractor holding a petroleum agreement that

predates Ghana Shipping (Protection of Offshore

Operations and Assets) Regulations, 2012 (L.I. 2010) going to claim exemption from this healthy development by virtue of its stabilisation clause guaranteeing to it the legal environment in which it was concluded?

Regulatory Consents – (Porton Capital cont’d)

The Law of Unreasonable Withholding of Consent : BARCLAYS BANK (D.C.O.) v. THOME [1973] 2 GLR 137 CA.

A lessor, in considering whether to withhold his consent or not, was to act reasonably not arbitrarily nor capriciously but prudently in his own self interest.

The issue, whether or not a party in withholding his consent acted reasonably and prudently in his own self interest was a matter of fact to be derived from the evidence.

Regulatory Consents

IN RE F.R. (AN INFANT) [1972] 2 GLR 61 HIGH COURT, SUNYANI - unreasonable refusal in family law context: If a mother wishes to bring up her child according to her station of life, it cannot be said that she is withholding her consent unreasonably

Not a helpful precedent for the purposes of this discussion.

The English High Court in Porton Capital Technology Funds and Others v 3M UK Holdings Ltd and another [2011] EWHC 2895 upheld previously established principles in determining whether consent had been unreasonably withheld.

The judge confirmed that principles developed in landlord and tenant cases are applicable to commercial situations.

Regulatory Consents

In determining whether a refusal of consent is unreasonable, the following principles apply:

the burden is on the party requesting the consent to show that the party refusing consent is acting unreasonably;

the party refusing consent does not need to show that such refusal is right or justified. It is only necessary to show that the refusal is reasonable under the circumstances, which will be a question of fact in each case;

the party refusing consent may have regard to its own interests; and

the party refusing consent need not balance its own interests against the interests of the party requesting consent, unless they are entirely disproportionate. Again, this will be a question of fact in each case.

Regulatory Consents

Administrative justice – Constitution, Article 23:

Administrative bodies and administrative officials shall act fairly and reasonably and comply with the requirements imposed on them by law and persons aggrieved by the exercise of such acts and decisions shall have the right to seek redress before a court or other tribunal.

Ghana National Gas Company (“GNGC”)

Ghana National Gas Company (“GNGC”) a limited liability company100% government owned established to utilise Ghana’s natural gas.

Ghana National Gas Company (“GNGC”)

Definition of “Petroleum” “Crude Oil or Natural Gas or a combination of both.”

(Petroleum (Exploration and Production) Act, s. 33; PA, Art. 1)

Inextricably mixed in nature in regulatory structure Ghana proposes to put asunder what nature has put inextricably together.

In doing so no action taken so far to amend the law.

Other than the GNPC, no other organisation shall engage in the exploration, development or production of petroleum except under a petroleum agreement with GoG and GNPC (s.2(1) PEP Act)

Ghana National Gas Company (“GNGC”)

GNGC has no legal basis for undertaking an production activity except with the authorisation of GNPC.

Yet in practice it is setting out to be the GNPC of natural gas.

PETROLEUM REVENUE MANAGEMENT ACT

An achievement to have managed to pass a statute on the subject

Our PRMA promotes transparency and access to information and lays down principles for payment expenditure and saving of petroleum revenue

Nigeria has been trying to update an outdated act for more than a decade

Several countries on this content have extremely murky petroleum revenue system

ALLOCATION OF BENCHMARK REVENUE

• Up to 70% of expected revenue from petroleum operations may be utilized in any financial year (Sec 18 of PRMA)

• The excess revenue after the Budgetary allocation must be paid into the Petroleum Holding Fund (Sec 23(1) of PRMA)

Allocation of Benchmark Revenue

At least 70% of the excess revenue, after budgetary allocation, must be transferred into the Heritage Fund (An endowment fund to support development for future generations when petroleum reserves have been depleted)

The balance is paid into the Stabilization Fund (a Fund to sustain public expenditure capacity during periods of unanticipated petroleum revenue shortfalls)

Allocation of Benchmark Revenue

In effect, less than 30% of expected revenue from petroleum operations each year is allocated to our endowment Fund

Contrast with Norway, for example, where since 1957 only 4% of revenue from petroleum operations is with drawn for public spending

Over 90% of revenue is invested

Allocation of Benchmark Revenue

Reasons for Norway’s allocation? To prevent expensive exports due to increase in prices Slowdown in trade activity leading to a destruction of

the non-oil sector Dissipation of oil resources due to corruption To curb inflation

The allocations to the Stabilisation and Heritage Funds are up for review in 2014 (Sec 23(2) of PRMA).

GNPC Entitlement

Revenue due from the direct or indirect participation of the Republic in petroleum operations, is paid into the Petroleum Holding Fund,

Only after cash or the equivalent barrels of oil is ceded to the GNPC (Sec 7(3) of PRMA)

It is not clear why this ceding to the GNPC before payment into Petroleum Holding Fund

Non Collaterisation of Petroleum Holding Fund

The amount in the Petroleum Holding Fund earmarked for transfers into the Ghana Petroleum Fund may not be used to provide credit to any person or entity as collateral for debts, guarantees, commitments

or other liabilities of any entity.(PRMA, section 5(1).

The Annual Budget Funding Amount may be used as collateral for debts and other liabilities of Government for a period of not more than 10 years after the commencement of the PRMA.(Sec 18(7) of the PRMA).

Security Interests over Oil and Oil Revenue

PRMA makes it impossible for lenders to get a direct security over the oil or the oil revenue.

Fixed and floating charges have to be created on collection accounts and debt service reserve accounts into which petroleum revenue will be paid after it has passed through the Petroleum Holding Fund, the Consolidated Fund.

Lenders are not comfortable with this but that is the position Palliative: offtake agreements that provide for delivery of

oil to designated offtaker;

Environmental Issues

Environmental legal framework for oil industry– Imminent enactment of Marine Pollution Act

promises specific detailed regime for marine pollution

– Handling of Kosmos spill of 600bbl demonstrated unpreparedness of existing environmental institutions to handle marine pollution issues.– Ministry of Environment, Science & Technology;

Environmental Protections Agency.