Ghana's oil find: an unmitigated solution to the quagmire of poverty?

Author:Mahama, Patrick Y.
Position:Essay
 
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Introduction

Africa's 57 countries, as it stands currently, are endowed with both renewable (water, land, forest, fish) and non-renewable (minerals, metals, oil) natural resources that may be discovered, undiscovered, or barely harnessed. The continent contains more than half the world's resources of cobalt, manganese, and gold as well as significant supplies of platinum, uranium, and oil. An estimated $1 trillion of minerals, metals, and oil were extracted in 2008, with commodity exports accounting for 38 percent of the continent's GDP (Forstater et al. 2010).

Hence, natural resources can contribute to economic growth, employment, and fiscal revenue. They are often a major source of national income, but they are also, if mismanaged or shared unfairly, a major cause of conflict and instability (Collier and Hoeffler 2002; Auty 2001a; b). Countries with weak institutions often struggle to handle the potentially destructive force of corruption and inequality in the distribution of natural resource wealth, and efforts by various actors to capture the wealth generated by the natural resources. The governance of natural resources is especially important in the context of divided societies, because control over the benefits from local natural resources is often a chief motivator of ethnic or identity-based conflict (Lesourne and William 2009; Custers and Matthysen 2009). Many resource-rich and resource-dependent African countries are characterized by disappointing growth rates, high inequality, widespread impoverishment, bad governance, and an increased risk of civil violence (Collier 2007; Dunning 2008; Mildner et al. 2011). The challenges posed by managing natural resources have been characterized as the "natural resource curse" or "paradox of plenty" (Auty 1993; Humphreys et al. 2007; UNDP 2011).

Nevertheless, the experiences of countries such as Norway, Botswana, Thailand, and Malaysia give hope that the natural resource curse can be avoided if there are strong institutions as well as strategic policies to govern the sector. Also, given the extensive opportunities that the country has to learn from the broad experiences of oil-rich economies, there is ample opportunity to derive significant benefits from the discovery.

This however, is contrary to other held views that institutions in Africa are too weak to manage properly the significant and varied interests that evolve from the development of an oil industry or any extractive industry. Numerous poor examples have often been cited to support these views, and the most recurring ones being the situations in Nigeria, Cameroon and Gabon. Thus, the history of natural resource exploitation and management in Africa is certainly not a very positive. Besides, Ghana's own history with the extractive industries is quite contentious and which has led to debates about whether Ghana will be able to effectively apply the revenue from various extractive industries to finance its development agenda. This obviously, remains a question to be addressed properly with good research. This is especially so in view of the considerable deterioration in prominent mining communities such as Obuasi, a town in southern part of the Ashanti region, Prestea, is a town in the Western region in southwest, and Bogosu, is a small mining town in the Western region of Ghana, to mention but a few. These are often referred to as the mining curse. And specifically, oil discovery has been of economic benefit to the most developed countries while it has brought a curse to the economies of most developing countries, with the difference seen in the managerial principles adopted among these two categories of countries.

The generally acclaimed managerial principles of oil wealth and macroeconomic principles concerning fiscal management and exchange rate policy should ensure airness and equity in oil wealth distribution wherein the inequalities that occur mostly is in oil-rich nations via multinational oil companies, which comprise of an auction design and bidder preference that involve oil management laws, the setting of accounts for oil revenue, transparency, accountability and, the oversight and control of oil revenue.

When these key principles are ignored, oil-rich countries could suffer from: environmental destructions, Dutch disease syndrome (shrinking other sectors of the economy), poverty, inequalities and unemployment, ineffective rule of law, attitude of rent-seeking, greater risk of conflicts and war that can cascade into a serious threat to democracy.

The question of whether Ghana is properly positioned to manage the new oil boom remains topical both on the policy front and in public discourse. In the main, we seek to address: (i) what specific policy measures and legislative instruments are required to engender transparency and accountability in the application of oil revenues?; (ii) what could be a reasonable expectation about the likely benefits of the oil discovery to the public, particularly in the context of poverty reduction and sustained local development, (iii) how do we manage oil revenue to address the issue of inequality?; (iv) how do we manage the likely environmental effects with its potential effects of widening the inequality gap?; and, (v) how do we manage the windfall to avoid potential 'Dutch Disease effects?

Oil Exploration in Ghana

Ghana started the exploration and production of oil and gas in 1896. However, it is known that Signal & Amaco Group made the first commercial discovery in 1970. This was at Saltpond in the central region of Ghana. The recoverable oil reserves were estimated at 4.9 million barrels. The production at this field began in 1978 by Agri-Petco, producing a total of 4,800 barrels a day (modernghanaonline 2009). In 1985, when production decreased to 580 barrels per day, the field was eventually closed down. Production however resumed in the year 2000 at about 600 barrels per day (Ghana National Petroleum Corporation 2006). Active research on Ghana's oil began in the 1980"s by the Ghana National Petroleum Corporation (GNPC). The Ghana government, with the aim of owning the reserves when discovery were made, decided to fund the exploration. This approach by the government towards the exploration was not successful due to the high cost associated with the exploration.

In 2001, the government of Ghana decided to move away from the nation-centric approach to an all-inclusive approach, which served as an incentive for the participation of private bodies. The change in taxes and other levies on oil production during the second quarter of the year 2003 also led to the involvement of several major international oil and gas firms like Tullow, Kosmos and Gasop. With the involvement of private interest groups alongside a re-equipped GNPC, both Kosmos and Tullow made new discoveries of oil and gas in commercial quantities in what is known as the Jubilee field. This field has a reserves of about 800 million barrels of light crude oil with an upside potential of about 3 billion barrels (Commerce Ghana 2010). And thus, other discoveries have since been made and are yet to be developed.

Ever since oil was discovered in large quantities, there have been several suggestions on how the government should use the oil and gas resources of the country for the greater economic benefits of its citizens. Many stakeholders including politicians, journalists and economic experts have added their opinions on how the oil rents must be utilized to achieve greater economic prosperity for the country. It is in this light that the subject of "oil discovery: a blessing or a curse" has been an important and major debating point across the length and breadth of the country.

Oil discovery obviously brings enormous excitement and anxiety to the citizens of those nations with the hope of greater economic transformation. In Ghana, oil discovery can affect its economy either positively or negatively, and of course, this depends on the managerial principles and models that would be deployed in the exploration process and in the management of the oil rents for the total benefit of every individual in the society. Thus, it is essential that the necessary conducive managerial settings are in place to ensure that the positive effects are maximized, whereas the negative effects are minimized.

And although there is uncertainty involved in oil discovery, it is important to note that large oil revenue (compared to the size of the economy) will have a significant impact as new oil rents flows with a significant increase in existing ones that can transform an economy for better or worse, as usually expectations are high as disappointment often follows. However, certainly, oil revenue has the potential to make an economy better-off although it also produces large risks that the potential benefits will not fully be realized or indeed, that it may make an economy worse-off than before (Najman, Pomfret & Raballand 2008).

Natural Resources Governance in Africa

The natural resources sector's value chain consists of five stages (Humphreys et al. 2007; Dunning 2008): These are award of Contracts, Monitoring of Operations, Collection of Taxes and Royalties, Distribution of Revenue and Utilization in Sustainable Projects.

The chain is governed by laws and regulations to ensure maximum efficiency...

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