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BY Dominic Hlordzi
Forecasting the unknown is not a joke. Yes! Our Minister of Finance and the Independent Benchmark Revenue Certifier are not clairvoyants to see into the future to know exactly how oil prices will behave. If they were Ghana’s benchmark revenue arithmetic will always be accurate and the “deviation curve” from the actual outturns wouldn’t be a bother.
It is in light of this unpredictability that the framers of the Petroleum Revenue Management Act, PRMA (ACT815) 2011 with an eye on practices elsewhere regarding bench-marking oil revenues threaded in the law, a formula for the calculation of the expected revenue from Petroleum operations. This formula according to some watchers of the sector has not produced satisfactory results as the gap between benchmark revenue and the actual revenue that is realized at the end of any fiscal year leaves much to be desired. The situation results in inconsistent transfers into the Ghana Petroleum Fund and the Annual Budget Funding Amount.
To this end, Government through the Minister of Finance, Seth Terkper has laid before Parliament the Petroleum Revenue Management Amendment Bill 2015. This Bill seeks among other modifications to amend the Benchmark Revenue rules and further cloth the Finance Minister with “more discretionary powers.”
“Clause 7 of the Petroleum Revenue Management Amendment Bill 2015 seeks to amend section 17 of Act 815 to mandate the Minister of Finance to recommend to Parliament a revision of the benchmark revenue where it becomes evident that unexpected petroleum prices movement or production conditions have resulted or are likely to result in a gross over projection or under projection of the benchmark revenue.”
Is this move not too discretionary? Parliament described by some as a “rubber stamp” of the Executive is unlikely to object to recommendations from the Finance Minister for the revision of the benchmark revenue.
How many times within one financial year can this proposed revision be done if oil prices movement or production conditions throw-up various scenarios within each quarter of the year, giving the volatile nature of oil prices?
Is there any merit in calling for the amendment of the current Benchmark revenue regime? A big No!! from a policy think tank, Africa Centre for Energy Policy.
Reflecting on the Minister of Finance’s Statement to Parliament in March on the Effect of Oil Price Fall on Ghana’s Budget, the Director of Operation at the Africa Centre for Energy Policy, (ACEP) Benjamin Boakye unequivocally noted that “the Minister has no Mandate to review certified projection of petroleum revenues”. Projected petroleum revenues for the 2015 fiscal year were put at GH¢4.2 billion based on crude oil price of $99.33 per barrel and production volume of 102,033 barrels per day. However, in his statement, the Minister revised the revenue projections to GH¢1.5 billion based on average crude oil price of $50 per barrel. This according to the Minister implies that there would be a shortfall of GH¢2.7 billion on petroleum revenue projections.
According to Mr. Boakye what the Minister sought to do in the view of ACEP was to make a case for the proposed PRMA amendment Bill before Parliament to allow him the discretion to revise the benchmark revenue when crude oil prices fall relative to the estimated price for the year. The Minister at the moment does not have the power to do that. He asserted.
“The Minister cannot revise petroleum revenues (or Benchmark Revenue) projected from 1st September which was certified by an independent certifier when market prices change. Rather, in the event of a fall in market price relative to the moving average based price, the Minister can draw from the GSF to smoothen spending.” He explained.
“We do not support any amendment that allows the Minister the discretion to revise the projection of petroleum revenues (Benchmark Revenue) when crude oil prices fall. There is no problem with the law on the pricing regime as well as on the comprehensive buffer provided for smoothing expenditure. Rather the problem is with the arbitrary and discretionary determination of a lower cap by the Minister. Therefore the proposal to amend the PRMA and allow the Minister the discretion to revise the benchmark revenue should not be granted by Parliament.”
Making reference to two reports by the Public Interest and Accountability Committee (PIAC), the Minister of Petroleum, Emmanuel Kofi Armah Buah reiterated the technical gaps in the implementation of the Petroleum Revenue Management Act PRMA.
He noted “Calculating benchmark revenue has been challenging due to production uncertainties and weaknesses in the Petroleum Revenue Management Act (PRMA). Overestimating benchmark revenues, in turn, has led to over-allocation of oil revenues to the current budget and under funding of the Stabilization and Heritage funds”. Hence, the need to tinker with the Act. He seems to be suggesting.
The Public Interest and Accountability Committee has in its reports also expressed concern about the discrepancy between projected benchmark revenue and the actual amount that is normally realized and urged the Ministry of Finance and other institutions which provide input to the estimation of the benchmark revenue to make every effort to improve the outcome of the revenue projections. PIAC also supports the review of the formula to provide more robust and reliable estimates.
Many have questioned the appropriateness or unwarranted haste in seeking amendment to the existing section in the Act that deals with the benchmark revenue. They wondered if the amendment will weaken or strengthen the rules of the PRMA. Basically, is the rationale behind calling for the amendment justifiable?
To Mark Evans, Africa Economic Analyst with the Natural Resource Governance Institute, “the amendment of most concern is a change that allows revisions to the “benchmark revenue” figure when the Minister of Finance deems there has been a ‘”gross over-projection or under-projection”. In practice this means that the government can alter the spending and saving strategy in a given year, weakening the rules in the PRMA. From experience we know escape clauses such as these must be clearly defined and restricted in law to rare instances. The Africa Economic Analyst observed that the proposed amendment does not do this.
“While this amendment might help the government to manage the current fall in oil prices, it is a decision to ease short-term problems that poses a significant risk to the long-term integrity of the rules. If revenues come in higher than budgeted, the spirit of the PRMA was not to give some flexibility to spend the excess revenues, it was to ensure these are saved for the future. This amendment undermines that objective.”
He said although there may be a case for a review of the framework if oil prices remain low, this should be carried out with much greater consultation than we’ve seen thus far with the amendments on the fiscal rules. “The fear is that these changes are being rushed through to manage short-term problems and will ultimately undermine Ghana’s efforts at managing “resource curse” challenges”.
Mr. Evans however noted that many of the amendments are important and reflect the government’s efforts to deal with longstanding problems; however there are some areas for concern.
Some analysts have also posited that regional spot price should rather be used as appropriate reference oil pricing instead of the present calculations that are undermining the accuracy in revenue forecast and capture from the oil sector.
Benchmark revenue Mathematics
In Section 17, the first schedule of the Act says the Annual Benchmark revenue from petroleum operations shall be calculated on the basis of the actual and expected average unit price for crude and natural gas derived from a seven year moving average, the seven years being the four years immediately prior to the current financial year, the current financial year itself, and two years immediately following the current financial year.
Per the ACT Benchmark Revenue=Expected current receipt from oil +Expected Gas royalties +Expected dividend from the National Oil Company.
Petroleum revenue as described by the law comprises (a)royalty in cash or in equivalent barrels of oil or equivalent units of gas payable by a licensed producer including the National Oil Company or a company under Production Sharing Agreement or other agreements, (b) Corporate Income Taxes payable by licensed upstream and midstream operators, (c) Participating Interest, (d) Additional oil entitlements, (e) dividend from the National Oil Company for government equity interest, (f) the investment income derived from accumulated petroleum funds, (g )surface rentals paid by licensed producers or (h)any other revenue determined by the Minister to constitute petroleum revenue derived from upstream and midstream petroleum operations.”
Parts of 2014 and the first half of the 2015 have been one of the most distressing periods in the oil industry. Some oil producing countries observed in astonishment as analysts were caught unaware by the abrupt drop in crude oil prices on the world market. The black gold which sold for US$115 a barrel in July last year had tumbled to about US$48 in April this year.
This is chiefly as a result of an over-supply of the product in the market as Saudi Arabia increased production and the Organization of Oil Producing Countries’, OPEC refusal to cut production to lift the price. Also innovative oil production methods known as ‘fracking’ are been operated in the United States leading to more supply than demand on the international market. This is forcing oil producing countries to take a second look at their revenue projections for the year.
Yes! many have argued the need for the ACT to be refined by the lawmakers to enhance best practices, efficient and judicious management of the oil and gas resources but the question is, will tinkering with section 17 of Act 815 yield the desired results.
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