When Ghana discovered oil and gas in commercial quantities, many concerns were raised about what the share of government will be and how these oil revenues will improve the lives of citizens. Especially after the government represented by Ghana National Petroleum Corporation (GNPC) and other stakeholders have signed various agreements and awarded contracts to oil producing companies like Tullow, ENI and Kosmos energy among others. It is therefore imperative for us to understand the procedures in which government collect resource rent. 

The main aim of every host country is to maximize the size of its economic rent and to maximize the social welfare of its citizens (Stevens and Mitchell 2008), in other words, obtain a sizable share of the cake (Sunnevag 2000). 

There are various mechanisms that the country can use to collect economic rent, the most common methods are the use of auctions for the awards of licences and leases and other fiscal devices like taxes(Kemp 2016). 

Economic Rent

This can be categorized under two main types; anticipated economic rent and realized economic rent. The anticipated rent in simple terms is the revenue that the government collects from international oil companies (IOCs) even before the oil exploration commences. Auctions are therefore the mechanism that is targeted to collect these anticipated economic rent, they reflect the value that investor places on the oil resource (Sen and Chakravarty 2013, Sunnevag (2000). Realized rent on the other hand is revenue that the government collects after oil production commences. 

 Auctions are quiet favourable because they serve two key functions; not only do they help the government allocate the oil resource to the preferred bidder but they also serve as a resource rent taxation tool (Sunnevag 2000)i.e. they ensure early lump sum revenues to the state (Kemp 2016)

Uncertainties in Petroleum Exploration

There are so many uncertainties surrounding petroleum exploitation, the most important being 

• Chance of discovery

• Oil price

• Investment and operating cost

• Oil prices (Kemp 2016)

As a result of these uncertainties the amounts of revenues received by the government through the auction system may either be underestimated or overestimated depending on the direction in which these uncertainties go. In economic terms the anticipated economic rent may differ from the realised rent. For example, if government signs a contract with an IOC at the time when oil prices are low and after production commence oil prices shoot up, then the anticipated rent will be significantly lower than the realised rent. To make this clearer if we assume government signed a contract with an IOC in the 2002 when price averaged $24 per barrel and we assume it took the investor 6 years of exploration before oil production commenced in 2008 where oil price averaged of $99.57 a barrel (EIA 2016), all other factors held constant, then clearly government would have collected lower revenues than it should have. In other words, the Expected Monetary Value will be lower than the Net Present Value. Government will therefore have to resort to different methods to augment the size of its economic rent through the use of various forms of taxes such as income tax, royalty, production tax and other special taxes.

Author: Dei-tutu Dennis Newton

Energy Economist

0246912550 d.deitutu1@gmail.com

REFERENCES

Energy Information Administration(2016)Spot Prices for Crude Oil and Petroleum Products

Kemp, A. (2016) Economic rents and the collection to the state. University of Aberdeen.

Stevens P. and Mitchell J. (2008) Resource Depletion, Dependence and Development: Can theory help?. Chatham House, London

Sunnevag K. J. (2000) Designing auctions for offshore petroleum lease allocation. Resources policy, Foundation for Research in Economics and Business Administration, Norway

Sen A. and Chakravarty T. (2013).  Auctions for Oil and Gas Exploration Leases in India: An Empirical Analysis. Oxford Institute for Energy Studies OIES Paper: SP 30

 

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