OIL DISCOVERY IN GHANA (A Blessing or a Curse)

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ABSTRACT

Oil discovery has been of economic benefit to most developed countries while it has brought curse to the economies of most developing countries. The difference, upon investigation in this thesis, was of the managerial principles adopted among these two categories of countries. The generally acclaimed managerial principles of oil wealth are investigated in these crucial areas: Macroeconomic, which was made up of fiscal management and exchange rate policy; second, ensuring fairness and equity in oil wealth distribution, that is dealing with inequalities that occur mostly in oil-rich nations; third, Dealing with multinational oil companies, which comprises of the type of auction design and bidder preference; fourth, Oil management laws, which also include setting account for oil revenue, transparency, accountability and, oversight and control of oil revenue.

When these key principles are ignored, oil-rich country 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, and nondemocratic state.

In the context of Ghana’s current economic status, certain key managerial principles are drawn from the generally accepted principles and also the experience of other resource-rich countries. There are two major macroeconomic challenges that Ghana faces. First, is how to deal with the characteristic frequently changing oil price and the volatility of its output and Second, is its recurrent fiscal imbalance. The former could be resolved through manipulating the oil revenue share to be deposited into the national budget and making investment with the remainder overseas. By establishing a permanent fund, where only the interest on that fund is transferred to the budget is necessary to deal with the latter problem.

Ghana also needs structural transformation. Agricultural productivity growth and diversification of the economy away from oil production. It means the country’s agricultural sector which accounts for greater percentage of its workforce should be strengthened and value-addition to the primary products which means heavy industrialization. However, Ghana should invest massively on public and merit goods which in turn will promote growth in the sectors mentioned above. The famous Dutch disease is of no essence if oil revenue is invested in public goods rather than consumption.

Good governance, transparency and accountability are of greater essence to Ghana in the proper management of its oil wealth. Drawing from Ghana’s experience with the mining industry, there was lack of transparency and favourable laws that served as incentives for rent-seeking behavior. Laws that mandate independent bodies to oversee the management of the oil rents and the public disclosure of information concerning all oil dealings among the oil companies and the government are paramount to the effective management of the oil rent. Ghana should also make its compliance to the EITI mandatory to help solve the transparency problem that has bedeviled its mining industry.

Lastly, environmental concerns are of equal greater importance to Ghana‟s economic growth. There should be environmental laws that would ensure that multinational oil companies comply with environmental regulations to prevent a major disaster to the environment. 


TABLE OF CONTENTS

1 Introduction

2 Theoretical framework

3 Literature review
4 Positive effects of Ghana‟s oil discovery
            4.1 Macro-economics
                        4.1.1 GDP increment
                        4.1.2 Foreign exchange availability
                        4.1.3 Fiscal expansion
            4.2 Micro-economics
                        4.2.1 Employment creation
                        4.2.2 Consumer spending

5 Negative effects of Ghana’s oil discovery
            5.1 Macro-economic impact
                        5.1.1 Dutch disease
                        5.1.2 Income volatility
                        5.1.3 Democracy threats
                        5.1.4 Environmental pollution

6 Ghana’s experience with the mining industry: Gold, bauxite and manganese
            6.1 Economic impact of mining in Ghana
                        6.1.1 A boom in mining activities
                        6.1.2 Underdevelopment
            6.2 Social impact of mining in Ghana
                        6.2.1 Health issues
                        6.2.2 Conflict issues
            6.3 Environmental impact of mining in Ghana
                        6.3.1 Water pollution
                        6.3.2 Land degradation

7 Countering the oil curse
            7.1 Handling the macroeconomics of the oil fortune
7.1.1 Oil wealth investments and savings
7.1.2 Exchange rate policy
7.2   Ensuring fairness and equity of oil wealth distribution
7.2.1 Oil income distribution
7.2.2 Fiscal social contract implementation
7.3   Dealing with oil companies
7.3.1 Auction process
7.3.2 Bidder preference
7.3.3 Auction design
7.4   Setting the oil revenue management law
7.4.1 Account establishment
7.4.2 Oversight and control
7.4.3 Transparency
7.4.4 Law sustenance
7.5   Countries experience with oil wealth management
7.5.1 Economic volatility reduction
7.5.2 Democratic prosperity
7.5.3 Inequality and conflict reduction
7.5.4 Transparency
7.6   Solution relevant to Ghana‟s state of the economy
7.6.1 Governance and transparency
7.6.2 Macro-economic policy
7.6.3 Structural transformation

8   Conclusion
References
Appendices
Appendix 1. Peaking in 2011-16, oil extraction could add US$1 Billion to Ghana‟s budget
Appendix 2. Sao Tome‟s oil fund
Appendix 3. Norway‟s oil fund


1    Introduction


Ghana started the exploration and production of oil and gas in 1896. However, it was known that Signal & Amaco Group made the first commercial discovery in 1970. This was at Saltpond in the central part of Ghana. The recoverable oil reserves were esti-mated at 4.9 million barrels. The production at this field began in 1978 by Agripetco, producing a total of 4,800 barrels each day (modernghanaonline 2009). In 1985, when production decreased to 580 barrels per day, the field was eventually closed down. Production however resumed in year 2000 and now produces about 600 barrels per day (Ghana National Petroleum Corporation 2006). Active research began in the 1980‟s by Ghana National Petroleum Corporation (GNPC). The Ghana government, with the aim of owning the reserves when discovery were made, decided to fund the explora-tion. 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 ap-proach to all inclusive approach which served as an incentive to participation of private bodies. The change in taxes and other levies on oil production during the second quar-ter of the year 2003 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, new discoveries of oil and gas in commercial quantities were made by both Kosmos and Tullow 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). Indeed 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, jour-nalists and economic experts have added their opinion on how the oil rents must be utilized to achieve greater economic prosperity for the country. It is in this light the subject ”oil discovery: a blessing or a curse” has been an important and major debat-ing point across the length and breadth of the country.

Oil discovery brings enormous excitement and anxiety to the citizens of those nations with the hope of greater economic transformation. The oil discovery can affects Gha-na‟s economy either positively or negatively. This depends on the managerial principles and models that would be deployed in the exploration process and the management of the oil rents for the total benefit of each individual in the society. It is therefore neces-sary to put in place conducive managerial settings to ensure that the positive effects are maximized whereas the negative effects are minimized.


This much is certain: large oil revenue (compared to the size of the economy) will have a significant impact. New oil rents flows, or a significant increase in existing ones, will transform an economy for better or worse. Usually expectations are high. Disappoint-ment often follows. Certainly, oil revenue has the potential to make an economy bet-ter-off but it also produces large risks that the potential benefits will not fully be rea-lized or indeed, that it may make an economy worse-off than before (Najman, Pomfret & Raballand 2007).


This thesis discusses the possibilities of oil as a blessing or a curse to Ghana‟s econo-my. To understand the subject matter, this thesis outlines the positive impact that is made up primarily of macro-economic effects and micro-economic effects that Ghana could experience due to the oil find. In addition, the thesis also discusses the negative impact that may occur if the oil resource is mismanaged. Furthermore, Ghana‟s expe-rience of management with the mining industry is discussed. Best practices for realiz-ing a sustainable economic growth and development as a result of the oil boom are the subject of the next chapter. Again, comparisons of practices in a developed country that has performed well and in a developing country that has done badly in the oil windfall managements are set as lessons for Ghana. Finally, recommendations based on Ghana‟s current economic situation are outlined.


2    Theoretical framework


The “paradox of plenty” is what most social scientists use to describe the “resource curse” that befalls many resource-rich economies. Nations with large deposit of natural resources, such as oil and gas most often perform worse with regards to economic development and good governance than do countries with fewer resources...

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