CONTRACTUAL AGREEMENTS IN GHANA’S OIL

AND GAS INDUSTRY: IN WHOSE INTEREST?

Kow Kwegya Amissah Abraham*

ABSTRACT
This article examines the history, nature, scope and policy ramifications of
the production sharing contract as the core contractual agreement guiding
the Ghanaian petroleum sector. It discusses the policy linkages between this
form of contractual agreement and the management of the country’s oil
exploration activities from 2010 to 2014. The article assesses the extent to
which Ghana, as a new oil exporting country, has sought to actualize its
resource benefits through negotiated contracts and agreements as well as
management policies. The article argues that better negotiated contractual
agreements ensure maximum State benefits from oil exploration. Again,
production monitoring, periodic evaluation and institutional capacity building
are effective ways of securing greater profits from oil resources. Finally, better
legal and policy frameworks will also guarantee prudent management of the
oil revenues.

Keywords: Contracts; policy-making; agreements; oil exploration and

production; Ghana.

DOI: https://dx.doi.org/10.4314/jsdlp.v8i2.9

1. INTRODUCTION
As a natural resource, oil, even in its untapped and unexplored form,
makes a country rich. But for its riches to translate to better human
living conditions, it has to be exploited, produced and sold for the
returns to be invested into the lives of the citizens of the country.1 The
higher demand for capital, technological know-how, human resource

* BA, MPhil (Ghana), MPP (Germany), Lecturer, University of Cape Coast, Cape
Coast, Ghana, and Executive Director, Centre for Policy Research and Training.
[email protected]
1 See Damilola Olawuyi, “The Increasing Relevance of Rights-Based Approaches
to Resource Governance in Africa: Shifting from Regional Aspiration to Local
Realization”(2015) 11(2), McGill International Journal Sustainable Development
Law & Policy, pp. 293, 319.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 187

and expertise in oil exploration have made it imperative for oil-rich

countries to enter into contractual agreements with private transnational
oil companies to explore such country’s oil resources. This is, indeed,
vital since it is the beginning of the extent to which a country will
benefit or lose in the exploration of its oil.
Generally, a government has three main options for exploiting its
natural resources. The first is to establish a state company with absolute
authority over oil exploration and production, as is the case in Saudi
Arabia, Oman, Iran, etc.2 The second is for the country to invite private
companies to explore and produce, as is done in countries like Canada,
the United States and the United Kingdom. The third option is to
combine the expertise available in public and private companies to
explore, develop and produce oil, as practised by states such as
Azerbaijan, Nigeria, Kazakhstan, etc.3 From these options, government
is expected to choose that which will enhance maximum benefit from
its natural resources. Apart from the option whereby a government
manages its own oil by taking absolute control of exploration and
production, the other the options demand a contractual agreement
between the government and the private oil corporations to determine
their various interests and relationships. Even more, the onus of
regulation is placed on the government since it has to monitor how
these private companies comply with their mutual agreements.
If, for instance, a particular government opts to invite private oil
companies into the industry, major contractual issues have to be raised
and settled in the ensuing agreements. Two ready examples are how
the cost of production is to be treated and how profits or rents are to
be divided between the government and the oil companies. The
enormous tasks involved in the oil business as well as the rigour of
translating these into performance indicators in the contract agreements
often reduce the government to an underdog in negotiation expertise.
This is so because the vast resource base of transnational oil companies
gives them the opportunity to hire top skilled professionals to negotiate
for best deals. In this regard, developing countries are often
disadvantaged. Again, the question of corruption plays an enormous
role in the disadvantage. Most oil contracts and agreements are

2 Jenik Radon, “How to Negotiate an Oil Agreement”, in M. Humphreys, J. D.

Sachs & J. E. Stiglitz (eds.), Escaping the Resource Curse (Columbia University
Press, New York, 2007), pp. 89-113.
3 ibid.
188 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

shrouded in secrecy, which makes it difficult to ascertain what actually

transpires.
The aim of this article is to examine the form and scope of
contractual agreements that Ghana entered into with the major oil
companies operating within it as at 2013. The objective is to ascertain
the extent to which these contracts benefit the country and potentially
contribute to obtaining sustainable income to quicken economic growth.
This position is motivated by the existing lacuna between resource
abundance and development, which has been explained within the
frameworks of the resource curse and paradox of the plenty theories.
The major attributable reason for the translational problem of resource
abundance and development has been corruption. This article, however,
takes a different dimension by examining what actually goes into the
contractual agreements and how the explorations are managed, using
Ghana as a case study.
This article is divided into four sections. After this introduction,
section 2 provides a detailed analysis of the contractual agreements
that are open to oil producing countries and the history behind these
agreements. The aim of the section is to explain why certain contractual
agreements are prevalent in particular regions of the world as well as
the factors that influence a country to adopt one contract instead of
another. Section 3 concentrates on Ghana’s contractual agreement. It
assesses the two major oil companies in the country and the contents
of the agreements they signed with the government. The objective is
to provide a good background for understanding what Ghana is getting
from its oil exploration. Section 4 is dedicated to examining the
management and legislative frameworks that regulate the whole oil
economy of Ghana. The aim is to assess possible missing links between
policy design and implementation, which has been the problem with
most developing oil-exporting economies. Section 5 is a reflective
analysis and policy proposal of what ought to be done in future
contractual agreements to ensure that Ghana gets maximum benefits
from its oil wealth. The section also proposes solutions to strengthen
the management frameworks to prevent occurrence of the resource
curse phenomenon that has bedevilled other oil-producing countries.

2. PETROLEUM CONTRACTS AND AGREEMENTS:

ORIGINS AND EXPOSÉ
Most African States take the option of entering into partnership
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 189

agreement with private oil companies to explore their oil resources.

Like other African states, Ghana has enormous economic problems,
infrastructural deficits and other priorities which make it incapable of
solely exploring its oil resources. 4 Indeed since 1896, Ghana has
employed the services of private transnational oil companies to explore
the possibility of producing oil in commercial quantities. It seemsby
default, therefore, that Ghana opted for an agreement which allowed
it to collaborate with transnational oil companies. This also demands
a contract negotiation and consequent signing with transnational oil
companies. To be sure, the four main types of contractual systems in
oil negotiation include Concession or License Agreement, Service
Contract or Agreement, Joint Venture Agreement, and Production-
Sharing Agreement.5 Thus, a country would have to first decide on the
type of contract it wants before actual negotiation begins
Concession or License Agreement, the oldest and most widely
practised contract system, has been in existence since the 19th century.
It was developed in the 1800s when the United States began to explore
oil.6 In the Concession Contract, a country grants exclusive rights to
private oil companies to explore, produce as well as market its oil
resources.7 This gives the oil companies exclusive rights over a long
period of time. Giving such rights follows many processes such as
competitive bidding, bonus signings, etc. It is important to note that
the basic principle of this contract is anchored on the concept of land
ownership in the United States. In that country, a landowner has
absolute right over what is on, beneath and above the surface of the
land. Thus, this agreement is seen more or less as granting a land
ownership to a private company over a period of time for a fee and
whatever the new owner finds beneath the surface of the land is
considered as part of his property. This conception has gone through
many modifications by other countries that have adopted it for use in

4 Morgan Bazilian, Ijeoma Onyeji, Peri-Khan Aqrawi, Benjamin K. Sovacool,

Emmanuel Ofori, Daniel M.Kammen, and Thijs Van de Graaf, “Oil, Energy Poverty
and Resource Dependence in West Africa” (2013), Journal of Energy & Natural
Resources Law, Vol. 1, No. 31, pp. 33-53.
5 Radon (n 2), pp. 89-113.
6 Tim Boykett, Marta Peirano, Simone Boria, Heather Kelley, Elisabeth Schimana,
Andreas Dekrout, Rachel OReilly, Oil Contracts: How to Read and Understand
Them (Austria: Times Up Press, 2012).
7 Michael Likosky,”Contracting and Regulatory Issues in the Oil and Gas and
Metallic Minerals Industries” (2009) 18 (1) Transnational Corporations 1.
190 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

the exploration of their oil resources. It explains why states such as

Sudan, Angola, Ecuador and so on are able to use it.8
Again, this contract grants certain rights to the state to benefit
from the initial concession payment, royalties and taxes from
transnational oil company. However, the transnational oil company
assumes all financial burdens in terms of exploration and production
costs. Thus, the host government is exonerated from any financial
burden and loss in the event that commercial reserves are not discovered
during the period of exploration. The downside, however, is that
governments and sometimes the oil companies themselves have no
adequate knowledge of how much oil is there to be explored and so,
most of the time, the agreement seems to be at the detriment of the
government. Again, a company has the right to negotiate the price to
bid for license. Since the transnational company determines the volume
of production it is often realized that the government ends up losing.
This happens especially when the compensation paid by companies
are not tied to the value of the resources.9 It should also be noted that
the contractual period given the company is normally a long lease. For
instance, according to the oil concession of 1934, Kuwait granted a
concession right to run for a period of 75 years.10
The second type of contract is the Joint Venture Agreement, which
is not as popular as other agreements in oil exploration. In a joint
venture agreement, the state works in partnership with the exploration
companies. In that case, the exploration and production rights are
awarded to the joint venture itself made up of the national oil company
and the international oil companies.11 This agreement allows for
substantial state participation even to the extent of sometimes holding
the majority stake.12 It thus means that the role of a national oil company
could be diverse. For instance, it could arrange credit facilities for loans
to be granted in the international market; it could also be the regulating
body or even hold the largest equity in the partnership. The agreement
could also demand that the government get the required expertise and
capacity to play a major role in the venture. Since parties ought to

8 Radon (n 2), pp. 89-113.

9 Likosky (n 7) 1.
10 Kirsten Bindemann, Production-Sharing Agreements: An Economic Analysis
(Oxford: Oxford Institute for Energy Studies, 1999).
11 Boykett et al (n 6) 18.
12 Likosky (n 7) 1.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 191

agree on any venture, the agreement again demands that the parties
understand themselves well. Parties also share risks in the venture and
this makes the host government potentially responsible for resource
extraction. Furthermore, this type of contract requires in-depth
negotiation and extensive coordination between the contracting parties.
Furthermore, there is the Production-Sharing Agreement, which was
introduced in Indonesia in 1966. The main motivation for this type of
agreement is attributed to the legacy of colonialism. After independence,
most colonized countries developed widespread resentment towards
foreign control of their national resources. To curb this growing hostility
and promote national interests, the Indonesian government reversed
the already existing concessionary agreements which gave foreign
companies absolute authority to explore, produce, manage and market
its natural resources. To maximize its oil benefits, therefore, a new
petroleum agreement had to be drawn up between the parties. Based
on this agreement, the state, as the owner of the natural resource, i.e.
oil, contracts foreign or transnational oil company to provide financial
and technical services for the exploration and production of oil.13
In this agreement, therefore, the state remains the custodian of
the oil resource and is represented by a national oil company. Through
this, the government has the option to partake in the exploration and
production in different forms. With this form of contract the
transnational oil company bears the absolute burden of exploration
risk. It receives no compensation whatsoever when there is no oil
discovery in commercial quantities. Again, this approach provides a
solution to the sovereignty issue since the resource is still owned by
the state anyway. This agreement has four components: (i) The
company pays royalty on gross production; (ii) It is entitled to a share
for production cost recovery; (iii) The rent or profit is shared among
the partners on agreed terms; and (iv) The company pays income tax
on its rent.14 Generally, the agreement rests ownership of the resource
in the state and then grants foreign companies the right to explore the
oil. This benefits the state in the long run, especially as all financial
risks are borne by the companies. However, governments’ loss will be
material ones given that the physical equipment for the production
belongs to the state.15 Moreover, the downside of this agreement rests

13 Bindemann (n 10) 142.

14 Ibid.
15 Radon (n 2) 100.
192 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

on the negotiating power between governments and its oil companies.

This is so because much premium is placed on professional negotiation
and government access to technical expertise.
Finally, there are Service Contracts, which have many similarities
with the Production Sharing Agreement. A Service Contract involves a
contractual agreement in which a government grants exploration and
production of its oil to a foreign oil company for a pre-determined fee
for a long-term period but remains the owner of the resource.16 The
drift towards service contract can be explained by higher sovereignty
concerns.17 The service contract differs from the production sharing
agreement with respect to fees. Here, the international oil company
agrees to a pre-determined fee in lieu of the profits to be earned.18
Although the service contract gives greater control of natural resource
to the state, it has its own downsides. For example, it demands that
states have strong institutions and monitoring framework. Also, they
should have adequate expertise to better manage the resources. Thus
the service contract places the onus of risk on the state since it has
contracted only the services of a foreign oil company.

3. AGREEMENTS AND CONTRACTS:

GHANA’S OPTIONS
Like many emerging oil exporters in Africa, Ghana opted for the
Production Sharing Agreement in order to receive greater benefits from
oil resource. To achieve this, the government operates through the
Ghana National Petroleum Corporation (GNPC), its state oil company.19
Through GNPC, the government enters into petroleum agreements with
the transnational oil companies. GNPC enters into negotiations with a
Model Petroleum Agreement which spells out the basic terms of
agreement.20 The agreed contract gives exclusive right to a foreign oil
company to engage in petroleum operations in a given contract area.

16 Abbas Ghandi and Cynthia Lin C-Y, “Oil and Gas Service Contracts around the
world: A Review” (2014) 3 Energy Strategy Reviews, pp. 63-71.
17 Tengku Machmud, The Indonesian Production Sharing Contract: An Investor’s
Perspective(Kluwer Law International 2000).
18 Ghandi and Lin (n 16), p. 65.
19 Ghana National Petroleum Corporation,” History and Exploration in Ghana”
(2014)<http://www.gnpcghana.com/overview.html>Accessed July 2014.
20 Ibid.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 193

According to the Model Petroleum Agreement Act (2000), the GNPC

participates in the management of petroleum operations through the
establishment of a Joint Management Committee with the foreign oil
company.21 In accordance with the agreement, the state or its subsidiary,
the GNPC, does not bear any financial risk in the event that oil is not
found in commercial quantity during exploration. Thus, the foreign oil
company absorbs the full cost of oil exploration. Additionally, the GNPC,
under the agreement, is to hold a 10 per cent initial interest in all
petroleum operations.22 This “carried interest” in oil exploration and
development becomes a “paid interest” during production. The 10 per
cent interest is subject to additional interest charges as determined by
GNPC but this would have to be tabled within six months. The
international oil company has to be reimbursed for all the expenditure
attributed to the additional interest from the period of commercial
discovery.23
This arrangement generally means that the contracting companies
cannot hold an interest of more than 90 per cent in exploration and
production operations. Concerning the period of exploration, it is not
be more than seven years with a possibility of two extensions, for
which the company has to apply in writing through the Minister of
Energy.24 After signing the agreement, the oil company also has a
maximum of 60 days to begin exploration. In the event of the discovery
of oil in commercial quantity, Article 8.1 of the Agreement states that
the contractor is supposed to notify, in writing, the Minister of Energy
and the GNPC within 30 days. 25 Again, Article 10 of the model
agreement is dedicated to the sharing of crude oil that will be produced
and further states that 12.5 per cent of the total production will be
considered as royalty to the state as stipulated by the Petroleum Law.26
The state, in this case Ghana, reserves the right to receive this either in
the form of crude oil or cash. The GNPC, which represents the state as
the national oil company, collects all petroleum monies due to the
state.

21 GNPC, Model Petroleum Agreement (2000) <http://www.eisourcebook.org/

cms/files/attachments/policy-legal-contractual-regulatory/Ghana%20-
%20Model%20Petroleum%20Agreement.pdf>Accessed April 2014.
22 Ibid.
23 Ibid.
24 Ibid.
25 Ibid.
26 Ibid.
194 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

The agreement further tasks the state and GNPC to supply crude
oil for local consumption. This has to be supplied from the state’s
entitlements under the agreement. In the event that this is not enough
for domestic consumption, the GNPC can purchase more crude from
its partner, the oil company in charge of exploration and development,
or other contractors to make up the shortfall. Article 16, on the other
hand, mandates the contractor to keep the GNPC informed of all
developments during exploration by sending periodic reports, data,
samples, and so forth, and treating all such information as confidential.27
Furthermore, the GNPC is to have the inspection and monitoring rights
to assess the offices, installations and structural facilities for audit in
consultation with the contractor. This is to ensure that the contractor
provides effective health and environmental safety systems, obeys labour
laws and all other regulations stipulated in the agreement as well as
the laws of the land. As the National Oil Company (NOC), the GNPC
becomes the sole owner of petroleum produced and recovered except
the state and contractor’s entitlements. It is also the owner of the
physical assets except those purchased and installed for use by the
contractor for which the full cost has not been recovered. Article 20,
stipulates that in the event of equipment purchase, the contractor is
obliged to consider local preference which also includes the provision
of services.28
The terms of the agreement did not leave out local contents in the
industry. In addition to employment, the contractor is mandated to
pay US$200,000 per annum to GNPC for the training of Ghanaian
personnel.29 This is to ensure effective technical and managerial skills
transfer and efficient conduct of petroleum operations. The contractor
is expected to consider this money as production cost. The contractor
is also expected to submit an employment plan showing the number
of persons and technical skills needed to GNPC and ensure that local
citizens are given the jobs. A job window is also to be created for
personnel nominated by GNPC to been rolled by the contractor either
for internship or on-the-job training. These opportunities will include
short, industry-related courses and continuing education, and the cost
of such training is regarded as part of the production cost. The life
span of the agreement is 30 years; however, there is the possibility of

27 Ibid.
28 Ibid.
29 Ibid.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 195

a contract renewal based on newly negotiated terms and agreements.30

The contract takes care of each contract area and the government is at
liberty to enter into agreements with more than one oil company in a
particular contract area. For instance, in the West Cape Three Points
(WCTP) contract area, government signed a contract with Kosmos and
E.O.Group. This sometimes makes negotiation complicated since each
party has different vested interests and negotiating capacity.
Government negotiates with these contractors as a joint operation
group to make the process easier to deal with.

3.1 Contractual Agreement: Deepwater Tano

The Deepwater Tano (DT) block is one of the most important oil contract
areas under current development and production. This is the area where
most of Ghana’s oil production comes from and it is also where the
Jubilee field, the Tweneboa field, and other newly discovered fields
are located. The contracting parties at Deepwater Tano are mostly Tullow
Oil, Kosmos Energy Sabre Oil and Gasand Anadarko. The negotiated
contract is a joint operating agreement between the various companies.
With the Model Petroleum Agreement as the basic guideline the
Deepwater Tano contract was not significantly different from the model
agreement.
According to the Petroleum Agreement (Deepwater Tano, 2006),
the exploration period in this contract area should not to be more
than six and a half years (78 months) and it is to be divided into two
periods. 31 First is the two and a half years (30 months) of initial
exploration period, which is further divided into one year and one and
a half years (18 months) sub-periods; and the second period which is
an extension period covering four years, split into two years each.32
Also, the GNPC makes all the documents and information concerning
the contract area available to the contractor upon request and gets
reimbursed for the cost of providing such information. For effective
project execution, therefore, the contractor should target a minimum
expenditure of US$2 million during the first phase of exploration and

30 Ibid.
31 Petroleum Agreement-Deepwater Tano “Files” (2006) <https://
www.tullowoil.com/Media/docs/default-source/5_sustainability/petroleum_
agreement_deepwater_tano.pdf?sfvrsn=4> Accessed September 2017.
32 Ibid.
196 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

US$20 million during the second phase.33 Article 6 of the contract

mandates the setting up of a Joint Management Committee to aid in
the smooth operation of petroleum operations with membership of
this management committee comprising four GNPC appointees and
four appointees of the oil company with the chairperson chosen by
GNPC.34 The management committee will meet at least twice a year
with not less than 20 days’ notice to members. The committee will
also establish technical, accounting or auditing sub-committees and
receive from the contractor an annual work programme and budget
proposal on the planned activities for the year.
Furthermore, Article 7 of the contract gives absolute responsibility
for the conduct of petroleum exploration to the contractor35 on the
condition that full and accurate records are submitted to the
government. In the event of the discovery of oil in commercial quantity,
the oil minister is to be informed within 30 days.36 Following the
discovery of oil, the contractor is required to prepare appraisals and
development plans, including estimates of capital and operational
expenditures, for the oil minister’s approval. The GNPC can also arrange
to appraise a discovery, but that is only when a contractor has not
shown adequate interest in appraising the discovery. In that case, the
GNPC will appraise the discovery on a sole cost basis and bear the risk
of expenditure. Furthermore, Article 10 stipulates the sharing of crude
oil among the parties and the entitlement of the state to a royalty of 5
percent of gross earnings from crude oil production as determined by
the Petroleum Law.37
Again, crude oil with an API gravity of 18o shall attract a royalty of
4 percent on gross production with the state being entitled to a gross
production royalty of 3 per cent on natural gas.38 The state reserves
the right to either receive the royalties in cash, based on the prevailing
market price, or crude oil to meet its local consumption while the rest
is sold off. After the deduction of the royalty, the rest of the crude is
shared in accordance with the interest holdings between GNPC and

33 Ibid.
34 Ibid.
35 Ibid.
36 Ministry of Energy and Petroleum, “License” (2013)<http://
www.energymin.gov.gh/sites/default/files/ghana_model_petroleum_
agreement%281%29.pdf
37 Petroleum Agreement-Deepwater Tano (n 31).
38 Ibid.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 197

the contractors concerned. The agreement further instructs that all

payments by the contractor to the state or GNPC, including income
tax, should be made in American dollars; ditto for all payments from
GNPC to the contractor – they must also be made in dollars and through
electronic transfer.39 Then, again, the state and GNPC have responsibility
for the domestic supply of crude oil. In the event that domestic supply
is inadequate, the state will pay the contractor and give him a three-
month notice to provide additional volumes of crude.

3.2 Contractual Agreement: West Cape Three Points

(WCTP)
The contract area during the agreement was operated by Kosmos Energy
and the E.O. Group who have now sold their stake in the contract area
to Tullow Oil.40 The agreement allows for an exploration period of seven
years structured into three years initial exploration period with a sub-
division of one and a half years each. Then there is the four years
extension of two years each.41
Exploration is to begin within 75 days after the signing of the
contract with a minimum budget of US$4 million for the initial
exploration period and US$8million for the second sub-period.42 Any
further extension will require a minimum of US$8 million budget and
a joint management committee made up of four members; two
appointed by the GNPC and two by the contractor.43 Here, again, the
committee will oversee petroleum operation in the contract area. Article
10 of the agreement indicates that the state will be entitled to a 7.5
per cent royalty on the gross production of oil, 5 per cent for crude oil
with API of 20o and another 5 per cent for gross natural gas production.44
This forms the bases of the contractual agreement at the two most
important contract areas in Ghana’s oil exploration. It should be
realized that the model agreement reflects in the main agreements

39 Ibid.
40 Kosmos Energy, “Operations” (2012) <http://www.kosmosenergy.com/
operations-ghana.php> accessed April 2014.
41 Petroleum Agreement - West Cape Three Points (2004) <https://
www.tullowoil.com/Media/docs/default-source/5_sustainability/
petroleum_agreement_west_cape_three_points.pdf?sfvrsn=4> Accessed
September 2017.
42 Ibid.
43 Ibid.
44 Ibid.
198 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

examined. These agreements determine how much Ghana is getting

from its oil exploration. Also important is the inclusion of local
preferences in terms of human resource, services and equipment needed
for exploration and production, even though Ghana does not have the
industrial and manufacturing capacity to produce the equipment. The
framework for the contract, the production sharing agreement, is
expected to positively impact on the relationship between government,
represented by the GNPC, and the international oil companies.

3.3 Regulatory and Management Policy

Readiness for oil exploration is not dependent only on infrastructure
and capital availability. It also depends or existing legislations, laws
and all regulatory instruments in the petroleum industry. The moment
Ghana began oil exploration, it became necessary to pass many laws
to monitor and regulate its oil exploration and production activities.
The same development also necessitated the establishment of regulative
and coordinating bodies in the oil sector. To effectively assess the extent
to which Ghana has gone in getting the best out of its oil exploration,
it is pertinent to examine the various legislative enactments and the
veracity of these instruments.
Petroleum legislation in Ghana encompasses both the upstream
and downstream sub-sectors of the industry. The downstream sub-sector,
which entails importation, refining, storage, transporting, distributing
and petroleum marketing, is dominated mainly by local companies.45
These companies concentrate mostly on the transportation and
distribution of oil. There is also the retail aspect, which has maximum
local content. Indeed, it is illegal for a non-Ghanaian to engage in
retail business in Ghana. Therefore, the commercial aspect of Ghana’s
downstream industry is predominately controlled by local companies.
Ghana’s economy is fully dependent on oil in terms of consumption.
In fact, crude oil consumption represents almost 70 per cent of the
energy needs in Ghana with consumption as at 2012 standing at
approximately 950,000 tons per annum.46 Tema oil refinery, in its current
capacity of 45,000 barrels, meets about 60 per cent of the domestic

45 Kimathi Kuenyehia Sr, Sefakor Kuenyehia and Augustine Kidisil, “Oil Regulation:
Ghana”, in B. P. (ed.), Law Business Research (Encompass Print Solutions, London
2011).
46 Ibid.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 199

demand for oil.47 The refinery has been facing serious financial problems
which have debarred it from reaching its refinery capacity for some
time now. Again, government’s commitment to increasing its refining
capacity to about 100,000 barrels has not been realized. The
entitlement of Ghana from the exploration is sold on the international
market by Vitol SA, which also has the contract to market Tullow’s
share of the oil production from the Jubilee field and Cirrus Oil Services,
a local company established in 2007 and licensed as a bulk oil
distributor.48
Laws such as the Ghana National Petroleum Corporation Law, 1983,
the National Petroleum Authority Act, 2005, and the Energy
Commission Act 541, 1997, regulate the activities of Ghana’s
downstream industry. 49 Act 541, which established the Energy
Commission, gives it the task of regulating and managing energy and
power (electricity) in Ghana.50 There is also room for advisory roles
whereby the Ministry of Energy and Petroleum receives suggestions on
how and what policies to make to achieve efficient and effective supply
of electricity and petroleum. The statute also empowers the Energy
Commission to grant licences to companies to transmit, make wholesale
supply of, distribute, market and store petroleum products.51 Act 691,
which established the National Petroleum Authority (NPA) bestows
on it the responsibility of overall regulation and monitoring of the
downstream petroleum industry.52 The NPA is also responsible for
petroleum price adjustments and review.
In the upstream industry, there are regulations that govern the
conduct of activities as far as oil exploration is concerned. The supreme
law that primarily governs all contracts relating to natural resources,
including oil, is the 1992 Constitution. In article 257 of the 1992

47 Ibid.
48 Petroleum Revenue Report, “Annual Report on Petroleum Funds” (2014)
<http://www.mofep.gov.gh/sites/default/files/news/2014%20Annual%
20Report%20on%20the%20Petroleum%20Funds.pdf> Accessed September
2017.
49 Robert Adjaye, “Ghana’s Oil Find: Technological Challenges for Upstream Skills
Development”(Accra 2009).
50 Energy Commission Act , 1997 (Act 541) <http://www.energycom.gov.gh/
files/ACT.pdf>Accessed April 2014.
51 Kimathi Kuenyehia Sr, Sefakor Kuenyehia and Augustine Kidisil (n 45), p. 79.
52 National Petroleum Authority Act , 2005.<http://www.eisourcebook.org/cms/
February%202016/Ghana%20National%20Petroleum%20Authority%20
Act%202005.pdf> Accessed September 2017.
200 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

Constitution of Ghana, every mineral beneath the surface of the land

demarcated within the territorial borders of Ghana, including the
continental shelf, belongs to the state and is vested in the President
on behalf of the people of Ghana.53 This constitutional provision makes
it clear that individuals may own lands in their private capacities
provided no natural resource such as metallic resource or extractive
resource can be found underneath them. All minerals found under such
privately held lands automatically revert to the President who exercises
authority over such resources on behalf of the people of Ghana.
This constitutional provision differs significantly from the basic
idea that underlies the concession agreement of the 1900s in which
landownership by private individuals included any resource beneath
or above the surface of the land. In this vein, it is the government who
can grant the right to explore any mineral in accordance with due
process. The Constitution again stipulates that any right given to foreign
companies to explore natural resource in Ghana requires a
parliamentary ratification.54 This means that the President or any
member of government cannot unilaterally give concession right to
anyone to exploit mineral resources without the approval of the
Parliament. This provision is meant to serve as a check and balance on
the authority of the Executive and thus prevent possible abuse of
authority or privilege either by the President or his appointees.
Again, there are other statutes that are used to regulate the
upstream industry. These are the Petroleum Revenue Management Act,
2011, the Petroleum Income Tax Law (PNDCL 188), 1987, the
Petroleum Exploration and Production Law (PNDCL 84), 1984, and
the Ghana National Petroleum Corporation Law (PNDCL 64), 1983.
These laws form the bases of the upstream legal framework in the
regulation and the conduct of petroleum operations. The Petroleum
Exploration and Production Act of 1984 reemphasises the ownership
of petroleum resources as a state asset and as a result creates the
contractual relationship that ought to take place between the state,
represented by GNPC and the transnational oil companies.55 The Law
also takes care of government entitlements in terms of royalties and

53 The 1992 Constitution of Ghana.

54 Ibid.
55 Petroleum Exploration and Production Act, 1984.<http://www.energymin.gov.
gh/sites/default/files/petroleum_exploration_and_production-law_1984
_pndc_law_84.pdf> Accessed September 2017.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 201

interests and also prescribed income tax system in the petroleum

operation.
The Ghana National Petroleum Corporation Law (PNDC 64), 1983,
is also the law that establishes the Ghana National Petroleum
Corporation (GNPC).56 The GNPC is generally in charge of exploration,
development and production of oil. Since its establishment, it has
collaborated with many international companies on oil exploration
activities. It should be noted also that as, the national oil company,
GNPC manages the state’s interest in the exploration and production
of oil. The Petroleum Income Tax Act, 1984, sets out the law governing
the tax system in the upstream petroleum industry.57 Through this law,
the incomes to be taxed and the percentage of taxation are all spelt
out. Hence, this law regulates the tax monitoring aspect of oil
exploration and production. There is also the Petroleum Revenue
Management Act, 2011, which provides the framework for how
petroleum revenue will be used.58 Reflectively, the regulatory framework
goes a long way in ensuring efficiency in the management of oil
exploration in Ghana. The problem, however, is the extent of its
applicability. To be sure that these regulations are complied with, there
are monitoring mechanisms and established bodies mandated to enforce
due compliance. Thus, there also are monitoring bodies put in place to
manage the exploration and production industry.
Extractive activities have been seen to adversely affect the local
communities where the exploration is done. Thus exploration has
associated institutional, financial, health, environmental and political
impacts that could be detrimental to growth. There are examples of
many resource-rich countries that mortgaged their sustainable
development mainly because they negotiated a bad deal in the
exploration of their natural resources. Even more relatable is the virtual
non-existence of effective regulatory frameworks and efficient
management strategies to better govern the exploration operations.
Effective management of petroleum resources is daunting and
requires a lot of factors and ground rules. This explains why most oil-
exporting countries in Africa seem susceptible to policy failure. Since
oil exploration is capital intensive and technology driven, it has always
demanded extensive skill, knowledge and the technological

56 Ghana National Petroleum Corporation Act.

57 Petroleum Income Tax Law 1987.
58 Petroleum Revenue Management Act.
202 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

advancement to execute. Therefore, states that wish to explore their

oil resources must be adequately prepared in terms of capital and the
technological know-how. Again, oil resource exploration demands cruise
interplay between economics and politics. The successes and failures
of fully maximizing the rents accruing from mineral exploration are
more political than economic. This begins with the negotiated
agreements and contracts. Many oil rich countries in Africa go through
various difficult times during the oil negotiation stage. Anecdotal
evidence shows that it is, indeed, a period of underground activities
such as corruption, patronage and kick-backs. However, because these
are done under the table, it is difficult to determine their prevalence
beyond reliance on perception based methods.

4. POLICY DIRECTION AND RECOMMENDATIONS

Much premium has always been placed on how resource-rich countries
that are experiencing stagnant growth have failed to make use of their
accrued revenues for accelerated development. Many reasons have been
adduced for this phenomenon, such as corruption, whereby realized
revenues do not reach the public purse. Others include lack of proper
prioritizing by these governments and excessive spending. The real
causes for the so-called resource curse are, however, composite; even
more contributory is the existing non-transparency and inequity in the
negotiating and signing of contract agreements between states and
transnational oil companies. Many agreements entered into with
transnational oil companies for exploration, development and
production rights seem to be terrible agreements, with the State always
being at the losing end. For instance, the Zambian government
negotiated for a royalty of 0.61 per cent in the mining of its copper at
the Konkola Mines out of a total income of US$1 billion.59 Thus,
negotiated agreements play an enormous role in the management of
natural resources. This is not to say that a country ought to surcharge
in the exploration operation, but that there has to be equitable
percentage negotiations.
Ghana has been mining gold for over 40 years and has continued
to receive a royalty of 3 per cent on until 2011 when it was increased

59 Oxfam International, “Lifting the resource curse” (2009) www.oxfam.org: http:/

/www.oxfam.org/sites/www.oxfam.org/files/bp134-lifting-the-resource-curse-
011209.pdf. Accessed April 2014.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 203

to5 per cent after many years of failed attempts to review it.60 In the
case of oil exploration Ghana’s negotiations has been guided by the
model agreement, which spells out the various percentages due the
State. For instance, the agreement stipulates a threshold of 121/2 per
cent of royalty. However, in the Deepwater Tano agreement where
Jubilee field is located, Ghana was able to negotiate up to 5 per cent of
royalty. This was less compared to West Cape Three Points contract
area where it negotiated 71/2 per cent of royalty.
It is important to note that royalty and carried interest account for
a greater part of accrued revenue to the State. Therefore, if a country
fails to negotiate well, it will inevitably suffer revenue inadequacy
despite nature’s generosity to it. As a common practice, negotiating
countries are made to understand that profit increases for both the
government and the transnational oil companies when royalties are
low. The argument thus advanced is that since government will
ultimately collect rent and corporate tax it would fill the royalty gap.
Experience has shown that this is not necessarily the case, especially
when government cannot rely on transnational oil companies to always
pay their taxes. For instance, in the 2011 and 2012 financial years, oil
companies did not pay their corporate tax, and this affected the
budgeted income of government with a negative variance of US$232.10
million in 2012 alone.61 Thus it is always necessary for the government
to sharpen its negotiating skills and aim for the best deal possible.
Moreover, it should be noted that the transnational oil companies
are big industry players that are sometimes bigger than some of the
countries they negotiate with in terms of capital. It thus places them
at an advantage on the negotiation table. This is because they can
afford the best skilled negotiators and technocrats in order to have the
best deal. In Ghana, the policy of winner-takes-all in elections where
the party that wins elections absolutely forms government and controls
everything without any opposition involvement has made every issue
be deeply politicized. Thus, appointments into critical areas of
governance and the economy, including the Chief Director of the
National Oil Company, GNPC, are reserved for political associates
instead of qualified and experienced technocrats. This gives the room

60 KPMG, “Ghana: Country Mining Guide”(2014).<https://assets.kpmg.com/

content/dam/kpmg/pdf/2014/04/ghana-mining-guide.pdf> Accessed
September 2017.
61 Petroleum Revenue Report (n 48).
204 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

for patronage, favouritism and nepotism. Given this scenario, it is

difficult for a Minister of Energy and Petroleum who is inexperienced
in energy and petroleum matters to fully engage in any technocratic
negotiations that will lead to a good deal for the country. Of course,
these appointees have experienced technocrats working with them in
various supportive capacities but as long as the final decision lies in
the hands of political appointees who are not merit-driven, experienced
or patriotic, negotiating for a great deal would easily be thwarted.

4.1 Management and Regulation: Policy Analysis

The existing relationships between States and transnational oil
corporations have always been murky, and this makes it difficult for
policy analysts and scholars to propose better alternatives to improve
their relationships. This is so because petroleum operations are always
interwoven with the political order of the State. This is not to say that
there are transnational oil companies doing politics in these States.
Rather, since it is the political authority that can give rights to explore
and it is the transnational oil companies that can explore and produce
to improve the revenue profile of the country, their relationship
becomes a bit more complicated.
Political regimes will always want to be in power even though the
mechanisms they employ to hold onto power differs – ranging from
legitimate elections to high handedness. If it is through legitimate
elections, it means that they will always need additional revenues to
increase spending and expand public projects to maintain their hold
on political power. If it is through high handedness, they will still need
additional income to consolidate their hold to power through patronage
and clientilism. Transnational oil companies are also a business and,
thus, for profit. This means that they look for avenues to increase their
profit margins. Since oil exploration is a capital-intensive venture,
transnational companies are always willing to invest in a country that
gives them less investment risk, and a reliable political regime that
will relax rules that can potentially strangulate investment
opportunities. Again, because these companies compete with other
transnational companies, they are always willing to offer the best deals
to governments, sometimes through the back door, for exploration
and production rights. This makes their partnership with governments
something of a mutual interest.
Opting for petroleum-sharing agreement calls for improved
relationship between the government and the oil companies. However,
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 205

unlike a joint venture where every decision has to be taken on the

basis of a compromise, existing relationship is more of regulatory than
partnership it is always difficult to ascertain the nature of a previous
relationship between a government and a foreign company prior to
commercial production. This confirmation would have been vital to
any reasonable assessmentin case any patronage took place that might
have affected the terms of the signed contracts. In Ghana, an evidence
of a prior relationship only came to light when Kosmos Energy, a United
States company, was accused by Anadarko, another United States
company, of bribing government officials to secure contracts.62 We note
that government’s relationship with transnational companies is vital
as far as contract negotiation and petroleum production is concerned.
Since pre-existing relationships which normally affect contracts have
enabling circumstances for secrecy, we dwell on existing relationships
in the production period. As earlier described, the existing relationship
between the State, that is Ghana, and the transnational oil companies
is more regulatory and managerial. Regarding the production-sharing
agreement, Ghana still exercises sovereign rights over its resources;
hence it has the responsibility to ensure that petroleum operation is
done within the stipulated laws and regulations.63 In this regard, there
have been many regulatory frameworks to guide the petroleum
operations. There are also established bodies to ensure that these
regulations are complied with. Thus, as far as the various instruments
are concerned, exploration operations are duly regulated. The problem,
however, is that the institutions tasked with ensuring compliance are
not always as efficient as people assume. For instance, the adverse
effect of gold mining on the environment, especially on water bodies,
farm lands, etc., as a result of the surface mining which has taken away
the subsistence livelihood of the mining communities and the
inadequate response from the Environmental Protection Agency is an
evidence of how weak some of these institutions have been. Given
that petroleum operations are currently offshore, the Agency does not
have the required human and structural capacity to effectively ensure

62 David Wethe and Jason McLure, “U.S. Closes Inquiry as Ghana Probes Alleged
Bribery at Jubilee”Bloomberg (2 September 2010)<http://www.bloomberg.com/
news/articles/2010-09-02/u-s-closes-inquiry-as-ghana-probes-alleged-bribery-
at-jubilee-oil-field>
63 Ransford Gyampo, “Saving Ghana from its Oil: A Critical Assessment of
Preparations so Far Made” (2010) 3 African Research Review 4 .
206 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

compliance with international and national environmental laws.

Also, institutions established to check transnational companies’
respect for labour laws in terms of salaries and conditions of service
are not sufficiently proactive. Take example of the newly established
Petroleum Commission. This is an institution that seems ill equipped
with human and funding capabilities to adequately regulate and oversee
the general health of the petroleum industry. The legislative arm of
government appears even worse. The Parliament is so polarized that
every issue, including developmental issues and regulatory duties, are
politicized between the majority and minority divide. Consensus is
mostly reached only on issues that affect the Parliament itself; the rest
are subjected to hard party-line debates where the majority always
have their way, and the minority, their say. This has greatly affected
monitoring agencies.
The second dimension of the existing relationship is management
of the country’s petroleum industry. The petroleum contracts provide
for the compulsory establishment of a Joint Management Committee.
This Committee is made up of representatives of GNPC and the
transnational oil companies in the contracting area. The Committee
manages all operations of the fields, including annual budget approvals,
equipment assessments and purchases, etc. 64 Thus, the core
administrative duties concerning oil operations are vested in the hands
of the Committee. The establishment of the Committee is a laudable
idea in that it further forges a close and cordial relationship between
the contractors and the state. Since the State picks the chairman of the
Committee, it exercises a great deal of control over the operations of
the oil industry as a whole.
To date, there is no evidence that the Committee has become
dysfunctional, which in itself is a good omen. Also, since GNPC receives
40 per cent of the State’s carried interest,65 it is expected to use the
funds judiciously, including money allocated for capacity building. There
may be need to look more closely into how the committee uses money
allocated for capacity building. This is in view of a report submitted by
Public Interest Accountability Committee in 2012 which indicated that

64 Petroleum Exploration and Production Act.

65 Petroleum Revenue Report, “Annual Report on Petroleum Funds 2012”(2013)
<https://s3.amazonaws.com/ndpc-static/pubication/2012+Annual+Report
+on+the+Petroleum+Funds.pdf> Accessed September 2017.
2017 CONTRACTUAL AGREEMENTS IN GHANA’S OIL AND GAS INDUSTRY 207

government through the GNPC ought to account for how money

allocated for capacity building has been used.66 This implies that the
GNPC itself should be well regulated and managed to ensure efficient
and judicious use of its funds.

4.2 Policy Summary

Central to policy assessment is the provision of alternative or
strengthening options for policy makers. It is obvious that strong
institutions, better regulatory and legal framework and the needed
political will are central to enhancing increased benefit from oil
production and governance. To this end, the Ghanaian government
must strengthen its negotiating capabilities. In other words, the
government should appoint more technocrats and experienced people
to key positions in the oil industry without recourse to political
affiliation.
Also, there is a need to increase the State’s interest from 10 per
cent to a maximum 20 per cent. This will enable the State to better
make use of its local content policy especially when oil production
does not involve large employment base. Furthermore, it is also
imperative to strengthen the various regulatory institutions like the
Petroleum Commission, the Environmental Protection Agency, the
National Petroleum Authority, and so on, to enable them regulate the
petroleum industry better. Moreover, there should be enhanced capacity
development at the GNPC. The Ghanaian government will need to
equip GNPC to better manage the State’s stake in the exploration
operation. Again there is the need to delink the political appointment
of the head of GNPC and make it a technocratic position.
Finally, there is a need to for the government to implement
transparency measures by further strengthening Ghana’s version of
Extractive Industries Transparency Initiative. This will include removing
information confidentiality clauses from contracts to make information
on petroleum operations and licenses accessible and available for public
consumption. Where the need to protect sensitive and classified public
security information does not arise, general information on licensing,
petroleum operations and the scope of work under existing contracts
must be proactively disclosed to the public to promote a culture of
openness in the petroleum sector.

66 Petroleum Revenue Report (n 48).

208 AFE BABALOLA UNIVERSITY: J. OF SUST. DEV. LAW & POLICY VOL. 8: 2: 2017

5. CONCLUSION
Ghana’s contracts are not necessarily a bad deal although the State
could have done better given that we cannot always rely on the
transnational oil companies to pay their taxes. Again, holding only a
10 per cent participating and carried interest is inadequate. This is
because government itself must commit some capital to exploration
with the accompanying risks. However, if the government was looking
forward to good profits, then it could increase its interest in the stake
to 20 per cent to increase its accumulated profits. This would have
been necessary especially since government seeks to implement 90
per cent local content in the industry by 2020. It is difficult to imagine
how government can implement such huge local content in a contract
that has a life span of 30 years when it has only a 10 per cent interest
in the stake.
One could argue that government does not need to commit capital
to the exploration, but the government has given sovereign guarantees
to private and foreign companies who have won contracts to undertake
projects in Ghana, and so government could do the same thing when
it comes to exploration. Indeed this goes with risks but there is the
option of also engaging in prudent spending and prioritizing capital
for that venture.
Production-sharing agreement does not prevent a country from
having a maximum share of 20 per cent in the exploration of its natural
resources. Indeed, this article proposes that government should take
this into consideration in other contracts especially when it comes to
royalty negotiation and carried interests. This is so because the current
contracts are only subject to re-negotiations after 30 years. Thus, for
the State to take charge of its natural resources proactively and make
use of skills transfer, it is also must have an appreciable stake in the
operations. This is the reason to depoliticize certain positions of
employment especially in the GNPC and other relevant state institutions
such as the Petroleum Commission. When that is done, a change of
government will not necessarily warrant a new appointment, and that
will lead to continuity, efficiency and impartiality. Again, those who
occupy such position will feel more responsible to the State rather
than the government, President and the political party in power, as is
the case currently.