Ghana: Upfront payment mechanism for surface rentals proposed in oil sector to mitigate rising defaults
In a bid to address the growing issue of defaults by oil companies, Benjamin Boakye, the Executive Director of the Africa Centre for Energy Policy (ACEP), has put forward a compelling proposal for an upfront payment mechanism for surface rentals in Ghana’s oil sector. The aim is to curb the alarming trend of non-payment and ensure that oil companies, particularly international oil companies (IOCs), honor their financial obligations under petroleum agreements.
The urgency of this proposal arises from the mounting surface rental arrears, which reached US$2.7 million at the end of December 2022, representing a 7.6 percent increase from the previous year’s figure of US$2.5 million. These defaults have had severe financial implications for the country, with Ghana losing substantial revenues as companies exit without fulfilling their financial commitments.
Under the current system, oil companies are expected to settle their surface rental fees within the year. However, Boakye advocates for a more stringent regime that mandates companies to make upfront payments at the beginning of each year. By establishing a specific month or quarter for these payments, preferably at the start of the year, Ghana can better ensure timely receipt of the fees.
Explaining the rationale behind this approach, Boakye emphasizes the necessity of proactive measures to safeguard the country’s interests. He argues that waiting for companies to make payments throughout the year can prove challenging if they decide to exit, making it difficult to locate them and recover outstanding fees. By requiring upfront payments, Ghana can significantly reduce the risk of non-payment and enhance its revenue collection efforts.
Boakye’s proposition is in response to recent developments where some companies have chosen to exit Ghana mid-year without fulfilling their surface rental obligations. In a 2022 report by the Public Interest and Accountability Committee (PIAC), concerns were raised regarding the escalating surface rental arrears. The report revealed a 16.8 percent decrease in surface rental payments received in 2022, totaling US$687,759.16 compared to US$826,815.52 in 2021.
According to PIAC, the Ghana Revenue Authority (GRA) indicated that the amount received in 2022 pertained to nine out of the current fourteen companies operating oil blocks. Notably, a significant portion of the surface rental arrears, amounting to US$1,803,124.41 (65 percent of the total arrears), is attributed to four contractors whose petroleum agreements were terminated by the Minister for Energy in 2021.
The terminated contractors, including Swiss African Oil Company Limited (SWAOCO), UB Resources, Brittania U, and Sahara Energy Fields Ghana Limited, were found to be in arrears of US$1.88 million during the 2021 fiscal year. Their outstanding payments accounted for approximately 73 percent of the total surface rental arrears, which stood at US$2.5 million at that time.
Despite efforts by the GRA to recover these arrears, the Committee’s latest report highlighted that desired results have not been achieved. In light of this impasse, PIAC recommended that the GRA intensify its efforts in collecting surface rental arrears, particularly from the four contractors whose petroleum agreements were terminated in 2021.
Given the persistent challenges in recovering arrears and the gravity of the financial implications, it becomes evident that strict regulations regarding payment timelines are imperative. The proposal for upfront payment of surface rentals at the beginning of each year, as advocated by Boakye, offers a promising solution to address the issue of defaults and enhance revenue collection in Ghana’s oil sector.
It is worth noting that as far back as 2019/2020, PIAC had called on the GRA to take swift action in recovering arrears, including the appropriate interest as outlined in the Petroleum Revenue Management Act (PRMA). This underscores the long-standing need for robust measures to tackle non-payment and strengthen the financial integrity of Ghana’s oil industry.
Moving forward, the implementation of an upfront payment mechanism for surface rentals could have far-reaching implications for Ghana’s oil sector. Not only would it mitigate defaults and minimize revenue losses, but it would also bolster investor confidence, encourage responsible financial practices among oil companies, and provide the government with a steady stream of funds for development projects and public services.
As stakeholders navigate the complexities of Ghana’s oil sector, it is crucial to strike a balance between attracting investments and safeguarding the country’s financial interests. The proposal for upfront payments represents a significant step towards achieving this equilibrium and ensuring a sustainable and prosperous oil industry in Ghana.
