Developing a Strategy for Managing Ghana’s Oil industry

Introduction

Ghana has a history of oil exploration dating back to 1896. The recent discovery of oil reserves may be a mixed blessing. The experiences of other countries like Angola, Nigeria and Venezuela shows that the discovery of oil becomes a ‘curse’ rather than a ‘blessing’. This essay explains the concept of the “Dutch Disease” and explores specific the lessons that Ghana can benefit from. Many reasons are advanced to buttress the dire need of a strategy for managing Ghana’s new oil industry. It highly recommends the pursuance of a downstream value addition chain backed by a strong political will and commitment to sound economic policies to transform Ghana into an industrialized economy.

Record of Oil-Rich Countries: Lessons for Ghana

Ghana discovered its first major oil find on 18 June 2007, announced by the Ghana National Petroleum Corporation (GNPC) with its partners, Kosmos Energy and Tullow Oil. The discovery of oil is often seen as a one way ticket to economic growth and development. However, the record of oil-rich countries has been very dismal in terms of improvements in the lives of the people. For instance, from 1965 to 1998, in the Organization for Petroleum Exporting Countries (OPEC) Gross National Product (GNP) per capita growth decreased on average by 1.3%, while the rest of the world was on average by 2.2% (Wikipedia,2008).

Thus, a “paradox of plenty” and “resource curse” have become two commonly used phrases to describe the impact of oil wealth on the economies of the oil exporting countries. The most common influence of oil boom on economies is cited as the ‘Dutch disease’. It is an economic phenomenon in which the revenues from natural resources exports damages a nation’s productive economic sector by causing and appreciation of the real exchange rate coupled with a decline in the Agricultural Sector and the competiveness of the manufacturing sector.  It was named after the decline of the manufacturing sector in the Netherlands following the discovery of natural gas in the 1960’s. Researchers identify 3 challenges associated with crude oil. They point out that: they are extremely volatile, unpredictable and large relative to the total exports, and GDP. Corruption, conflict and excessive borrowing and inequality characterize oil rich nations. The prospects of this oil find brings to the fore the need to develop a strategy for managing the oil industry. To prevent the oil from becoming a curse, there should be effective participation of the local people in the immediate vicinity of the oil production, promoting transparency in accounting for oil revenues, investing oil rents and adding value to the crude oil.

Involving the Local People

Ensuring effective participation of the local people averts inequality and conflicts, which usually plague oil rich countries. To ensure community participation and avoid the Niger delta and Cabina province situation, there has to be a policy of training and technology transfer. Skills training should be offered to the youth in the area especially since they are active participants in riots. This will give them the necessary capacity to take advantage of the numerous business openings that will be created as a result of the citing of the oil companies. The Oil and Gas Forum (2008) concurs: “Develop people and enterprise capabilities to allow local business to take ownership of the oil industry”.

Ensuring Petroleum Sector Transparency

Promoting transparency in accounting for revenues is a sure way of preventing corruption and mitigating poverty. Oil revenues have rarely helped reduced poverty as demonstrated by levels of poverty in countries such as Nigeria and Angola. It is suggested that the legal framework be reviewed. Parliament should amend the law to oblige the government to publish all budgetary documentation and other fiscal information, open and competitive bidding process. Notwithstanding the existing procurement law, it is advised that, a separate legal instrument be introduced to deal with the huge activity and inflows in the sector. The oil companies must be mandated to disclose their income which is not the practice in the mining sector. Additionally, civil society and the public at large should be made aware of all information relating to the proceeds.

A Petroleum Fund: The Norway Model

Investing oil revenues can ensure we cope in bad times. The most common influence of oil boom on economies is cited as the ‘Dutch disease’. In this vain the establishment of petroleum is recommended. The Norway model readily offers useful lessons. The fund should be set up by an act of parliament which will make it mandatory for the government to publish a comprehensive quarterly report on the fund’s status. Furthermore, the fund should be run by the central bank with auditing made the responsibility of the Auditor- General. It is advised that the fund be an integral part of the budget. On the other side, consensus must be built on how to spend the oil wealth to avoid the macro instability that Ecuador experienced as they did the reverse.

Value Addition: The way to go?

Ghana should pursue a downstream value addition system to ensure that the oil benefits the entire population and diversity in the economy. This is inevitable as oil and gas employ little labour directly and the extraction offers little potential for creating a more diversified domestic environment. This may well meet the expectations of Ghanaians, who expect the new oil wealth to be translated into new jobs, boosting their incomes. Major derivatives from crude oil include; rubber, tyres, varnish and paints. Chemical engineering graduates together with allied professionals in the refinery industry should be mobilized. Also, there should be the establishment of a national tool center to manufacture or replicate the needed machinery and equipment.

New Commitment to Action

There should be a strong political will and a conscious effort to ensure that this oil find inure to the benefit of Ghanaians. Notwithstanding the fact, that no single mechanism is likely to produce a silver bullet. Our past socio- economic experiences indicate that pursuing a downstream value addition is the way we should go and be factored into the overall national development agenda.

References:

Government of Ghana. National Forum on Oil and Gas Development; Draft report. Accra: Government of Ghana.

Wikipedia. Oil Curse. 2000. http://en.wikipedia.org/wiki/Oil_curse#cite_note-2 (accessed May 6, 2009).