Ghana’s Offshore Oil Contracts

A Bump in the Road or a Dead End?

The 2007 discovery of oil off Ghana’s shores has attracted new foreign investment to the country. Considered one of the most stable countries in Africa and chosen by President Obama as the only African stop on a multi-country tour last year, Ghana has managed to avoid much of the corruption that has bedeviled its neighbors, including oil-rich Nigeria. The Jubilee field – Ghana’s first major oil discovery – is expected to begin production by the end of 2010 and could provide a major boost to the country’s economy, which has grown consistently over the past decade. However, the government’s recent backpedaling on a major deal between Kosmos Energy, the American company that discovered the field, and ExxonMobil, has given some investors pause.

To understand this stalled deal and its significance, Ergo asked leading experts to describe the opportunities and risks associated with investing in Ghana.

Insights from the Ergo Network

• Expert 1: Former Chevron executive and West African petroleum engineer

  Fear of extended arbitration may delay investment from U.S. companies
  
  

  “The deal there between Exxon, Kosmos, and the government will result in a very careful forward motion in Ghana. Tullow [which operates part of the Jubilee field] will probably continue there and they need the money from Ghana, which is expected in the fourth quarter this year. That is probably going to go ahead, but any other projects there are going to be head scratchers, at least for a while. I don’t think any American company will get involved in anything that might cause them to become involved in extended arbitration. Shell and Total might have a different plan. My belief right now is there is going to be a “go slow” [attitude] as far as new projects are concerned, which could last for some time."

• Expert 2: Ghanaian journalist focusing on economics, energy, and politics

  Ghana will learn from the mistakes of other oil-producing countries
  
  

  “I think Ghana’s situation is ideal. It’s got so much to learn from other countries. It has seen how oil destroyed economies in other parts of the world. The government has set itself up to pick from the experiences of other countries, see what went wrong, and build a better situation for Ghana. They also want to improve the mining sector and to improve cocoa by capitalizing it. At the end of the day, it’s not just going to be oil that is going to be the sole source of revenue for the country. They are trying to diversify the economy rather than have an economy that is solely dependent on oil.”
  
  “The government has made it very clear the situation involving Kosmos is because Kosmos hasn’t done certain things right. There are rules and regulations for investors; you must agree to play by the rules. Once you agree to play by the rules, you are welcome.”

• Expert 3: Ghanaian political leader and former Mayor of one of Ghana’s largest cities

  Strong legal foundation and commitment to protecting the public interest
  
  

  “The rule of law, which is usually the guiding principle for attracting investment, is working in Ghana. Even though government was forced to abrogate some of the contracts or renegotiate, they are using legal procedures, the legal channels prescribed by the constitution. Investors should not be scared because the law will still be respected. The government will say, for example, if a bad deal was negotiated before we came into power, it is in the interests of the public that the deal is looked at. The law will be used to review that deal so that the public is protected. Ghana is still a stable country. We have a well-educated workforce and a strong constitution.”

Ergo’s View

The government’s obstruction of the deal between Kosmos and ExxonMobil has called into question Ghana’s image as an oasis of good governance in a region plagued by corruption and economic mismanagement. But our experts believe this interference stems from the specifics of that contract and how it was struck (many allege that pervasive bribery and corruption caused the previous government to agree to unfavorable terms), and thus is not indicative of a general trend. Notably, the current government is pursuing recourse through legal channels, and is not simply tearing up the contract or nationalizing the field, as other countries in the region might be prone to do. Unless a major push is made by the government to renegotiate deals across industries, Ghana should remain a stable place for investment in a volatile region.

Additionally, as Ghana’s oil sector develops, the country’s stable government and transparent revenue collection framework should allow profits to trickle down and benefit other parts of the economy. The profits from oil production will allow the country to invest further in its already burgeoning tourism and mining sectors. For now, Ghana is demonstrating its determination to take advantage of its natural resources without falling into a cycle of corruption and overdependence on oil revenues that has led to economic stagnation in other oil-rich developing countries.

Ergo has recently conducted in-depth studies of oil legislation and oil contract allocation in several East and West African countries, and has access to thought leaders in industry and government across the continent.