Accra, Ghana, September 7, 2020//-Who holds title over oil reservoirs? To what extent are mineral rights on private and public lands involved?
Natural resources
Is there a legal distinction between surface rights and subsurface mineral rights? At what stage does title to extracted oil transfer to the licensee, lessee or contractor?
Ownership of land in Ghana is generally vested in chiefs, families, the state and individuals. However, the system of landownership makes a conceptual distinction between surface rights and subsurface rights for the purposes of determining ownership of any minerals embedded in a given piece of land.
The right to minerals embedded in the subsurface is severed from the surface rights of persons who have an interest in land. The 1992 Constitution provides that every mineral (including petroleum) in its natural state within any land in Ghana, the exclusive economic zone and any area covered by the territorial sea or continental shelf is the property of Ghana and shall be vested in the president on behalf of, and in trust for, the people of Ghana.
State ownership of petroleum resources is further emphasised in the Petroleum Exploration Law. Section 3 of the Law stipulates that all petroleum existing in its natural state within the jurisdiction of Ghana is the property of Ghana and is vested in the president on behalf of, and in trust for, the people of Ghana, subject to any right granted, conferred, acquired or recognised.
Subject to the payment of appropriate compensation, the state has the right to appropriate any given piece of land for the exploration and development of petroleum resources.
In brief, the legal regime for property rights is dual in nature. In one respect it enables individuals to enjoy the surface rights relating to a piece of land; at the same time, it vests in Ghana control over the mineral resources embedded in the subsurface.
The issue of title to the extracted oil is determined on a contractual basis. In most petroleum agreements, the title and risks in the extracted oil pass to the licensee, lessee or contractor at the point where the extracted oil passes through the outlet flange or the delivery point.
Exploration and production – general
What is the general character of oil exploration and production activity conducted in your country? Are areas off-limits to exploration and production?
The Petroleum Exploration Law does not make a distinction between the licensing regime for undertaking either an offshore or onshore activity.
Most of the petroleum activities are offshore and any person who intends to undertake a petroleum activity is required to enter into a petroleum agreement with the government.
Under the Petroleum (Local Content and Local Participation) Regulations 2013 (the Local Content Law), indigenous Ghanaian companies are to be given first preference in the grant of a petroleum agreement or a licence with respect to petroleum exploration and production. Despite this provision, oil exploration and production are dominated by international oil companies.
Pursuant to the Local Content Law, contractors are required to source goods and services from Ghanaian companies unless the contractor can show that the quality of the Ghanaian goods required is lower than what is to be imported or that there is no Ghanaian company with the requisite technical skill.
Companies that are active in petroleum exploration, development and production in Ghana include Eni, Hess, Afren, Saltpond Offshore Production, Vitol, Gasop Oil, Oranto Petroleum, Vanco Ghana Limited, Lukoil, Kosmos, Tullow, Springfield and Anadarko. Also, Ghanaian companies such as Seaweld Engineering and Belmet Ghana are active in the provision of support services in the exploration, development and production of oil.
Oil exploration and production has been mainly offshore at the Jubilee Field located in an area straddling the West Cape Three Points and Deepwater Tano contract blocks. TEN Fields, also in the Deepwater Tano block, has produced its first oil, and export of gas from the field is expected to begin in 2017.
Also, the Sankofa Gye Nyame Field produced its first oil in 2018, which is expected to help in sustainable production of electricity in Ghana. The GNPC is also currently undertaking exploration activities in the Voltain Basin to enhance knowledge of the basin and establish its prospectivity.
The legal regime regulating petroleum operations does not explicitly designate particular areas as off-limits for the purposes of oil exploration and production.
However, petroleum operations can only be carried out in a particular area if the Minister for Petroleum so declares, and the operations are expected to conform to the environmental laws of the country and to international best practice for the protection of human and marine resources.
Exploration and production – rights
How are rights to explore and produce granted? What is the procedure for applying to the government for such rights? To what extent are the terms of licences or contracts negotiable?
The Ministry of Energy has the overall responsibility for providing policy direction for oil exploration and production. The government’s participation in the regulation of the oil industry is undertaken through the Petroleum Commission.
Under the general supervision of the Ministry of Energy, the Petroleum Commission is responsible for managing the petroleum resources of Ghana. The law establishing the Petroleum Commission, in the main, spells out its organisational structure, objects and mode of operation.
The Petroleum Exploration Law provides the legal framework for establishing the contractual relationship between the state, the GNPC and prospective oil companies.
Section 10 of the Petroleum Exploration Law provides that no person other than the GNPC shall engage in petroleum exploration, development and production except in accordance with the terms of a petroleum agreement between that person, the GNPC and the Republic of Ghana.
The Petroleum Exploration Law further provides that any person intending to engage in petroleum exploration and development shall participate in an open, transparent and public competitive bidding process initiated by the Minister for Petroleum.
Direct negotiation will generally not be used in the first instance, unless that is the most efficient way of ensuring optimal exploration, development and production of the area. For instances of direct negotiation, the interested oil company must submit an application to the Minister for Petroleum.
In practice, the licensing procedure is coordinated by the GNPC and the Petroleum Commission, which has packaged Ghana’s upstream oil potential into blocks. Interested investors apply to the Minister, who then refers the application to the GNPC and the Petroleum Commission for evaluation and due diligence.
The Petroleum Commission then issues a report that leads to negotiations, and a draft petroleum agreement is then sent for the approval of the cabinet and parliament. The licence is only granted after parliament ratifies the petroleum agreement in accordance with article 288 of the 1992 Constitution of Ghana.
The Petroleum Exploration Law provides the framework for the management of oil and gas exploration, development and production. It deals extensively with petroleum contracts, the rights and responsibilities of contractors, and compensation payable to those affected by activities in the petroleum subsector.
In addition, it provides the basic terms and conditions of every petroleum agreement negotiated and executed in Ghana and spells out the rights and obligations of each party to the agreement, as well as the sanctions that may be applied for any breach of obligations assumed under the petroleum agreement.
On the basis of the Petroleum Exploration Law, a standard petroleum contract, known as the model petroleum agreement (MPA), has been developed to provide the framework for negotiating the terms and conditions of a petroleum agreement among the parties to a petroleum agreement. The parties to a petroleum agreement are free to negotiate any terms provided that such terms do not violate the law.
The only mandatory terms under the Petroleum Exploration Law for a petroleum agreement are that, the agreement must provide that the GNPC shall hold an initial participating carried interest of at least 15 per cent for exploration and development and shall have the option to acquire an additional participating interest.
The parties are made up of the GNPC, the government and the oil company. In addition to the mandatory terms, the petroleum agreement will embody the final terms and conditions to regulate the intended petroleum operations. The typical terms of a petroleum agreement, as set out in the MPA, include:
- the contract area (block) (the delineated area where petroleum operations may be carried out by the oil company (investor));
- the exploration period (the limit in terms of duration for the exploration operations);
- the work programme (the defined amount of work that the investor is expected to achieve in the contract area during the exploration period);
- the cost of work, that is, the agreed amount to be expended by the investor to carry out the work programme, during the exploration period; and
- sanctions, in the event of failure by the investor to achieve its work programme at the stipulated time.
The Petroleum Exploration Law provides an initial contractual period of 30 years, which is subject to renewal for all petroleum agreements between the state and oil companies.
Under the law, an oil company with a prospecting licence is required to make a commercial discovery within seven years, failing which it will be required to relinquish the contract area.
Apart from its licensing role, the Petroleum Commission together with the GNPC is further mandated to approve field development plans and monitor the production cost and activities of the international companies.
Government participation
Does the government have any right to participate in a licence? If so, is there a maximum participating interest it can obtain and are there any mandatory carry requirements for its interest? What cost-recovery mechanism is in place to recover such carry? Does the government have any right to participate in the operatorship of a licence?
Under section 10 of Ghana’s Petroleum Exploration Law, the government has a statutory right to participate in an exploration or production licence.
Section 10 of the Petroleum Exploration Law states clearly that, when a discovery of oil is declared to be commercial, the state, acting through the GNPC (the state oil company) shall have a carried interest of at least 15 per cent and the option to acquire additional participating interest in the discovery, depending on the terms of the petroleum agreement. This option to acquire additional right must, however, be exercised within a particular time frame and is a paying interest, excepting costs incurred during exploration.
The oil companies and the government agree on the terms of the petroleum agreement through direct negotiations before an agreement is signed and ratified by the country’s legislature.
Royalties and tax stabilisation
If royalties are paid, what are the royalty rates? Are they fixed? Do they differ between onshore and offshore production? Aside from tax, are there any other payments due to the government? Are any tax stabilisation measures in place?
The fiscal package consists of:
- royalties;
- carried interest;
- paying interest;
- additional oil entitlement;
- petroleum income tax; and
- annual surface rental.
There are also indirect tax obligations in the form of local content requirements, domestic supply obligations and decommissioning.
The Petroleum Law provides that the oil company (the investor) pays royalties on production, but no figure has been fixed. However, the MPA, which was prepared and used by the GNPC, and was approved by government, has negotiable rates.
The main advantage of the royalty tax system is that the resource owner (ie, the state) can have its resources exploited and receive benefits without making any financial contribution.
In view of the fact that payment of royalties affects the profits of the operation, the industry practice has been to levy lower royalty rates on the riskier, more costly and deep-sea operations, and then levy a higher rate commensurate with the lower level of risk associated with the onshore and offshore shallow water operations.
Royalties are levied on gross production of oil and gas by the state irrespective of the profitability of operations. It can be taken in the form of oil or cash.
The tax regime dealing with the petroleum sector also recognises the commercial entitlement of investors; the companies that undertook the huge risks and expenses of exploration, development and now production of Ghana’s Jubilee Field.
The fiscal aspect of the petroleum industry in Ghana makes no distinction between onshore and offshore production for purposes of determining the tax liabilities of international oil companies.
Other than tax and royalties, the only payments that will be required are licensing and registration fees payable to the Petroleum Commission.
Licence duration
What is the customary duration of oil leases, concessions or licences?
Section 14 of the Petroleum Exploration Law provides, in the relevant part, that a petroleum agreement shall be valid for a total period not exceeding 25 years.
The Petroleum Exploration Law permits the term of a petroleum agreement to be extended or a new petroleum agreement entered into by the parties, subject to ratification by parliament.
The law is also flexible in terms of a review of petroleum agreements where significant changes occur in the circumstances prevailing at the time of entry into the agreement or the last review of agreement. An extension is therefore a possibility.
The Petroleum Exploration Law fixes the maximum period for petroleum exploration at seven years. This is normally divided into an initial three-year phase followed by two-year phases.
Depending on the size of the contract area, these phases can be negotiated. The contractor is required to relinquish part of its contract area after a period of seven years if it fails to make a discovery in commercial quantities.
Depending on the size of the contract area, the contractor will be required to relinquish 20 per cent of the contract area. For a smaller acreage, relinquishment may be between 10 and 15 per cent. The percentage of relinquishment is subject to negotiation.
Extent of offshore regulation
For offshore production, how far seaward does the regulatory regime extend?
In accordance with international law, the regulatory regime extends up to a maximum of 200 nautical miles from the baselines, from which the breadth of the territorial waters is measured.
It is reported that the extended legal continental shelf holds significant recoverable reserves of oil and gas for Ghana.
Onshore offshore regimes
Is there a difference between the onshore and offshore regimes? Is there a difference between the regimes governing rights to explore for or produce different hydrocarbons?
There is hardly any difference between the onshore and offshore regimes. They are both governed by the same laws and practices, and both regimes are expected to conform to international best practice.
Authorised E&P entities
Which entities may perform exploration and production activities? Describe any registration requirements. What criteria and procedures apply in selecting such entities?
The GNPC, in collaboration with oil companies, usually carries out exploration and production activities subject to petroleum agreements.
The GNPC has carried out a preliminary evaluation of the oil and gas potential of Ghana’s sediment basins and packaged the potential areas into blocks.
These blocks are applied for by potential investors. An investor completes an application form and submits it to the Minister of Energy who then refers it to the GNPC and the Petroleum Commission.
The Petroleum Commission and the GNPC then carry out due diligence on the company that has applied for the block. In evaluating the application of an investor, the Petroleum Commission and the GNPC take cognisance of the financial capability of the investor, the technical track record of the investor, the proposed work programme, and budget and fiscal package proposed by the investor.
The work programme and the fiscal package are two of the critical areas for negotiations. Due diligence is also conducted on the investor company to ensure that it is duly incorporated as a corporate legal entity to conduct operations.
When this has been done, a comprehensive report, including the Petroleum Commission’s recommendation and the GNPC recommendation, is submitted to the Minister of Energy. If the investor company qualifies in accordance with the set criteria, the Minister instructs the petroleum agreement negotiation team to negotiate with the investor.
Under the Petroleum Local Content Law, an investor who intends to enter into a petroleum agreement with the government or obtain a petroleum licence in order to explore, develop and produce oil and gas is required to incorporate a company in Ghana and grant an indigenous Ghanaian company at least 5 per cent equity participation.
In practice, most investors register branch offices during the negotiation phase of the petroleum agreement and then incorporate the subsidiary companies before commencing petroleum operations in accordance with the law.
Regulatory powers over operators
What controls does the regulatory body have over operators? Can operatorship be revoked?
The Minister of Energy’s control over operatorship is usually restricted to the appointment of an operator before execution of the petroleum agreement or change of an operator after the petroleum agreement has been executed, as set out in the four steps below:
- the Minister may appoint an operator for parties to a petroleum agreement. The parties to a petroleum agreement are required to agree on an operator before the petroleum agreement is executed. However, the Minister may appoint an operator for the parties if the parties cannot agree on an operator;
- where the parties to a petroleum agreement select an operator, the operator must be approved by the Minister before execution of the petroleum agreement;
- after execution of the petroleum agreement, the parties to the agreement may only change the operator with the approval of the Minister; and
- the Minister, in consultation with the Petroleum Commission, may change an operator if the operator ceases to meet material requirements under the law or the petroleum agreement.
Joint ventures
What is the legal regime for joint ventures?
There is no express provision for the regulation of joint ventures in the petroleum industry. Membership and operation of joint ventures are regulated by the standard rules of contract and other petroleum laws that are relevant to such joint ventures.
At present, the joint venture partners operating the Jubilee Field in Ghana comprise Tullow Ghana Limited (35.48 per cent), Kosmos Ghana HC (24.8 per cent), Anadarko WCTP Company (24.8 per cent), Petro SA (2.73 per cent), and the GNPC (13.64 per cent). The EO Group has since sold its 1.75 per cent stake to Tullow.
Also, the joint venture partners for TEN Fields are Tullow Ghana Limited (25 per cent), Kosmos Ghana HC (30.2 per cent), Anadarko (30.2 per cent), GNPC (12.5 per cent) and Petro SA (1.8 per cent).
Matters dealing with petroleum exploration and development are governed mainly by petroleum laws such as the Petroleum (Exploration and Production) Act 2016 (Act 919) and the Ghana National Petroleum Corporation Law (PNDC Law 64).
The fiscal aspects of petroleum operations are regulated by the Petroleum Income Tax Act 1987 (PNDC Law 188). It is submitted that joint venture agreements will generally be regulated by specific contract terms as well as the various statutory provisions.
At the moment, under the Petroleum (Local Content and Local Participation) Regulations, 2013 (LI 2204) (the Petroleum Local Content Law), all foreign companies who intend to provide goods or services in the upstream petroleum sector are required to incorporate a joint venture company with an indigenous Ghanaian company and afford that indigenous Ghanaian company at least 10 per cent equity participation.
These joint ventures are required to register with the Petroleum Commission in order for them to legally engage in tenders or bids to provide goods or services to the contractors, licensees, subcontractors or the GNPC.
It is important to note that these joint ventures are different from the oil and gas exploration, development and production companies. These joint venture companies only provide goods and services to the oil and gas exploration, development and production companies who have entered into petroleum agreements with the government or hold petroleum licences.
Reservoir unitisation
How does reservoir unitisation apply to domestic and cross-border reservoirs?
Under the Petroleum Exploration Law, the Minister of Energy has the prerogative to determine that a petroleum field shall be developed as a single unit, where a petroleum field extends beyond the boundaries of an area covered by a petroleum agreement or other authority granted or recognised under the act.
Licensee liability
Is there any limit on a party’s liability under a licence, contract or concession?
There is no limit on a party’s liability. Liability for any damages can also be joint and several.
Guarantees and security deposits
Are parental guarantees or other forms of economic support common practice or a regulatory requirement? Are security deposits required in respect of any work commitment or otherwise?
Yes. Parental guarantees and other forms of economic support may be sought by the Minister of Energy. According to the law, a licensee is required to provide the Minister with the performance bonds or guarantees that the Minister may require for the fulfillment of the obligations undertaken by the licensee and for possible liabilities arising out of the petroleum activities undertaken under the licence, petroleum agreement or petroleum subcontract.
The nature of the guarantee or performance bond is usually dependent on the requirements of the Minister. Usually, the Minister would require a guarantee from the ultimate parent company.
In relation to the environment, the Petroleum Exploration Law provides, in the relevant part, that a contractor is required, at cessation of operations, to restore the affected areas and remove all causes of damage or danger to the environment.
Under the Petroleum Exploration Law, a licensee is required to set up a decommissioning fund for funding of its decommissioning plan. Under the Environmental Regulations, every contractor is required to provide a reclamation plan, which will be followed on decommissioning.
In addition, the contractor is required to post a reclamation bond in the form of a security deposit with the EPA. In practice, the EPA and the contractor will negotiate the terms of the reclamation security agreement as well as the security deposit to be posted by the contractor.
Kimathi & Partners Corporate Attorneys – Akua Pinamang Addae, Kafui Quashigah, Kimathi Kuenyehia, Sr, Sarpong Odame and Sefakor Kuenyehia
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