Just one oil field could make poverty history in Ghana

The debate on how Ghana should deploy it’s oil wealth continues. Guardians of fiscal rectitude are concerned that the government budget has already leapt with joy to a deficit high point of over 10% of GDP before the first barrel’s even been landed. That hasn’t stopped the government getting locked into a huge argument over the sale of the Kosmos interest to ExxonMobil, with all the accompanying accusations of vested interests on all sides. An earlier promise to publish all the oil contracts has not materialised, though the Revenue Watch Institute are still working on it.

More broadly, there’s a sense of anticipation which reflects Ghana’s status as the grand old man of African democracy. Can a country which has successfully held five elections, developed a tax base and hosted President Barack Obama’s first foreign trip avoid the oil curse? After all, Ghanaian President John Atta Mills is a long-time university professor and technocrat who is an expert on taxation and fiscal policy!

While debates rage continue over a range of development and infrastructure plans, there is one option decidedly off the table – giving the revenues away before there is any incumbency to deal with. And, in case a handy slogan or buzzword is needed to brandish in the face of all those disappointed bureaucrats, OpenOil has made a happy chance discovery: distributing the government’s expected take from the Jubilee field, due to come online in December 2010, could virtually abolish adult poverty across the country in the space of six months. How about that for a political platform?

The numbers work like this:

The World Bank’s figures for poverty head count at the definition of extreme poverty (defined as income of $1.25 per day using the Purchasing Power Parity definition) were 6.7 million Ghanaians in 2006, the last year for which figures were available. The World Bank also gave the poverty gap for that year at 10.49%. The poverty gap is the average across an entire population by which each citizen fell short of the $1.25 a day standard (with those above the line, who constitute a majority, counted as 0). It represents the amount of money you would need to completely abolish poverty if you were able to conduct a perfectly targeted distribution of cash – in this case, $1.07 billion. If you take this total and then divide it among the 6.7 million people who are below the absolute poverty line of $450 a year, you arrive at a mean shortfall of about $160. So in other words, if you could hand out $160 to every Ghanaian beneath the poverty line, on average you would be able to eliminate poverty altogether.

But of course there’s no such thing as a perfect cash distribution, and in any case we’re talking about direct oil dividends as a citizen right, in order to keep the state out of questions of targeting population groups, complicated assessments and so on, and in order to establish the dynamic of citizen power and public service. So we need more than $1.07 billion a year because we need to also distribute $160 a year to every other citizen. Now if we restrict the dividend to adults over the age of 18, and for the sake of simplicity assume that is 50% of Ghana’s 2006 population of 22.4 million people, we need 11.2 million distributions of $160 each, or $1.79 billion.

How much oil do we need for that? Well as the terms of the contracts aren’t public we’re going to have to make some educated guesses. Let’s assume:

  1. The price of crude holds at about $70 a barrel or above through 2011 as it has since early 2009.
  2. Extraction costs are $10-15 per barrel. Jubilee is deep offshore so production costs are higher than the great onshore fields of the Middle East, where it can cost as little as $2 per barrel.
  3. All in all, the government take is between 65% and 72%.

Put those three assumptions together and we arrive at government revenue of about $40 per barrel produced from Jubilee. Divide $1.79 billion by $40 and you get just under 45 million barrels of oil a year – 122,600 barrels of oil a day, almost exactly what the Jubilee Field is scheduled to produce!

Of course there are some sleights of hand in this calculation:

  • Meeting the mean shortfall won’t bring the poorest of the poor right up to the poverty line. But the progressive nature of the flat dividend means the poorer the individual, the greater the boost the oil dividend would represent, and by normal poverty distributions you would have reached a significant majority of those beneath the poverty line with $160 per head.
  • Children, of course, represent a large proportion of those living in poverty and this oil dividend would only reach adults.
  • Extraction costs could be higher, the government take could be lower, and the price of oil could drop. The numbers we’ve used here are all within industry norms globally, but the degree of local variation is high.

On the other hand, there are some conservative assumptions built in here as well:

  • The definitions of poverty are in PPP whereas our calculations are in hard currency. Normally to arrive at PPP calculations you use a multiplier which nearly always work in favour of the hard currency – the PPP method of measurement was introduced in the 1990s after all to boost the levels of income reported in the developing world to what represented actual buying power as opposed to hard currency value.
  • We are only counting on the projected production of oil from one field here. Neither Jubilee Field’s trillion cubic feet of gas, nor any of the other fields now under development are being considered. Jubilee’s reserves themselves are estimated at 1.6 billion barrels, which would put the initial prroduction at a modest depletion rate of 2.8% – meaning production from Jubilee itself is also likely to rise. So it’s perfectly possible to argue that Ghana will have enough revenues over the longer-term to provide for infrastructural and investment plans led by the government as well, just that the political model would be set by starting direct dividends first.

So there it is: initial production from just one field could all but end adult poverty across Ghana. If we can’t claim it would abolish poverty, because of the children, we can at least claim instant achievement of MDG1, halving the proportion of the population living in extreme poverty over the period 1990 to 2015. Figures show the percentage has remained roughly the same (and with population growth the absolute numbers have risen) at just under 30%. A distribution from the Jubilee Field on the lines proposed would halve it.

It seems unlikely to be implemented, though. The Center for Global Development wrote a paper in late 2009 proposing a similar measure and subsequently went to Ghana to meet officials there. But they reported that they were unable to persuade them to consider any direct dividend at all, as they were already immersed in large government spending plans.

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