(a) The three main contractual arrangements under which countries grant oil and gas exploration and production rights to upstream petroleum companies are the following: a. Royalty/Tax Regime or Concession; b. Production Sharing Contract or Agreement; and c. Service Contract (Pure or Risk)

The Royalty/Tax Regime or Concession The key features of this contractual arrangement are as follows:

• A State grants petroleum exploration and production rights to a contractor.
• Contractor carries risk of exploration failure.
• If there is a commercial discovery and petroleum is being produced, the State levies royalty on production and tax on income as revenue to the State.
• The contractor has the right to export the oil and gas less any domestic supply arrangement.

Production Sharing Contract (Agreement) The key features of this contractual arrangement are as follows:

• Exploration and production rights are granted to a contractor by a State.
• Contractor carries economic risk of exploration.
• The state as the resource owner is entitled to a proportion of the oil and gas produced.
• The contractor keeps agreed proportion of the oil to cover cost (cost oil).
• The remaining oil which is the profit oil is shared between the contractor and the state.
• In some jurisdiction the contractor’s share of profit oil is subject to income tax.

Service Contracts There are two types of service contracts; pure and risk. Pure Service Contract is a contractual arrangement under which

• The State hires a contractor to explore and produce oil and gas for a fee. A form of technical service.
• Contractor carries no economic risk of exploration
• The contractor is paid for its services. It could be an agreed proportion of the oil or gas to cover cost and fee.
• The State keeps the remaining oil and gas. (2 Marks) Risk Service Contract is a contractual arrangement under which
• The State hires a contractor to explore and produce oil and gas for a fee. A form of technical service.
• Contractor solely bears or shares economic risk of exploration failure with the State
• The contractor is paid for its services. It could be an agreed proportion of the oil or gas to cover cost and fee.
• The State keeps the remaining oil and gas.

(b) A Petroleum Fiscal Regime is a set of laws, regulations and agreements which governs the sharing of economic benefits derived from production of petroleum between the resource owner and the oil and gas companies. It is categorised into three main groups: Royalty/Tax Regime, Production Sharing Contract and Service Contracts.

For a fiscal regime to be described as a “hybrid of Royalty/Tax Regime and Production Sharing Contract” that regime should have some of the main or distinctive elements of both fiscal regimes. Ghana has in its petroleum fiscal regime the main elements of the royalty/tax regime, that is royalty and tax, but does not have the distinctive elements of the production sharing contract, cost oil and profit oil. Ghana’s petroleum fiscal regime cannot therefore be described or explained as “a hybrid of the Royalty Tax Regime and Production Sharing Contract.”

The main elements of Ghana’s petroleum fiscal regime include:

• Royalty
• Initial (Carried) Interest
• Additional Participating Interest
• Income Tax
• Additional Oil Entitlement.

Initial (Carried) Interest and Additional Participating Interest (API) is the State share of oil or gas distributed to interest holders in a Petroleum Agreement. This is not sharing of profit oil.

The Additional Oil Entitlement (AOE) is additional profit tax based on the rate of return achieved. The base for determining the AOE is not production but rather cash flow calculation to determine the rate of return achieved. Where the specified rate of return is achieved, Ghana is entitled to additional oil. The AOE is therefore not sharing of profit oil but rather the payment of additional tax in kind.

The main elements of Ghana’s fiscal regime are the royalty and tax and because the state participates in all upstream petroleum operations Ghana’s fiscal regime can be described as Royalty/Tax Regime with State Participation, to differentiate it from a pure royalty/tax regime.