Local Content and Local Participation Legislation - A driver of indigenous businesses in the oil and gas sector?
Many oil rich countries have used their oil resources as a major tool to propel development and improve the living conditions of their people.
It is in the light of this that the discovery of oil in commercial quantities in Ghana in 2007 was embraced with euphoria by many Ghanaians.
In an effort to ensure that the oil resources meet the high hopes of Ghanaians, the government through Parliament passed important enactment such as the Petroleum Revenue Management Act to ensure that the oil resources are well managed to the benefit of the people of Ghana.
The Petroleum Local Content and Local Participation Regulation, 2013, L.I. 2204 was also passed to give legal backing to the Local Content and Local Participation Policy Framework that was formulated in 2011.
A key aspect of the Local Content Policy is that it targets a minimum of 90 per cent local participation in all aspects of the oil and gas value-chain by 2020.
The legislation requires that an oil and gas company or firm must obtain 60 per- 90 per cent of its goods and services from domestic sources within 10 years of its operation in the Ghana oil and gas industry.
Similarly, the legislation targets a local content of 60 per cent – 80 per cent in various onshore engineering services within 10 years of operating an oil and gas firm.
Fabrication and construction companies must utilise between 50 per cent - 100 per cent local content within 10 years of operation.
In fact, the only service in the regulation that requires an oil and gas company to use below 50 per cent local content and participation (within 10 years of operation), are those within the health, safety and environmental service areas.
Despite the expeditious passage of the local content and local participation regulation ,however, analysts and industry experts are not convinced that Ghana has done the necessary preparatory work to ensure that the capacity of local businesses and firms is duly built so as to enhance their capacity to deliver the desired quality of goods and services to the oil and gas sector.
The government has acknowledged three key challenges it is confronted with regarding actualising the ambitious local content requirements in the regulation, namely human resource capacity, finance and technology.
In particular, the upstream oil and gas industry is highly technical in nature involving exploration, development and production. Being a specialist field, it may take Ghana some time to generate the pool of experts in the numbers required to make the local content impact it desires.
The technological strength to undertake sophisticated and expensive exploration and development activities in the upstream oil and gas sector is a challenging imperative if the local ideal is to be fulfilled.
Significant capital outlays are needed to finance exploration, development and production of oil and few finance houses and local firms if any have the financial muscle or willingness to venture into such investment opportunities.
Nevertheless, the evidence shows that the challenge to meet the local content targets and benchmarks set remains an uphill battle.
Total activities in the petroleum upstream sector were reported at 6.3 billion dollars between 2010 and 2015.
Out of this, foreign companies were reported to have accumulated 5.3 billion dollars with local companies/businesses managing a paltry one billion dollars. With the country already three years to the 2020 target of 90 per cent local content and local participation, these results represent only 18.8 per cent local content.
The foreign firms within the sector have argued that many local businesses are not able to deliver to the desired quality and within the stipulated time and budget lines. As such, they are forced to lean more towards more internationally competitive service providers.
The local firms complain, in large part, that they lack the appropriate incentives to enhance their capacity to deliver and that not all opportunities are made available to them by the International Oil Companies (IOCs).
Incentives to indigenous businesses entering into the oil and gas sector may be in the form of tax holidays for about 10 years as granted to foreign companies producing export goods in the free zones enclaves.
Perhaps, indigenous companies should not also be charged subscription fees by the Petroleum Commission.
This could serve as a major incentive to qualified local companies to participate and compete effectively with the foreign firms.
There is also the need to scale-up capacity building programmes so that more local firms and individuals would be technically equipped to the level of the international firms. For example, it is heartwarming to note that with regards to petroleum agreements or licence, L.I. 2204 makes it possible for the Minister of Energy to waive the five per cent equity participation requirement of an indigenous Ghanaian company.
It has been argued that Ghana’s local content requirements are too lofty in a situation in which the oil and gas industry is still very young. This can be compared to a mature oil industry such as Brazil which has local content requirements that only run as high as 70 per cent.
Pundits who lean in favour of this argument believe that Ghana’s nascent oil industry may be less attractive to international investors if the local content regulation is applied in a stringent manner in the medium-term.
Angola and Nigeria started producing oil in the mid-1950s but these countries enacted their local content policies in 2002 and 2010 respectively.
There may be some merit in the argument that despite the yawning capacity gaps in skilled human capital and institutional finance confronting local businesses, strict adherence to the highly ambitious local content requirements may be counterproductive.
This can make Ghana’s oil industry uncompetitive and unattractive to international investors.
The evidence suggests that Ghana’s local content and local participation legislation could be more effective in stimulating the growth of indigenous businesses in the oil and gas industry currently.
If the local content legislation is backed by a comprehensive and well targeted capacity building programme, financial and tax incentives for local businesses, growth of local businesses and jobs will be accelerated in the medium to long-term.
Norway, Brazil, Malaysia and Trinidad and Tobago have excellently used similar strategies to engineer the growth of indigenous businesses, jobs and their economies in general.
The writer is a Senior Assistant ConsultantShawbell Consulting