Local content in the petroleum sector: So far so good?
Ghana’s Petroleum Local Content Regulations (LI2204) came into effect in February 2014, after commercial discovery in 2007. This is commendable, given Nigeria’s Local Content law was passed in 2010, generations post commercial discovery in 1956 at Oloibiri in the onshore Niger Delta by Shell-BP. Serious attempts at formulating a local content policy commenced in the 1990s in Angola, despite initial discovery in 1955 in the Kwanza Basin,
After much fanfare heralding its promulgation, some 3.5 years on we can surmise that LI2204 has passed its toddler ‘terrible twos’ and settled gracefully. In assessing its impact, we must bear in mind that, as with all new regimes, it may well take a few more years to mature.
Notwithstanding initial hostility from some operators, early indications appear promising. Since Jubilee, there has been a steady increase in local content in the TEN, and recently, eni’s OCTP projects. A comparative analysis of current involvement of Ghanaian companies in the sector vis-à-vis the prevailing status quo during the early stages of Jubilee supports the view that participation has increased, with a steady stream of companies trooping to the Petroleum Commission (PC) to register to provide goods and services.
Key highlights of LI2204 include requiring foreign companies to, not only register with PC, but also to form Joint Ventures (JV) with indigenous Ghanaian companies (IGN). Contracting strategy, contract awards and procurement of goods and services above a $100,000 threshold, and sole or single sourcing must be justified, and approved by PC.
Succession and Localisation Plans must be submitted to PC for approval. Furthermore, in collaboration with Ghana Immigration Service, Work Permits for expatriate staff must be routed through PC, which conducts an initial scrutiny to determine whether there is sufficient justification for recruitment of expatriates.
Despite the rosy picture painted by IOCs and Service Providers (SP) in glossy brochures, challenges remain. So far, the emphasis for the past 3years has rightly been embedding a local content culture within the value chain, and enforcement of LI2204. However, enforcement must necessarily walk in tandem with development of the limited capacities of IGNs to provide the core complex technical services underpinning successful petroleum industries.
IGNs are still classified as poorly structured SMEs, with insufficient financing opportunities. Although PC has mounted a spirited advocacy in Local Content in Financial Services, access to finance remains out of reach of the average IGN. Interest rates remain at suicidal levels, up to 35% in some instances, rendering financing projects uncompetitive at best, and impossible at worst. But hope springs eternal, and the Local Content Fund provisions in the 2016 E&P Law, Act 919 are refreshing, somewhat.
Information asymmetry on tendering processes and lack of requisite certifications are rife. As was the case in Kazakhstan’s 2012 assessment of impediments to using local goods and services, insufficient awareness of strict compliance with HSE regulations, as well as the ‘whom you know’ attitude of operators who prefer to work with proven suppliers, if unchecked, could prove fatal. For IGNs, winning the smallest contract while competing with internationally experienced SPs remains a herculean task.
Nevertheless, if properly policed, solutions could be found in JVs for skills transfer and capacity building. Sadly, however, some companies have taken to the high road with dubious share transfers and fronting in a bid to outwit regulators by benefiting from provisions on price preference to IGNs, only to sub-contract services at a higher cost to international SPs. Pocketing mark-ups at the nation’s expense! Some JVs also operate as shell companies, with no assets, while decision-making powers continue to reside in faceless executives outside the reach and jurisdiction of Ghanaian authorities. Indeed, some IGNs have complained about being blind-sided by foreign partners. In-spite of assurances to the contrary, and information provided in Local Content Plans and tendering documents, it appears some foreign JV partners are executing contracts without the knowledge and involvement of their IGN partners. Transfer pricing also appears to be on the increase.
Crucially, interpretation and implementation of a number of the Regulations is a challenge to continued effective implementation. For instance, the First Schedule contains various targets, some of which are unrealistic, given the current status of development. Also, a number are obsolete, having been exceeded by the experience of IGNs in areas, such as catering, and fabrication. The Common Qualification System and the catalogue of Guidelines are also yet to materialise, leading to inconsistencies in application by operators. The Local Content Plan approval procedure also appears convoluted and unwieldy, given the large number of companies registered with PC. Recent developments in the Financial Services sector resulting in a reduction in the number of ‘indigenous banks’ in Ghana makes the effective implementation of the provisions on Financial Services problematic. Additionally, provisions on Technology Transfer and development of a National Policy on Technology transfer with respect to the petroleum sector remain unrealised.
Despite these challenges, statistics from the PC presented at the recently concluded Energy Summit in June 2017 indicate that Ghana is on track. According to PC, as at December 2016, some 418 companies were registered to provide both direct and indirect services, out of which 249 were IGNs. PC noted that in relation to eni’s OCTP project, out of a total contract sum of US$6.2billion awarded to date, US$1.75Billiion was to IGNs.
On employment and training, PC stated that 93% of the 12,183 personnel currently employed in the sector are Ghanaians. To address the skills shortage in the sector, PC announced its launch of 2 flagship projects: Ghana Upstream Internship Programme (GUSIP) and Ghana Upstream Sector Technical Vocational and Apprenticeship Programme (GUSTVAP).
In terms of infrastructure, although fabrication yards in Takoradi, do not currently measure up to Nigeria’s Nigerdock, and the facilities at the Snake Island Integrated Free Zone (SIIFZ), Ghana’s achievements at this early stage compare favourably. FPSO deck stools, jumpers, and suction piles are now being fabricated in Takoradi by IGNs, such as Seaweld and JVC, and JVs, including, Orsam, Belmet, and Amaja. Also, IGNs including Conship, Zeal and Rigworld now supply services, such as vehicle rental, freight forwarding, waste management, offshore catering and manpower supply exclusively. Excluding the Onshore Receiving Facility (ORF) under construction by eni, it is estimated that over $20bn has been invested in the upstream sector in Ghana in the past 10 years.
Ghana is on the right track and our challenges are not insurmountable. However, the extent to which our Local Content has taken root after a record breaking 3 major developments in 10years can be ascertained by conducting a critical review of our achievements and emerging challenges in light of LI2204.
Such a review must address mainstreaming local content and development of clearly defined metrics for local content measurement in Ghana, with realistic targets, taking into account capacities of IGNs. Experience of countries, such as Brazil and Kazakhstan shows that standardised measurement of local content makes it easier to monitor and ensure compliance with local content targets. Measurement tools in South Africa’s Broad Based Black Economic Empowerment (BBBEE), which allocates specific points to matters, such as enterprise and supplier development, could perhaps form the basis of a Ghanaian approach to measurement.
Government’s role in continued creation of an enabling environment must not be downplayed and initiatives aimed at developing local content, such as reservation of services for IGNs, and provision of tax incentives must be reinforced. For example, establishment of a duty-free regime for importation by IGNs of specified technical equipment for petroleum activities. Of course this must be balanced with the need to encourage local manufacturing.
Account must be taken of the extent to which clustering of activities can promote Local Content development. This approach has been successfully trialled in places, such as the Chilean Antofagasta "mining cluster". Although, a number of companies have taken root in Takoradi, a deliberate effort at cluster mapping and development must be made to enhance productivity, knowledge spill-overs and efficiency through synergies and coordination.
Our Financial Services sector and IOCs must adopt innovative and pragmatic solutions to facilitate IGNs’ access capital. For example, Total Nigeria Limited’s MOU with 8 banks in 2013 to provide an estimated $7.5billion in contract funding to local contractors.
Moving forward, in addition to laws mandating specific local content levels, urgent steps must be taken to ensure development of local skills, and capable, competitive sustainable IGNs. Local Content development does not happen overnight and an increased share of local content in only total expenditure may not necessarily lead to long-term competiveness and sustainability. Ghana’s Local Content can only grow in leaps and bounds and it is heart-warming to see sectors, including Power, and downstream oil and gas working assiduously on their sector specific legislation.
From the above assessment and reassuring figures issued by PC it is fair to conclude that so far so very well!
The writer is a Principal Consultant, Anojul Afriyie & Co and former Consultant and Head Of Local Content Department,Petroleum Commission, Ghana