High entry barrier limits local participation in upstream oil sector
In spite of the vast opportunities available in the upstream oil and gas sector, local participation is very low due to high barriers of entry, a report by Ernst & Young (EY), Ghana, indicates.
The report shows that local participation in areas like well drilling, engineering services, exploration and subsurface, recorded low viabilities as a result of high capital requirements and low existing capacities.
Partner advisor for EY, Mr. Michael Sackey, explained that “there are more foreigners than local companies in the upstream sector for a number of reasons. One is capability. Today, as we speak, we don’t have the capability and it also takes a long time to build the capability: up to ten years.”
“The other reason is about the capital requirements. We just don’t have the financial muscle to get into that space. While you have the foreign companies, who have been doing this for years,” he added.
According to the survey report, activities such as well drilling services has high demand and attracts the highest capital expenditure across the upstream value-chain. However, existing capacity of local suppliers to service the sector is low due to high requirements in skills, capital, HSEQ and technology.
Michael Sackey made these revelations at a recent breakfast meeting organised by EY dubbed, “Meet the Regulators Series” in Accra. The 6th edition of the meeting brought together stakeholders and investors in Ghana’s oil and gas industry to discuss issues on local content and local participation.
Representatives from the Petroleum Commission made presentations on the requirements for local companies to participate in the upstream oil sector, highlighting the legal requirements and processes that must be fulfilled in gaining a licence from the commission.
Mr. Dominic Naab, Chief Revenue Officer at the petroleum unit of the Ghana Revenue Authority, took participants through the different taxes and regulations in the oil and gas sector.
“Taxation is about the law and that is why programmes like this are important so we make inputs and engage them on tax education geared towards making the provisions clear to guide operations of these companies,” he explained. “We think that Ghana stands to benefit so much”.
Government has put in place Local Content and Local Participation Regulations, with the aim of promoting the use of locally made goods and services and also define local content targets across 10 main upstream supply chain sectors within the oil and gas value-chain. However, participation by local companies in these areas remains low.
Following the passage of the law, Ernst & Young (EY) Ghana conducted a market study to assess the viability of the upstream supply chain sectors in Ghana to increase local content at the speed and the level as stipulated by the local content regulation (LI 2204).
The market assessment focused mainly on the 10 upstream supply chain sectors within the oil and gas value-chain.
Local capacity exists in the priority sectors (transportation & supply, HSE and IT & communications) to meet the supply chain needs of the oil and gas industry while there is opportunity to deepen local content in the transformational sectors (fabrication & construction, marine operations & logistics and materials & procurement), the report says.
The report revealed that, "well drilling services will attract the biggest spend up to 2024 in the industry despite the fact that local capacity is quite low".
Opportunities therefore exist in the oil and gas industry however, organisations looking to invest in the industry need to obtain a good understanding of the requirements of relevant legislation particularly the local content regulation (LI 2204).”