Local content regulations in Ghana’s petroleum sector – A balance of interests

Discovery of oil

In 2007 Ghana made a discovery of oil and gas in commercial quantities in the West Cape Three Points block at what is now known as the Jubilee Field, located about 60 km offshore the Western Region.

At the time, there were many who linked the discovery to divine providence because it happened in the year when the country was celebrating its independence golden jubilee anniversary.  This was against the background that the country’s prospect for oil which started in the 1970s through to the 1990s yielded negligible discoveries.  The interpretation in some quarters, at the time of the discoveries, was that Ghana’s economic woes were drawing to a close.

Many were those who were too quick to make comparisons with other oil producing countries both within and outside Africa and imagined Ghana’s prosperity forgetting that Rome was not built in a day.   Maybe, the reminder to such people could be found in our own backyard, a country formerly known as Gold Coast.  As a world producer of gold for over a century, and Africa’s second largest producer, no streets in Ghana and for that matter the town of Obuasi, the primary location of Ghana’s rich mineral, are paved with gold.

Active players

With Kosmos Energy, an American Oil company making the initial discovery, and subsequent discoveries made by Kosmos and Tullow Oil of the United Kingdom, there was the strongest belief that the initial discoveries of these two Jubilee Partners would lead the country’s oil prospects and production to a major world producer status.  This is more especially when appraisals conducted indicated that the Jubilee Field and nearby discoveries contained expected recoverable reserves of about 800 million barrels of light crude oil with an upside potential of about three billion barrels as well as significant quantities of associated natural  gas.

In December 2010, production at the Jubilee Field commenced.  Currently, the daily production stands at 110,000 barrels a day, with the expectation that this will rise to 120,000 barrels a day by the close of the year.  This is as compared to our West African neighbour, Nigeria, which features on the list of top oil producing countries and which, in 2012, had an average crude oil production of 2.2 million barrels per day.    They are said to have an industry well grounded in successful exploration.  Today, Nigeria is Africa’s largest producer of oil and the sixth largest in the world.  In fact, the daily oil pilferage in Nigeria, estimated at over 150,000 barrels, is higher than Ghana’s daily production.

Ghana has some mileage to go.  Compared to other countries that are big in oil, Ghana is still young with only one major producing field to its credit even though 23 or so new discoveries are said to have been made.  So, as the country progresses with oil production which currently is said to have hit 76 million barrels since production started nearly three years ago, a new Petroleum Local Content and Local Participation Regulations Legislative Instrument (LI) has been laid before Parliament for approval.

Petroleum local content and local participation Regulations

At a recent forum with members of the Institute of Financial and Economic Journalists, the Director of Finance and Administration at the Ministry of Energy and Petroleum, Solomon Asoalla, spelled out the need for a petroleum law saying, “At the time our current energy and petroleum law was passed, we did not have oil.  But now, we have oil and we are even producing”.  He continued, “So there is the need to get a new law that will take some things into consideration such that when an investor comes in, he doesn’t take advantage of the obsolete law, PNDC Law 84 to outwit the country.”

So how is the new Petroleum Local Content and Local Participation Regulations LI going to work and work effectively so that the Ghanaian gets the best out of the industry and the investor gets incentivized to risk their resources in our country?  Perhaps a balancing act that would not leave Ghanaians cheated on their own soil while at the same time leaving active players and future investors encouraged to remain our development partners?

What is Local Content and Local Participation?

Local content regulations are not new to the oil and gas industry.  They are put in place to ensure the active participation of the local people and businesses in the industry.  For us in Ghana, parts of our constitution even encourage participation and benefits for the people, as found in some of the general principles of public conduct that impact on allocation and regulation of resource rights.  One such is Article 1 which requires the powers of government to be exercised in the name of and for the welfare of the people.  By interpretation, government is therefore left with the task of defining welfare through the exercise of its policy and law making powers.

Indeed, speaking to Mr. O. B. Amoah, the Chairman of the Parliamentary Select Committee on Subsidiary Legislation, amongst the things the Committee looks for in its work and as per the Parliamentary Standing Orders is whether a Legislative Instrument being considered by Parliament is in accordance with the general objects of the constitution or that Act pursuant to which it is made.  Somehow, Article 11 Clause 7 of the constitution places a limitation on the powers of the Subsidiary Legislation Committee since they cannot modify but only annul a pending LI based on certain conditions including violation of the constitution or any international treaties of which Ghana is signatory to.

Local content and local participation regulations therefore will provide for the development of local capability in the energy and petroleum sector by providing a legal and regulatory framework for monitoring and implementation.

The purpose of the regulations among others is to:
·    Promote the maximization of value addition and job creation through the use of local expertise, goods and services, business and financing
·    Achieve minimum local employment levels in the sector
·    Increase the capability and international competitiveness of domestic businesses
·    Achieve and maintain a degree of control for Ghanaians

The regulations seek to achieve 90 percent participation by locals in all aspects of the industry’s value chain within one decade.  Specific targets for direct employment and the roadmaps to achieving that include 30 percent of Ghanaians to be employed in management staff positions which will gradually increase to 50-60 percent within five years.  It also seeks 20 percent of the technical core staff to be Ghanaians and within five years increase to 50-60 percent while all other staff remains one hundred percent Ghanaian within 10 years.

Varied views on local content

Views on local content and local participation vary.  However, there is no doubt that there is a general consensus between both Industry and Government on the need to get locals fully involved in the oil industry and also ensure that the discovery remains a blessing and never a curse.

The Government recognizes the efforts of the industry in the area of local content, but would like to see an acceleration of the pace at which it is being implemented. It believes that the introduction of the local content LI will help in this regard.

The American Chamber of Commerce in Ghana with some of its members in the oil business believes that the objectives of the local content regulations are very clear and focused on one key area – the development of Ghanaians to quickly fill highly skilled jobs and to provide services in the energy sector.

The Local Content and Local Participation Regulations seek to accelerate the development of Ghanaians to fill the industry’s job opportunities.  But not only that.  If done properly, a local content regulation would create a win-win for the industry and the people of Ghana by providing skilled labour and services at competitive rates that lower industry operating costs by reducing the reliance on expatriates.

The oil and service companies support the principles of local content and are already working to address local content ahead of implementation of the local content regulations, through employment of Ghanaians and use of available local goods and services.  In view of the specialized nature of the industry, there is a great deal of expertise that needs to be developed.  For this reason, they bring in external advisers to help in the training of personnel while coaching and mentoring continues to be a daily management affair.

In addition, personnel are assigned to operations outside Ghana so they can experience best practices available elsewhere in the industry and investments are made in sponsoring Ghanaians in technical and degree level studies and supporting the development of educational facilities for individuals and businesses.    On the question of expatriates, these services are used in the deep water operating environment and other specialized jobs where the skills are currently lacking locally.  But even then, these specialized contractors only come in for short periods to do specific jobs and Ghanaians are being developed to assume these responsibilities in a planned and systematic manner over a period of time.   A major strength in the local content regulations is the central co-ordination by the Petroleum Commission, thus creating one central point to deal with all regulatory issues.

Opportunities in local content regulations

No doubt local content and local participation regulations which create opportunities for indigenes and local companies are steps in the right direction.  The advantages in providing jobs and opportunities to create wealth and reduce poverty are well articulated by a civil society group, the Africa Centre for Energy Policy.

The Centre sees local content as an opportunity to promote the interests of Ghanaian citizens in the petroleum sector.

In my interview with the Economic Desk of the American Embassy, it was clear that they were in support of ensuring that Ghanaians benefit fully from the oil industry.   They supported the idea of creating local employment, pushing for technology transfer and empowering local companies in the oil business to stand on their feet and be able to even compete outside Ghana once they acquire the expertise.  They advocated for transparency to ensure that all Ghanaians benefitted and that the terms of the regulations should encourage rather than discourage foreign direct investment into the industry.

Other views

Local content works well when there is transparency and all Ghanaians get an equal opportunity to benefit.  There are however doubts that need to be cleared.  Is the Local Content Regulation full of over ambitious and unrealistic targets?  Are the local content and local participation regulations incentivizing enough in a high risk, highly technical and specialized industry such as energy and petroleum to attract the best industry players with world class expertise and the financial clout?   Are the regulations encouraging unnecessary bureaucracy which can delay processes, knowing that time is of the essence in the oil industry?  These are some of the pertinent questions to ask as we seek for a balancing act in the local content regulations.

Talking about probably overstretched  targets, an example could be made of the First Schedule of LI 2204 (Regulations 1 (c ), 10 and 18) which states in the tabulation that a minimum Ghanaian content in goods and services should be 10 percent at start and move to 50 percent at five years and 60 – 90 percent at 10 years.  The views of industry players are that these targets are not realistic and therefore not achievable within the set time of five to ten years.  One suggestion is that long term targets should be reviewed and reset annually.  Annual reviews would allow all parties to monitor the growth of the industry and take into account the life cycle of oil and gas operations.

Such target resets could be done with the Local Content Committee, industry players, the Association of Ghana Industries (AGI) and the Petroleum Commission.

On unnecessary bureaucracies, Sub-regulations 13 (1b) and 14 (1b) say that the Commission must be informed of all potential contracts and purchase orders greater than US$100,000.  We are dealing with an industry whose contracts and purchases are exceptionally high and where the value of most items exceeds the US$100,000 threshold.  Would such a limit therefore not lead to overburdened administrative costs, inefficiencies and unnecessary delays?

Discretionary power

One area of concern to most Ghanaians surveyed by the Africa Centre for Energy Policy is the discretion given solely to the Minister of Energy and Petroleum to determine which Ghanaian companies qualify as partners to foreign companies.  Sub-regulations 4(2) and 4(4) of the Local Content Regulations talk about a minimum five percent equity participation by an indigenous Ghanaian company in any petroleum agreement or license.  It stipulates that the Minister of Energy and Petroleum shall determine the local companies who are so qualified to be given the opportunity to acquire the equity position.

First of all, it is difficult to understand why foreign companies with extensive global experience in selecting partners and suppliers and with substantial investments locally, are not being allowed to select their own local partners subject to regulatory approval by a substantive board such as the Petroleum Commission.

According to those who argue for the review of this sub-regulation, too much power has been left to the Minister to decide which Ghanaian company shall be deemed eligible to participate.   By this argument, if there is a Petroleum Commission in place to see to the management of the sector, why should one person be left with so much discretion to decide in this case?
In any case,   Article 296 of the constitution states that discretionary power should be deemed to be fair and candid.  Therefore, any discretionary authority must be backed by guidelines specifying the criteria for selection.  This will ensure a level playing field and transparency.

So that the Sub-regulation 4 (4) does not leave any ambiguity in the minds of Ghanaians and to eliminate capriciousness and bias, this particular sub-regulation should be either amended or withdrawn.

When contacted to comment on sub-regulations 4(2) and (4), a representative of the Ministry of Energy and Petroleum with the Local Content Directorate said it was the Ministry that prepared the entire Local Content and Local Participation Regulations and therefore they have no comments to make.  Pressed further, they clarified that the discretion will not be solely that of the Minister as contained in the sub-regulations but in consultation with others.

 How has local content worked elsewhere?

Some oil producing countries have successfully maintained the balance of protecting investor interests while ensuring that the industry benefits locals broadly.

In Brazil for example, Petrobras is said to have maintained active involvement in the industry from formation and developed capability in deep water drilling through the use of international experts as trainers.  Malaysia on its part formed partnerships with international oil companies.  Local industry is said to have gained world class best practice and cutting edge technology through its close cooperative relationships with the international investors.  Norway, a country cited for exemplary oil industry practices is said to have shown upfront openness towards international companies combined with a strong focus on national value creation.  All of the  above countries are endowed with significantly more oil and gas resources, started with a better educated workforce and took decades to achieve their current levels of local content.

As Parliament resumes sitting, we are already well into the 21 days period after which the Petroleum Local Content and Local Participation Regulations automatically come into effect if there is no annulment or withdrawal.

At this teething stage in our oil production, and for an industry where the best of world class expertise partnerships are sought, one probably needs to ask whether the Local Content and Local Participation Regulations 2013 as they are now constituted encourage the much needed foreign direct investment (FDI) while building the local industry for the benefit of Ghanaians?  That is really the question.

By Vicky Wireko-Andoh