Local Content Policy in Ghana’s Oil and Gas Industry: What are the Prospects and Challenges?

By Gilbert Azaah

In recent times, local content has become a significant issue and most resource rich countries especially in the oil and gas industry have made it part and parcel of their investment agreements with International Oil Companies (IOCs) by enshrining such requirements in law. Local content according to the International Petroleum Industry Environmental Conservation Association (IPIECA)[1] (2008) is “the added value brought to a host nation (national, regional and local areas in that country, including communities) through the activities of the oil and gas industry. This may be measured (by project, affiliate, and/or country aggregate) and undertaken through activities such as but not limited to: workforce development, supplier development and community development.” It basically refers to the development of local skills, transfer of technology, and the use of local manpower and local manufacturing. Local content provisions are employed by governments especially in developing and middle income earning countries as a way of deriving maximum benefits from their new found wealth in order to “support the long term development of the sector locally so that the future of the oil and gas projects can bring the desired sustainable benefits to the local economy.” (Wilson and Kuszewski, 2011)

Since the discovery of oil and gas in commercial quantities in 2007, the government of Ghana has taken steps to put in place measures aimed at increasing local capacity and participation as well as ensuring that the country gains maximum benefit from its oil and gas find. Section 23 of Ghana’s Petroleum (Exploration and Production) Law, (2011) imposes a number of local content compulsions on investors in the oil and gas industry. Some of these obligations are as follows;

· Ensure that as far as possible, employment opportunities are granted to Ghanaians having the requisite expertise and qualifications in the various levels of operations;

· As far as practicable, use goods and services produced or provided in Ghana in preference to foreign goods and services;

· Prepare and implement plans and programs for training Ghanaians in all job classifications and all aspects of petroleum operations;

· Prepare and implement plans and programs for transfer to GNPC of advanced technological know‐how and skills relating to petroleum operations while protecting the contractor’s competitive position.

This policy is aimed at maximizing the benefits from Ghana’s oil and gas sector through the maximum use of local expertise by way of employment as well as the patronage of local goods and services. It also involves the building of local capacity through education, skills development and technology transfer. It also seeks to achieve some degree of influence and control of development initiatives by local stakeholders. Finally, it sets a target of attaining at least 90% of local content participation throughout the oil and gas value chain within a decade of its implementation.

Indeed it emphatically states that “every profit, operation, activity or transaction must have a Local content Place.” (Ghana Petroleum Law, 2011) For this reason, all operators in the oil and gas industry are required to procure goods and services produced or provided by Ghanaian companies as opposed to foreign goods and services as far as practicable so far as they are competitive in terms of quality, price and their timely availability.

The aim of this study is to examine Ghana’s local content policy as enshrined in its Petroleum (Exploration and Production) Law, (2011) and its Local Content and Local Participation in Petroleum Activities Policy Framework to find out how best Ghana can be able to take advantage of this provision to derive maximum benefits from its oil and gas wealth and also efforts being made by the government of Ghana, the various International Oil Companies (IOCs) as well as Small and Medium scale Enterprises (SMEs) in implementing this provision and the challenges being faced in the implementation process and finally offer some recommendations on how best this policy can improve the lives of Ghanaians.

With the aid of legislative and policy frameworks, various publications and reports from Ghana’s Energy Ministry, which is the sector ministry, various OICs and local businesses, this study will examine how Ghana’s local content and local participation policy is being implemented by the various stakeholders and the challenges being faced in the implementation process.

Literature Review

There has been extensive literature on this subject matter which goes to show that even though the issue of local content has gained prominence in recent times, it actually dates a few decades back. According to Tracy et al, (2011) “it was first introduced in the North Sea in the early 1970s and its aims ranged from restrictions on imports to creation of NOCs”. These aims have since evolved from the creation of backward linkages such as the creation of local employment opportunities and increasing local ownership and control, to the creation of more forward linkages such as the processing of the sector’s output before exporting, it has thus come to include broader economic diversification.

It is for this reason, that most oil and gas bearing countries especially in the middle income and developing countries have subsequently adopted local content policies as part of their investment agreements with IOCs and increasingly enshrining such requirements as law (Wilson and Kuzewski, 2011). Local content requirements are employed by these governments as a means of capturing more of the development of hydrocarbons within the country. It is important to note however that the ability of these companies to meet any local procurement targets will depend on various factors such as the nature of work that is to be done and the availability of skilled labour to do the job as well as the quality of local goods and services to be supplied.

Another significant reason for this has been the changing trend of oil and gas agreements from “old style” concessions to partnership agreements which gives impetus to host countries (often represented by a national oil companies) more control over key decisions such as local participation in the oil and gas sector (UNCTAD, 2007). As noted by Klueh et al, (2009) where as local content promotion is a topical issue, most of Africa’ oil and gas producing countries have yet to develop any comprehensive framework on it. Although most countries include local content considerations in legal frameworks and production sharing arrangements (PSAs), smaller countries and newcomers are only starting to define objectives and strategic priorities.

Also, the implementation of this policy has met a mixed reaction in various countries as not all countries have been successful in its implementation, according to Ariweriokuma (2009), whereas local content implementation has been illusive in a country like Nigeria. Some countries namely Saudi Arabia, Kuwait and Venezuela had made significant progress in local content development in their oil and gas industries. Norway is said to be the most successful country to develop this policy, having achieved local content utilization ranging from 65 to 90 per cent in various categories of input. Local content policies are implemented gradually with an increasing utilization period set within a time frame. In Kazakhstan for instance, new legislation has set targets for procurement from Kazakh suppliers to 50 per cent and for local services up to 90 per cent by 2012 (Wilson and Kuzewski, 2011). In order for these targets to be met, there is the need for these local personnel and companies to possess capabilities that are highly valued and demanded by the oil companies. This seems to be the reason why the policy has been more successful in developed countries than middle income and less developed countries.

Also, Klueh et al, (2009) believe that most developed countries have been successful at implementing this policy by following some key policy principles which have proved to be crucial in their attempts to foster local content in the oil industry. These include the creation of a dedicated and independent government authority responsible for monitoring local content in the oil industry. All local content assessments and targets must take into account technological considerations as these can impact on the level of economic benefits, most importantly, there must also be an unambiguous definition of what constitutes local content. For developing countries like Ghana to succeed in its local content policy, it must take a cue from above principles.

A challenge faced by IOCs with regards to local content realization in less developed countries where most local businesses are still in their infancy is the fact that they must still abide by local rules and still ensure that they get the desired quality and cost of supplies (Inkpen and Moffett, 2011). This is one of the main reasons why most IOCs recognize the need to train local employees and develop local suppliers to match their desired standards.

NUTSHELL

Gilbert Azaah, in this article, examines Local Content Policy Framework applied in the Ghanian oil and gas industry and seeks to find out how best Ghana can take advantage of these provisions to derive maximum benefits from its oil and gas industry. He also examines the efforts made by the Government and stakeholders in implementing this policy and the challenges which are being faced in the implementing process. This is the first installment of this interesting piece. Read, Learn, Share and Discuss! Comments and questions on this issue are welcome.

[1] The International Petroleum Industry Environmental Conservation Association (IPIECA) was established in 1974; its membership covers over half of the world’s oil production, and provides one of the industry's principal channels of communication with the United Nations.