Monday, 12 March 2018

Local Content Law: a ‘loose document’ ….An Industry Player’s Perspective (Part I)

 Image result for ALEX MOULD

Adnan Adams Mohammed

Petroleum industry experts have argued that, the Petroleum (Local Content and Local Participation) Regulations 2013, L.I 2204 are defective in their punitive measures.

They adduce that, the Petroleum Commission as the regulator does not have the capacity to enforce the LI, thereby, allowing foreign companies and local politicians with complicity from greedy Ghanaians to abuse the law.

The experts have registered their disquiet with some provisions of the LI as well as the slackness of the regulator in ensuring that players in the industry comply with the law.

Ghana made commercial discoveries of hydrocarbons in 2007.This has attracted the attention of several international oil and gas companies as well as local entities. But, lurking in the background of commercial discovery of oil is the oft mentioned resource curse-the inability of countries to take the full benefit of their natural resources to improve public welfare needs among others. 

In order to promote Ghanaian interest (participation) in the petroleum value chain, two key pieces of legislation were passed: The Petroleum Commission Act, 2011 (Act 821) and The Petroleum (Local Content and Local Participation) Regulations 2013, L.I 2204, as a pragmatic step taken to break the lurking undesirable resource curse.

The Petroleum Commission Act, 2011 (Act 821), established the Petroleum Commission for the regulation and management of the utilisation of petroleum resources in Ghana and coordination of policies in relation to them. In relation to local content, specifically, section 3 (f) of Act 821 mandates the Commission to promote local content and local participation in petroleum activities as prescribed in relevant legislation to strengthen national development. Additionally, the Board of the Commission is required to establish a Local Content Committee to deal with local content and local participation issues.

In November, 2013, the Petroleum (Local Content and Local Participation) Regulations 2013, L.I 2204 was promulgated to inter alia promote maximisation of value-addition and job creation through the use of local expertise, goods and services business, financing in the petroleum industry value chain and their retention in Ghana. The Local Content Committee established by the Board of the Commission is required to oversee the implementation of LI 2204.

The regulator, the Petroleum Commission, is to ensure both local and foreign companies comply with the provisions and requirements of LI 2204. To this end, every contractor, sub-contractor, licensee, corporation or other allied entity carrying out petroleum activities has a responsibility to ensure local content forms a central plank of its operations.

 Some authors and international law cases suggest that local content requirements by various countries are contrary to international law. Nonetheless, the object of Ghanaian legislation is to among others promote job creation through the use of local expertise and to develop local capacities in the petroleum industry.

The Petroleum Commission as established by the Petroleum Commission Act, 2017 (Act 821) regulates, promotes and among other duties, oversees the implementation of the local content and local participation in the upstream petroleum industry.

According to the LI, Local Content refers to the quantum/percentage of locally produced materials, personnel, financing, goods and services rendered to the oil industry and which can be measured in monetary terms. Local Participation on the other hand refers to the level of Ghanaian Equity Ownership in the oil and gas industry.

Some of the key features of L.I. 2204 in respect of local content are the following requirements: Non-indigenous Ghanaian companies are to incorporate a joint venture company (JVC) with an indigenous Ghanaian company and afford that indigenous Ghanaian company an equity participation of at least 10 percent; Submission of a plan specifying the role and responsibilities of the indigenous Ghanaian company; Submission of a plan specifying the strategy for the transfer of technology and know-how to the indigenous Ghanaian company; Preparation and submission of annual local content plans for approval; Insurable risks relating to petroleum activity in the country are to be insured through an indigenous brokerage firm or where applicable, a reinsurance broker; Legal services required in the country are to be obtained from a Ghanaian legal practitioner; and Financial services in relation to petroleum activity are to be obtained from a Ghanaian financial institution.

In practice, an International Oil Company (IOC) typically enters into a petroleum agreement with the Republic of Ghana (Ministry of Energy) and the Ghana National Petroleum Corporation (GNPC) to engage in activities in the upstream petroleum industry. For the purpose of local content, the IOC which has entered into the petroleum agreement is said to be the contractor for the activities under the petroleum agreement. The contractor may subcontract some or all of the activities to various subcontractors. The agreements entered into between the contractor and subcontractors are often referred to as service agreements. It is also common to find various services further subcontracted by the subcontractors.

Some of the common service agreements associated with the production of oil and gas through FPSO facilities are Engineering, Procurement, Construction, and Installation (EPCI) agreements, Charter agreements and Operation & Maintenance agreements. 

However, to bid for and provide such services or engage in petroleum activities, a non-indigenous Ghanaian company (usually comprising a foreign company or a company incorporated in Ghana which does not have at least 51% of its equity owned by a citizen(s) of Ghana) is required to incorporate a JVC in Ghana. This implies that a foreign company must first incorporate a company in Ghana and use that company incorporated in Ghana to form the JVC. It is either an indigenous Ghanaian company or such JVC’s formed by a non-indigenous Ghanaian company which can bid for and provide services to a contractor, subcontractor, allied entity or GNPC. In providing these services, the quantum or percentage of local content among others must be met.

In abstract, when some people hear about local content, it immediately sounds like locals getting empowered to own businesses in the nascent Oil and Gas business; to some it resonates something similar to South Africa’s Black Empowerment.

 The former GNPC boss, the national oil company operating in the oil and gas industry on behalf of Ghanaians, Alexander Mould, giving an elaborative insider meaning of Ghana’s local content law in the Oil &Gas industry to the Economy Times said; assume that all contracts go to Joint Ventures Companies (JVCs), set up in Ghana where the minimum indigenous participation is 10% (This means a foreign company should first of all register as a local company in Ghana not a branch, which many who initially participated in Ghana, such as Tullow, KOSMOS and others did) either with some local shareholding, or, if the company set up does not meet the Regulators local content requirement of 10%, then it must enter into a Joint Venture (JV) with an indigenous company where that indigenous company owns at least 10% of that JV.

However, Mr Mould, in answering a question on what steps GNPC put in place during his tenor as chief executive to ensure that the local content policy was fully enforced, responded, “The GNPC as presently structured, hasn't got the bite to ensure that the right thing is done at the operational level; plus the politicians will interfere to ensure that the Local Company [LC] that partners the Foreign Company [FC] is just a rent seeker and hasn't got the capacity to actually undertake any part of the scope on tender. Neither do they have any desire to develop the capacity. In the end the whole local content objective is defeated and reduced to commission payment, that is, a reduction in consumer welfare.”

Commenting on whether there are any success stories that can be used as a model for oversight and enforcement, he stated that, “There are a few success stories but this only works when the LC is knowledgeable of the industry (and really wants to learn) plus has built, or is prepared to build, capacity - this requires resources from LC spent on building capacity and some transfer of knowledge from the FC; this really works when the FC sees the LC as a well-resourced and formidable partner and not a pawn of some politician (or of other vested interests in the NOC or the Regulator), or of the FC themselves.”

After interacting with some local companies, it is worthy to note that, the main issues arise in the sharing of the scope of work under the contract. For some Operators, it is a requirement to state the scope of work and how it is divided between each partner at the time of tender submission; it is also a requirement to ensure that this agreed scope of work is actually carried out by the JV; it is the responsibility of the Operator to see that this is carried out as enshrined in the Petroleum Agreements ; lastly it is the role of GNPC as the business owner, and PC as regulator, to ensure that these Operators carry out their duties and that the sub-contractors of these operators follow the rules of engagement and the award conditions which includes the sharing of the scope of work of each partner in the JV.

However, in a shocking revelation by the former CEO of GNPC, he conceded that, “in practice many subcontractors under the watch of the Operator (GNPC), and Regulator (PC) flout this simple rule of engagement; the reason given is simply: ‘because they can!’.”

So, the question is, ‘Why can they?

Unfortunately, the truth of the matter is that, majority of the oil services companies (OSC) do not like any local content law; they are used to running their businesses without any interference from local partners; some of them have gotten around this local content law by entering into JVs with companies set up by themselves with the help of some unscrupulous Ghanaians who have no capacity nor any intention of carrying out any scope of work themselves, and whom have no intention of building capacity to do such work in the near future; many such JVs exist and unfortunately the PC and GNPC turn a blind eye to this; the motive for this in most cases is either political pressure or financial gain.

Citing an example to buttress his point, Mr Mould said, “Let’s say a contract is given to mop up oil spills; since, a Ghanaian indigenous company, which doesn’t have the expertise, it joins forces with a reputable foreign company to form a joint venture to bid. The JV then bids and wins. In its bid the JV said LC will handle 30% of the scope of work and FC 70%. LC will work with the FC to build its capacity by using FC standards so that it becomes a world class Oil Service Company as well over the period.

“But, there are cases where FC has no real intention to build capacity of LC and thereby puts impediments in the way of LCs so that they do not deliver and then FC takes over the scope of work intended for LC and sometimes gives LC some pittance to compensate for resources spend so far, if at all. We need to remember the whole essence of the JV agreement is for FC to assist in getting LC up to speed; build capacity; and transfer technology so that LC does the work to the standard that is expected by Operator. There are also cases where the LC has no intention of building capacity and doing the work and then negotiates with FC for a payout when the work is done, which is direct fronting.”

It is, therefore, the duty of Operator, Regulator and GNPC to ensure that the JVs work and that the contracts awarded are carried out based on the scope split to help make the local content policy work effectively. Enforcement of the law of local content is the main issue here.

But, Nana Yaw Ntrakwah and Judith Donkoh of Ntrakwah& Co., in a publication on the topic: ‘LOCAL CONTENT IN THE UPSTREAM PETROLEUM INDUSTRY IN GHANA -THE LAW & PRACTICE’,stated that, failure on the side of any party to comply with the LI could result in criminal liability.

Consequently, according to the Ntrakwah& Co.’s publication, one stark practical and conceptual challenge emanating from the local content legislation is the requirement for non-indigenous Ghanaian companies to form joint venture companies (which constitute separate legal entities) with indigenous Ghanaian companies to execute or provide services.

By law, the parties to the joint venture are required to state their roles and responsibilities in the joint venture company. The parties to the joint venture company are also required to share profits and losses. The parties are also expected to have joint control and rights to the net assets of the joint venture company.

A critical examination of the law and practice would seem to reveal a mix-up of two types or concepts of joint venture. The requirement for the formation of a company clearly implies the creation of a separate legal entity owned by the joint venture parties. The assets of the JVC are its own assets without the joint venture parties owning any of them. The joint venture parties own only shares in the JVC. The liabilities of the JVC should in the usual corporate sense not be the liabilities of the joint venture parties. 

The requirement for the joint venture parties to continue to show (after the formation of the JVC) the different roles played by each of them, the sharing of profits and losses, joint control over net assets of the JVC are conceptually problematic. This is because not only do those requirements fit better under a different type or concept of joint venture (the pooling of resources together by the joint venture parties through an agreement for the execution of a project) but are also in conflict with the well-established principle of the creation of a separate legal entity after incorporation.

This article will have a follow up (part II) to critically consider the subject from an industry player perspective on the Petroleum (Local Content and Local Participation) Regulations 2013, L.I 2204 and the Petroleum Commission’s and GNPC’s role in fostering and enforcement of the Law.