Monday, 12 March 2018

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


Adnan Adams Mohammed

After analyzing some defects in the local content and participation law in the oil and gas sector in the previous article (part I), it is necessary to critically consider the subject from an industry player’s perspective on the Petroleum (Local Content and Local Participation) Regulations 2013, L.I 2204 and the Petroleum Commission’s role in fostering and the enforcement of the Law. This takes into account a story told by a local industry player, who is very vibrant in the industry. [Name of the source has been withheld for other reasons.]

Prior to the enactment of the LI2204, the requirement for local content participation in the oil and gas sector, specifically participation in activities envisaged under the various petroleum exploration activities were subsumed in the various petroleum agreements where the signatories to these agreements agreed to some voluntary measures to accord recognition to local content participation under their respective agreements. Under this voluntary regime, the industry did not see much local participation in the activities pertaining, for example, to the exploration work done on the jubilee field.

To ensure that the operators and the international oil companies paid attention to according local content participation under their respective petroleum agreements, LI2204 was enacted to make mandatory the voluntary obligations that the international oil companies had under these petroleum agreements.

However, despite the mandatory requirements of local content participation, the LI2204 has not lived up to the expectations of many industry participants.

Several reasons have been given for this, some legitimate and some just perspective. I will attempt to provide herein, what I see as the challenges in the enforcement of the law and provide some ideas that I hope will be useful in helping solve some of these challenges.

The L.I. 2204

The LI itself, is probably one of the most self-interpretative document compared to many legislative instruments out there. It is fairly comprehensive and easily comprehensible. The letter and spirit of the instrument is to promote the maximization of value-addition and job creation through a series of achievable measures in the petroleum industry value chain.

The main purpose is to build and retain capacity to a point where Ghanaians have to ability to perform most of the tasks involved with petroleum exploration and exploitation.

The LI has specific numerical targets that should be achieved in the acquisition of goods and services. The setting of numerical target though admirable is also the one area in the LI that has been subject to the most misinterpretation. From the player’s perspective, the most important clause in the LI is the lead-in paragraph to the first schedule of the instrument; specifically, the language as captured below:

The law is very clear on the numerical target set-forth in Schedule in the LI are to be measured from the time when an operator or contractor acquired their license or signed their petroleum agreement. However, many have mis-interpreted this provision to mean the date of the enactment of the LI. Consequently, a petroleum agreement which was signed 5 years prior to the enactment of the LI which should be awarding local content contracts at the 50% milestone is still ear-marking local content targets at the 10% percentile. This is a clear violation of the LI. So, despite the admirable intent of the LI, sheer misinterpretation of it is rendering the enforcement of it ineffective.

JV Formation

The first point of contact that most of the Oil Service Providers (OSPs) make when they come to Ghana intending to participate in the oil and gas sector is to meet with local counsel to get a sense of what the requirements are in incorporating a joint venture as required by the petroleum commission. The first question that is normally asked is what percentage of the joint venture must go to the local partner. Invariably due to the misinterpretation of the LI, almost all the advice given to this question is a 10% local participation in the JV. This is a gross negligence of counselling from these lawyers who have perversely made the minimum requirement also the maximum commitment.

What is even more egregious is that the JV percentage participation is the target then used by the OSPs in allocating the local content targets attained from the contracts awarded. This gross misinterpretation then trickles down and negatively impacts the relationship of the partners throughout the life of the contract.

Another effect of the poor initial counsel given to the OSPs intending to circumvent the LI is having them partner with entities who have no technical basis for implementing a technology transfer scheme as required by the LI. For example, having a technical company partner with a bank to form a JV to bid on a tender. There is absolutely no way such a company will be able to achieve the minimum local content target more so the real targets as mandated by the LI.

Equity allocation vs. Local Content Participation in Awarded Contracts

In line with the discussion above, there is confusion regarding the equity position in the JV vis-à-vis the mandated numerical target set-forth in the LI. The advice typically given at the onset of the formation of the JV somehow permeates the process so that the OSPs equate the percentage participation in the JV (equity) to the percentage participation in the work scope in the contract (the numerical target mandated in the LI). This misinterpretation, in my view, has severe consequences with regards to achieving the purpose and goals of the LI in ensuring that Ghanaians achieve the requisite capacity to operate in this industry without foreign interference and intervention.

Relationship between the Indigenous companies and the JV partners

The default position for many of the OSPs on local content is non-compliance. My general impression of the industry is that the relationship between the OSPs and the indigenous companies has become one of an adversarial than a cooperative one. This is for the simple reason that the OSPs have no interest in adhering to the tenets of the LI while the Operators insist on some level of adherence to the LI. Remember that this is even where the minimum targets are not being achieved. Ironically, while the operators (ENI and Tullow) require the OSPs never to meet with the regulator and GNPC without their presence, the OSPs do not extend the same courtesy to the local content partners when they meet with the PC.

The other main area of contention is in how the JVs are managed and governed. It has been my view that most of the JVs are almost 100% managed by the OSPs despite submissions to the PC indicating otherwise.  This is even further complicated by the adversity to compliance with the corporate governance laws of the country.
Most of the OSPs, though incorporated in the Ghana, do not have arms-length dealings with their parents in their respective countries. Hence decisions are made outside the country to be implemented in the country. This means that the JVs, though required to be independent entities, are shadows and fronts of the parents of these OSPs. This also means that capable Ghanaians recruited to work for or with these JVs become mere paper pushers with no effective voice in how these companies are run.

The PC and the IOCs and OSPs

Our LI was modeled after those in Trinidad and Tobago and Norway. In each of these countries the respective regulators have power and are feared by the OSPs due to a simple fact that the regulators do enforce the letter of the law. Here, in Ghana we see the opposite. For a variety of reasons, the OSPs have no fear of been hauled before the PC for their various infractions.  The problem as I see it is that the PC does not have a strong sanctioning regime for these OSPs. This may be due to the fact that the PC sees the industry as nascent and does not want to “rock the boat” with these OSPs. However, this has to change if the industry is to attain and achieve even half of the targets and milestone mandated by the LI. This is due to the fact that many of the IOCs and OSPs see the LI as a nuisance and a drag on their business. They also almost interpret the requirements under the LI as a voluntary commitment rather than a mandatory one.

The PC and the IOCs

The general consensus when you speak to people in the industry is that although the PC has a good relationship with the indigenous companies, there is a sense that the PC is ineffective is handling complaints that many bring up against their JV partners. In my personal experience, the PC can only handle these complaints if they are filed without fear or fervor. However, since most of the JVs cow their local partners into fear, the indigenous companies are afraid to express themselves in the presence of their partners for fear of retribution.

Political Interference

This is obviously a sensitive subject. However, my concern is that the interference is leading to a cartelization of the industry which is not only detrimental to the industry but the economy as a whole.

How to make Local Content really work: Role of PC versus Role of GNPC

Image result for ALEX MOULD

According to Mr Alex Mould, former GNPC boss, the roles of PC and GNPC are complementary and not adversary as sometimes misconstrued by the industry, especially the International Oil and Gas Companies (IOCs) and Oil Service Providers (OSPs).

The PC’s role is to ensure that all players abide by the provision of the regulations that it administers, while, the GNPC’s role is to ensure that their Contractor/Partners do not violate the covenants that they agree to in the PA and also that the partnership are in good standing with the Minister and PC

Good Corporate Citizen

However, another role of GNPC is to agree and enforce the rules of engagement within the partnership, especially on how the partnership will be seen as a good corporate citizen by the government, PC and other stakeholders, such as the communities, in which they work.

To GNPC, the local content law is one that any good corporate citizen should embrace because it achieves the goal of the Contractor group in the long run; reduces the cost of doing business in Ghana and thereby increases their profits; but, for government it achieves the goals that the local content laws were set out to achieve: increase local participation; increase local capability in doing majority of the scope of work within any service provider; and increased % of scope of work - in tonnage, man hours, and value; but, this has been misconstrued by many IOCs and OSP to be equated to the minimum equity participation.

GNPC has a unique role to act as first defence in ensuring that good business practices are enforced by challenging its Contractor group not to give that scope of work, for which there is in-county capability, to the Foreign Partner (FP) in the JV to do; this should be the case especially when there are capable local firms to do the work, even the JV Local Partner (LP) themselves may not have the capability themselves.

Going forward, the JVs must behave as true JVs and not like two separate entities in a forced marriage where the daily management of the JV is only handled by the JVFP; where decisions are not taking jointly;  where meetings with the Operator - and in many instances with the PC and the Minister - are not done jointly as a JV (with the JVLP in attendance) or even discussed with the JVLP, either prior to the visit or even after such meetings occur; and where no minutes are taken nor supplied to the JVLP either at subsequent JV management meetings or even to the LP shareholder of the JV as a courtesy.

Industry experts have therefore recommended that, the type or concept of joint venture which requires the formation of a separate legal entity should be reconsidered when the opportunity arises for a review. It is imperative to consider the objective of the law, which is to monitor the specific roles played by the joint venture parties and for them to share profits and losses, this then gives us the idea that, the formation of a company resulting in the creation of a separate legal entity may not be the solution. The solution may then lie in the other type of joint venture which based on a joint venture agreement and does not result in the formation of a new company.

In most cases, the only time that the JVLP is taken to the PC, or to the Operator, is when the JV is in violation and needs its "local connection" to smooth things over.

Intimidation by Operators

MrMould revealed that, another issue that needs to be addressed is the intimidation techniques used by the IOCs on the OSP, especially the FP; in some cases the Operator (IOC) makes it clear to the OSP not to meet with GNPC without them present and when such a meeting is set up, (normally by the Operator) the Operator instructs these OSP and FP what to say and what not to say.

The onus of local content compliance of all service providers (OSPs) must remain with the Block Partners, and specifically the Operator; it is GNPC's responsibility to keep their Contractor Group and Operators in check and this should be done at the Joint Management Committee (JMC) where GNPC is the Chairman.

The PC must ensure that the IOCs and their Partner GNPC submit to them on a regular basis, semi-annual basis; a local content complaint report of their operations including that of their OSPs as per the terms of the contacts they awarded. Any deviation for the agreed scope of work and its split between the LP and the FP needs to be approved at the JMC level of the Partnership and then reported to and ratified by the PC before that change can occur.