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.
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 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
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
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
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
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 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
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

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.
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.
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