Local content law …engine of growth for ghanaian enterprises in oil & gas industry

By Abdul Malik Kweku Baako, Editor-In-Chief, The New Crusading GUIDE

The Petroleum (Local Content & Local Participation) Regulations, 2013 (L.I. 2204) passed by the Ghanaian Parliament on November 20, 2013, has received broad endorsement from many International Oil Companies (IOCs) and indigenous Ghanaian companies as “representing not only the best chance of ensuring increasing Ghanaian participation in the oil and gas sector but also presenting perhaps more importantly, the country’s best hope of effectively integrating the sector into the rest of the national economy”.

Among other purposes, Legislative Instrument (L.I. 2204) under reference, seeks to “promote the maximisation of value-addition and job creation through the use of local expertise, goods and services, business and financing in the petroleum industry value chain and their retention in the country; develop local capacities in the petroleum industry value chain through education, skills transfer and expertise development, transfer of technology and know-how and active research and development programmes; achieve the minimum local employment level and in-country spend for the provision of the goods and services in the petroleum industry value chain; increase the capability and international competitiveness of domestic businesses; and achieve and attain a degree of control for Ghanaians over development initiatives for local stakeholders, etc” (General Provisions, Regulation 1 (a-h).

L.I. 2204 also requires that “a contractor, sub-contractor, licensee, the Corporation or other allied entity carrying out a petroleum activity shall ensure that local content is a component of the petroleum activities engaged in by that contractor, sub-contractor and licensee, the Corporation or allied entity”; and that “an indigenous Ghanaian company shall be given first preference in the grant of a petroleum agreement or a licence with respect to petroleum activities subject to the fulfillment of the conditions specified in the Regulations”.

An important part of the Regulations is the requirement that “there shall be at least a five percent equity participation of an indigenous Ghanaian company other than the Corporation to be qualified to enter into petroleum agreement or a petroleum licence”.

To give practical effect to the Regulations (L.I. 2204), the Government commissioned the Enterprise Development Centre (EDC) in May 2013. The EDC is a five-year Project jointly sponsored by the Jubilee Partners – Tullow Oil, Ghana, Kosmos Ghana, Anadarko, Petro SA and the GNPC, and is under the general supervision of the Ministry of Energy & Petroleum and the Ministry of Trade & Industry. It (EDC) provides support to Ghanaian small and medium enterprises (SMEs) to enable or empower them to position themselves to take advantage of business opportunities in the oil and gas sector.

The EDC also provides a range of services such as business training, capacity building programmes, advisory services, access to market and information, and also acts as a focal point for coordination between SMEs and the oil and gas companies, their contractors and sub-contractors. The Jubilee Partners have supported the Government of Ghana (GoG) in this endeavor and are committed to funding the establishment and running of the Centre for a period of five years.

An official document published and released by the EDC underscores the pivotal role of the Centre in identifying opportunities and facilitates the development of SMEs for their participation in the oil and gas sector. The document under reference titled: “EDC – Empowering, Developing, Creating… Enhancing Opportunities for Ghanaian SMEs in the Oil and Gas Industry”, stipulates that (a) SMEs formally register with the EDC including describing the goods and services they provide and their experience and qualifications. With these details available, the EDC will review the oil companies’ and contractors’ requirements and identify the most relevant opportunities for each SME; (b) the SME and EDC will review the relevant minimum standards that the SME will be required to attain if the SME is to be considered for inclusion in the oil companies’ and contractors’ procurement processes. Then, if required, the EDC will provide advice and certain training to the SME and arrange provision of other developmental support from third parties; (c) when the training and development activities have been completed, the EDC will communicate this to the oil companies and contractors who will consider including the SME in their procurement process”.

Talking to this author, Mr. Yen Sapark, Head, Training, Development & Research of the Enterprise Development Centre (EDC), underscored that in the Ghanaian context, the term “Local Content” (LC) is defined by the Petroleum (Local Content & Local Participation in Petroleum Activities) Regulations,2013 (LI 2204) as “the quantity or percentage of locally produced materials, personnel, financing, goods and services rendered in the petroleum industry value chain and which can be measured in monetary terms”.

While conceding that a local content law or strategy is not necessarily a quick fix or route to achieving short-term benefits, he contended that it requires planning, coordination, resources and perseverance to obtain improvements which are often realized in the long term.

He further submitted that Local Firms’ participation in the supply chain – with strengthened capacity to compete – is crucial to the promotion of local content. One key strategy to achieve this, according to him, is “the adoption of an ‘enterprise development’ initiative. One key ingredient for the realization of the local content aspiration of the country is thus the stimulation, incubation and promotion of local Small and Medium Enterprises (SMEs). Opportunities come from longer-term efforts focused on helping to develop local businesses and employees”.

He outlined the general objectives of Local Content as generation of employment opportunities for nationals; increased engagement and participation of domestic nationals in the oil and gas industry; training and development of nationals’ capacity building of local expertise; reduction in expatriate staff of oil operating oil and gas companies and utilization of local raw materials, goods and services.

Mr. Sapark noted that the EDC since its birth in May 2013, has been engaged in building a comprehensive database of competitive and efficient local suppliers of the oil and gas industry (supplier database); enhancing and increasing local supplier capacity; providing consultancy services on SMEs development interventions and requirements of the oil and gas industry and network leveraging – identifying local SMEs that can be integrated into a value chain of the oil and gas sector.

He indicated that despite the daunting challenges facing local SMEs, all over the world, the oil and gas sector is a huge mine field with enough space of opportunities for all without exceptions for the local businesses or SMEs.

He revealed that a UNIDO – Harvard Research had found that those opportunities may generally include procurement, agricultural out-growers schemes, manufacturing sub-contracting, out-sourcing non-core functions and services, information and communications technologies, and other productive inputs and tools.

“However, coming down home from the global perspective, specific gaps within the current Ghanaian oil market for consideration and exploitation of small businesses include: waste management, rental of cranes/lifting equipment; fuel and lubricants; lifting and rigging equipment; manpower supply; freight services; rigid spools & jumpers; supply vessels; clinic insurance and medical services; office suppliers; IT Services and Legal, Consultancy & Banking Services”, submitted Mr. Sapark.

Referring to the potential benefits of business linkages for Small and Medium Enterprises (SMEs), Mr. Sapark noted that apart from the inherent opportunities, local SMEs or businesses stand to gain a lot when they succeed in integrating into the value chain of the oil and gas sector. Acceleration of knowledge transfer and technology upgrading, enhanced skills, standards and capacity, opportunities to innovate, upgrade and increase competitiveness, access to new domestic and/or foreign markets and above all increased employment and wealth creation.

Mr. Sapark outlined some of the challenges confronting the local SMEs in pursuit of the Local Content Policy such as the dominance of international suppliers, noting that the capacity of local SMEs remains hugely underutilized as the industry is currently dominated by foreign firms or suppliers handling projects which could ordinarily be undertaken by local SMEs or firms. He said though most of the International Oil Companies (IOCs) for instance profess support for local content, the reality is that they prefer to deal with their global suppliers for a number of reasons and are reluctant to break such supplier relationships.

He said “Information Gap” (lack of awareness of contract opportunity and company requirements) – The lack of information is a two-sided challenge.

“First of all, IOCs in search of local suppliers express difficulty in identifying and assessing the suitability of Ghanaian suppliers as most of them have relatively short track record or reputation. Similarly, local SMEs too are confronted by information deficit or what can best be described as ‘information block’ specifically related to WHERE and HOW to access information regarding tendering opportunities. Where information is provided about upcoming opportunity or project, chances are that such often comes too late to the local businesses resulting in insufficient lead time to prepare and submit a tender”, added Sapark.

He also cited the “difficulty of local SMEs in identifying the entry point(s) to the oil and gas value chain” – the dilemma here for the local SMEs is WHERE TO BEGIN from and WHO TO DEAL WITH; whether to deal directly with the IOCs such as Tullow Oil, Kosmos Energy, ENI or rather to become a supplier to a supplier such as Schlumberger, Halliburton Technip or Baker Hughes.

Yet another challenge, he said, is the “Capacity Gap” which relates to the difficulty of SMEs in accessing highly skilled human capital and the requisite institutional financial as well as technical muscles required to perform technical disciplines as required by the oil and gas sector.

“Moreso, most local SMEs have a phobia for investing in staff training due to their high turnover rate. Thus, more often the gap between the IOCs and local capacity is too wide”, he noted.

He underscored that of paramount concern to the major oil companies are strict standards and requirements bordering on among others Environment, Health and Safety (EHS), insurance requirements, business ethics and compliance including anti-bribery and above all quality standards.

“Accordingly, oil companies are often reluctant to source from local businesses that fell short of international certifications such as ISO, API or ASME regardless of what such businesses bring to the table… Local Content Development works best if local businesses are internationally competitive and the local content aspiration of Ghana is meaningless unless there are capable Ghanaian businesses to support it”, emphasised Mr. Sapark.

For a factual, empirical evidence of the impact or benefits of the Local Content Law/Policy on indigenous Ghanaian enterprises in the oil and gas industry, this author contacted two indigenous Ghanaian companies involved in the industry for their input and assessment.

According to Mr. Joseph Amuzu, Managing Director of Zodiac Marine Services Company Ltd, the passage of L.I. 2204 “was a blessing for local small and medium enterprises specializing in services provision in the oil and gas sector”.

“The law shows the government’s determination to get Ghanaian SMEs to be owners of this new industry. This law (L.I. 2204) is also designed to reduce capital flight, unemployment for Ghanaians, improve technical and managerial capacity for Ghanaian SMEs as well as accelerate growth of the Ghanaian economy”, Amuzu posited.

Zodiac Marine is a service provider in the Marine sector including Oil and Gas. Its core areas are Operations in Ship Stores Suppliers, Manpower and Recruitment, Ship Chandelling and Freight Services for Ship Stores in transit.

“One of the areas that have benefitted Zodiac since the passage of the Legislative Instrument (L.I. 2204), is the human resources managerial capacity building – very critical area for development for Ghanaian SMEs in Oil and Gas. As part of Government’s and IOC’s efforts and commitments in ensuring that the very essence of the bill is promoted, these two stakeholders have established an Enterprise Development Centre (EDC). EDC has among other things been offering training and orientation seminars for SMEs in Oil and Gas”, articulated Amuzu.

The impact of this training by OICs and EDC, according to him, “has enhanced the capacity of many SMEs on issues such as Compliance Business Systems, Environment, Health and Safety, Tendering and Procurement, among others”.

“Additionally, it has brought IOCs closer to the Ghanaian SMEs since most of these training schemes are done by representatives from the IOCs; something which was missing before the implementation of the law. Another area of benefit since the L.I. passage is that it has enabled and given many SMEs the confidence to approach IOCs and offer services. The IOCs are now more receptive towards the local SMEs. Zodiac is now pre-qualified by three IOCs as Service Provider with another three extra vender registrations pending”, Mr. Amuzu intimated.

He however cautioned that the picture was not an entirely rosy one. “Critically, I must confess that it is too early yet for Ghanaian SMEs to fully benefit from the promulgated Legislative Instrument (L.I. 2204). SMEs are now getting to grips on what it takes to be part of this new sector. Nonetheless, the L.I. since its promulgation has generated some benefits for some companies such as Zodiac Marine Services”.

Some of the challenges facing the L.I., according to Mr. Amuzu, will be the possibility of Ghanaian companies “fronting for international organisations”. He hoped the government would be “strict on dealing with foreign companies which failed to follow the Regulations”.

“The high level of taxation to SMEs struggling to fit in the sector is a worry, and Government should take a critical look at the tax liability of the Ghanaian SME. There must be a very flexible tax regime for SMEs in Oil and Gas. For the Local Content Law (L.I. 2204) to succeed, the government will have to ensure strict compliance by IOCs. This can be done by establishing measurable and monitorable indicators at the various IOCs”, added Amuzu.

“Future prospects include but not limited to a strong local SME content. An improved supply chain system, a strong economy buoyed by the availability of capital from the service provision from Oil and Gas. Another prospect is that it will enhance the job creation chain in Ghana. New technical skills acquired will be transferred to other areas of the economy”, underscored Mr. Amuzu.

Enter Mr. Fennec Okyere who is the General Manager of a wholly owned Ghanaian company with speciality in Engineering, Procurement and Construction (EPC) and other supply chain activities in the oil and gas sector. The Company known as C.A. Nzema Oil & Gas Company Ltd (CANOG), was established in July 2011, “as a company of choice with a reputation to deliver high quality service in a safe and reliable manner”.

Mr. Okyere told the author that CANOG entered into the oil and gas business with a vision to be a leading independent Engineering, Procurement and Construction (EPC) and supply chain contractors for the oil and gas industry in Africa and the Middle East.

“Our company started by building the capacity every top international oil and gas company in EPC has. We have a wide range of technology and technical staff some of whom are Ghanaians who were already into the sector. We have also so far with our partners trained close to 100 Ghanaians who are now very knowledgeable in equipment and engineering operations”, disclosed Mr. Okyere.

Mr. Okyere explained that because of the competitive nature of the oil and gas business, it was very difficult for a local company to get enough space to operate, and so “we decided to make the training of our staff very important. I have personally benefitted a lot from top quality training and conferences across the world which have broadened my capacity in the business”.

“I believe our company and many other Ghanaian companies have built the requisite capacity so fast to the extent that there is the need for our recent local content law to be strengthened to protect our Ghanaian players and ensure their effective participation in the oil and gas sector or business. If we protect our own they will grow and become major international players who will also go out there and participate in big contracts and projects”, Okyere entreated.

Yet another wholly owned Ghanaian SME whose experience or progress is evidence of the benefits of the Local Content Policy is Hydra Offshore Limited (Hydra Offshore).

Registered with the Enterprise Development Centre (EDC), the company last year signed an MoU with Wood Group Company to explore opportunities to provide services for local operators.

Wood Group Ghana Limited (Wood Group) announced that it had entered into an agreement with Hydra Offshore “to deliver subsea engineering projects for Ghana’s oil and gas industry”.

The partnership, according to the MoU, was aimed at combining the strengths of Hydra Offshore’s subsea engineering capabilities with the technical experience, capacity, technology and technical assurance of Wood Group’s global oil and gas business.

“Wherever Wood Group works in the world, we endeavor to do our part to create jobs, develop local resources and stimulate the economic base. We continually expand the local contents of our activities and operations in line with our Core Values, and this partnership with Hydra Offshore will underpin this work”, Ian Mckay, Wood Group Ghana Ltd’s Country Manager said at the ceremony at Enablis (the Centre in charge of EDC) located in Labone, Accra.

“Hydra Offshore is committed to the national agenda of maximizing local content and strives to achieve a very high degree of practicable Ghanaian content without compromising operation and technical integrity. Our partnership with Wood Group and other affiliates is designed to encourage the needed knowledge transfer required to promote local participation of Ghanaian companies in the oil and gas sector”, submitted Delali Otchi, the CEO for Hydra Offshore at the same ceremony.

The future prospects of Ghanaian SMEs relative to the operation and application of the Local Content Policy (Law) (L.I. 2204) look bright though challenging, and as advised by Yen Sapark of EDC, “the government should work with the International Oil Companies (IOCs) to encourage the implementation of bidding processes that help local firms. When possible, the IOCs should use bid processes that facilitate local content. In the event that a local supplier’s bid is unsuccessful, extensive feedback should be provided to enable the local firm understand where it needs to improve”.

The success of Ghana’s Local Content Policy (Law) lies in the effective operationalisation of the laid-down regulations (L.I. 2204) in terms of compliance, transparency, accountability (including adhering to the Extractive Industries Transparency Initiative (EITI) and the attendant effect of real, actual grooming, and growing of local SMEs with the requisite institutional, financial and managerial capabilities to compete favourably with and/or effectively partner International Oil Companies (IOCs) in Ghana’s expanding Oil and Gas Industry.

Is anybody listening?