Local Content and Local Participation

– A New Frontier in Ghana's Oil and Gas Industry

The coming into force this month (February 2014) of Ghana's Petroleum (Local Content and Local Participation) Regulations (LI 2204) presents both foreign and local investors with a once in a lifetime opportunity to get in on the ground floor of a sector with a projected lifespan of 25-30 years, following the discovery of commercial offshore reserves of crude oil in June 2007.

Summing up the provisions of LI 2204MahamaAyariga, minister of Information and Media Relations explains: “The key highlights of the [Local Content] policy include that priority should be given to Ghanaians in the granting of licensing and agreements in the petroleum sector in all operations. Where foreigners want to be involved they must partner with Ghanaians who should carry at least 5% equity interest. And that is reviewable at the pleasure of the minister [of Energy and Petroleum] given certain circumstances.

“Also there is an elaborate reporting procedure which requires that the [oil] companies use local services and products manufactured by Ghanaian companies. And they must also make investments in research and carry out programmes aimed at technology transfer to Ghanaians,” the minister added.

Industry watchers such as the Africa Centre for Energy Policy (ACEP) have argued that the four years it has taken for the Local Content (LC) and Local Participation (LP) provisions to become law represent a missed opportunity, although they broadly welcome the new regulations.

“Two plans of development on Tullow's TEN project and ENI's Sankofa project have been approved by government,” ACEP said in a statement in November 2013. “These projects have very important procurements involving billions of U dollars. But Ghanaian suppliers cannot be guaranteed any significant role in these transactions due to lack of comprehensive regulations. The TEN project for example is expected to cost about $6 billion.

“Also, the minister of Energy and Petroleum, Honourable Armah-Kofi Buah, announced that about $20 billion would be invested in the oil and gas industry in the next five years.”

ACEP nevertheless believes that the LC and LP targets outlined in LI 2204 are in line with international standards. Ghana's quotas “are not different from those of Nigeria and Brazil, two important oil producing countries with considerable development in local content. We however appreciate the capacity constraints and recommend that the Petroleum Commission introduces an independent certification system through competitive bidding, which can match local content plans of foreign companies against available capacity.

“On the penalty for violation of the regulations, we think that Ghana's provisions are also not different from other jurisdictions.”

Both the Ministry of Energy and Petroleum (MoEP) and the Petroleum Commission (PC) have dedicated Local Content desks. Dr. Juliette Twumasi-Anokye, Legal Advisor to the PC, told journalists at this month's Offshore West Africa conference in Accra that a register is being compiled of all companies operating in the petroleum sector, including the Ghana National Petroleum Corporation (GNPC). Registration fees have been set at GHc2,000 for majority Ghanaian-owned companies, and a minimum of USD7,000 for foreign-owned entities.

LI 2204 provides for the proportion of local content in goods and services in the petroleum sector to reach a minimum of 60% within 10 years. On the human resources front, local management and core technical staff are to rise to 80% within the same period, while the proportion of other staff is targeted to reach 100%.

Meanwhile, the Private Enterprise Foundation has drawn up an exhaustive list of sectors which could benefit from the growth of the oil and gas industry, providing opportunities for both local and foreign investors. These include: Banking and Insurance; Catering and Hospitality; Property and Estate Management; Clearing and Forwarding; Drilling, Engineering and Construction; Rig Logistics and Supply; Security; Water Supply and Sewage Disposal.

Ghana can already boast of a world-class service provider in Zeal Environmental Technologies Ltd (ZETL), which handles and disposes of waste from offshore petroleum operations in the West African sub-region, including the Jubilee Field off the Western region.

Scott Bergeron, health, safety and environment director at Dallas-based Kosmos Energy, on a surprise visit to ZETL's base at Nyankrom last year, told reporters “The location of the facility in Ghana is strategic and critical to our operations because in West Africa we have limited options…With the level of commitment and standards we see here at the facility, we are assured that our waste has gotten into the right hands.”

Several initiatives have already been taken by both the public and the private sector to promote the aims of LI 2204. The Jubilee Consortium partners are sponsoring oil and gas training programmes at Takoradi Polytechnic. USAID has awarded a $4.9 million, 5-year grant to Pyxera Global, an American company, to set up a Ghana Supply Chain Development Programme to promote collaboration between local small and medium-sized enterprises (SMEs) and the international oil companies (IOCs), and to build capacity.

According to Awulae Attibrukusu, vice president of the National House of Chiefs, “This initiative is all about local content and support for the promotion and development of the country. The extractive industries must have a vibrant local content policy.”

In 2011, the Russian government granted 20 additional scholarships to Ghanaian students of petroleum engineering. Welcoming the move, Energy and Petroleum minister Buah said “the Russian government granted the additional scholarships because [they are] impressed with the academic performance of Ghanaian students in the country coupled with the fact that they were peaceful and cooperative.”

There are over 150 Ghanaian students currently studying in Russia, according to the Ghanaian Times. Meanwhile Tullow Ghana Ltd (TGL), the operator of the Jubilee Field, also awards annual scholarships to local students to study abroad, and provides them with opportunities to gain practical work experience in South Africa. TGL is also the only foreign IOC listed on the Ghana Stock Exchange

The Jubilee Technical Training Centre at Takoradi Polytechnic began offering technical and vocational courses in oil and gas-related subjects in 2013. And the government of Ghana has sponsored an Enterprise Development Centre in the region which will facilitate deals between local and foreign service providers, such as the recent agreement between the Wood Group and Hydra Offshore to deliver subsea engineering projects.

“Hydra Offshore Ltd is a wholly Ghanaian-owned oilfield services company providing offshore and subsea engineering solutions to the oil and gas industry in Ghana,” explains the company's CEO Delali Otchi. And not to be left out, GNPC has signed a long-term joint venture agreement with the French company TechnipSA, to facilitate the transfer of Technip's pipeline laying and engineering expertise to Ghanaian engineers.

Hess Ghana Exploration Ltd is one of the newer entrants into the upstream sector, operating the Deepwater Tano/Cape Three Points block, and has already recorded 7 of the 23 offshore discoveries made offshore since Mahogany-1 in 2007, according to Willieson Shamo, acting director of petroleum at MoEP.

In the past two years, Hess has awarded scholarships to over 170 students, mainly girls from three of the six coastal districts in the Western region, to attend senior high schools or vocational and technical training institutions. The beneficiaries, from Nzema East, Ellembelle and Jomoro, are chosen in consultation with GNPC and the local district education departments.

The relatively high success rates recorded recently by exploration and production (E&P) companies operating in Ghana (80%) and Nigeria (60%) hold great promise for investors with pockets deep enough to unlock Africa's natural resource potential, according to Mutiu Sunmonu, country chairman of Shell companies in Nigeria and managing director of Nigeria's Shell Petroleum Development Company.

Speaking at an oil and gas leadership conference in Accra last October, Sunmonu forecast that global petroleum demand would double by the year 2040, and that 85% of the extra demand would have to be filled by non-OECD producing countries. Given Shell's 5 decades long experience of working in Nigeria, he was also in a good position to pass on four of the most important lessons learned so far - the interests of the host country are paramount; LC and LP provisions must have robust regulatory foundations; governments must adopt a long-term clarity of approach; and politicians should stick to the national policy blueprint for the oil and gas sector.

The Nigeria Content Development and Monitoring Board is seen by some industry analysts as a classic example of politicians failing to stick to the guidelines outlined above. But the Nigerian and other West African oil industries still hold lessons for Ghana. And Akinwuni Osuntoki, CEO of Richardson Oil and Gas, is a vocal advocate of regional, rather than local, content.

“Nations should have areas where they can have comparative advantage specialise in those areas so that we can begin to see savings, shared assets, [and] mobilization of human and material resources across the region.”

African oil producers also need to adopt a common approach to guard against piracy and illegal bunkering, the two biggest scourges facing the oil industry in the Gulf of Guinea. “We must work well across the borders so that we become proactive in preventing oil theft and piracy,” Osuntoki told Offshore West Africa 2014 conference participants in Accra.

“There must be joint patrol across the borders, security surveillance in all areas. We must put in place the principle of comparative advantage and if possible for operators to share … access to labour, and have aggregate requirement of demand across the region. Regional investment is what we must look at rather than the pockets of opportunities individuals can have,” Osuntoki said.

West African oil and producers are apparently listening. Ghana is to spearhead the establishment of a regional gas company to develop the infrastructure for the importation, storage and regasification of Liquefied Natural Gas, in collaboration with the governments of Equatorial Guinea, Ivory Coast and Nigeria. Energy ministers from the four companies are to meet in Malabo in April to discuss the plan, according to the Business Analyst newspaper.

The proposal comes despite simmering tensions between Ghana and Ivory Coast over a disputed oil-rich area on their common border. The matter is still under negotiation, according to Ghana's Lands and Natural Resources minister Alhaji Inusah Fuseini, within the framework of the UN Convention on the Law of the Sea, and should be resolved by June 2014.

And in Ghana at least there is no immediate danger of a shortage of reserves in the short- to medium-term, according to Energy and Petroleum minister Buah. “The TEN fields plan of development [has] received [my] approval and paved the way for the field development to facilitate the exploitation of reserves of about 245 million barrels of oil, and 367 billion cubic feet of associated and non-associated gas,” the minister told journalists in December last year,

“The Sankofa-Gye Nyame appraisal activities have been completed. Both oil and non-associated gas discoveries have been declared commercial, with proven reserves of 116 million barrels of oil, and 1,110 billion cubic feet of gas.”

Set to take advantage of the prospective regional investment climate is Lonrho, which has just signed an agreement with the Ghana government to construct a $600 million shore-base facility and Freeport at Atuabo in the Western region. $150 million has been budgeted for spending on local content.

Work on the project will begin in the second quarter of this year and last 18 months, and it is expected to provide 1,500 new jobs in logistics supply, warehousing, fabrication and rig and vessel repair.

The Ghana government is to receive a carried interest of 45% in the port, and has not been required to provide any funding, guarantees or subsidies. Local land owners will be able to trade their land for equity in the company. 55% will be owned by international investors.

The UK-based logistics company, which has developed a similar project in Equatorial Guinea, believes “The new facility [will be] uniquely located to capitalize on the growth in deepwater exploration in West Africa, with an expected increase of 300 offshore supply vessels in the region over the next five years.

“Atuabo Free Port provides an attractive location for Ghanaian companies to become involved in the wider West African oil and gas industry, and not just the Ghanaian market,” Lonrho says, pointing to the recent surge in E&P activity along the West African Transform Margin in Sierra Leone, Liberia and Ivory Coast.

Local observers believe that the Atuabo Free Port will relieve the intense pressure on the regional capital's roads and other infrastructure, especially Takoradi port and the Ghana Air Force base, which currently serves as the oil industry's air transport hub in the Western region.

Oil has now outstripped cocoa as Ghana's second biggest earner of foreign exchange, according to the central bank, bringing in $3bn annually and making the country the world's 50thlargest oil producer.

Alhassan Andani, the CEO of Stanbic Bank, foresees dramatic changes in the economic structure of the West African sub-region flowing from recent oil and gas discoveries. “Ghana sits on the threshold of a major expansion of the industry from a participant to a regional leader. Investors are keen to invest and are looking for guidance as to where and how to invest.”

The Stanbic Bank boss adds that the European financial crisis presents an opportunity for emerging lenders to fill the resulting financial vacuum. “Standard Bank [the parent of Stanbic Bank], through its on-the-ground presence and global industry expertise is well placed to attract and structure the huge capital that will be needed to deliver this potential to Ghana, as it is doing in Nigeria, Mozambique and across the continent.”

Kwabena Mensah

Accra

19 February 2014