The Economy: Considerations for Guyana’s Draft Local Content Policy – Going Forward
As indicated in the article carried on January 04, 2018, today’s article examined the LCPs of Trinidad & Tobago, Kazakhstan and Malaysia, followed by a conclusion and recommendations for Guyana’s Local Content Policy. For ease of reference – here’s a link to the previous article: https://newsroom.gy/2018/01/04/the-economy-an-overview-of-guyanas-draft-local-content-policy-for-the-petroleum-sector/
Kazakhstan’s LCPs regulations since 1995 has been driven by government’s objective of altering the investment climate in the oil sector toward increased use of local goods, services and personnel, while enhancing its governance of natural resources (IIED 2011) cited by World Bank (2013). The 1995 Petroleum Law included only high-level provisions requiring that subcontractors in the oil sector be largely Kazakh owned. This was followed by the 1996 Law on Subsurface and Subsurface use, which required that companies propose, at an early stage, their own local content commitments. This included: (1) Employing a specific percentage of local workers; (2) Procuring products and services of Kazakh origin; and (3) Improving infrastructure and contributing to economic and social development objectives in the region of operation (MENAS, 2009).
Moreover, in the 2005 Law, more specific policies were laid out concerning Production Sharing Agreements (PSA) when conducting offshore Petroleum Operations. The Law required that KMG hold a minimum of 50 percent share of new PSAs and determined specific requirements to ensure purchase of local goods and services. During 2010, new regulations were introduced in which the main concepts and objectives of previous regulations were retained. Additionally, clear targets, procurement rules and strict measurement procedures were introduced.
- Target quotas for foreign staff employed by subsoil users
- Limitations on granting work permits
- Minimum budget dedicated to training of the local workforce
The objective of Malaysia’s LCPs are to: (1) provide affordable petroleum resources to the local market; (2) build the foundation for forward links; and (3) secure local involvement and control of both upstream and downstream segments (Nordas et.al, 2003).
A mix of regulations, incentive-based and capability-building programs, are used to achieve the abovementioned objectives. The main ‘vehicle’ for the Malaysian LCPs was through Petronas (Oil & Gas Company) inter alia – its participation in PSAs and its policies focusing on developing the local workforce technical skills and efficiency of their supply industry. Under the PSA terms, contractors are required to:
- Minimize the employment of foreign workforce – to this end, the recruitment of foreign personnel requires the approval of Petronas.
- Train internal Malay personnel – this includes the provision of capability development programs that enable Malay personnel to replace the expatriate workforce
- Commit a minimum monetary amount to be allocated to the training of Petronas personnel, the amount being contracted specifically
- Offer on-the-job training to personnel of the NOC, upon the request of Petronas
Also, every PS contractor is subject to an annual research contribution equivalent to 0.5 percent of the sum of cost oil and contractor’s share of profit oil and the research contribution is tax deductible.
Trinidad & Tobago:
The first objective of the LCPs is to increase the local industries involvement of in the energy sector value chain. In contrast to other countries, local content in T&T has a broader objective, scope, and definition. Two interlinked objectives are separately mentioned in their policy framework of 2006: (1) maximize the level of participation of T&T’s national people, enterprise, technology and capital; (2) Maximize the value of the country from its assets (MEEA, 2006).
T&T approach to maximizing local content participation:
Identify Opportunity Determine Enablers Ensure Delivery
Identify specific goods or services where local value-added opportunity capture exists
• Manage the program of activities in the sector as a portfolio, so that project pace and scheduling enable the maximum opportunity for development of local capabilities and their sustainable utilization.
- Target local capability development by increasing the amount, depth and breadth of ‘in country’ activities so as to enable fuller participation of nationals and enterprises in the value chain.
- Give preference, firstly to locally owned, controlled and financed enterprises, and then to those that demonstrate a clear culture, commitment and capacity for maximizing local value-added, participation and capability development, consistent with the country’s aspirations and vision;
- Focus on improving local skills, business know-how, technology, financing, capital market development, and wealth. • Aggressively promote and rigorously apply this policy wherever State controlled resources are involved
- Facilitate the development of local capability to enable local value-added;
- Remove barriers for local participation;
- Set targets of local content and participation that will be assigned to individual projects , operations and/or operators and supporting these targets with appropriate contract terms;
- Measure and report on the performance of operators in the sector;
- Periodically compare the local content and participation performance amongst operators, and between projects
Source: Based on Data from MEEA 2006, cited by World Bank (2013).
Despite the availability of a small number of jobs in the oil and gas sector, numerous possibilities for employment exist and/or – are created given the large number of goods and services needed for oil exploration and production (a separate article will be done on the economic benefits of oil & natural gas production, in the context of local content).
Thus, the sector can only contribute meaningfully through a combination of both appropriate investment of revenues and the development of productive linkages between the oil and non-oil economies (Ovadia, 2015).
Best Practices in Local Content Development
With the availability and accessibility of sufficient literature of lessons learned in hindsight – on poorly implemented and less effective LCPs in some African oil producing countries such as Nigeria and Angola for example; it is now imperative that local content strategies be adjusted to address important questions about definition and measurement of local content and seeking balance between strong regulation and encouraging investment that secures the best possible outcome. It is the responsibility of host governments to link local content to governance, anti-corruption strategies and substantive transparency by all parties (Ovadia, 2015).
Development strategies that rely solely on productive investment of petroleum revenues have failed Africa in every case. Yet, local content offers new potential to make oil and gas work for African development in the 21st century. To this end, Ovadia (2015) argued that – with the right policies and involvement of all stakeholders, natural resources can be developmental.
Going forward / Recommendations
Having thus benchmarked Guyana’s draft LCP to the LCPs of other established petroleum producing countries around the world, a number of inherent weaknesses have been identified. While the draft policy recognizes in generic terms – the objective of local content strategies – it does not speak to the specificities with respect to how it intends to execute local content activities and/or strategies. For example, it highlighted that there will be a regulatory mechanism but it did not address the workings and functionalities of that mechanism. And it does not speak to a strategy of removing barriers (if any) for local firms’ participation, and what strategies will be undertaken for enhancing the contestability of local firms’ and Guyanese nationals’ participation as against international firms and foreign nationals.
Overall, the draft document mirrors an academic paper – albeit inadequate – rather than a pragmatic policy paper.
With regards to proposed recommendations, first and foremost, the local content strategies and policies need to be incorporated into the legislative framework. It is noted also, that the draft petroleum commission bill merely speaks to the promotion of local content and local participation in petroleum activities which is unarguably inadequate; unless there will be a separate legislation to address local content. As was evidenced in the local content around the world, without having it incorporated in the legislative framework, it is largely ineffective and much to the disadvantage of the host countries.
So the first recommendation, for emphasis is the incorporation of the LCP into the petroleum legislation (s); clear targets, procurement rules and strict measurement procedures need to be identified and established; policy tools and/or instruments were not addressed as well – hence this need to be worked out for example, what fiscal incentives would be put in place etc.
A final point to note is that the announcement of oil discovery was made since in 2015. With respect to training of Guyanese to work in the sector and specific oil related training, through the spirit of CARICOM and a Memorandum of Understanding between the Government of Guyana and the Government of Trinidad & Tobago, it would have been wise to identify a number of Guyanese to be sent to T&T to receive hands-on technical training in their oil & gas sector. Had this been pursued, 2015 -2020 will have been five years of technical training and real-time exposure to the oil & gas operations for Guyanese nationals.