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1. INTRODUCTION

It is common practice for oil and gas producing countries to negotiate local content agreements with interested IOCs in an attempt to secure for the country a higher share of the value from oil and gas projects. This trend has surfaced as a result of the realization of the poor economic performance of many resource rich countries despite their vast wealth.

In recognition of this, the IMF in September 2007 put out a working paper ‘to offer specific inputs to the debate on local content promotion in the oil industry, using the specific case of Sao Tome and Principe as a point of reference.’ One country in which the local content debate is currently on the sizzle is Ghana. In 2007, the country, well known for its export of gold and cocoa, discovered oil in commercial quantities. The country’s offshore oil reserves discovered so far are estimated at 3 billion barrels, a figure which puts the country in a position to be described as an oil rich country.

This new found source of wealth however poses significant challenges to the West African nation, one of the main challenges being how to ensure that it derives value from its oil and gas production activities for the benefit of the country’s estimated current population of 23 million Ghanaians and the local economy.

As part of measures being undertaken to put in place the framework for Ghana’s oil and gas production, a Bill entitled the Ghana Petroleum Regulatory Authority (GPRA) Bill was released in October 2008. This Bill when passed into law would serve as the framework for the establishment of the GPRA and its authority for conducting regulatory functions over the industry. Sections 100 to 105 inclusive of the Bill deal with the promotion of local content, specifically, the involvement of the state oil company, provision of goods and services by local entrepreneurs, as well as the employment and training of citizens of Ghana.

It is the writer’s hope that this paper would provide a positive contribution to the work of government officials of the relevant Agencies, Members of Parliament and other stakeholders in Ghana, as Parliament considers this Bill.

2. THE LOCAL ECONOMY AND THE HYDROCARBONS INDUSTRY

2.1 CHALLENGES TO THE LOCAL ECONOMY

Various literature provide evidence to the effect that oil wealth or abundance as well as other natural resource wealth produces negative results on a country’s economy. Sachs and Warner for instance following an analysis of a number of natural resource economies between 1970 and 1989 found a negative correlation between natural resource abundance and economic growth. Similarly, it has been found that between 1960 and 1990, growth rates in resource rich countries were 2 to 3 times slower than that of non resource rich countries.

It must however be noted that these observations of negativity associated with natural resource wealth though preponderant are far from conclusive. This is because contrary to the above evidence, countries like Norway, Australia, Chile, Botswana and Indonesia which all possess abundant natural resources have performed creditably.

Many of the challenges to economic performance in resource rich countries arise from the nature of the resource industry itself. The industry is characterized by large-scale, capital intensive, high risk investments, requiring high amounts of skill and sophisticated technology. For this reason, many countries at the time of discovery of their natural resources are ill prepared to carry out production on their own. Indeed, the nature of the industry serves as a barrier to local firms especially in developing countries, preventing them from exploiting the resource by themselves and keeping the benefits within the country. It calls for the involvement of IOCs and foreign direct investment (FDI).

As a result of the above involvement of IOCs and FDI, large portions of the income generated from the extractive activity are repatriated to be paid out to shareholders of the IOCs as well as to service foreign debt. In this way, a huge amount of income is lost to the local economy.

There are also limited opportunities in the form of backward and forward linkages for the domestic economy to benefit from the extractive activity. This is due to the capital intensive and highly technical nature of the industry, the export oriented nature of the industry and also the limited absorptive capacity and unpreparedness of domestic firms to benefit from potential spillovers.

Another challenge to the local economy is the volatility of oil revenue. Volatility of oil revenue is due to three factors: the variation over time in rates of extraction, variations in the timing of payments from IOCs to states and fluctuations on the international markets in the value of the oil and gas produced. Revenue volatility has an adverse effect on growth and development of the local economy in the sense that where the economy is highly dependent on oil revenue, it becomes difficult to finance projects started in times of windfall when oil revenue falls, leaving these projects uncompleted. Avoiding the phenomenon known as the ‘Dutch Disease’ also poses a strong challenge to the local economy upon the discovery of hydrocarbon resources. The Dutch Disease refers to the crowding out of sectors of the economy by one sector, a most obvious example being the crowding out of the manufacturing and agricultural sectors of the economy by the extractive sector. This phenomenon is caused by two factors, the first being an appreciation in real exchange rate caused by a sudden rise in the country’s income from natural resource exports. This has the effect of making non natural resource export products uncompetitive on the international market, leading to a collapse of the domestic non natural resource export sector. The second causal factor for the Dutch Disease is the shift of domestic resources in the form of labour and capital away from the non resource export sector to service the booming natural resource sector. This leads to a rise in the cost of these resources to the non resource export sector, causing it to shrink.

2.2 PROMOTING LOCAL CONTENT
The promotion of local content involves the imposition by government of ‘conditions on inward direct investments, requiring that a minimum proportion of value-added of the resulting output be derived from host-country goods or services’.

A policy to promote local content may be effected through a framework of legal, regulatory and institutional structures and mechanisms.

The usual conditions or requirements imposed towards the promotion of local content are the use of some fraction of domestically produced goods and services, the participation of a state oil company, the employment and training of local staff and skills and technology transfer to the domestic economy.

3. THE GPRA AND LOCAL CONTENT

3.1 PROVISIONS OF THE BILL

The Bill, entitled the Ghana Petroleum Regulatory Authority Act 2008, seeks ‘to establish the GPRA to regulate, oversee and monitor activities in the upstream petroleum industry; provide for licensing in the sector and provide generally for upstream oil and gas in the best interest of the people and future generations of Ghana and for connected purposes’.

Section 100 of the Bill provides for the government’s participation in petroleum activity under a licence granted under the GPRA Act. Government participation is to be carried out by the GNPC through a joint venture established by a joint operating agreement in accordance with the licence. The GPRA is given the authority subject to the approval of parliament to specify the participating interest of the NOC in petroleum activities.

Under Section 101, it is provided that the NOC shall under each licence have a carried interest for exploration and development operations and a paying interest for production operations. Additionally, the company has an option to acquire an additional paying interest for development and production operations under each licence.

Section 102 of the Bill deals with the transfer of assets to the NOC. It states that ‘A licence shall provide for the transfer to the company of the physical assets purchased, installed, constructed by the contractor for petroleum operations the cost of which has been included in the exploration expenditure, but licencee shall have the use of the assets for the purposes of operations under a petroleum agreement and shall remain liable for maintenance, insurance and any other cost associated with the use.’

The requirement for the provision of goods and services by national entrepreneurs is captured in section 103. Under the section, the licencee is required to ‘give priority to a competent entity owned by nationals in the provision of goods and services.’ Priority is also to be given ‘to the purchase of local products and services from citizens of Ghana where they are competitive in terms of price, quality and timely availability’. In the circumstance that a foreign company is to provide goods and services, the section requires that the company must operate from Ghana and team up with a company owned by a citizen of Ghana.

Section 104 of the Bill is on training and technology transfer. The section requires a ‘clearly defined training programme for the local employees of the licencee’ together with scholarships and other financial support for education. Where practicable, the licencee is to ‘maximize knowledge transfer to citizens of Ghana and to establish in the country any necessary facility for technical work, including the interpretation of data’.

Finally, the requirement for the employment and training of citizens of Ghana is captured by Section 105 of the Bill. Under this Section, a licencee is to submit to the GPRA within twelve months of the grant of its licence, a detailed programme for recruitment and training of citizens of Ghana for approval. The programme is to provide for the training of Ghanaian citizens in all the various stages of petroleum operations. The licencee is also required to publicly advertise for and ‘give preference to the employment of citizens of Ghana who have the requisite qualification, competence and experience required to perform the required work.’ There is also a requirement under the same section for scholarships to be awarded by the licencee which are not related to the oil industry generally to be submitted to the GPRA for approval.