Excerpt
Table of Contents
Executive Summary
1. Introduction
1.1 Scope
1.2 Aim and Objectives
1.2.1 Aim
1.2.2 Objectives
2.0 Literature Review
2.1 Introduction
2.2 Nature of Local Content Policy in Oil and Gas
2.3 Overview of Local Content Policies in Oil and Gas including legislations in Ghana and Norway
2.4 Impact of implementing LCP on economic factors in Ghana and Norway
2.4.1 Improvement and expansion of local businesses
2.4.2 Success in garnering technology and management skills
2.4.3 Improvement of derivative goods and services
2.4.4 Rise in the Gross Domestic Product (GDP)
2.4.5 Increase in employment
2.4.6 Retraining of local labour force
2.5 Theoretical Framework and Overview
2.5.1 Industry Network Theory
2.5.2 Keynesian Economic Theory
3.0 Analysis
3.1 Introduction
3.2 Comparative Analysis
3.2.1 Justification for the selection criteria
3.2.2 Selection of contextual factors
3.2.3 Criteria for the country selection
3.3 Data/Evidence
3.4 LCP Policy Analysis of Ghana and Norway
3.4.1 Context
3.4.2 The Applied LCPs
3.4.3 Outcomes of the LCP in Norway and Ghana
4.0 Discussion
4.1 Local employment
4.2 Local sourcing of services and goods
4.3 Training requirements
4.4 Technology Transfer
5.0 Conclusion and recommendations
5.1 Conclusion
5.2 Recommendations
6.0 References
7.0 Appendix
Appendix 1: Oil Production in Ghana (OECD, 2016)
Appendix 2: HDI evolution in Ghana (UNDP, 2016)
Executive Summary
Most petroleum-producing countries have enacted local legislation and content to regulate international Oil and Gas companies. However, there is a dearth of literature focusing on local content policies. Due to the gap in the literature, the research focused on exploring the contents and the impacts of the LCP implementation in Norway and Ghana. These two petro-states have been chosen because they emphasis the contrast between a developing country which initially did not have the means to develop a regulatory framework for local content (Ghana) and a developed country which did (Norway).
The aim of the study was to determine the economic impact of the implementation of local content policies in Oil and Gas producing countries, using Ghana and Norway as examples. The study explored three research objectives:
1) To examine the benefits and the challenges involved in implementing local content policies in developing countries.
2) To determine how other developing oil and gas producing countries can benefit In terms of implementing appropriate policies by understanding the successes or failures of implementing local content policies.
3) To make recommendations on how to improve the implementation of local content policies
The review of literature indicates that there are a number of impact of implementing LCP on economic factors in Ghana and Norway. The impacts include improvement and expansion of local businesses, success in garnering technology and management skills, improvement of derivative goods and services, rise in the Gross Domestic Product (GDP), increase in employment and the retraining of the local labour force.
The research applied the method of comparative analysis to explore and offer an in-depth explanation of similarities and or differences between two or more comparable alternatives, variables, processes, systems.
There are a number of major conclusions from the research. First, very high minimum targets for local employment can lead to the creation of skill gaps in some areas while only achieving increases in some job categories; mostly the semi-skilled and the unskilled positions. Secondly, considering the unemployment, there appears to be no relationship between the unemployment percentage and the quality of the local content policies. Third, where National Oil Company takes the lead in the fostering of local content policies, better results are achieved in terms of skills transfer, increased local sourcing and better training programs. Moreover, mandatory cooperation through JVs and partnerships leads to greater technology spill over from the foreign companies to the local companies. Coupled with the above, higher government spending by there would be an increase in the local supply of both non-specialised and specialised products to the oil and gas industry. Finally, the successful LCPs require the provision of fiscal incentives to the local firms, as well as empowering the national oil company to foster technical skills transfer and fostering training. Moreover, some contextual situations such as political stability, HDI in terms of the educational attainment and R&D spending were linked to better outcomes of the LCPs.
Based on the findings and the analysis from the research, it is recommended that policy makers and legislators in countries that want to develop local content policies should focus on coordination and getting input from the oil and gas operators, provision of incentives to the local businesses such as access to credit and the empowering of the national oil companies as a means of fostering the training and technology transfer from the foreign IOCs to the local companies
1. Introduction
The local content policies are adopted by developing and developed countries which have become petro-states. Most of them have found oil and gas and do not have the regulatory framework by which the international oil companies can be regulated (Esteves, Coyne and Moreno, 2013). In seeking to establish such regulatory framework, some of these states often discover that they do not have the expert human resources, the institutional requirements and important government departments and agencies to facilitate the creation of the regulatory framework (Esteves, Coyne and Moreno, 2013). Other countries which are more developed are not confronted by these problems. However, it appears that the question of local content is one where there has not been a maximum amount of research and analysis in this area (Tordo et al., 2013).Therefore, there is a need for research and analysis which can add to the body of literature which can serve as the basis for important policy decisions in respect of local content. The research and analysis undertaken goes a long way in contributing to the understanding of the factors that lead to success of the local content policies.
Most petroleum-producing countries have enacted local legislation and content to regulate international Oil and Gas companies (Ngoasong, 2014). Local content is an important policy of an emerging petro-state because it facilitates integration of important aspects of the local economy with the emerging oil and gas sector in the context of the national economy. The framework for local content can be established by legislation (Oyewole, 2018). Once the relevant legislation becomes part of the laws of the state, then the government can design programmes to ensure that there is capacity building, the involvement of local industries in terms of supplying critical areas of the oil industry and, most of all, ensuring the efficient access to technology and management techniques. It can also involve important human resource development in various aspects of the oil and gas industry and the improvement and development of local businesses (Ngoasong, 2014)
It is essential that the legislation to support local content should not be poorly drafted or implemented to avoid such issues as corruption and which could result in a minority of the citizens enjoying the benefits of the oil and gas sector (Asante and Owusu, 2014).
The question of the drafting a suitable or appropriate legislation is a critical issue. It means that the country’s concerned must be fit for the purpose of implementing the policy of local content by having the required legislative skills and to be capable of absorbing and managing the forces relieved by its technological relationship with the multinational companies. Most developing countries do not possess these skills and therefore have no choice but to obtain them from available sources (Ihua, 2010)
1.1 Scope
The research focuses on the economic impact of implementing local content policies in Ghana and Norway. These two petrostates have been chosen because they emphasis the contrast between a developing country which initially did not have the means to develop a regulatory framework for local content (Ghana) and a developed country which did (Norway).
The researcher first considered the definition of local content which is “the extent to which the output of the extractive industry sector generates further benefits to the economy beyond the direct contribution of its value-added, as through links to other sectors.” (Tordo et al., 2013, p. xi).
The research also considered the need to develop local content policy, laws and regulations which will promote and enhance the state’s ability to implement local content policy. The research undertook an examination of the relevant laws and regulations developed by Ghana and Norway to implement local content policies. Specifically, the focus will be on the local content committee of both countries and how they perform in implementing these policies followed by the examination of the local content policies’ impact on the economy of the two countries to determine its impact. The main aim of the research was to aid in understanding whether the LCPs led to the improvement in local businesses, success in garnering technology and management skills, expansions in small businesses, improvement of derivative products and services, a rise in Gross Domestic Product and increased employment. The example of these two countries will provide a platform from which the relevant research can focus on modern theories which locate the difficulties and problems of regulating the impact of local content on the economies. The results of the utilization of these theories can serve as a useful guide to highlight the challenges and requirements of implementing the policy of local content. The two theories applied in the analysis as well as explanation were industry network theory and the Keynesian theory of economics.
1.2 Aim and Objectives
1.2.1 Aim
The aim of this study was to determine the economic impact of the implementation of local content policies in Oil and Gas producing countries, using Ghana and Norway as examples.
1.2.2 Objectives
4) To examine the benefits and the challenges involved in implementing local content policies in developing countries.
5) To determine how other developing oil and gas producing countries can benefit In terms of implementing appropriate policies by understanding the successes or failures of implementing local content policies.
6) To make recommendations on how to improve the implementation of local content policies.
2.0 Literature Review
2.1 Introduction
Several academic writers and international organizations such as the World Bank have added to the growing body of literature of Local Content as various countries in the developed and developing world discover oil and gas and become petrostates. A central consideration of these writings is the definition of local content as determined by the oil and gas industry in general and these states particular. Local content is mostly focused on ensuring local employment, local sourcing, technology transfer and training of the local workforce (Acheampong et al., 2016; World Bank, 2011; World Bank, 2013)). Most states aim at increasing value added products which can replace imported ones and this policy is intended to ensure to have a positive impact on the economies of different states. This aspect of the local content policy and other related issues have become a growing area of focus for academic writings and analysis. It is the purpose of this review to look at a wide variety of literature on these questions.
2.2 Nature of Local Content Policy in Oil and Gas
Local Content Policy maybe be defined as “The extent to which the output of the extractive industry sector generates further benefits to the economy beyond the direct contribution of its value- added, as through links to other sectors (Tordo et al., 2013). Local content policies and legislations are important instruments for developed and developing countries and increasingly, these countries implement such policies to ensure maximum benefits are gained for their economies and people’s from the petroleum industry (Acheampong et al., 2016). Most government aim to use local content in order to improve local businesses, improved access to technology and management skills, expand small businesses, increase employment, retrain the labour force and generally seek to increase Gross Domestic Product (Acheampong et al., 2016).
2.3 Overview of Local Content Policies in Oil and Gas including legislations in Ghana and Norway
Local content policy is largely determined by the level of development, technical and educational level and the legislative and regulatory framework created to manage the oil and gas industry. This is clearly illustrated by the local content policy of a rich developed country like Norway as compared with a developing country like Ghana (World Bank, 2013). The former does not find it necessary to have local content policy and legislation whereas the latter finds it necessary to have appropriate legislation and regulatory framework. From a study of the local content policy of these two countries the conclusion must be reached that the success of local content policies correlates with the nation’s institutional arrangements and level of economic development.
The discovery of petroleum in Norway has had a positive impact on its economy and now makes a significant contribution to its GDP. The petroleum industry is regulated by the Petroleum Act (Act No. 72 of 29 November 1996) and the national Petroleum Regulations (Regulation No. 653 of 27 June 1997) and provides the legal basis for licenses which govern the activities of the industry. Norway does not have legislations or regulations for local content. The Norwegian government supports Norwegian firms but insist that they must be chosen when they are competitive in three significant categories: price, quality and delivery (Acheampong et al., 2016; Oil and Gas IQ, 2010). Initially local firms in the oil and gas industry were selected even when there were not the most cost effective. Local companies such as Statoil, Norsk Hydro and Saga Petroleum were created in such a manner that there were listed as operators because there were regarded as not having the capacity to operate oil and gas assets and so foreign oil companies were contracted to act as technical advisors and to assist with technology transfers (. Apart from this technology transfer international oil companies usually brought international supply chains to Norway and we’re required to establish local subsidiaries and employ local staff. This was matched by supplier development programs to foster the use of local service companies. The concentration on the sector’s production promoted links with private and local firms to create clusters in the economy which in time became internationally competitive. This, in addition to its global shipping industry and its capacity in the manufacture of ship equipment and shipyards facilitated vital offshore operations.
Norway’s developed educational facilities at the time of oil discoveries in maritime activities, energy-intensive process industries, metals and materials and geology were an important part of the nation’s knowledge base. In addition, Large processing facilities used for metal production in Norway’s established mining sector helped local firms with a good international reputation to dominate these sectors. The combination of these industrial strengths and the use of local firms and services in the oil and gas production chain expanded Norway’s knowledge and skills base which further ensured local expertise in the oil and gas sector. Norway therefore developed a highly skilled and competitive oil and gas sector resulting from local content policies. In 2012 this sector employed 125,000 people. The Norwegian service and supply industry generates some USD64 billion annually, making it the second largest industry after oil and gas (Acheampong et al., 2016, p. 300).
It is now an established fact that Norway’s ability to obtain maximum benefits from oil and gas has been important to its economic and social development. The energy sector generates a third of the nation’s wealth. An efficient and productive energy sector placed Norway in an advantageous position to benefit from the high price of oil between 2000 and 2014 and this in turn allowed the country to engage in high levels of public spending and polices of low taxation.
In contrast to Norway, Ghana, after finding petroleum in 2007, created the legislative and regulatory framework to manage its oil and gas industry. Oil and gas development is guided by five basic laws the Petroleum and exploration (Exploration and Production) Act 1984 (PNDC law 84); the Ghana National Petroleum Corporation Act, 2011 Act 82 and the Petroleum Revenue Management Act, 2011 (Act 815)
In order to ensure the growth of local content development the Government has worked through the Ministry of Energy and Petroleum created the Local Content and Local Participation in Petroleum Activities Policy (”Local content Policy”) which laid the foundation for local content regulations. These regulations we’re set up to manage the interactions of the various regulatory mechanisms. The local content legislation and regulations has allowed the Ghanaian government to bring the people of that country and its local companies into all aspects of the petroleum industry value chain.
As is the intent of local content policy the intention of the Ghanaian government to obtain optimum benefits of the industry benefits as a result of the improvement of skills, specialized education, technology transfer, research and activities designed to promote the development of the country. The PNDC law already referred to mandates the government to give preference in sourcing of plant, equipment and supplies to indigenous companies as well as to create programmes to train Ghanaians to acquire needed management and technical skills.
These are the theoretical constructs of the local content policy. What was its practical application? The literature here suggests that this policy, governed by regulations and legislations, has not met the targets set as regards the object of achieving 90 to 100 percent of local content participation. The conclusion must be reached that while goals of the local content policy is laudable it has not the same impact on the national economy that the same policy has had on the economy of Norway. It is also worth noting that at the time of its first oil Norway’s industrial competence was already operating according to industrial standards. Hence, Norway was able to leverage its industrial maturity to strategically implement strong local content initiatives.
The LCP in Ghana is aimed at the maximization of the upstream value chain and the policies use upstream value chain as an important parameter in the negotiations before the award of offshore oil blocks. In PNDC Law 84 (the Model Petroleum Agreement), the subcontractors and contractors are required to prefer indigenous (local) companies in the sourcing of equipment, plant and supplies. The investments in the downstream linkages such as the establishment of parastatals such as Ghana National Gas Company, Tema Oil Refinery, and Bulk Oil Storage and Transportation Company amongst others have played an important role in the provision of downstream services in areas such as storage depots, operation of the petrochemical plans, oil trading, ancillary financial services and oil refineries (Acheampong, Ashong, and Svanikier, 2016). The downstream of the oil and gas sector is well-established thus the downstream can be used to pursue interventionist and regulatory policies similar to the approach adopted by Norway.
2.4 Impact of implementing LCP on economic factors in Ghana and Norway
2.4.1 Improvement and expansion of local businesses
The implementation of LCP have had varying impacts on the local businesses. Acheampong, Ashong, and Svanikier (2016) found that the local business involvement is limited as the country has very limited industrial base thus the local businesses lack the knowledge as well as the bespoke services and inputs such as construction, and fabrication services, well-drilling, seismic and exploration services as well as front-end engineering. African centre for Energy Policy [ACEP] (2017) noted that the Jubilee/ TEN Field Partners awarded indigenous companies in Ghana contracts worth $489 million (35%) of the total contracts. ACEP (2017) added that that the ingenious companies were awarded 28% of the contracts in the offshore Cape Three Points Field. However, the local business improvement has been limited due to the limited capabilities and capacities of the local business to undertake the oil and gas operations (ACEP, 2017; Asante and Owusu, 2014; Asamoah, 2012; Asafu-Adjaye, 2010; Boyefio and Ochai, 2014). The challenges include limited information that denies the local businesses the benefits and opportunities in the supply chain, lack of skilled staff to offer services that meet the IOCs standards, limited financial capabilities thus the inability to handle large contracts, and limited certification of the local businesses by the International Organisation for Standardisation (ISO).
2.4.2 Success in garnering technology and management skills
The success in the garnering of technology and management skills has been limited in Ghana as the local companies have nor prioritised the training of the staff, or even the acquisition of the skilled manpower (Guriev, Kolotilin, and Sonin, 2011; Acheampong et al., 2016). However, the Petroleum Commission in Ghana began expediting the capacity building efforts for the local businesses through joint venture (JV) formation.
2.4.3 Improvement of derivative goods and services
Boyefio and Ochai (2014) noted that the oil industry in Ghana is still dominated by foreign companies even for the products and services that could be supplied or made by the local firms. The researchers noted that even though the IOCs have professed their support for the LCP, they have been reluctant to break-off the existing supplier relationships with their global suppliers. There is a view that there is a deliberate attempt by the IOCs to deliberately bypass the local companies as evidenced by the contracting of products and services from Ivory Coast rather than from the local Ghanaian businesses (Ackah and Mohammed, 2018).
2.4.4 Rise in the Gross Domestic Product (GDP)
The extractive led-argument based on liberal economic perspective holds that countries endowed with extractive resources such as gas and oil would record accelerated economic growth and development (Henstridge et al., 2012). The above view was supported by studies that found positive correlation between the oil and gas sector growth and the growth of the GDP in several countries in Africa (King, 2010; Bruckner, 2010; Brunnschweiler and Bulte, 2008; Tordo and Anouti, 2013). The main assumption by liberal economists is that the extractive sector growth would lead to increased government revenue and spending in financing programmes for the alleviation of poverty (Henstridge et al., 2012). However, there are concerns about how the trickle-down works as some researchers have noted that the extractive sector (i.e. oil and gas) rather than being a blessing to the developing African nations, has turned into a curse (Ayelazuno, 2014a; Ayelazuno, 2014b; Andersen and Aslaksen, 2008; James and Aadland, 2011; Mainguy, 2011; James and James, 2011; Stevens and Dietsche, 2008; Ross, 2012).
2.4.5 Increase in employment
The Local Content and Local Participation policy framework developed in 2010, especially Section 5.4 of the policy framework stipulates a number of milestones with regards to the employment of Ghanaians. The policy framework states that:
- A minimum of management staff at the international oil companies (IOCs) should be Ghanaians at the start of the activities of the IOCs and be at least 80% within 5 years of the operation.
- The policy also states that at least 30% of the technical staff roles should be undertaken by Ghanaians at the start of the licensee activities with the percentage to increase to 80% within 5 years, 90% within 10 years while all the other staff categories should be 100% taken up by the Ghanaians (World Bank, 2016).
The implementation of the LCP has led to significant benefits in terms of the employment. Buah (2016) noted that at the end of 2015, local Ghanaians held 81% of all the employment in the upstream sector with expatriates taking up 19% of the employment. When the employment numbers are considered in view of the targets of the local content, it can be stated that the targets for the management and other staff had been met by 2015. However, Ahwireng (2016) noted that there still exists a significant gap in the technical staff especially the technicians and engineers. It is worth pointing out that some of the IOCs operating in Ghana have prioritised the use of local labour force in their project execution for instance ENI has devoted 25% of the engineering man hours to Ghanaians at the Sanzule gas processing plant. Also, Tullow Oil and Kosmos Energy also have offices that are committed to the meeting of the employment under the local content policies in Ghana (Africa Centre for Energy Policy, 2017). Despite the progress made, there still exist significant salary disparities between the foreign staff and the Ghanaians leading to occasional protests by the locals. Petroleum Commission noted that the disparities in the salaries are linked to the lack of oil and gas industry technical skills by the Ghanaians. The Petroleum commission noted that even in the cases where the Ghanaians had the academic qualifications, they lacked the practical competences and skills required for the technical and engineering areas in oil and gas industry (Africa Centre for Energy and Policy, 2017). Okuthe (2015) writing on the impact of the oil sector in Kenya noted that oil sector usually leads to the massive people movement to the oil production areas; with the majority of the people engaging in social vices as they are not all absorbed by the oil sector. In Ghana’s case especially Sekondi-Takoradi city, Obeng-Odoom (2014) noted that many of the young women who moved to the city following the 2007 discovery of oil turned to commercial sex work. Darkwah (2013) also added that the majority of the young people who acquired skills in line with the oil industry have remained unemployed.
2.4.6 Retraining of local labour force
As noted by Ahwireng (2016) with regards to the gaps in the technical expertise of the local labour force. Several initiatives have been undertaken by the Petroleum Commission to aid in bridging the gap through local labour force retraining.
2.5 Theoretical Framework and Overview
The two theories used to analyse the economic impact of the implementation of the local content policies in Ghana and Norway include the industry network theory and Keynesian Economic Theory.
2.5.1 Industry Network Theory
A theory of study in relation to the local content policy will be the industry network theory which provides a framework for the integration of local content (Parker, Halgin, and Borgatti, 2015). The theory proposes that achieving local content requires the development of business network links and a resource alignment among local companies and institution and foreign companies and institutions in addition to multinational oil companies (Halgin, Gopalakrishnan, and Borgatti, 2012; Domenech, and Davies, 2009). The basic assumption in industrial network theory that there is the dependence amongst firms on resources which are controlled by other firms; thus the access to the resources is highly dependent on the positions of a firm in the network. The other important element in the theory is the issue of trust. Trust is linked to the issue of uncertainty especially the general lack of information in the network. Since the uncertainty cannot be reduced through the collection of new information, due to the fact that the uncertainty is rooted in the exchange, the parties in the network must develop trust to effectively interact and transact with others in the network. The overall assumption is that the firms in the network are dependent on one another (Borgatti, and Halgin, 2011). The important characteristics of the members of the network include control over resources, the goal of the actors is to increase their control over the resources. Thus, the various elements which go into the creation and establishment of local content will be examined according to this theory (Owusu and Vaaland, 2016).
2.5.2 Keynesian Economic Theory
The other theory applied in the research is Keynesian economic model. The theory is focused on how an increase in domestic demand influences real Gross Domestic Product (GDP). This is the multiplier and the accelerator principal associated with the Keynesian economic model. The theory is based on three assumptions; rigid prices, effective demand and saving investments (Blinder, 2008). Keynesian economic theory holds that the government plays an important role in the stabilisation of the economy of the country. British economist J. M. Keynes noted that aggregate demand (AD) measured in terms of the total spending by the government, businesses and households is the most important factor that drives economic growth (Hansen et al., 2015). The theory also holds that free markets lack the self-balancing mechanism that can help in creating full employment. Keynesian’s thus justify the intervention of the government through public policies aimed at achieving price stability and full employment (Cogan et al., 2010). Keynes and other proponents of the theory have argued that inadequate aggregate demand can lead to periods of prolonged unemployment. The principle arguments of the theory include (Blinder, 2008):
- Prices and wages slowly respond to the changes in the demand and supply thus leading to surpluses and shortages.
- Aggregate demand is influenced by a number of economic decisions at both the private and public level thus Keynesian economists support a mixed economy guided primarily by the private sector but partly influenced by the government policies.
- Changes in AD; whether unanticipated or anticipated have the greatest short-term impacts on the employment and real output as opposed to having impacts on the prices. This is based on the belief that the process are rigid to some extent thus the fluctuations in the investment, consumption or expenditure by the government leads to changes in the output levels.
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