LOCAL CONTENT IN OIL AND GAS: A LEGAL PERSPECTIVE
By ATTORNEY–AT-LAW, SANJEEV DATADIN
There is no universal definition for local content. This is because the aim/ focus, structure and implementation varies from country to county. It is the kind of concept that, as with other areas of law, should remain as a category as opposed to a defined concept. All the same, it is worth for the purpose of clarity to borrow a definition from the World Bank so that we may all have a better idea of what we are speaking about. “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.” (World Bank 2013: Tordo, Warner, Manzano, Anouti) In Nigeria (referred to as ‘Nigerian Content’) it is defined by statute as follows:“The quantum of composite value added to, or created in, the Nigerian economy by systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the extractives industry.”(Section 106 of the Nigeria Oil and Gas Industry Content Development Act 2010.) In simple terms, Local Content has come to mean and is understood to mean the vehicle that a country adopts to benefit from the oil and gas industry, more specifically the extraction of oil and gas, beyond those specific revenues. The value gained by the country’s economy is commonly referred to as “Local Content” (LC).
How Would Local Content Work in Guyana? In truth,LC can and is expected to work, depending on the model adopted, in one of its many formats adopted worldwide. Before we get to the various formats LC has taken in the sector, let’s understand two common terms of art in the literature and in the industry – “Backward Linkage”, “Lateral Linkage” and “Forward Linkage”.
It may be best to convey what the three (3) terms mean by way of examples. 1. Backward Linkage refers to the business before extraction, supply of pipes, supply of building materials and other things concerned with the exploration and extraction process; the Supply Chain. 2. Forward Linkagerefers to the procession of the extracted petroleum, such as a refinery; making use of the produced products, mid and downstream sector involved. 3. Lateral Linkages refers to permitting the oil companies to build roads or an airport for its usage by the company but to be used by the community. This capacity building can benefit other sectors.
It is expected to work in practical ways; providing labour and supplies. Whether this is local content depends on the view taken or the definition favoured. For example, we can have a local company supplying all the materials but the materials are all imported from overseas and the local supplier is what we would term a middleman. Another example may be a locally incorporated entity owned by foreigners who are classified as a local company and they supply the materials used by the oil companies. The supply of materials by local companies may be difficult because it may be specialized equipment and/ or materials and simply not available in Guyana; or a particular skill in the labour force may be needed and it may be simply unavailable in Guyana. Great care must be taken not to stifle production and/ or create bottlenecks in exploration/ production by demanding locals be employed and locals supply and the locals have the capacity to do neither. The aim of LC in Guyana, in a perfect world, would be to have locals employed in the sector at all levels in a high percentage and be suppliers of all the materials needed by the oil companies. This may be “life goals” but may not be practical.
Local Content in Guyana Local Content may be a new phrase but it’s certainly not new to Guyana. In fact, those of us in practice in the mining and forestry sector are very familiar with it and its operation. The Mining Act Cap. 65:01 in the Act and its regulations require proposals for the employment and training of citizens to be of a “satisfactory” level before a prospecting licence is granted [See 30(2) (c)] and the same is required for a mining permit by section 46 (1) (d). The Forestry Act Cap 67:01 require that there be “satisfactory” proposals for the employment and training of nationals before an exploratory permit is granted; (6(2) (c). Petroleum (Production and Exploration) Act, Cap. 65:10 permits only a Guyanese national to obtain a licence as an individual. Companies owned by foreigners can too.
Local Content Policy In April 2017, the Government of Guyana produced and released a policy framework document on Local Content in the Oil and Gas Sector in Guyana. The document was a working draft for discussion and it is still in the discussion and consultation phase. Minister Trotman has stated that it was not the intention of the Government to implement Regulations at this time but it may be necessary in the future.
The stated objectives of the draft LC Policy are as follows: (a) Training, development and employment initiatives (Capacity Development). (b) Ensuring availability of ownership participation for qualified Guyanese equity interest (Ownership Value). (c) Supplier development provisions for goods and services by locals to support sector operations (Local Content). (d) The various aspects of handling, processing, trading and utilisation of produced crude oil and natural gas and their derivatives (Value Addition); and (e) Well-tailored social contributions for greater impact and benefits (Societal Benefits).
Petroleum Agreement Article 15 of the Petroleum Agreement with the Government of Guyana and Esso/ CNOOC/ HESS provides for the payment of agreed taxes and royalties. It provides for payment of 2% royalty and payment of taxes as agreed. It is noteworthy that there is much tax exemption agreed. Article 18 of the Petroleum Agreement with the Government of Guyana and Esso/ CNOOC/ HESS requires the production companies to “give preference” to the:(a) Purchase of Guyana’s goods and materials once competitively priced and available; (b) Employment of Guyanese sub-contractors in so far as commercially competitive and they meet technical requirements.
Article 19 of the Petroleum Agreement with the Government of Guyana and Esso/ CNOOC/ HESS requires the hiring and training of locals. In simple terms, it requires that monies be advanced by the producers for the training of Guyanese and it requires an annual plan to be submitted for approval with the utilization of local skills in the workforce of the oil companies.
Local Content Models/ Mechanisms Local content policies in the oil and gas sector worldwide seek to encourage the “participation and development of national labour, goods and services, technology and capital.” (World Bank 2013). The models worldwide vary and the mechanisms employed are unique to each country and circumstance [developed or developing countries, mature or immature economies etc.] The desired objectives for local content are achieved by one or a combination of the following mechanisms (known in the industry as “channels of policy implementation”): (a) Primary legislation (Kazakhstan, Nigeria) (b) Secondary legislation (Kazakhstan, Mozambique, Angola) (c) Negotiated contracts (PSA) (Tanzania, Uganda) (d) Licensing agreements (e) Concession agreements
The establishment of a commission or similar supervisory body to record, track and ensure compliance with a government’s local content policies is common and in fact desired;(Trinidad and Tobago and Kingdom of Saudi Arabia).
Primary Legislation examples: (a) Kazakhstan. Article 50 of the Sub Soil and Subsoil Users law mandates that bids for new subsurface mineral rights include commitments to minimum levels of local goods and works. Article 1 establishes the minimum requirement for employment to be 95% Kazakhstani citizens (foreigners try to get citizenship to qualify). Article 78 requires that Kazak bids for contractor selection be discounted by 20% at time of consideration. (b) Nigeria’s Oil and Gas Content Industry Development Act requires 100% local content by tonnage for the supply of steel plates, 80% for engineering of floating production and storage and off loading vessels [floating production proposed to be used in Guyana]. Waivers by Minister available (much criticized for “corruption claims”.)
Secondary Legislation examples: (a) Mozambique. Decree No. 24/ 2004 Petroleum Operations Regulations mandates contracts to be awarded on internationally competitive basis. Article 38 mandates an operator to “give preferential treatment to local goods and services” and to give award to local contractors that are “inclusive of taxes not higher than 10% of available imported goods”. (b) Kazakhstan. Decree 965/ 2012 requires all procurement plans to be made public in the short and long term so that local companies can plan and be prepared to supply goods and services. (c) Angola. Ministerial Order No. 127/ 03 reserves certain of categories of procurement to only Angolan companies (logistics, catering, pressure testing of pipes and storage tanks), identifies spending where bidding by foreign suppliers is predicated on them forming a joint venture with local companies, allows Angolan companies first refusal if they cost no more than 10% of foreign companies.
Guyana is an example of local content included in the Petroleum Agreement. Azerbaijan has local content in their PSA too and they require an employment regime as follows: (a) Prior to development 30-50% professionals and 70% non-professionals. (b) Upon commencement of production, 70% professionals and 85% non-professionals. (c) 5 years after production, 90% professionals and 95% non-professionals.