This section uses the above discussions to answer the main research question. How can Ghana effectively develop and implement LCPs in the upstream oil and gas?
Local Capabilities and Infrastructure. Kazzazi and Nouri's framework on local capacities and local infrastructure is analysed from the Ghanaian perspectives. What local capabilities and infrastructures are required to implement Ghana’s LC policy in the upstream oil and gas segment? Ghana has an enabling business environment, and ranked one of the most attractive locations in Africa for doing business [17]. It is a stable, multiparty, parliamentary democracy, and committed to market liberalization with a sound macroeconomic environment and immediate access for all markets of the Economic Community of West African States (ECOWAS). Other objectives are on-going privatization of key economic sectors; infrastructure development; expanding stock markets; a competitive labour force; fast developing financial infrastructure; and a high degree of personal safety [17]. Ghana is performing credibly well in the governance of oil and gas resources, and scored 67 out of 100 points from the global Resources Governance Index, making it the best performing extractive country in Sub-Saharan Africa [21]. Ghana has demonstrated that it has an enabling environment, with social and local infrastructures adequate for the development and implementation of LC in the upstream oil and gas sector [14, 16].
Local Policies: The GNPC Act, 1983 (PNDCL 64) and the Petroleum Commission (PC) Act 2011 (Act, 821) established, respectively, a national oil company, GNPC, and an upstream petroleum resources regulator, Petroleum Commission. The GNPC is, among other things, responsible for ensuring that Ghana: obtains the greatest possible benefits from the development of its petroleum resources; secures the transfer to Ghana of appropriate technology in petroleum operations; facilitates the training of Ghanaians, and the development of national capabilities in all aspects of petroleum operations [11].
The Petroleum Commission, on the other hand, is mandated to regulate and manage the utilization of petroleum resources and coordinate the policies in the upstream petroleum sector [31]. The commission is responsible for, among other things: promoting local content and local participation in petroleum activities as prescribed in the legislative instrument (LI 2204) and other applicable laws and regulations [31].
The GNPC is well governed [22], and if its laws are adequately implemented it would ensure effective upstream LC development and implementation in Ghana. The GNPC’s activities over the years have resulted in accelerated commercial upstream petroleum discoveries and production in Offshore Tano, West Cape Three Points, Saltpond and the Keta basins. Through the activities of the GNPC, Ghana’s upstream petroleum operations have rapidly transformed on every front in investments, scale of operations and new institutions [11]; the GNPC should, however, aim to achieve higher, global, standards, and be the engine of national development [22] and the “poster child” for Ghana’s upstream oil and gas LCPs.
In the areas of LC development and implementation, the GNPC admittedly has been unable to ensure the training of Ghanaian citizens and the development of national capacities in all aspects of petroleum operations. Except for joint venture operations with IOCs, the corporation is yet to develop any upstream infrastructure for the production of oil and gas in Ghana. Furthermore, the corporation has been unable to meet the country's national petroleum requirements, making it a net-importer of petroleum products, while the GNPC sells crude oil to the global market to the detriment of the internal domestic refinery market.
The problem is a poor LC backward linkage of integrating upstream crude oil production to an existing (Tema Oil Refinery) refinery capacity. It also prevents Ghana obtaining the greatest benefits from its petroleum resources, except the ones from petroleum revenues and limited employment opportunities in the upstream sector. The GNPC is also constrained in ensuring the transfer of technology from IOCs in operationalizing their mandate. The [22] recommendations to GNPC effective performance and implementation of LC include: the GNPC defining a commercial mandate and financing commercial activities, and attracting adequate debt and equity financing; limiting political interference in technical decisions, and investing in staff capacity and integrity; and ensuring transparency and oversight of the activities of their LCPs.
The PC, as an upstream regulatory institution, is required to ensure the implementation of LC legislation (LI. 2204). In efforts to implement Ghana’s upstream LC regulations, the PC and the interviews with the stakeholders identified the following factors affecting upstream LC implementation in Ghana:
Equity participation in upstream operations and service provisions. In the Local Content LI, an Indigenous Ghanaian Company (IGC) shall be given first preference in the grant of a petroleum agreement with respect to petroleum activities. Also, there shall be five percent (5%) equity participation of an IGC other than the GNPC to be qualified to enter into a petroleum agreement. Additionally, a foreign company that intends to provide goods or services in the petroleum sector shall incorporate a joint venture company with an IGC, and afford that IGC equity participation of at least ten percent (10%).
Despite the aforementioned good intentions of the law, there are still a number of serious constraints. The main constraint on the IGC 5% equity participation in upstream operation is the difficulty of accessing financing to pay for their equity. Very few IGCs can absorb the risk of cash calls for exploration activities, and the potential and real risk of no discovery can subsequently negatively impact the survival of the IGC. Additionally, the 5% equity participation is inadequate to participate significantly to management and ownership control. In this regard, IGC is merely used to acquire petroleum agreements and licences, and not allowed adequate participation in the decision making and operations of the joint venture. This obstruction undermines the purpose of skills acquisition and technology transfer to IGCs. That is why we agree with the suggestion of the [17] that Technical Partnership Agreements should be signed with IGC, instead of just a joint venture that allows Ghanaians to be part owners of the contracts with the foreign companies. Doing so will include them among the drivers of execution, giving Ghanaians some management and operational control. When this is properly monitored by the PC, skills and technologies can be transferred to the IGC.
Establishing a robust financial link: From 2011 to 2018 Ghana received US$4.97 billion, and distributed US$5.013 billion as cumulative revenues from upstream oil and gas operations in the form of royalties, participating interest, taxes, interest, surface rentals, and gas revenues [13]. The Petroleum Revenue Management Act (815), amended as Act 893, stipulates the distribution of petroleum revenues, and the Bank of Ghana receives these funds into a Petroleum Holding Fund. Not more than 55% is given to the Ghana National Oil Company. The remaining 45% is distributed as follows. Not more than 70% is given to the Annual Budget Funding Amount (ABFA). Out of the ABFA fund, not more than 30% is allocated to the Ghana Infrastructure Fund, the Public Interest and Accountability Committee, and selected priority areas of investment for the country. The remaining 30% of the 45% is disbursed into the Ghana Petroleum Funds [15, 13].
The GNPC uses 55% of its share of petroleum revenues to finance its upstream operations and increase their equity participation. The Ghana Government uses the ABFA to finance government expenditure on goods and services and the remaining amounts for public investment expenditure. In this way does the economy of Ghana benefit from these oil revenues for national development [13].
To address some of the critical infrastructure woes in the upstream oil and gas sector, funds from petroleum revenues should be used to provide some of the critical infrastructure (roads, rails, and ICT), as [16] noted, which is required to implement LCP. Investments should be channelled into providing new and improving existing physical and social infrastructure at the upstream in collaboration with the GNPC. Some funds can be made available to provide financial support to the IGC to compete with their foreign counterparts in the services sector. The petroleum revenues can provide seed capital for the local content fund, and serve as a leverage to develop critical infrastructure to scale-up indigenous participation.
The lack of a local content fund is another major challenge: in the stakeholder interviews financial challenge was identified as the main barrier and it hinders the participation of the IGC in the upstream oil and gas sector. [7] identified two aspects of the problem: poor capital mobilization, and higher interest rates. There are no specialized investment banks to deal with the long-term financing needs of the oil and gas industry. Syndicated loans could solve the problem, but local banks lack adequate capital, and cannot support the high-risk exposure in the upstream oil and gas sector. To solve the local content funding problem, the Oil and Gas Business Development and Local Content Fund (OGBDLCF), supported by the IOCs, was established to support education, training, and research and development for the government to address the human resource gap. The Petroleum Commission is currently developing guidelines to operationalize the local content fund (LCF). This fund is meant to provide financial assistance to the IGCs to help them compete in the sector. The LCF is supposed to be funded by 1% of every contract signed in the sector. There has, however, been very little cooperation from companies in contributing. While the idea might be good for local companies, it’s not in the long-term interest of the IOCs. Stricter enforcement and supervision or a consultative approach is required to compel/convince the IOCs to honour this contractual requirement of funding the LCF.
In-country spending by IOCs: LCPs can be used as a tool to develop local supply chains [32], but this is minimally done in developing countries [20]. Evidence from the Petroleum Commission indicates that from 2012 to 2019 in-country spending along the oil and gas value chain was US$16.4 billion. Foreign companies received 55%, (US$9 billion), IGCs 7% (US$1.2 billion) and Joint Venture (JV) companies 38% (US$6.2 billion), as shown in the table below.
Source: [31].
IGCs receive a marginal share of 7%, representing US$1.2 billion out of a total of US$16.3 billion of the in-country expenditure in the upstream oil and gas sector within seven years of operation (2012 to 2019). Upstream contracts going to foreign companies (55%) are still far greater than the combined contracts going to both IGCs and JVs (45%). The in-country spending, procurement of goods and services, and joint venture activities are a significant source of both direct and indirect benefits of the oil and gas industry to the Ghanaian economy. The in-country spending can be re-engineered so that the majority goes to IGCs through joint ventures, as stipulated by the local content law (LI.2204), which requires oil and gas service companies to form joint ventures with IGCs with 10% equity participation. As well, the IGC 10% equity participation needs to be monitored by Petroleum Commission to ensure that the IGCs benefit fully from this law.
There is, however, resistance from these international service companies to the implementation of the 10% joint venture equity participation with IGCs. For instance, a respondent (Senior Manager – Expatriate) with one of the Multinational Oil Companies argued that “Their companies are of international repute, and they cannot give 10% ownership to an IGC. Even a local subsidiary of our companies does not merit any JV with an IGC”. While this concern is legitimate, the PC can consider services JVs on a contract award and execution basis, instead of company ownership. Furthermore, while contract awards going to foreign companies can be discouraged, joint venture operations should be encouraged through joint operating agreements for IGCs in order to learn from their foreign counterparts in the areas of joint management, control, and operations of projects/contracts. At the same time, an IGC that is credible enough to be on their own should be encouraged and promoted while preventing fronting[1] tendencies, which is a criminal offence in Ghana [6].
It is noteworthy that the in-country spending total of US$16.3 billion over the past seven years is twice the amount of direct oil revenues (US$4.97 billion) to Ghana's government. This means that the LCP should target optimization of in-country spending towards IGCs. In-country spend has an indirect effect, driving benefits from the oil and gas industry. As the [19] noted, between 40 and 80% of the revenues created in oil and gas is spent on the procurement of goods and services, which often exceeds the benefits from tax and royalty payments.
Employment linkage: The Local Content law LI 2204 on employment requires that a company operating in Ghana for 10 years must employ 70-80% managerial, 70-80% core technical, and 100% of other Ghanaian staff. Data from the Petroleum Commission indicates that as of 2019 about 4,362 (Industry Wide) Ghanaians were employed in 30 companies operating in the upstream oil and gas industry. This represents 91% of the total workforce; foreign expatriates represent 9% of employment positions, as indicated in Figure 2 below.
Source: [31].
The number of expatriates employed in the upstream oil and gas sector in Ghana is significantly marginal, representing 9% out of the total 4,794 employees working in the upstream sector. Further analysis, however, of this 9% is necessary to ascertain their roles and responsibilities, and to see whether they can be replaced by Ghanaians.
A further breakdown of categories of the upstream employment roles in Ghana shows that Ghanaians represent 75% of management roles, and expatriates 25%, as indicated in Figure 3 below. The majority of the 9% expatriate workers are in the management segment. Further analysis is required by the PC to ascertain which managerial roles Ghanaians occupy.
Source: [31].
There were also constraints on the impact of the managerial roles occupied by Ghanaians. As was indicated by a respondent (Senior Manager IOC - Ghanaian), “Not all managerial roles are strategic or technical, and the IOCs appoint Ghanaian managers to meet the local content law requirement, but these managers do not have any significant impact on strategic decisions making in the IOC”. Ghanaians can be appointed as managers of IOCs, but what is the level of their participation and control? Most important, which part of the decision value chain are they managing? What are the financial authorization limits for him/her? And, finally, who is he/she responding to?
Another respondent (Senior Manager, IOC-Ghanaian) said: “The IOC has a Ghanaian country director, who operates the IOC Ghana office solely, and reports directly to the overseas head office. The manager was recruited by the overseas head office.. This manager takes all the operational, technical, and strategic decisions in-country, and has a financial authorization limit of US$400million. He meets weekly with the company’s board of directors and with his other colleague managers from other subsidiary country offices”.
On the same issue, another respondent (Senior Manager IOC-Ghanaian) stressed that “the IOC has an expat from Headquarters office as the stationary manager, but there is a Ghanaian local content manager acting mostly as the country manager. The less active expat manager, however, is the final authorization point, and reports to the IOC head office outside Ghana”.
The difference in the two managerial level roles cases affords a sound understanding of the extent of their control and the ability of two Ghanaian senior level managers working in two different IOCs to exert any strategic managerial control. The difference between the two managers for the two IOCs is in their control and authority to make in-country financial and strategic decisions. While the manager of the IOC in the second case is constrained by an expatriate, the first one reports directly to the headquarters. This requires the PC to further inquire into the managerial roles of Ghanaians in these IOCs upstream and their effectiveness.
In the core technical roles Ghanaians are 59%, and expatriates are 41%. This low representation of Ghanaians in proportion to the expatriates in the technical core staff in upstream operations undermines a core aspect of the local content law. We agree that the upstream oil and gas industry is high capital intensive, and low in labour intensity [10]. The few jobs available from upstream operations are very technical and highly skilled, such as engineering and higher management positions. This shortfall is a result of the lack of Ghanaian workers with core technical expertise in upstream oil and gas operations, and the challenge of enforcing knowledge and skills transfer from expatriate technical staff to their Ghanaian counterparts in the upstream [29]. Unless and until this is addressed, the idea of knowledge and skills transfer as required in the implementation of the local content law in Ghana will remain a mirage. In order to address this, Local Training in core technical skills (e.g., drilling, engineering, geosciences, and technical management) needs to be scaled-up, and mentoring, experience building, and efforts to localise major core technical positions should be encouraged [29]. Training and education in technical expertise in the upstream sector is thus paramount [28].
Technological transfer: LC LI requires that technology be transferred from MOCs to local companies. The [16] LC framework notes that the absorptive capacity of the IGC is crucial in technology transfer. Technology transfer in the upstream oil and gas segment in Ghana is minimal, as [7] agrees. Mentorship is the best way to achieve this objective, but as one respondent (GNPC Professorial Chair) observed, “It is interesting to note that none of the MOCs will willingly transfer technology to an IGC. Technology is not transferred willingly, unless it’s stolen”. This indicates the magnitude of the constraint, and it means that even in the best of circumstances, it is difficult, if not impossible, to have technological transfer until concerted efforts are made by the PC to ensure effectiveness. It must develop a technology transfer plan.
Research and Development: with research and development, the LC LI 2204 requires IOCs to ensure that their research and development activities in relation to the oil and gas industry are conducted in Ghana. Little is achieved by the PC in petroleum research activities in Ghana. Meanwhile, in 2018 the GNPC established four (4) research chairs in four public universities to accelerate research and training in upstream oil and gas activities. A US$1 million research endowment fund is made available to each of these institutions to establish new training programmes and research into petroleum-related activities for GNPC and Ghana at large. While this is an opportunity to contribute significantly to research and development in the sector, and encourage academic talent, the GNPC's initiative should be supported by the PC, and scaled-up to be more inclusive and sustainable, while the management and disbursement of the funds need to be improved.
Forward and Backward Linkages: The backward linkages arise from activities established to supply inputs into the production of a commodity, with a focus on local firms providing services and supplying inputs to the oil industry in the country [25, 3]. The backward link emphasises the ability of local companies to provide goods and services to meet the requirements of upstream oil and gas operations. IGCs have low to moderate capacity to take up opportunities in the core technical areas where IOCs tend to spend more; these include well-drilling services, Front End Engineering and Design (FEED) services, detailed engineering, and fabrication, among other services. Many local companies tend to focus on the non-technical areas of transportation, supply, and disposal, environmental health and safety, IT, and communications. This limits the opportunity of local companies to build advanced technological competencies for opportunities in the backward linkage, and shows why IGCs play a less significant role in in-country spending. The in-country spending and backward linkage is directly related; when IGCs are adequately prepared to offer goods and services to the IOCs competitively, less will be achieved through the backward linkage. This is why the LC Fund's research and development and technological transfers should be targeted to IGCs to improve their performance so as to enable their contribution in the upstream oil and gas sector through the backward linkage.
The forward linkage provides direct and indirect benefits to the Ghanaian economy, as seen in the benefits of natural gas utilization for power generation and liquefied petroleum gas for domestic use [12]. Little, however, can be said about crude oil. There could be enormous benefits from it, if supplied through the Domestic Supply Obligation to be refined locally for local consumption.
[1]Fronting is a rent seeking behaviour where individuals or entities use companies’ names to obtain economic gain at the expense of the larger society.