MARITIME SEMINAR FOR JUDGES 2008

ORGANISED BY THE GHANA SHIPPERS COUNCIL

‘EXPLOITATION OF OIL GAS: EXPOUNDING A LOCAL CONTENT POLICY FOR GHANA’

BY

Oritsematosan EDODO-EMORE LL.M [LOND] BL

SYNOPSIS OF LECTURE

The paper examines the importance of a Local Content Policy in developing nations and its relevance to Ghana as a country freshly involved in oil and gas exploitation. It seeks to show what should be contained in a Local Content Policy for Ghana.

The paper deals with the realities and challenges which may befall such a policy and addresses how the country may use its Local Content Policy as a vehicle for change and national development.

The paper would be presented by power point and a prose format shall be submitted for publication by “The Admiral”

‘EXPLOITATION OF OIL GAS: EXPOUNDING A LOCAL CONTENT POLICY FOR GHANA’

I would like to thank the Ghana Shippers Council for arranging such a well thought out seminar for judges at this time in Ghana’s history. I thank you for giving me the opportunity to be part of this process.

The theme of this seminar is timely and the topics under discussion are most relevant.

A good staring point in expounding a local content policy for Ghana would be to understand what a Local Content Policy is, the rational behind it, whether it is relevant to Ghana, the challenges that she might face regarding such a policy and decide how Ghana may use the Local Content Policy as a vehicle of change to stimulate her national development.

1. THE LOCAL CONTENT POLICY

In many developing oil and gas nations the Local Content Policy is a written expression of the desire of the state to ensure that companies owned by its citizens actively participate in all aspects of the oil and gas trade and not just in the periphery. Malaysia, Singapore, and Brazil have pursued aggressive local content policies.

The Nigerian example<

The greatest dilemma of the Nigerian State for example has been that its most lucrative export product – the one that finances its economy is explored, exploited, exported and transported by foreign companies, some in joint venture with the federal government.

It is common knowledge that oil exploration and exploitation are processes involving highly skilled technical manpower. The transportation of oil whether crude or refined involves the use of specialized tankers which translates into huge capital outlay and the most sophisticated financial instruments. For these reasons

companies owned by Nigerians were hitherto excluded from virtually all the lucrative aspects of the wet cargo trade.

It was to reverse this situation that the Nigerian Local Content Policy came into being. Its aim is to make it mandatory that all aspects of the Nigerian Oil trade amongst others have local input in terms of man power development, local investments and supply base. The Directorate of Petroleum Resources is the regulatory body for the enforcement of the Nigerian local content policy. This policy is in the process of being codified in the form of the NIGERIA CONTENT DEVELOPMENT ACT which presently stands as a bill before the Senate of the National Assembly.

Ghana and Nigeria as virtual siblings

Despite the huge difference in size, in terms of land mass and population, Ghana and Nigeria share a common destiny. Both are Anglophone countries of repute in the West and Central African sub region. What happens in one country invariably affects the other or is replicated in the other.

Ghana has only just commenced its commercial exploitation of oil and gas. Wisdom demands that it should not suffer the same hardships as Nigeria but should be able to avoid pitfalls that Nigeria may have entered into – whatever these may be.

2. IS A LOCAL CONTENT POLICY RELEVANT TO GHANA?

The question arises whether a local content policy is relevant to Ghana? My view is that such a policy put in place at the dawn of commercial exploitation of oil and gas, is relevant for speedy development of Ghanaian capacity to manage its economy and its technological advancement.

3. WHAT SHOULD BE INCLUDED IN A LOCAL CONTENT POLICY FOR GHANA?

Objectives.

The local content policy for Ghana must contain clear objectives of what the policy seeks to achieve for the Oil and

Gas industry in Ghana within a definite time frame.

It must define in clear terms the goals of the policy and state its vision for the oil and gas industry as well as for the development of the Ghanaian economy.

In Nigeria, although oil was discovered in commercial quantities in 1957, it was not until the year 2000 that local content policy issues came to the fore front of national consciousness. Since then local content has evolved as a developmental issue.

However, it was in 2005 that the Nigerian Content Development policy in the oil and gas industry was actually launched. The objective of the Nigerian local content policy is to ensure Nigerian participation in all aspects of the oil and gas industry within a particular time frame.

For the target year of 2010, in the upstream sector Nigeria aspires to achieve a reserve of 40billion bbs, crude oil production rate of 4.5 million b/d and a 70% local content capacity.

For natural gas, she aspires to develop her domestic market and end gas flaring by December 2008 and for the down stream sector, she aspires to achieve self sufficiency by 2010.

Using the Nigerian example, Ghana must set definite dates in which she aspires to attain some definite national goals.

b. Target.

The local content policy for Ghana must state its policy targets. Although the policy primarily targets the Oil and Gas industry, It should state specific target areas for government intervention. -eg projects in the upstream, downstream and natural gas.

c. Policy Guidelines.

The Local Content Policy must set out specific guidelines for its implementation. In practice it is the guidelines that the industry works with at the teething stages before a legal and regulatory framework is established.

Plan of Action- Executing Agency.

Recently the honorable Minister for Energy, Mr Felix Owusu- Adjapong, announced that the Local Content Committee is putting in place, a Ghana Content Development Policy to ensure that Ghanaians actively participate in the Oil and Gas industry without compromising international standards.

What he has not yet announced is the agency that would drive the policy to fruition.

The Local Content Policy should have a plan of action and an agency of government set apart to actualize the plan. Lets call this agency the GHANA CONTENT DEVELOPMENT AGENCY.

The objectives of the agency would be:

i. to establish a frame work for continuous growth of Ghanaian content in the Oil and Gas industry and in the Ghanaian economy as a whole.

Ii To create a balanced programme of planning, target setting, monitoring stimulating employment, improving contractor capability, capacity building and manpower development.

iii. To ensure competitiveness of goods and services provided by Ghanaian companies.

e. Legal and regulatory framework

The Local Content Policy would require a legal frame work which would provide the power to enable the policy achieve its objectives. Several Local Content legislations would come into existence. Chief among the bills likely to come before parliament are:

i. Ghana Content Development bill

CCoastal and Inland Shipping [Cabotage ]bill

The primary Local Content legislation

The Ghana Content Development Act would be the primary Local Content legislation which would create the Ghana Content Development Agency. However this legislation alone will not be sufficient to address all the Local Content issues relating to Oil and Gas exploitation.

Ghanaian Cabotage legislation

Oil exploration and exploitation activities generate heavy maritime traffic moving men and materials to and from offshore sites. Most of the vessels and companies that would service oil exploitation activities would be foreign owned.- many of which would be companies with whom the oil majors are familiar in other jurisdictions.

It would take a deliberate local content legislation by way of a Cabotage Act to ensure Ghanaian participation in the coastal movement of men and materials destined for the oil industry. It would be necessary to ensure that the vessels operating within Ghana coastal waters are owned by companies in which the citizens of Ghana own majority of the shares, such vessels should be manned by Ghanaian crew and they ought to be built in Ghana.

The first comment likely to come out of a proposal for a Ghanaian cabotage legislation would be that Ghana currently lacks capacity to own vessels destined to service the oil industry , does not have enough men to man such vessels and there are no ship yards here so no ships can be built in Ghana!

It is precisely for these reasons that I would propose a liberal cabotage regime creating a system of waivers where there is no Ghanaian capacity. Liberal cabotage is more realistic for Ghana at this time. She may borrow from the Nigerian Coastal and Inland Shipping [Cabotage] Act 2003 and improve on it.

LOCAL CONTENT THE BENCH

How does the Ghana Content Development Policy concern the Bench? The learned justices of the higher bench would be called upon to interpret the terms of the various local content legislations that would come into being as a result of oil exploitation. It is for this reason that the terms of the policy and the proposed legislations must be written in simple clear and unambiguous language. Ghana must decide how she wishes to define or anchor her local content legislation.

Definition of ‘local content‘ in Nigeria

In Nigeria for example “Nigerian Content” is defined as

“the quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through deliberate utilization of Nigerian human and material resources and services in the Nigerian Petroleum Industry”

“Nigerian Petroleum Industry” means all activities connected with the exploration development exploitation transportation and sale of Nigerian Petroleum Resources including downstream Petroleum Operations”.

The definition of the Nigerian content emphasizes the value added in nigeria, by use of local manpower and material by “systematic job creation and investment in local facilities and stimulation of local capabilities.”

Definition of ‘local content’ in Trinidad and Tobago

In Trinidad and Tobago for example, local content in public sector project is said to include “all value added activities undertaken in Trinidad and Tobago”. Local content also “applies to activities undertaken by all suppliers in the supply chain who are required to give consideration to the intent of the policy”.

“local good” is defined as “ a good for which a certificate of origin that identifies that a product has been produced in Trinidad and Tobago in accordance with the Rules of Origin …”has been obtained

“services” includes consultancy services and will fulfill the requirement of ownership (greater than 50% equity) and control (ability to appoint the Board of Directors) of the service company.”

Consequently in Trinidad and Tobago the local content is defined clearly in terms of goods and services, --origin of the goods and ownership of the service company.

The definition of the “Ghanaian content” could go the same way as the Nigerian and Trinidadian definitions and even further.

What is “cabotage” in Ghana

Oil and gas exploitation would generate a flurry of maritime activities within st1:country-region w:st="on">Ghana’’s coastal waters.

Consequently a local content maritime legislation such as a maritime cabotage Act is a natural fall out of oil and gas exploitation. One of the challenging provisions that the bench would decide is “what constitutes “coastal trade” or “cabotage” in Ghana?

Meaning of “cabotage” in Nigeria

In st1:country-region w:st="on">Nigeria S. 2 of the Coastal and Inland Shipping (Cabotage) Act 2003 provides inter alia that:

“Coastal trade or “Cabotage” means

(a) tthe carriage of goods by vessel or any other mode of transportation from one place in Nigeria or above Nigerian waters to another place in Nigeria or above Nigerian waters either directly or via a place outside Nigeria and includes the carriage of goods in relation to the exploration, exploitation or transportation of mineral or non – living natural resources of Nigeria whether in or under Nigerian waters”.

Liability for cabotage surcharge and waiver fees.

The practical effect of being involved in Coastal trade or cabotage in Nigeria is that every vessel involved in Coastal trade or cabotage is liable to a 2% levy, must pay waiver fees if not wholly manned by Nigerians ,if not built in Nigeria and if majority of the shares of the shipping company are not owned by citizens of Nigeria. Additionally such vessels must apply for special cabotage licence enabling them to trade in Nigeria’s coastal waters.

Are Heavy Lift Vessels involved in coastal trade?

In my practice, the question has arisen several times whether Heavy Lift Vessels (HLV’s) are involved in cabotage. HLV’s as the name suggests are vessels which carry heavy construction materials used for oil and gas exploitation from st1:place w:st="on">Europe to Nigeria.. They service construction vessels which lay pipelines or umbilicals underneath the sea bed. They bring cargo such as heavy reels as heavy as 240, 000MT and so they have their own cranes, gears and heavy lift equipment .

when they arrive in Lagos, construction vessels lie beside

them and umbilicals are reeled from the HLV’s into construction vessels.

The construction vessels now go to the offshore sites to lay the umbilicals under the sea bed.

It is said that the construction vessels are clearly involved in cabotage but whether or not HLV’s are subject to cabotage has called for interpretation.One interpretation says that as HLV’s do not travel to offshore sites they are not involved in coastal trade and so should not pay the 2% cabotage surcharge. However they are made to pay waiver fees for manning, ownership and building. These are charges made for vessels involved in cabotage.

What is the “contract sum” performed by a vessel engaged in coastal trade?

The source of the 2% cabotage surcharge has

generated conflicting interpretations within the oil industry in Nigeria..

s. 43 of the cabotage Act provides that:

“There shall be paid into the fund”.

(a) a surcharge of 2 per centum of the contract sum performed by any vessel engaged in coastal trade.

The question is what is the 2% of contract sum performed by a vessel for a company involved in Epci (Engineering Procurement Construction and Installation) contracts which are prevalent in oil exploitation and exploration?

Is it the whole EpCI contract or the marine aspects of the contract that is subject to the 2% levy?.

As the Act does not clarify this point, the industry have chosen for the time being, an interpretation that is most convenient and less expensive i.e. daily rates of the vessels as can be seen from the charter parties. For vessels in which there are no charter parties e.g. where a supplier uses its own vessels, discovering the contract sum worked by its own vessel can be quite a problem.

Some industry users have suggested that the cabotage levy should have been based on tonnage of vessels for which there can be no dispute.

When a dispute eventually arises between the regulatory authority and a stakeholder, the bench would be called upon to put an end to this débâcle and give a judicial interpretation.

Given Nigeria’s example Ghana should be able to do better in terms of clarity in its local content legislations.

5. Challenges of a local content legislation

The Ghana Local Content Development Policy will not be actualized without challenges. Chief among these are:

Lack of Capacity

one of the earliest challenges that the policy will face, is a lack of local capacity and capabilities in practically all segments of the oil and gas industry. Right now there is a global shortage of skilled personnel in the oil and gas industry. As a country newly exploiting oil and gas Ghana, would have to compete with the rest of the world for skilled man power.

To address this problem, the proposed Ghana Content Development Act must deal with issues of capacity building.

In Nigeria, the whole of part V of the Nigerian Content Development Bill is dedicated to capacity building. Ghana could take a cue from that and enjoin the proposed Ghana Content Development Agency to work with industry stakeholders to map out ways of building Ghanaian capacity and monitor the progress being made to develop local capabilities.

Lack of Capital base:

servicing the oil and gas industry requires a sound capital base which many Ghanaian companies may not yet have:

i. Servicing offshore sites

The marine segment of the industry requires the acquisition of vessels such as supply boats, anchor handling vessels ,tug boats etc. suppliers who have dealt with the oil majors in other jurisdictions would readily follow them to Ghana. It is then up to the local content legislation to make provisions for Ghanaian service providers to acquire vessels to enable them participate the oil and gas industry.

In Nigeria, the Coastal and Inland Shipping (Cabotage) Act 2003 created the Cabotage Vessel Financing Fund, into which the 2% cabotage levy is paid. Ghana may wish to follow this example and improve on it.

Lifting Crude Oil and Crude Oil Sale Terms

Ghanaians would be interested in lifting and selling the wet cargo generated by its oil exploration and exploitation. However the huge capital out lay required for transportation of wet cargo can be daunting.

InNigeria under the Crude Oil Sale terms, a prospective

transporter of wet cargo, should own and manage a refinery in

any part of the world, have an annual turn over of $100Million

and a net worth of at least $40Million. It is needless to say these terms virtually exclude local

players! From the benefit of the Nigerian example, Ghana Crude oil

Sale terms should be more favorable to enable Ghanaian service providers participate actively.

6. LOCAL CONTENT POLICY AS A VEHICLE FOR CHANGE AND NATIONAL DEVELOPMENT

a. Technological Advancement

The oil and gas industry is recognized worldwide for the

dominant role it plays in the technological advancement of any economy in which it is exploited. In Ghana , this would be no less different.

b. Building local capacity and capabilities

A local content policy in the oil and gas industry would serve as a tool for advancing local development not only in the industry, but in the economy as a whole. Such a policy backed by relevant legislation and structures would build human capacity and build capabilities of local service companies which in turn would have a multiplier effect on the rest of the economy.

Let us see what has happened in Nigeria.

7/span>. THHE NIGERIAN EXAMPLE OF THE EFFECT OF NATIONAL CONTENT DEVELOPMENT POLICY ON NATIONAL DEVELOPMENT.

a. Oil majors seek to satisfy local content policy.

How has st1:country-region w:st="on">Nigeria fared in the oil trade and in the oil services industry since the local content policy came into being? Has there been any significant achievement in the development of national content? My view is positive. We have come from a near zero involvement to a position where major players in the oil industry seek to satisfy the local content policy. In my practice, I have seen bid documents specifying/that suppliers of vessels must show evidence of cabotage compliance.

b. Stimulation of highly technical work

The advent of the Nigerian Content Development Policy has had a plural effect on the Nigerian economy. Firstly it has forced oil majors to engage Nigerian companies to do highly technical work which they would hitherto have contracted to their subsidiaries or to foreign suppliers with whom they are familiar. It is on record that Exon Mobil has awarded engineering contracts worth over $420million to seven Nigerian companies in the last five years. Execution of the contracts would result in more scientific, engineering and technical training on

the part of the Nigerians. Consequently the country’s technical capacity is built up. The same could be replayed in Ghana

c. Actual lifting of Nigeria’s wet cargo.

How has the Local Content Policy actually impacted on the volume of wet cargo transported by Nigerian companies? In my view the capacity of Nigerian companies to transport the wet cargo generated by oil exploitation in Nigeria is an interplay of the dynamics of finances and legislation regarding the acquisition of vessels. Nigeria has a Ship Acquisition and Ship Building Fund set up under the National Shipping Policy Act 1987. There is now a Cabotage Vessel Financing Fund created by the Coastal and inland Shipping [ Cabotage Act]–although this relates only to cabotage vessels and not deep sea going vessels or oil tankers.

d. Lifting Ghana’s wet cargo

Like Nigeria, in order to actualize the dream of Ghanaian vessels lifting the bulk of Ghana’s wet cargo, she must establish a Ship Acquisition and Ship Building Fund. Serious Ghanaian companies should be assisted to acquire the specialized vessels needed to transport her wet cargo and her manpower must be trained to man those vessels. To do this Ghana would need to expand the curriculum of her current institutions of maritime education.

Ghanaian vessels transporting Ghanaian wet cargo is not a pipe dream. It remains a process that can be realized. The Ghanaian Local Content Development Policy is one of the vehicles through which this dream can be actualized.

Nigerian examples have also shown that local players are more committed to developing the nations economy than foreign players. The latter are not charities. They are there for profit. It is therefore up to the Ghanaian Administration to create a sustainable environment for Ghanaians to enter the field, remain there and be productive.

In the interim what must Ghana do?

Before the legal and regulatory frame work become effective the Ghana’s Local Content Development Committee must issue directives to guide the industry.

Firstly it must identify gaps in the industry in terms of human resources infrastructure materials and institution. Then it must set targets and identify ways of closing these gaps.

DATED AT ACCRA THIS 10TH DAY OF OCTOBER 2008

Oritsematosan Edodo, Thorpe Associates

Bibliography

Nigerian Content Development Bill

Trinidad and Tobago Local Content Participation Policy Frame work

Nigerian Content Division, Nigerian National Petroleum Corporation’spresentation at the MARAN conference 2008.