Local partner in every oil block proves a tough call

The deep-water exploration contract government recently signed with oil major ExxonMobil posed a real test to the Petroleum Exploration and Production (E&P) Law; and although GOIL was eventually selected to take up the mandatory 5 percent reserved for locals, the need for a more realistic way of ensuring local participation in upstream operations has not been lost on many observers.

The law requires that for every oil block farmed out to an International Oil Company, 5 percent should be reserved for a local partner.

The Exxonmobil deal became the first under the new law, and after a long wait state-related Goil – a downstream operator – was announced as winner of the 5 percent stake.

Although the argument was made that the law does not limit the definition of ‘local partner’ to private entities, thereby justifying GOIL’s acquisition of the 5% percent stake, a private entity is now alleging that it won the bid.

A letter doing the rounds, which Exxonmobil allegedly sent to the GNPC, states that: “Following a thorough evaluation of over twenty companies, Exxonmobil is pleased to inform GNPC that we have identified Griffon Energy Africa Limited as our preferred indigenous Ghanaian company partner”.

The question some observers are asking is: how far can state-related entities go in taking on such risk, since the financial call that could be made on even that 5 percent stake might be huge – especially when their books are not that fantastic.

Emmanuel Kuyole runs the Centre for Extractives and Development, and he argues that while the country must at all costs push local participation in the upstream sector, it may have to adopt another approach.

Apart from Springfield, he reckons, the country has not been able to develop any more local players in the upstream sector, and the fact is that the local private sector does not have the capacity – a point recently-appointed Energy Minister John Peter-Amewu has been straightforward about.

Emmanuel Kuyole told the B&FT that the law will probably have to be reviewed; so that instead of insisting on a local partner in every single block, the GNPC could carry local players in less risky blocks to help them build capacity.

“The Exxonmobil case only re-emphasised what we already know. We have to rethink the strategy of engaging indigenous companies in upstream operations,” he said.

“I don’t think the idea of having Ghanaian participation in every single block, regardless of the risk, is the way to go. The cost and experience required is such that it is difficult to get a local private entity to take such risk. We can be selective and very deliberate, and we can identify fields where the risks are so low and, with the support of GNPC, help local players to acquire the skills and technology required in upstream operations.”

The Energy Minister, John Peter-Amewu, admitted recently that local capacity is scant in the sector. He said he foresees a time in the near-future when implementation of local content policies could become “very challenging”, as local firms struggle to make an impact because of their limited capacity.

“It is imperative, going forward, that we highlight the implementation challenges we face as a country. It is also important that we begin to take notice that the era of cheap oil is gone; and as International Oil Companies begin to migrate into challenging waters, implementation challenges of local content will be visible for everybody to see,” Mr. Amewu said at the opening of the two-day Annual Africa Oil Governance Summit.

“There is a need for improved technology; there is a need to improve skills and all the items and facilities necessary to lift the oil. On this basis, challenges are therefore open and become visible in our attempt to implement local content policies.”

The issue of fronting has often been mentioned as a real threat to realisation of the local content objective in upstream operations.

While lack of capacity on the part of indigenous Ghanaians has been offered as a reason they tend to front for foreigners, there appears to be just about enough of them ready to apply for the mandatory 5 percent stake reserved for them.

It is emerging, for example, that as many as 27 companies applied to take up the 5 percent in the ExxonMobil deal – one among which is alleging it won the bid that eventually went to GOIL.