Local content in the context of an oil and gas industry refers to the commitment by government and industry players to build on the capacity and capability of local people and businesses to support the long-term development of the sector.
Companies in the oil and gas industry often seek to voluntarily achieve this within their corporate social responsibility structures and internal policy statements. Being voluntary and often non-committal, industry initiatives by the companies cannot wholly be relied upon to provide certain and enforceable rights and obligations to promote local content.
Governments put in place laws and policies to regulate local content commitments to compel operators to source a defined quantum of their services and capital goods from within the host country. In a number of jurisdictions they also compel the state to ensure that in contracting and licensing operators and contractors, preference is given to local providers over foreign ones. Another dimension to the concept involves placing a duty on the operators to help build local capacities to provide services and capital goods needed in the industry. This is particularly common in countries with nascent oil and gas industries and where there is severe limitation of capacity.
The overriding objective is to extend real and sustainable benefits of the industry beyond the direct revenue obtaining from sell of oil and gas produce. This has led a number of countries and notably Uganda, Nigeria and Ghana to formulate dedicated laws, policies and regulations which in varied approaches require preferential treatment and or promotion of locally obtaining capital goods and services.
In Kenya there is currently no law or policy dedicated to local content compliance in the oil and gas industry. However, the Petroleum (Exploration and Production) Act, Cap 308, and the Model Production Sharing Contract have provisions that require local procurement of goods and services. The National Energy Policy (2014 Draft) also acknowledges that one of the key challenges in upstream petroleum industry is inadequate local content in gas exploration and production activities. Besides underscoring the need to develop local talent and capacity in energy resource exploitation and infrastructure development the policy also calls for the availing of opportunity for provision of services and goods by locals in the exploitation of natural resources and infrastructure development. It sets a medium and long term (2014-2030) road map for the development of local content policies and laws that cover technology and knowledge transfer, capacity building of local industry and local employment opportunities.
An inter ministerial Technical Committee convened by the Ministry of Energy and Petroleum (MEP) is currently working on the 5th Draft of the proposed Energy Bill, 2013. The draft is a culmination of wide ranging reform recommendations made to the government by British consultancy firms Hunton & Williams and Challenge Energy in 2013.
The most prominent deficiency of the proposed law is its apathy towards promotion of local content in the upstream oil and gas industry. Compared to legislative and policy regulation of local content in the oil and gas industries of other jurisdictions in Africa such as Ghana, Nigeria, Liberia and Uganda the proposed omnibus energy law of Kenya is agonizingly deficient, ambiguous and non committal on promotion of local content. This does not appreciate the significance of effective local content regulation if prosperity and stability in the country’s nascent oil and gas industry is to be achieved.
The Memorandum of Objects and Reasons of the proposed Bill reveals that the intended law aims to consolidate all other laws relating to energy in Kenya including Cap 308. While the Memorandum does not specifically set out promotion of local industries and capacities as part of the objects, it is noteworthy that the Bill is said to be intended to bring the law in the energy sector into conformity with the Constitution, 2010. The Constitution at Article 69(1)(h) obligates the government to utilise the environment and natural resources for the benefit of the people of Kenya. On this basis the Bill is expected to formulate frameworks including local content provisions which will ensure such benefit.
Part V of the Bill is dedicated to Fossil Fuels i.e. Coal, Petroleum and Gas. Clause 133 – 163 of the proposed Bill makes exclusive provisions on the regulation of upstream petroleum. The following are the examples of provisions in the Bill which deal with Local Content compliance.
At Clause 2 it would appear that the drafters had intended to define ‘local content’ but fell short of doing so by listing the phrase among the definitions but not providing the definition. It is appears as follows: ‘local content’ means….
A comparative look at various jurisdictions’ legislative and policy frameworks on local content regulation reveals that the phrase is hardly ever defined. Examples include Uganda’s Petroleum (Exploration, Development and Production) Act, 2013, Nigeria’s Oil and Gas Industry Content Development Act, 2010, Liberia’s Petroleum Law 2012 and Ghana’s Petroleum (Local Content and Local Participation) Regulations, 2013. However, the comprehensive provision on and prescriptive framing of local content set out in these laws vindicates this omission under the interpretative section. In any event, statutory definitions tend to be limiting especially for a sector with such versatility as the oil and gas industry. Besides, due to variety of circumstances of different E&P projects, it may be more reasonable therefore to allow the scope and meaning of the concept to be a question of negotiation between the proposed National Fossil Fuel Advisory Committee (NFFAC) and the prospective operator or leave it to the prescription under specific regulations by the cabinet secretary as is envisaged by Clauses 298 and 163 of the proposed Bill.
Clause 137(6) obligates oil and gas operators to ensure local content participation in all of [their] operations.
Clause 137 generally provides for obligations relating to licensing and contracting of upstream operators. It is not clear what this sweeping provision seeks to achieve or how it would be enforceable. By giving no detail of how an operator is to ‘ensure local content participation in all its operations’ the law would leave it to the discretion of the operators to choose what is meant by ‘local content’ and the modalities of ensuring such participation. If on the other hand it is argued that this would be a detail to be provided for by regulations to be passed by the Cabinet Secretary under Clauses 163 and 298, then this provision serves no purpose.
There is need for more specificity in creating local content obligations. Lessons on setting specific requirement for local content participation provision under a generic statute may be drawn from Uganda’s Petroleum (Exploration, Development and Production) Act, 2013 and Liberia’s Petroleum Law, 2012 which are more explicit.
Section 125(1) of the Ugandan Act for instance expressly provides that licensees, their contractors and subcontractors are to give preference to goods which are produced or available in Uganda and services rendered by Ugandan citizens and companies It is further noteworthy that the Ugandan law strives to make Local Content programs a prerequisite for licensing and has in place requirements to facilitate monitoring of compliance. To this end Section 126(1) requires that at the time of grant of license and every subsequent year the Applicant is to avail a detailed program for recruitment and training of Ugandans to the country’s Petroleum Authority for approval
The Liberian Petroleum Law, 2012 is even more elaborate on what local content participation obligation of the operator would entail. Section 2.2.15 of the Liberian law makes it mandatory for licensees to award contracts of supplies of goods and services valued at $3 million or less to Liberian contractors. Section 2.5.8 takes the preferential formula by obligating contractors and their subcontractors to give preference to Liberian products and service providers of equal quality, price, quantity and performance terms. So as to promote local capacity building the Liberian law at Section 2.5.9 requires that from the outset of the petroleum operations, the holder of the petroleum contract must establish and finance a program for the training of Liberian personnel for all positions and qualifications.
Such express provisions in the law give clear guidance to operators as to the nature and scope of the i.e. local content obligations. It also forms a good measure and basis for monitoring evaluation and enforcement of compliance. Kenya’s Energy Bill would be more instructive and manifest better commitment to local content promotion if it took this approach.
Clause 143 lists the general and implied terms and conditions of petroleum Agreements. Paragraph (g) makes it an implied obligation of an operator to give preference to the use of locally available raw materials, products, equipment, manpower and services. Paragraph (h) further makes it a mandate of an operator to continuously develop capacity of the locally available manpower.
On the one hand it may be argued that the inclusion of local content compliance as an implied term of the PSC serves as a safety net in holding operators to account on their local content performance. On the other hand though, where like in the proposed Section 143 of the Kenyan Energy Act, the condition is set out in ambiguous terms, it serves no purpose without specific regulation and quantifiable targets set out in regulation or within the appropriation contract. But then again, Clauses 163 and 298 are not specific on the scope of the local content provision the CS may pass. Kenya’s Model PSC is equally inadequate as it does not provide for quantifiable targets e.g. percentages. In fact, the model PSC is not any more detailed than Kenya’s Cap 308 or the proposed Energy Act.
Clause 163 mandates the Cabinet secretary to pass regulations which will among other things regulate the procurement of goods and services locally available in Kenya..
From the provisions, it is clear that ‘local content compliance’ is treated as one of the matters to be dealt with through ministerial regulations. This leaves a wide scope of discretion to the Minister and portends uncertainty in the industry in so far as local content requirement is concerned. The recommendable approach as used in other jurisdictions is to mandate the Minister to make local content Regulations but at the same time prescribe the matters relating to local content that the Minister is to make Regulations on.
Such an approach is exemplified in the Ugandan Act whose Section 183 creates ministerial regulation making power for the purposes of local content regulations. At the same time, the Act in other Sections defines the local content matters on which such regulations can be made. For instance Section 127(3) provides that the Regulations are to prescribe the requirements for technology transfer of knowledge and skills. Section 183 provides that the Ministerial regulations would include rules setting out the criteria for approval of competent entities owned by Ugandans for the provision of local goods and services.
Other matters that may be subject to Ministerial Regulations may be borrowed from the catalogue of regulatory matters listed in the Nigerian Oil and Gas Industry Local Content Development Act or the provisions of the Ghanaian Petroleum (Local Content and Local Participation) Regulations, 2013. These include Regulations on nature and scope of training programs, registration of local content providers, compliance with local content plans, reporting requirements, among others. The Ghanaian Regulations in cognizance of the uniqueness and instrumental nature of certain services has singled out a number of service sectors and specifically created special provisions for them. For instance the Regulations only permit the engagement of Ghanaian Legal practitioners and financial service providers except with permission from the Country’s Petroleum Commission upon satisfactory justification by the licensee.
Prescribing the areas of local content regulation by the minister as proposed above serves two key purposes. First it evades the strictures of prescribing local content compliance in details under statutes which are ordinarily more onerous to amend in response to industry requirements and market forces. At the same time, as opposed to giving the minister carte blanche regulation making powers, prescribing areas of regulation affords the industry players relative certainty as to regulatory expectations.
The Bill fails to make Local Content a precondition for licensing and contracting
At Clause 142 the proposed Bill expressly outlines the perquisites for licensing of oil and gas contractors. The only qualifications stated are that the contractor must have the financial ability, technical competence and professional skills necessary to fulfill the obligations under the Petroleum Agreement. This provision limits local content participation as it fails to seize the opportunity to make Local Content compliance a prequalification condition for prospective operators requiring that they demonstrate understanding and preparedness to promote local content and participation. For local content compliance to be achieved it would be prudent to have the companies show their willingness and preparedness to comply before being awarded licences and permits. This they can do for example by availing empirical studies to show local capacities, gaps and drawing up plans and programs on how they intend to utilize the capacities and fill the capacity gaps. The proposed law should in creating the mandate of the NFFAC under Clause 139 empower the Committee to demand of the prospective operators acceptable, feasible and sustainable demonstration of their local content programs before the award of contracts and licences.
The Ugandan Act comes close to achieving this at its Section 127(2) where it requires the licence issued to operators to include a commitment by the licensee to maximise knowledge transfer to Ugandans and to establish in Uganda, management and technical capabilities and any necessary facilities for technical work, including the interpretation of data. This in effect makes the commitment a precondition to grant of a licence. A more forthright approach as is used in Nigeria’s Oil and Gas Industry Content Development Act is more preferable though. Sections 7 & 8 of the Nigerian statute read together require prospective operators to submit a ‘Nigerian Content Plan’ to the country’s Content Development Monitoring Board at the time of bidding for licences, permits or interests. The Plan is required to set out a succinct blue print on how the Applicant intends to meet the country’s local content requirements. It sets out timelines and proposed measures as well as feasibility analysis of local capacity. If the Board is satisfied with the Plan, the Applicant is issued with a Certificate of Authorisation.
The second level of deficiency in Clause 142 is that in itself it may technically disqualify local firms and prospective operators which in all likelihood do not have financial ability, technical competence and professional skills which measure up to those of IOCs.
The Bill places no Obligation on State or Local Content Rights for Local Firms
The approach taken by the drafters of the Bill is to exclusively place the burden and obligation of ensuring local content compliance is on the operators and more so, only within a contractual sense. This approach denies local goods and service providers legitimate expectation and an enforceable right outside the contract between the government and the operators. To guarantee such expectation and create an avenue for enforcement, the proposed law should place clear obligations on the state agencies to ensure compliance and guarantee affirmative action in favour of local content providers.
Nigeria takes an exemplarily pragmatic approach in this regard. Section 3 of the Act requires relevant government agencies to give first consideration to independent Nigerian operators in the award of oil blocks, licenses subject only to conditions to be specified in regulations. The Act further requires exclusive consideration to accorded Nigerian indigenous service companies which demonstrate ownership of Nigerian equipment, Nigerian personnel, and capacity to execute the service in question. Such a provision avails an avenue for local content providers to enforce the right to preferential treatment without facing the legal technicality of making a claim that is premised on a contract between the government and an operator.
The Bill Lacks Monitoring and Enforcement mechanisms
The provisions in the Bill as regards local content compliance are purely contractual. Enforcement of the local content obligations as would eventually be detailed in the PSC would only be enforceable as a contractual term and not a statutory obligation. This presents a complication in monitoring and enforcement of local content compliance.
The proposed law needs to set out clear local content compliance reporting structures within the Act itself. The Ugandan Act at Section 125(5) takes this approach and provides that within 60 days after the end of each calendar year, the licensee is to provide the Petroleum Authority with a report of its achievements and its contractors and subcontractors’ achievement in utilising Ugandan goods and services during that calendar year.
In order to facilitate enforcement, the proposed law would need to place matters relating to local content under statutory as opposed to contractual obligations. Where the law permits the inclusion of local content terms in the contract, the Bill and the PSC should expressly provide that such terms shall be subject to statutory enforcement actions that go beyond the contractual remedies negotiated between the government through NFFAC and the contractor.
Conclusion
It should be noted that plenty of the conflicts encountered in the industry between operators and local communities arise from issues revolving around local content participation. This brings to mind in the Kenyan context the disruptive conflicts between the Turkana community and Tullow Oil over job opportunities for the locals. There is therefore need for the proponents and drafters of the Bill to reconsider the approach of leaving substantive local content obligation to subsidiary legislation and purely contractual obligations.
In so far as local content promotion is concerned, the Bill ought to proceed from the basis that the core concern of the government is to ensure that Kenyans get optimal and sustainable benefit out of the industry. It is therefore particularly important that the resulting law creates frameworks that obligate the government to take proactive steps and measures to facilitate, monitor and enforce local content.
*Valentine Ataka, Advocate is an Energy Law and Policy Consultant and an Associate at Michael Daud & Associates. He holds an LLM in Oil and Gas Law from Robert Gordon University. Aberdeen. Adan Daud, Advocate is Consultant on Fiscal regulations in International Investment and a founding Partner at Michael Daud & Associates
