Developing a LCP for Oil and Gas

Ever since Exxon struck oil back in 2015, apart from the revenues that would be negotiated with the international oil companies (IOCs) to exploit the resources of our country, and would flow into the national coffers, it was expected that the local populace would also benefit from participating directly in the ancillary activities consequent to the production of oil and gas. This latter expectation was covered under the rubric of “local content”.
It is however very disappointing that, four years after the discovery by ExxonMobil and just months before “first oil”, the Government of Guyana still does not have a local content policy in place, even though we have just been presented with a third draft that has elicited great consternation in sections of the business community. Designing an LCP for us in Guyana should not be rocket science, since examples abound from across the globe from countries that were, or are, similarly situated as we are. We can learn from their mistakes and benefit from their successes.
According, in the hope that our readers may have an informed appreciation of the ongoing local debate, we shall refer to one study that was undertaken for Tanzanian policy makers for their incipient oil industry: “The degree of local content in the production of a commodity can be defined by the share of local inputs (labour, capital, intermediate products) that are used in its production, and the share of local ownership of the production companies. The aim of a local content policy is to increase the degree of local content in the various value chains – beyond what it would be in the absence of such policies. This typically involves increasing the share of nationals working in the extractive sector, and increasing the participation of local companies in the supply chains.
“Based on a survey of LCP experiences in 48 countries, (one named study) provides a summary of the main factors for consideration in efforts to stimulate local economies. First, they find that it is important to maintain consistency between LCPs and other economic development policies. LCPs are embedded in a range of other policies, and all these policies must pull in the same direction if they are to be effective. Policies to improve education, health services, and infrastructure may well be an important part of attracting petroleum companies’ additional onshore upstream and downstream investments.
“In order to qualify nationals for the jobs in the value chain, skills development must be a cornerstone of LCPs. Shortages of qualified employees are a key obstacle for generating local content in almost all natural resources-producing countries. The more advanced the requirements are, the more dire the skills gap usually is. Education and skills enhancement at all levels are crucial in most countries’ LCPs. Knowledge transfer between companies is also important, and cluster development and regional trade have been used to promote such spillovers. Research suggests that clusters may be important for innovation and technology transfer. Many LCPs build on this, and use geographical and sectoral clusters to accelerate the development of local companies.”
The following observation is most pertinent to Guyana: “Finally, it is important to keep the administration of the LCPs simple and transparent, and have built-in mechanisms to prevent corruption. The costs of complying with complex requirements may be high, and may in turn make it harder to detect corruption – especially if transparency is low. The political economy in countries where rent seeking and corruption play a large role should always be considered when deciding whether to engage in LCP development. It is important to incorporate measures that take into account the fact that, in natural resource extraction, corruption and rent seeking are highly prevalent.
Local content requirements are easily adapted to the needs of rent seekers, and can also make it easier to conceal corrupt practices. Moreover, LCPs can be used strategically by multinational corporations, which in turn facilitate patronage problems in resource rich countries and exacerbate the resource curse.”