Govt.’s local content demands still unrealistic; will set Guyanese companies up for failure – Int’l Consultant
International Analyst, Arthur Deakin and Guyana Vice President, Dr. Bharrat Jagdeo who holds an oversight responsibility for the oil sector.
By Kaieteur News
Petroleumworld 11 23 2021
Following his perusal of the PPP/C Government’s second attempt at local content targets to be included in its draft legislation, Co-Director of Energy at Americas Market Intelligence (AMI), Arthur Deakin is of the firm belief that Guyana has still fallen short of outlining realistic procurement, training and employment goals for oil companies.
In one of his most recent columns, Deakin highlighted that the government, for example, expects that within 10 years, Guyanese firms should be used to cover 95 percent of the energy sector’s insurance risks. Deakin was keen to note that this alone is just not practical. Except for Brazil, which has managed oil and gas projects for half a century and has the 12th largest economy in the world, the analyst said no other Latin American country has the local insurance capacity to provide this type or level of coverage. Using this reasoning, he concluded that such an expectation or target shows a mismatch between the government’s expectations and the current reality on-the-ground.
The Co-Director at AMI also indicated that the PPP/C Government seems aware of the issues such a high target for insurance would cause, since it indicated in the draft bill that it encourages joint ventures between local companies and “International Tier 1 Contractors” for this purpose. Deakin acknowledged that joint ventures (JVs) are a fundamental part of any liberalized, growing economy and can be highly effective at curtailing local shortages. He was keen to note however, that if too much control is given to either the local or foreign players, this can negatively impact collaboration.
Expounding on the foregoing viewpoint, Deakin said one should note that until April 2020, China had 51percent local equity requirements that prevented foreign financial firms from owning a majority stake in Chinese JVs. Soon after, he said China removed foreign ownership limits in certain sectors, and it instantaneously attracted an influx of foreign funds. Given China’s size with a labour force of 811 million people, and its technological maturity, he was keen to note that the country still grew despite those strict regulations. With this in mind, Deakin said Guyana’s 600,000 labour pool does not give it the same leeway.
He recalled that it was only in October last that, Timothy Tucker, the President of the Georgetown Chamber of Commerce and Industry (GCCI) cautioned against local companies being caught in “rent a citizen[s],” scenarios; a case where foreign companies are given full control of decisions despite being in a local partnership. To avoid this, Deakin argued that voting powers could be split proportionally by the size of investment made by each party, allowing for an equal representation based on capital commitments.
As seen in other emerging economies, Deakin warned that unrealistically high local content requirements would set up local companies for failure, while simultaneously fining foreign companies for their inability to comply with the necessary thresholds.
In Ghana, a country producing 100,000 barrels of oil per day (bpd), Deakin noted that the development of the energy sector suffered because of the low capacity of its local firms. He said the west-African country, which is producing a fraction of the 1.4 million bpd expected in Guyana by 2040, is an example of a country that does not have enough local skilled employees to fulfill the energy sector.
The analyst believes Guyana is faced with a similar scenario while noted that Vice President, Bharrat Jagdeo, recently admitted that the country could soon hit full employment although there is only one FPSO currently in operation with six more expected by 2027. He said Guyana must therefore loosen its immigration laws, lower its local content requirements, and train local employees to meet the exponential growth ahead.
As the government finalizes the draft of its local content legislation, Deakin urged the authorities to “consider the reasonable capacity of the country’s current local labour force.”
Deakin said it is crucial that the government create a local content law that reduces highly technical thresholds and strikes the right balance between local participation and a friendly foreign investor framework. “As it stands, the bill falls short” of this, the analyst concluded.