For Guyana, a local content policy framework will be meaningless unless crafted, implemented, and managed as a development strategy.

Five years after oil and gas discovery in Guyana, an up and running local content regime is long overdue for Guyana.

On September 30, 2020, ExxonMobil made its final investment decision to proceed with offshore Guyana Payara field development after receiving “government approval”. ExxonMobil is operator of the Stabroek, Kaieteur, and Canje Blocks offshore Guyana. According to ExxonMobil, the Payara development will cost $9 billion (US) to develop 600 million barrels of oil – the same amount of oil as Liza Phase 2, but costing $3 billion more. Of the $9 billion capital expenditure over the next 4 years, do native Guyanese companies have competence, capability, or performance to participate? If so, how much participation? The answers to these questions constitute the essence of a meaningful local content regime.

As a policy matter, the goal of a local content framework should be to ensure development of in-country skills and expertise in all aspects of the (a.) oil and gas, energy, and natural resources industries, and (b) ancillary industries and businesses arising therefrom, such that Guyanese citizens shall be adequately trained and shall competently and significantly participate in management, control, operation, and supplying of all entities doing business in Guyana. That is, the objective is to convert the short-term benefits of revenues from production of petroleum (and other natural resources) into long-term sustainable economic development that creates jobs, local expertise, and other industries that remain after the petroleum revenues diminish.

This writing discusses local content (“LC”) as applied to the oil & gas industry. However, in Guyana’s case and because of its vast mineral resources, a meaningful LC framework must also include the bauxite, gold, and other mineral sectors.

Why does local content matter? In the oil & gas business, the Reserves to Production (R/P) Ratio underscores the importance of effective LC policies. If we freeze Guyana’s reserves at 8.3 BBOE (billion barrels of oil equivalent) and assume average production of 750,000 BBL/D (beginning Jan. 2020), Guyana’s R/P Ratio is 30.3 years. Further, assuming average production of 1 million BBL/D (barrels per day), Guyana’s R/P Ratio is only 22.7 years. So, the policy planning question is: what happens when oil revenues cease in 20- to 30- years?

Over the next 2 or 3 decades, the international oil companies (IOCs) will spend tens of billions of dollars (US) developing Guyana’s vast petroleum (oil and gas) reserves. Under Guyana’s existing PSAs (production sharing agreements) with IOCs (including ExxonMobil and its partners), the IOC recovers all of its capital expenditure- and operating- cost as cost oil (i.e., from Guyana’s share of oil production) before Guyana is allowed to share in profit oil (i.e., whatever remains after the IOC recovers all of its costs). Without significant national industry participation in the capital expenditure value stream that develops Guyana’s petroleum reserves, Guyana is essentially paying for ExxonMobil’s entire now risk-free investment and in return the country gets an effective grossly disproportionate small share of its own petroleum resources. In the beginning the country owned 100 percent of its oil & gas resources. Over the course of resource exploitation, Guyana will likely receive less than 30 percent of what it started out with. This is why local content really matters, and Guyana has to get it right.

Defining Local Content

Local content is the extent to which output of the local oil and gas industry (and other natural resources industries) generate added benefits to the country’s economy, beyond direct contribution to GDP (gross domestic product) and government revenues, through its linkages to other domestic production centers and ancillary services.

At its core, the local content (“LC”) goal comprises of three prongs: (1) employment of locals, (2) local capacity and skills development, and (3) national industry participation. Understanding the oil & gas industry value chain is critical to applying this framework for development of a local content regime that yields effective results.

What local content is NOT. While the presence of international oil companies (IOC’s) and their subcontractors in Guyana boosts the local economy through purchases of rents, goods, and services for general purposes (unrelated to tenders in the oil & gas value stream), such purchases do not constitute local content.

Purchasing food from Maggie’s (or Demico) and renting rooms at the Georgetown Marriott or Pegasus hotels undeniably add revenues to the local economy. However, such economic activity is not local content because there is no sustainable benefit from it … the benefits vanish when the IOCs leave or drastically scale down their operations. Moreover, let’s not forget that under the Guyana – ExxonMobil PSA (production sharing agreement) contract, the contractor will recover all of its costs from Guyana’s share of petroleum production (“cost oil”). Those costs include the aforementioned economic activities.

Additionally, meaningful local content is not a policy that merely favors the few well-connected Guyanese business- or political- elite getting into the oil & gas value stream and enriching themselves. Such an approach would result in further widening the wealth gap as the masses of Guyanese society are left out and see no tangible benefits from the resource development while everything around them becomes more expensive. That would be an absolute disaster and a repeat of what has happened to so many countries around the world that came into oil “wealth”. In any country, corporation (large or small), or government agency, people are the most valuable resource.

A country’s failure to develop its people resources results in that country’s failure as a nation because there can be no sustainable economic development without intentional investment in and development of all of its people resources. Here, Guyana has an opportunity to employ local content as a development strategy. It should not squander the opportunity.

The Oil & Gas Value Chain

Developing an effective local content regime for Guyana

An essential first step in the process requires examining each discrete sector of the oil & gas value chain against the 3-prong local content goal framework. The government may slice each sector into as many sub-segments as necessary to accomplish its goals. The oil & gas industry being new to Guyana, requires an objective appraisal of local resources and local capacity available for performance in the industry. After completing the gap analysis, policy makers will be equipped to set LC policy goals and specific performance targets.

A. The 3-Prong Local Content Goal Framework

At its core, the goal of local content comprises of three elements: (1) employment of locals, (2) local capacity and skills development, and (3) national industry participation. As discussed below, these elements are interdependent and interact with each other to achieve the overarching sustainable economic development strategy.

(1) Employment of Locals. Employment of local Guyanese citizens, in all sectors of the oil & gas value chain, in all job categories and job grades from top to bottom, should be a primary objective of any local content framework. That is, Guyanese citizens must be adequately trained and significantly participate in management, control, and operation of all entities doing business in Guyana. The gaps in employment and employability, present at the start of in-country operations, must be eliminated through training and policies that set specific employment targets and quotas that foreign companies are required to meet. There should be neither reliance on, nor encouragement of, expatriate labour for the medium- or long- term. Significant investments in education and training are critical to achieving this goal.

(2) Local capacity and skills development. There are two components to local capacity and skills development: (a) people capacity, and (b) domestic industrial competence.

      (a) People Capacity. Significant and sustained investments in education and training of Guyanese citizens is critical for success. This must occur at all levels – from elementary school to university level. While some training and education efforts are already on-going, such efforts are limited and largely sponsored by the oil companies and their subcontractors – sending select Guyanese for training abroad.

It is absolutely necessary that the University of Guyana receives significant endowments and grants to improve its capacity, standard, and product quality to meet Guyana’s emerging needs. The Guyana Government has and must play a major role in preparing its people for success.

If done correctly, Guyana’s future is very bright, and it requires engineers, oil & gas accountants, financial analysts, quantitative analysts, HSE (health, safety, & environmental) specialists, computer programmers, mathematicians, geophysicists and petroleum geologists, chemists, welders, plant operators, business analysts, bankers, pilots, etc. Training and education should already be in progress and begins in the elementary schools. Government investment in, and curriculum realignment of, primary-, secondary-, trade-, and tertiary- schools, are necessary to address Guyana’s newly emerging business landscape.

Moreover, Guyana must engage its vast diaspora, a largely untapped natural resource. There it can acquire competent resources that will significantly close the existing gap in skilled human resources. Additionally, the Guyanese diaspora will be a source of training, mentor-ship, and capacity building to its Guyanese family.  

     (b) Domestic Industrial Competence. Collaboration with foreign entities and the passage of time are key to achieving domestic industrial competence in service of Guyana’s oil and gas industry. While existing Guyanese companies are eager to acquire contracts in the oil & gas services segment, they largely lack industrial competence, skill, and high quality performance required and necessary for the oil & gas industry. As such, a local content framework requiring a fixed level of local partnership, for foreign companies (e.g., 10- to 15-%) participating in Guyana, could be used as a mechanism to build domestic industrial competence over time. Building local industrial capacity is necessary and critical to sustaining Guyana’s economic development. With appropriate legislation, the Guyana Government can facilitate the latter. On the other hand, the Government must be deliberate in providing incentives that prevent cannibalization and depletion of local resources that currently support Guyana’s existing industries.

(3) National Industry Participation. Local procurement and direct supply participation by Guyanese companies in the oil & gas value chain are desired outcomes of an effective local content regime. The extent of participation will depend on the availability and competence of local suppliers, and how aggressive the Government is setting compliance targets for foreign companies.

Article 18 of the ExxonMobil PSA requires the Contractor to give preference to (i) the purchase of competitively priced Guyanese goods and materials that meet ExxonMobil’s quality, quantity, and deliverability standards, and (ii) employment of commercially competitive Guyanese sub-contractors that satisfy ExxonMobil’s financial and technical requirements. This is a good start. Clearly, there is a considerable learning curve for local resources to develop the required expertise, competence, capacity, and performance. Thus, it will take considerable time for Guyanese resources to fully participate directly in the oil and gas sector.

Joint ventures and other business collaborations, with foreign companies, are means by which local Guyanese entities can gain expertise and competence. The focus should be on small- and medium- sized Guyanese business entities (SMBE’s). SMBE’s will benefit most from capacity-building initiatives and have the greatest potential for business development, economic growth, and sustainable jobs creation.

Having a national oil company is another means by which the Government can ensure national industry participation. While this option is likely unpopular with IOCs, it could be the best option to safeguard Guyana’s interest.

B. Setting Reasonable Employment & Industry Participation Targets

Employment

A recent estimate puts the Guyana population at 750,204 (¹CIA World Factbook, July 2020 Estimate). Of that population, about 45 percent (337,591) are 24 years old or younger, and 39.5 percent (296,180) are 25- to 54- years old. Of secondary school age children (12 – 18 years old), about 66.4 % (or 115,587) are enrolled in school (² Compendium 4, Bureau of Statistics, Guyana, April 2017 citing 2012 Population & Housing Censuses). Detail of the same data reveals enrollment of 95.6 % for ages 10 – 14, and 78.8% and 52.4% for ages 15 and 16, respectively. Clearly, more must be done to improve enrollment and matriculation rates for the 15 plus group. Many have opined that lack of opportunities after high school is likely a contributing factor to the lower rates. However, that was yesterday’s news. Today’s reality is one immense opportunities for Guyanese youth. So, let’s get the job done right!

Employment Job Groups. Direct employment opportunities in the oil & gas value chain are available in four general categories: (1) Technical and engineering positions requiring a 4- or 5- year university degree, (2) Technician/ operator positions requiring a high school diploma plus 8-month to 2 year skills trades/ technical school training, depending on the specific job family, (3) Management positions requiring university degreed resources (e.g., in engineering, business, finance, management, accounting), and (4) Generally skilled positions requiring only a high school diploma and on the job training.

Employment Targets. Guyana has a very young, capable, and educationally-pliable population. So, building local capacity in this group should mainly require purposeful commitment, leadership, and investment in education and training. Using locally available Guyanese people resources and supplementing with skilled resources from Guyana’s diaspora, Guyana could easily achieve the oil & gas employment targets set forth below.  

Local Industry Participation

Because the industry is new to Guyana, direct participation of local companies as suppliers of materials, equipment, and oil field services requires a very steep learning curve. It will take considerable time to build domestic industrial competence in Guyana’s oil and gas sector. As previously discussed, the Government can mandate (through legislation) certain minimum levels of partnership with local small and medium sized businesses.

Such policy would require foreign companies, supplying equipment, materials, or services in Guyana’s oil & gas sector, to partner with a local small or medium sized business enterprise. The latter is not unlike requirements United States federal-, state-, and local- government agencies impose on prime (or large) business contractors to facilitate competency development of Small Minority or Historically Disadvantaged Business Enterprises (SMDBE). The targets set forth below for local industry participation include a government mandated LC factor.

C. Codifying, Managing, & Regulating LC Performance

Countries employing local content (LC) as a development strategy, typically begin by developing LC frameworks that comprise of policies, laws, and institutions to manage and regulate performance of the policies. In Guyana’s case, a meaningful LC framework must also include the bauxite, gold, and other mineral sectors.

According to a recent UNCTAD study of LC ⁽³⁾ in several countries, a weakness of many local content frameworks is the absence of an effective institutional mechanism or independent regulatory body to monitor and evaluate LC policy performance against goals, and make adjustments when necessary. Guyana must be careful and not make that mistake. Without effective monitoring and evaluation of LC performance against goals, and continuously engaging stakeholders, Guyana’s local content policy will unlikely achieve its goals.

Many countries adopted LC frameworks very late in their oil & gas journey, and the lack of progress (or even degradation) of their people and societies show it. There are several examples, both good and bad, that Guyana can learn from.

The Nigerian Content Development & Monitoring Board (NCDMB), and the ANP in Brazil are held out as good models for effective monitoring and evaluation of local content policy frameworks (3).

In this writing, the author outlines a general framework of what he believes local content in Guyana’s case should look like. Of course, there is much more to it than discussed in this introductory article. Nevertheless, we believe this is a good starting point and framing of this very important issue for the Guyanese people.

D. Conclusion & Takeaways

• The goal of local content is tri-fold: (1) employment of locals, (2) local capacity and skills development, and (3) national industry participation. In Guyana’s case, LC must be employed as a development strategy and encompass all of Guyana’s mineral resources – not just its oil and gas sector.

• For Guyana’s LC regime to be effective, the Guyana Government must set up an effective institutional mechanism or create an independent regulatory body to monitor and evaluate LC policy performance against goals, and make adjustments when necessary.

• An effective local content regime in Guyana will convert short-term benefits of revenues from Guyana’s petroleum and other natural resources production into long-term sustainable economic development through capacity building that creates jobs, local expertise, and other industries that remain after the petroleum revenues diminish.

In summary, Guyana’s Local Content Regime should ensure  development of in-country skills and expertise in all aspects of the (a) oil & gas-, energy-, and natural resources- industries, and (b) ancillary industries and businesses arising therefrom, such that:

(1) Local Guyanese citizens become adequately trained and competent, and significantly participate in management, control, and operation of all entities doing business in Guyana, and

(2) Small and medium sized local Guyanese businesses develop industrial competence and high quality supply capabilities, and become significant suppliers to the oil & gas and mining industries.