News Americas, WASHINGTON, D.C., Sat. Nov. 6, 2021: In February 2021, the new Guyanese government released the first draft of their proposed local content policy for the energy sector. Local content regulation defines how much local labor is utilized during the development of an industry—a fundamental policy for any country that has just discovered vast natural resources. Guyana, who has uncovered 10 billion barrels of recoverable oil and billions of cubic feet of gas, will present its local content bill to Parliament before the end of 2021.
The Guyanese media has released some excerpts of the updated draft and it is almost identical to the bill presented in February. Few changes have been made, mostly in the initial requirements for well drilling services, but nearly all sliding-scale targets remained the same. Although Guyana has no local production of steel, 50% of steel plates will have to come from a local company within three years of a project being sanctioned. These high thresholds for raw materials will force local companies to depend on imports, leading to supply chain bottlenecks and extra costs that can hinder project development.
Local content requirements for several technical jobs, such as insurance, also remain too high relative to Guyana’s local capacity. Within 10-years, Guyana expects local insurance companies to cover 95% of the energy sector’s risks. Except for Brazil, who has managed oil & gas projects for half a century and has the 12th largest economy in the world, no other Latin American country has the local insurance capacity to provide this type of coverage. These targets show a mismatch between the government’s expectations and the currently reality on-the-ground.
Foreseeing challenges in fulfilling the local content requirements, the government is already encouraging joint ventures (JVs) between local companies and “International Tier 1 Contractors.” Joint ventures are a fundamental part of any liberalized, growing economy and can be highly effective at curtailing local shortages. However, if too much control is given to either the local or foreign players, this can negatively impact collaboration.
Until April 2020, China had 51% local equity requirements that prevented foreign financial firms from owning a majority stake in Chinese JVs. Soon after China removed foreign ownership limits in certain sectors, it instantaneously attracted an influx of foreign funds. Given China’s size, its labor force of 811 million people, and its technological maturity, it grew despite those strict regulations. Guyana’s 600,000 labor pool does not give it the same leeway.
In late October, the President of the Georgetown Chamber of Commerce and Industry cautioned against local companies becoming “rent a citizen[s],” where foreign companies are given full control of the company’s decisions despite being in a local partnership. To avoid this, 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, unrealistically high local content requirements will set up local companies for failure, while simultaneously fining foreign companies for their inability to comply with the necessary thresholds. In Brazil, its initial local content policy for its pre-salt fields were too stringent, creating bottlenecks and deflecting much-needed investment.
In Ghana, a country producing 100,000 barrels of oil per day (bpd), the development of the energy sector suffered because of the low capacity of its local firms. The west-African country, who 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.
Guyana is faced with a similar scenario. Vice-President, Bharrat Jagdeo, recently admitted that the country could soon hit full employment although there is only one FPSO currently in operation—six more are expected by 2027. Guyana must loosen its immigration laws, lower its local content requirements, and train local employees to meet the exponential growth ahead.
Guyana’s local content piece does have some positives: unskilled local content requirements are high, which ensures the participation of the local community, and it is creating an institutional arm mixed with public and private sector players that will oversee the implementation of the local content bill. Ghana too, had a regulatory arm responsible for overseeing its bill. However, its commission had a weak regulatory capacity to enforce local content rules, mostly because of its heavy partisan involvement. To avoid a similar mishap, Guyana should depoliticize its regulatory team and involve a greater share of private sector players, both local and foreign.
To handle the country’s newfound resources, the Guyanese government estimates that it needs US$40 billion in onshore logistics and real-estate investments. That is seven-times the size of Guyana’s 2020 GDP. As the government finalizes the draft of its local content piece, it must consider the reasonable capacity of the country’s current local labor force. First, the government can prepare by building an oil and gas technical institute, in addition to investing in primary and secondary education, to train skilled laborers. But it must also 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.
