At the IP Week conference in London, Alex Josiah Adzew, chief operating officer at GOIL Company, discussed the challenges facing indigenous companies looking to participate in upstream activities in Ghana
Giving some background to petroleum exploration activities in Ghana, Adzew mentioned that in 2007 Ghana struck a significant amount of crude. There are now many players taking part in exploration activities in Ghana. Companies operating offshore include AGM Petroleum, AMNI, Medea Development, Springfield E&P, ECO Atlantic Oil & Gas, ExxonMobil, Eni, GNPC, Tullow and GOSCO.
He said that a strong case has been made for indigenous companies in Ghana to take up five per cent equity in petroleum exploration activities in Ghana. This is backed by local content and local participation regulations, specifically Petroleum Regulation 2013-LI 2204, which covers both local content, i.e. increasing the use of domestic resources, and local equity participation, as follows:
•Local participation (building industrial capacity) through equity ownership (five per cent) in E&P
•Local procurement of goods and services, including in-country spend
•Transfer of skills and expertise development
•Transfer of technology and know-how
•Active research and development.
Adzew highlighted a number of issues and challenges relating to local content and participation in Ghana, including inadequate local capacity, skills and expertise; a focus on ‘content levels’ rather than the development of capabilities; ‘fronting’, where a company is registered with the local partner owning 51 per cent of shares and foreign partner 49 per cent, but the foreign partner is the active party; and inadequate monitoring and supervision.
He pointed out that the regulatory and resource requirements to qualify as an Indigenous Ghanaian Company (IGC) to acquire five per cent full paying participating interest in a block under 2013-LI 2204 are onerous, particularly the financial requirements. They must comply with various Ghanaian and international laws and submit to due diligence investigations. They must demonstrate the financial ability to participate in deepwater oil and gas exploration, development and production operations through measures such as providing three years of audited financial statements, having enterprise value in excess of US$85mn during the upstream exploration development phases, debt to book capitalisation of less than 50 per cent, and prior year operating cash flow to capital expenditures in excess of 1.25x, demonstrating that cash flow is adequate to fund capital investment when the company takes up the five per cent equity.
“This places a lot of responsibility on the IGC,” Adzew said.
He discussed how GOIL, an indigenous oil marketing company in the downstream sector, had coped with the challenges of moving upstream, through measures such as tough negotiations leading to the wavier of credit ratings of performing banks; negotiating with one of the major Ghanaian banks to provide a bank guarantee; long-term training and upgrade of staff skills; and early preparation to demonstrate a robust track record.
“We had to show that when the cash flow comes over the exploration period, we have the finances to back it up,” he said. “We managed to successfully overcome the challenges; everything was fiscally based on finance. We were very serous in scrutinising our books to ensure that when the cash flow came in we were able to deliver.
“We were able to cope with the challenges as we are very strong, ISO registered, company,” he continued.
“But if this is what the largest company in Ghana had to go through, what about other companies?” he questioned.
He advised local companies to seek support in building the right accounting and financial systems; provide open and transparent accountability to shareholders and the public; build local capacity, in particular through attracting internationally-exposed local talent; ensure compliance to both international and local laws and regulations; and provide regular and consistent public reporting.
