Since the beginning of petroleum industry and the renaissance era witnessed by all major countries producing hydrocarbons, most regulators of host governments discovered the vital role played by this industry in achieving sustainable development to their people. Whether by achieving a minimum limit for governmental revenue through taxes and royalties, or in the form of petroleum share, regulators discovered that achieving the in-country value throughout an effective local content strategy must be a main target of petroleum industry, in addition to monetary aspects and the petroleum share.
Delivering in-country value indeed involves a string of measures aiming at supporting local companies in the community. This is achieved through increased procurement of goods and services related to petroleum industry activities, as well as improving the capacity and capability of the citizens working in the petroleum field—including the transfer of knowledge from international oil companies (IOCs) to the people of the host country.
Achieving the in-country value throughout local content is not solely the responsibility of the host country, it is a matter of collaboration between the petroleum industry’s main players as well—host governments, national oil companies (NOCs), IOCs, and service companies—who shall seek to achieve sustainable development and building in-country value besides profit interests. To this end, a good investment atmosphere, associated with a comprehensive petroleum act and mutual beneficial petroleum agreements, should accompany the local content.
Petroleum Activity Legislation
The Egyptian regulator has paid great attention to local content, which is directly reflected by petroleum legislations applied in the Arab Republic of Egypt. For example, the “Mines and Quarries” law No 66 of 1953, the production sharing model agreements for exploration of oil and gas (PSAs), as well as Law No 8 of 1997 for “Investment Guarantees and Incentives,” each constitute the legal framework for petroleum activities is Egypt.
The mines and quarries law—as amended by law No 86 of 1956—is the Egyptian petroleum law organizing all petroleum operations in upstream projects, including the achievement of the country’s local content strategy. Despite this, the law does not satisfy the crucial need for an efficient strategy to guarantee economic and social gains resulting from petroleum projects on the Egyptian territory—particularly in respect to encouraging domestically manufactured materials, improving manpower, and the transfer of knowledge.
Benefits of PSA Model for Host Country
The PSA model was applied in Egypt for the exploration and exploitation of natural resources. It was promulgated through private legislation, which includes a comprehensive treatment for all exploration and exploitation mechanisms, including the host state’s right to achieve the main elements of local content. The model directly promotes local contractors, due to their positive contribution in strengthening the domestic economy and providing jobs opportunities in Egypt.
The model imposes an obligation on the contractor or operating company, as the case may be, to give priority to local contractors and sub-contractors as long as their performance is comparable to international performance, and the prices of their services are not higher than the prices of other contractors and sub-contractors by more than 10%. Furthermore, operating companies shall give preference to locally manufactured material, equipment, machinery, and consumables, so long as their quality and time of delivery are comparable to ones available internationally.
In spite of these obligations, if IOCs choose not to use locally manufactured goods, they are exempt from liability as long as the quality of goods is unsatisfactory for the IOCs. In fact, states whose manufacturing sectors do not perform particularly well or enjoy a particularly good reputation internationally cannot hope to develop their economics, unless they develop the technical knowledge and expertise necessary for the oil industry and related sectors. Hence once these capacities have been developed, the government can institute measures aimed at promoting domestic goods, services, and jobs—which are considered the other main element of local content.
To this end, the Egyptian PSA model set the standard and paved the way to transfer knowledge from IOCs to NOCs and other joint ventures’ domestic employees by stating that “The IOC shall, after consultation with EGPC, prepare and carry out specialized training programs for all its A.R.E. (Arabic Republic of Egypt) employees engaged in operations hereunder with respect to applicable aspects of the petroleum industry. IOC and operating company undertake to gradually replace their non-executive expatriate staff by qualified nationals as they are available.” Furthermore EGPC employees are entitled to attend and participate in training programs relating to exploration and development operations in.
Service Company Incentives
In another step towards achieving local content and increasing in-country value, Act No 8/1997 for “Investment Guarantees and Incentives” paid great attention and gave special treatment to service companies that provide digging and exploration services, as well as installation services for natural gas facilities, and natural gas transport. The companies were given certain incentives and guarantees to encourage the investors in this field. Such incentives and guarantees can be prescribed as follows:
- Companies may not be confiscated or nationalized.
- No administrative body can interfere in setting prices or profit margins.
- Projects may be entirely owned by foreigners. Furthermore, their boards of directors may be wholly composed of foreigners.
- Foreign experts’ salaries are exempted from income tax if their stay in Egypt is shorter than one year.
An assessment of Egyptian local content promotion measures clearly reveals the need for a pragmatic approach to local development policies. It is essential to avoid forcing development, as this would risk damaging the development opportunities for the local economy associated with a petroleum discovery.
In addition, it is essential to establish a unique and specialized department in the Ministry of Petroleum to manage local content, monitor implementation of national development policies, and monitor the accurate execution of the planned strategy of local content as prescribed by the law. This department should also promote dialogue between the petroleum industry’s main players—foreign and domestic companies. This department should act as a liaison between petroleum sector players to promote cooperation and collaboration, and for gathering resources aimed at developing local capacities.
By Mostafa Shazly, Attorney at law,
EGPC Petroleum Agreements Department, Member of AIPN