Case Study:Establishing Overseas Operations

Sector: Oil Exploration

oil and gas John Faulks case studyBackground:

Following a period of investment appraisal, an experienced oil exploration company bought into oil exploration licences in an African country where they had not worked before as operator. The national Ministry of Energy were the key government partner and sponsor. Contracts signed specified a mandatory work program with time limits for completion. Thereby creating an immediate requirement to establish overseas operations to comply with the contract terms.

Concern:

The lead-time required for the mobilisation of people and large volumes of material & equipment, which involved export from suppliers in various international locations and import into the country of operation following tendering for supply.

Challenge:

To determine and comply with all the necessary requirements needed to commence safe & legal operation.

Specific export challenges:

  • As a non-oil producing country the government agencies were unfamiliar with industry norms elsewhere and themselves growing capacity to support a new industry for their country. For example, for Customs authorities the challenge was to implement contractual customs duty exemptions signed in the agreements with the DOE.
  • To establish the presence of local and specialist foreign suppliers and contractors capable of supporting the work. Foreign sub contractors also needed to establish overseas operations to support delivery of their parts of the project.
  • High local stakeholder expectations and media interest
    • Local employment
    • Opportunities for local companies
    • Preference for local content
    • Corporate Social Responsibility – Education, Health, Water
    • Social licence to operate

Export solutions:

Suitable service providers were found locally to deal with work permits, legal & tax registrations, freight forwarding, customs clearance, travel & transport and security services. Office & staff accommodation was found that met safety standards. Local staff were recruited to fill roles on the planned organogram to get the operation running so that the delivery of materials, equipment and people could commence. Negotiations with customs authorities were required to agree how the import duty exemption would work, including the temporary import of vendor owned equipment on rental. It was agreed to supply bank guarantees prior to later evidence of material usage or equipment re-export. A process was setup with agents and bankers for the company to issue bank guarantees for incoming shipments. All guarantees had to be followed up and cancelled once permission granted by customs. A high degree of coordination required between the company, Customs, the Customs clearance agent, the freight forwarder and suppliers. Additional staff were recruited to manage the process, ensure compliance and smooth operation.

Benefits:

It took twelve months from completing the deal and acquiring the licences to getting first drilling results. Delays in establishing an export solution would have caused significant and costly disruption to the work programme. The work obligations under the licence we met within the contractual timeframe.

Funding

  • Stockmarket listed
    • Revenues form production operations
    • Resource based lending
    • Corporate bonds
    • Fundraising for operations in OECD countries is easier as less business risk.
    • If there is a government share this is often funded via Development agencies/banks e.g. World Bank
    • Thin capitalisation rules state the ratio of debt to equity permitted in local entity
  • Joint Venture partners (Non-operators)

Legal

  • Legal entity setup – UK parent, foreign 3rd country subsidiary & local branch
  • Local legal advisors engaged
  • UK Bribery act
    • Compliance handbook and staff training
    • Independent helpline established
    • Constant vigilance via compliance audit & investigation
  • Health & Safety
    • UK and best practice international standards applied
    • High risk areas – transport, malaria, lifting, dropped objects
    • Cultural change & education necessary – high management engagement
  • Environmental and land acquisition
    • Best international practice and local standards met
  • Petroleum Law
    • Exploration licences defined under Petroleum Law
    • Gov’t title to assets
    • Preference for local content

Accounting

  • Local accounting firm engaged
  • Transaction & reporting currency in USD to eliminate risk to accounting profit from currency fluctuation.
  • Company systems initially stand alone and later upgraded to group standard.
    • Internet provider
    • Cyber security
  • Local accounts filing to local standard (compatible with IFRS), subsidiary and parent consolidations under IFRS and country GAAP.
  • Exchange risk mitigated through natural hedge, keeping USD revenues in the group to fund USD expenditure. Strong reporting and forecasting required to manage requirements
  • Letters of credit required from suppliers, no credit rating industry local coverage.
  • Insurance – Broad range of cover

Taxation

  • VAT – Ensure not charged on exported goods.
  • Withholding tax – Charged locally on all supplies.
  • Income Tax & National Insurance – Local rules applied
  • Corporation tax – Equivalent governed under Petroleum law schedules locally.
  • Capital gains tax – Major issue for sale or part sale of business.
  • Double taxation relief – Consideration very important to structural planning
  • Transfer pricing – Charging the support services from parent organisation.

Banking

  • Local bank accounts setup
  • Local currency conversion to meet local obligations
  • Electronic payment option not always available locally
  • Larger cash component and increased management required
  • Telephone payment system used to minimise cash holding for multiple minor expenditures
  • Bank guarantees –needed for imports by customs authority
  • Supplier funding – Working with local banks to support local content

Export / Import

  • Local customs clearance agent engaged – Identify correct documentation and process
  • Import duties payable at different and changeable rates
  • Contractual exemption to duty for use in oil industry
    • Need to demonstrate use or re-export
    • Suppliers utilising exemption under company licence
    • Bank guarantees required by customs

Logistics

  • Lead time vs cost – Sea vs air freight
  • International Freight forwarder engaged
  • Local transportation contractor engaged
  • Warehousing secured at entry points and operational sites

Procurement

  • Tendering governed by Exploration licence requirements
    • A preference for Local content embedded
    • Withholding tax
  • Challenge to understand real cost base in the local market
  • Contractor management challenge
    • Working to your standards
    • Capability building
    • Visa sponsorship where no local presence

Duty of care to staff & contractors

  • Medical – Inoculations, Local provision of care, Malaria prevention, Insurance
  • Security – Crime, Terrorism, Emergency response
  • Safety  – Traffic, Electric, Water, Power
  • Transport – Vehicles, aircraft, airport transfer
  • Communications – Phones, internet, satellite
  • Registration – Visas, Work permits, Tax, Embassy
  • Accommodation – Office, housing, schools
  • Education – Risk awareness, training

Employing National staff

  • Local General Manager engaged
  • Pace of business and practices
  • Levels of education & experience in industry
  • Training & development
  • Unseen connections
  • Visa quota / Demonstrating expat need
  • Employment Law – Local regulation around engagement of national staff

 

Case Study: John Faulks (Click here to see John`s Profile)