Local Content’s future in the Global Oil Industry: Which way forward?
By Pita Ochai
For centuries, the world has been exploring natural resources, whether oil, gas or minerals. In the last few decades more countries joined the natural resource exploitation club. Many have also witnessed economic growth and development as a result of the exploration and exploitation activities of their natural resources. Significant investments are being directed towards the development and growth of the extractive industry in different countries.
As investments continue to grow in the exploration of natural resources, there is also the strong need for its maximum returns. The desire to achieve maximum benefits from investments in the exploration of natural resources of a country gave rise to the concept of local content, this involves the process of developing local skills and capacity and local supplier competitiveness and participation in an extractive industry.
Currently, the issue of empowering local oil industries with local content policy has began to spread in Africa like a wild ‘harmattan’ fire. In Egypt, Algeria, Libya, Equatorial Guinea, Nigeria, Angola, Gabon and the new frontiers that are hoping to join the league of oil producing nations of Africa such as Ghana, local content is the love that is in the air right now.
Governments around the world – including in Africa, the Middle East, Australia and South America, have introduced local content development policies that require mining and oil and gas companies to ‘give back’ to local communities via employing and training local people, or investing in infrastructure. Firms which fail to comply can be hit by various penalties, including licences being revoked, fines, or commercial restrictions.
The changes have put greater onus on operators to gather accurate data on their supplier base because across all regions, operators must prove they are using a specified percentage of local labour on contracts. This should be supported by other mandatory information such as company name and address, right through to product and service capabilities and compliance.
With growing pressure from governments and investors, businesses need to put in place fair and transparent systems for assessing and selecting small and local suppliers.
According to Abraham Jolayemi, an energy economist, the desire of different countries to build local content has been on the rise in the last two decades. To him, most countries realise that the only way a state can deepen benefits from its natural resources is from participation of its citizens in the processing of its resources. He said that Local content in the oil industry in its simple terms is the value added by creating opportunities and encouraging indigenous oil companies to actively participate in the exploration, production, manufacturing, fabrication, procurement and allied service sectors of the oil business.
According to Jolayemi, Local content if well comprehended is a win-win situation that will promote partnership among national oil companies, local companies and international organization. And it will create good business environment, through corporate social responsibility, harmony and insure maximum profit for all. The main driver of local content is the vital need to cure or ameliorate the effect of “Dutch Disease” in oil rich – nations, and ensure that the people of these resource-rich countries enjoy increase economic benefits from the domestic oil and gas industry.
To Abel Hilary, a professor of petroleum engineering, local content has come to stay globally and will continue to gain popularity especially in the oil and gas sector. He said that oil firms across the globe could be at risk of losing valuable exploration and operating licences unless they step up their efforts to award work to suppliers in the locality of contracts. “Increasingly, operators are shifting their focus towards opportunities in emerging markets as a source of revenue to counter the drop in oil price. Yet in a market survey conducted recently by an independent research consultancy, IFF, less than half (45%) of large buying organizations in the Oil and Gas industry said they would be making an extra effort this year to use local suppliers in contracts. It could mean they risk getting caught out by a raft of new commercial and legal regulations, unless they take steps now to upgrade supplier information systems,” he said.
In heavily regulated industries like oil and gas, it could be easy to view new rules as a burden – but in reality, local content development guidelines could present an opportunity for the smartest firms keen to get ahead.
In Africa alone, there were nearly nine million barrels of crude oil produced daily last year for those firms which overcame associated challenges around a lack of supporting infrastructure.
Angolanization, the term given to the local content policy of Angola, promotes human capital development with the objective of hiring local people in positions they are qualified in the oil industry and also insuring capacity building of it human capital base through training and education.
Another key part of the policy is the development of a local supply market in Angola which encourages sourcing materials locally or collaborating with local suppliers in the sourcing or procurement of materials in the sector. Analysts believe that part of the growth experienced in Angolans oil and gas sector is as a result of the success of its angolanization program and the freedom given to the national oil company to operate independently without much government encumbrances.
The discovery of the Kwanza basin helped to commence production in Angola, followed by the discovery and development of oil fields off the coast of Cabinda in the 1960s. From beginning, the Angolan petroleum sector is dominated by international companies. Sonangol, the national oil company only worked towards establishing partnerships with the international oil companies through Production Sharing Agreements (PSAs) and holding joint venture stakes in few blocks.
Nigerian Content, according to the NNPC, the national oil and gas company is “the quantum of composite value added or created in the Nigerian economy through the utilization of Nigerian human and material resources for the provision of goods and services to the petroleum industry within acceptable quality, health, safety and environment standards in order to stimulate the development of indigenous capabilities.”
The government of Nigeria has made huge investment up to $10 billion USD per annum in this sector and working towards achieving 70 percent local content goal in few years, which many see as not possible due to some internal setbacks and the prevalent political cogs holding back the takeoff velocity of the Petroleum Industry Bill (PIB) of this frontline producer in Africa and the world’s eleventh highest producer.
To solve the problem of employment and capacity building and ginger progress in the Nigerian Content, the Nigerian National Petroleum Corporation (NNPC) has put in place a comprehensive Nigerian Content development strategy in the industry.
Considerable developments have been seen in the Front-End Engineering side, contract award and procurement. The fabrication sector is one of the viable arms that have shown big promise through the marvellous accomplishments of companies such as Niger Dock, Dorman Long Engineering and Free zone who have continuously shown through the quality and delivery time of certain complex projects which they achieved that Nigeria’s local companies can sustain the development of the industry.
Between 2015 and 2016, Nigeria’s oil and gas sector raked in $10 billion (about N200 billion) worth of investments through the Local Content Development Policy.
So far, about $191 billion (N3.8 trillion) investment has been retained in-country and hundreds of thousands of jobs in manufacturing, engineering, sciences and technical services could be created.
According to Ernest Nwapa, the former executive secretary of Nigerian Content Development and Monitory Board (NCDMB), Ernest Nwapa, over $5 billion worth of investments has been made in Nigeria since the signing of the Nigerian Content Bill into law by former President Goodluck Ebele Jonathan in 2010.
As the trend in local content continues to permeate all African economies, Equatorial Guinea another effective producer in the Gulf of Guinea and Gabon are about launching their local content policies. Tanzania has just been hailed by the African Capacity Building Foundation (ACBF) in its efforts to build a strong local content legal and policy framework to guide the oil and gas sector.
Prof. Emmanuel Nnadozie, the Executive Secretary of the continental Foundation, said the local content policies and legislations would ensure the local populace is active in the oil and gas value chain. Prof Nnadozie , an economist and development expert, said the legislations and policies would oblige multinational companies in the sector to recruit locally and provide opportunities that build local capacity and skills.
Recently, the Tanzanian Parliament passed the Petroleum Bill, the Oil and Gas Revenue Management Bill and the Tanzania Extractive Industry (Transparency and Accountability) Bill and the local content policy draft has already been published to seek public final input.
Prof Nnadozie said that in oil and gas, such local content policies would help oblige multinationals to transfer technologies to local people. He said management of natural resources needs visionary leadership that needs both investing in human and physical capital.
“We need to build institutions that ensure policies are implemented and also ensure local content laws and policies are implemented. You have to ensure that countries from which resources come benefit,” he said.
A researcher at the Economic and Social Research Foundation (ESRF) Mr Ian Shangwi said the ACBF had supported the local Think Tank to conduct an important study on Lindi and Mtwara on how well the country can manage the oil and gas resource to ensure it does not fall or the Dutch disease. “We have worked with the Ministry of Energy and Minerals and it is waiting for these findings that we shall release soon,” he said.
Mr Shangwi said the findings from Lindi and Mtwara would help the Ministry in shaping the local content programmes in the oil and gas sector.
It is through, Local Content Policies and legislations that host governments make policies and laws, which require International Oil Companies (IOCs) to maximize the share of local participation in ownership, and in the supply of goods and services across the entire oil and gas chain. In so doing, he argued, the government develops a competitive base for local business community to invest, supply goods, generate income and create employment opportunities.
In the light of recent big gas discoveries, the government is coming up with appropriate policies and legal frameworks to guide future exploration and exploitation of the resources
The modern trend to fuse local content in national oil industries predates the period of the exploration of the North Sea in Europe and United Kingdom’s didactic policy in 1970 meant to assess local content by setting up Offshore Supplies Office to monitor and audit supplies and contracts handled by companies in order to insure that indigenous companies get sizeable share of the contracts.
The takeoff of Norway’s offshore oil industry in 1962 ushered in a huge growth. In 1965, the Norwegian Petroleum Law was enacted and in 1972, Article 54 of the Royal Decree of 1972 enshrined the local content law and mandated that government should vigorously pursue the goal of insuring that Norwegian goods and services be given preference in the running of the oil and gas industry, provided they were competitive in terms of price, quality, schedule and service.
Right from the establishment of Petrobras in 1953, and the emergence of Brazil’s offshore oil industry in the 1960s with the discovery of the Guaricema field, Petrobras, the world leader in deep-water drilling has remained the dominant player in the Brazilian oil industry From the very point that Malaysian oil industry began in the 1950s, the objectives of Malaysia’s oil and gas policy have been to maximize local benefits through the development of local capabilities and industrial base to support the growing onshore and offshore oil and gas industry.
Petrobras (Brazili) and Petronas (Malysian) are two successful national oil companies that most national oil companies in Africa tend to model after.
While the buzz of local content continues to build up, the alleviation of the effects of Dutch Disease” has not been realized as expected in the resource-rich nations. Some countries have claims of increase in GDP and standard of living but when you approach an average citizen he will make a sigh and say: “it is only the few rich that continue to get richer.” It explains that local content policy has not really started to work effectively and the people have not understood how to participate in it to reap the benefits, Dearth of jobs and unemployment is still rife in many African countries with unemployment rate reaching a 22 percent average.
Local contractors are not well equipped with the level of training, expertise, and technology to carry out certain jobs. Reliance on foreign companies is still high and only those who have been able to break forth and get into partnership with international companies have gained access to the arena. Problem of attracting loans is another big cog in the wheel. Local banks are either not liquid enough to give loans or are caged with multifaceted wrangling that disabled them from granting good loans. Despite all odds, local content is been visualized by many industry insiders and local players as the potential vehicle that will transform the national economy and maximize benefits of resources.