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New legislation makes local content the centre of the oil and gas industry

Article - December 11, 2012
'Audacious' legislation aims to greatly boost local content in the oil and gas sector
Although the oil and gas industry in the West African nation of Nigeria has been to a great extent dominated by multinational companies and outsourcing, changing political policies are successfully shifting the petroleum sector towards a local market, favourable both to foreign investors and the indigenous community.

The watershed moment for this shift was the passing of the Nigerian Content Act on 22 April 2010. This legislation, considered audacious by some, was the first major policy enforcement done by President Goodluck Jonathan, inaugurated in May of that year.

The Content Act was intended to increase indigenous participation in the oil and gas sector within the African country not only in training the local workforce for jobs in the industry but also requiring less outsourcing, subsequently establishing a greater retention of expenditure.

According to the Minister of Petroleum Resources, Diezani Alison-Madueke, in just two years considerable success has already been seen as a result of the new laws. In fact, she cites the creation of over 1,000 skilled jobs in Nigeria to be a telling number that the initiative is indeed having the intended effect.

Furthermore, according to the Executive Secretary of the Nigerian Content Development Monitoring Board (NCDMB) Ernest Nwapa, companies will be required to submit pupilage programmes demonstrating commitment to employing Nigerians as a precondition for being given contracts.

“Any project that is going to be awarded today, a minimum of 10 per cent of the man-hours or costs must be set aide for training. The first angle we want to look at is human capacity, then infrastructure and then equipment and institutions,” explains Mr Nwapa, who was awarded the title of Nigerian Oil and Gas Man of the Year in 2011 for his implementation of the Content Act. “We want to make sure that for the Nigerians who live in the oil-producing areas, that international oil companies (IOCs) are very mindful of their methods, that they do not degrade the environment and that it benefits the locals, not just in an indirect way, but directly.”

Although IOCs expressed some initial reservations about the new governmental policies, many are now on board with the changes and making concerted efforts to work as closely with local companies as possible.

For example, ExxonMobil, the distinguished American oil and gas multinational, works intimately with the Nigerian firm DeltaAfrik, collaborating to complete projects such as an ongoing offshore facilities upgrade. The Italian IOC Saipem also has taken on significant projects within Nigeria alongside the local electric and instrumentation enterprise, Desicon. The partnership has signed a contract valued at more than $800 million with Shell and the Nigerian National Petroleum Corporation earlier this year.

While these examples show progress towards the objectives of the Content Act, the ultimate goal is that indigenous companies contribute at least 70 per cent to the oil and gas sector. Although the number has increased from only 5 per cent in 2004 to 35 per cent in 2010, there is still room for substantial improvement. However, according to Mr Nwapa, the big IOCs already award most of their contracts to Nigerian companies, which will lead to increased capabilities and experience for these organisations within the field. 

“This Nigerian Content Act is not only targeted at increasing participation, but at growing the knowledge and ability to use the oil and gas resources for in-country value,” remarks Mr Nwapa. “The moment we have that technology and sufficient opportunities for Nigerians, you can start talking about local research and development in these areas.”

Besides acquiring expertise, Mr Nwapa also sees increasing the retention rate for the oil and gas industry's expenditure as a fundamental component of making the sector more sustainable. The goal for the NCDMB is set at retaining half of the $20 billion (£6.25 billion) spent annually by 2015.

“Nigerian companies are still importing goods and equipment and raw materials,” laments Mr Nwapa. “In order to retain $10 billion as the Minister has directed, we have to focus on manufacturing those pipes, valves, etc. imported from other countries here in Nigeria.”

Pushing forward this objective, ExxonMobil is paving the way, using locally manufactured pipes for replacing the oil pipeline in one of its shallow water oil fields. One of the pioneers in local pipe production is Abuja-based SCC Pipe Mills, whose facilities were originally set up to manufacture supply pipes for the water industry and were subsequently upgraded to service the oil and gas sector. SCC first produced pipes for ExxonMobil in 2011, which were installed on the petroleum giant’s offshore Edop facility. The contract spurred increased interest and orders from Shell, Chevron and Agip.

This incipient trend is likely to gain momentum because of the stipulations in the Content Act, creating investment opportunities for the growing field. In fact, investors are already planning to build pipe mills and other facilities with equipment needed for ventures in the petroleum sector in the southern cities of Calabar and Gbaran Ubie, as well as the northwestern municipality of Koko.

Although the National Content Act is predicted to attract investors because of such needs, another piece of legislation expected to pass shortly, the Petroleum Industry Bill (PIB), will mostly make these effects greater. The proposed law will not only call for a restructuring of the entire industry, but also will allow easier entrance into the sector for small companies. This evened playing field is forecasted to further attract international investors.

Both the PIB and the National Content Act were initially met with some apprehension on the part of the IOCs. However, Mr Nwapa has been praised not only by members of the current administration but also by these international players for implementing the new measures in a non-biased and honest way, gaining him personal respect as well as contributing greatly to the smooth transition the Nigerian oil and gas industry is making toward a more local market.