In praise of local content
Promoting local content through a deliberate effort to use local human and natural resources to stimulate capabilities at par with global practices is a laudable effort.
“Allowing for profits to flow back into the local economy and for business skills to be developed” is one way of developing local capacity, according to the Natural Resource Charter, co-designed by Paul Collier, professor of economics at Oxford University.
According to the Nigerian Content Development and Monitoring Board (NCDMB), the local content Bill has attracted $5bn into shipyards and upgrade of facilities, generated 300,000 jobs and saved $380bn in capital flight.
The intention of the Nigerian Oil and Gas Industry Development Bill, which was passed into law in April 2010, is to promote as much participation along the entire oil and gas value chain through the use of local goods, services, people, businesses and financing.
This ambition to localise the petroleum industry dates from the mandatory 10 percent equity for local companies during bid rounds for oil wells in 2005. However, achieving greater local participation is admittedly fraught with a yawning skills gap. Industry experts estimate a $1bn gap in skills and technology.
Higher value is captured when locals participate as shareholders or controllers, as operators or service providers, allowing profits to flow back into the economy and the development of business skills maximizing the amount of local goods, services, people, businesses and financing.
Some analysts contend that given the technology and skill deficit, meeting the requirements of the local content bill will be steep. The percentage of local content required in, say, engineering services; onshore, offshore and liquefied natural gas facilities range between 50-90 percent. There is also a 5 percent limit on foreign workers for projects over $100mn. For
joint bids by local and foreign companies at “least 50 percent of their machinery has to be manufactured locally.”
To correct this local content imbalance, training companies through partnerships with Nigerian firms seeking to develop local capacity are bridging this skill shortage.
Proven local companies have demonstrated that scarcity of domestic credit is not a constraint. AMNI, an indigenous oil company and partner of Afren, a UK-listed oil firm with significant exposure to Nigeria, was granted a $50m loan by GT Bank in July 2009 to finance AMNI’s Ima oil field project.
First Hydrocarbon Nigeria Limited, another pioneer indigenous oil company with links to Afren, got between $250m and $300m from local banks to buy 45 percent of OML 26 from Shell Petroleum Development Company (SPDC).
Prior to this, Nigerian banks lacked the technical knowledge and financial modelling expertise to handle such projects. However, they were willing to learn. With a bit of hand-holding banks were walked through local risks and operational issues. As a result, local financing has flourished. More local and international banks now participate in the sector.
Last week, Seplat, a leading indigenous oil and gas company that was established in 2009, recorded many firsts. Through its IPO, the first since the market crash of 2008, Seplat became the first Nigerian company to list on the main market of the London Stock Exchange (LSE) and the first pure play upstream listing on the Nigeria Stock Exchange (NSE).
Seplat is the first company on NSE’s E&P subsector of the Oil and Gas Sector. Seplat’s successful trail into unchartered waters will serve as a template from many other indigenous oil companies.
Beyond these milestones there are still challenges which impact Nigeria’s ability to increase its reserves. For example, piracy, illegal bunkering (oil theft), inadequate shipyard facilities, infrastructure deficit, environmental impact of oil exploration etc. Above all these difficulties,
attracting the required investment remain the largest and single obstacle to increase reserves.