Local Content implementation drives growth in oilfield services sub-sector

The Nigerian oilfield services (OFS) sub-sector is in a growth phase, with a forecasted compound annual growth rate of 8 percent from 2014 to 2017. The segment is presently valued at approximately US$23.72bn, representing approximately 5 percent of Nigeria’s GDP according to analysts at CBO Capital Partners.

However, at the faster rate of growth the industry is expected to experience, the value of the sub-sector is expected to increase to US$28.97bn by 2017.

Previously, the sub-sector grew slowly between 2011 and 2013, with a negative compound annual growth rate of 1 percent according to estimates from CBO Capital.

The growth in this sub-sector of the oil and gas industry has been driven by the implementation of the Nigerian Content Development Act creating opportunities for locals in the industry.

“The Act has driven local innovation, value creation and sustainable growth, measured through the inflow of US$5bn in investments and the creation of over 20,000 jobs”, says analysts in a recently released CBO partners report.

Specifically, in the OFS sub-sector, the Act seeks to increase domestic participation in the carriage of petroleum products, logistics, floating storage units, supply and warehousing, land transportation and submersible operations. The Act also seeks to increase the employment of local labour in the industry.

So far, the Nigerian Content Development Management Board (NCDMB) and the Petroleum Technology Association of Nigeria (PETAN) in collaboration with indigenous service providers, as well as the local and international E&P firms, have worked together to grow the industry to a value of over US$20bn annually.

PETAN and NCDMB have also partnered in other areas to accelerate the development of the industry including training and development of locals to become specialists in their respective fields in order to strengthen human capacity within the industry. This has helped create jobs for skilled workers, increase spending in the economy, and also contributed to economic growth.

The Nigerian Oil & Gas Industry Content Act (NOGICA) has attracted over US$5billion worth of investments for new and existing fabrication yards, investment commitments of almost US$2billion by Original Equipment Manufacturers (OEMs), and about US$5bn in investments in marine vessels.

According to a Ministry of Petroleum Resources report, 63 percent of the total US$10.19bn contract value awarded in 2013 was to indigenous firms.

Looking ahead, in the OFS sub-sector, key segments expected to lead the industry on the back of local content include transport and logistics, drilling and well completion, and EPC services.

The CBO Capital report points out that “stable opportunities, predictable cash flows and medium sensitivity to fluctuations in oil prices”, will propel growth and investments in the sub-sector.

In the maritime segment of the OFS sub-sector, investments into the maritime value chain is expected to increase in the coming years on the back of local content driving local manufacturing.

Presently, the value of investments into the maritime industry stands at approximately US$3.5 billion, according to analysts at CBO Capital – a marginal amount at 0.68 percent of Nigeria’s GDP.

As Nigeria develops its capabilities as an energy hub, local content implementation would drive investment into value added manufacturing boosting the maritime industry and in tandem, the OFS sub-sector.

Specifically, through the NCDA and Cabotage Act, the ownership profile and source of marine assets supporting the industry would be transformed to incorporate greater local participation.

In particular, the Act gives preference to vessels built, owned, and manned by Nigerians, over imported vessels, during tender processes.

A revised vessel categorisation strategy stipulates that vessels that are wholly built in Nigeria and vessels wholly owned by Nigerians will be given first consideration in all contracts in the oil and gas industry. Vessels which have 50 percent and above fitted out or constructed in Nigeria (by tonnage or spend) will be given the next consideration.

Finally, vessels which have below 50 percent fitted out or constructed in Nigeria (by tonnage or by spend) will be given consideration after exhausting the aforementioned categories.

“Vessel categorisation and domestication of assets not only represent the fact that assets are in domestic hands, but also guarantees assets contract awards that will increase cash flow available to service debts, and possibly accelerate further asset acquisitions”, points out the CBO Capital report.

As a result of the marine vessel and vendor categorisation scheme, local participation has increased significantly in recent years from 15 percent to over 55 percent of vessels operating in Nigeria, according to CBO Capital.

This ownership percentage is set to increase further as the implementation of the Cabotage Act in 2015 is expected to progress in full force.

At the 2014 Nigeria Indigenous Oil Summit, Executive Secretary, Nigerian Content Development and Monitoring Board (NCDMB), Ernest Nwapa said “we need to go deeper into the value chain, levels below ownership of assets, to create jobs and value-added manufacturing. There is the need for a robust supply chain.”

He added that backward integration would be next step, whereby local steel mills will be rejuvenated. However, the immediate need is to create the local demand for steel products.

Presently, there is a high demand for support vessels due to offshore development projects, with higher day rates recorded in Nigeria than other African oil producers, according to CBO Capital.

On the impact of the oil price slump on the demand for support vessels, the CBO Capital report says, “we do not believe that the recent fall in oil prices as a result of excess supply and reduced demand will be sustained in the long-run.

“To this effect, we believe that the OFS sector is open for investment”, it concludes.

The OFS sector of the oil and gas industry provides the equipment and services that help producers explore, extract, and transport oil and natural gas.

OFS includes exploration drilling, equipment support, well workovers, pipeline build, maintenance operations, and all other operations required across the upstream value chain.

Yinka Abraham