The Nigerian Oil and Gas Development Act of 2010 imposed local content requirements that have been largely successful and have benefitted both the Nigerian population and the industry.
Image courtesy of Eroton
Nigeria has grown to master the practice of local content, to the extent of mentoring other resource-rich countries such as Uganda in promoting their own industries. Nigeria is one of the few countries to have enacted a primary regulation dedicated to it, with a broad objective to domicile a share of the US$18 billion average annual spending on exploration and production by IOCs. Nigeria’s pursuit of local content has greatly facilitated the growth of local service providers and contractors. It has also fostered a mutually beneficial relationship between international and local companies. “Sometimes there are not any local companies with the required level of experience and a partnership is then created between a local company and an international company. This allows for knowledge transfer and the local company gains necessary experience,” highlighted Seni Edu, CEO of Eko Support Services, a leading logistics solutions provider.
A major milestone was the divestment of IOCs from onshore and swamp fields. “The real game changer for the indigenous industry is the divestment of the IOCs where locals actually acquire these oil fields,” explained Nicholas Okafor, partner at Udo Udoma & Belo Osagie, a Nigerian full service law firm.
The Nigerian Oil and Gas Development Act was signed into law in March 2010 by president Goodluck Jonathan. The law gives Nigerians the opportunity to be considered in the awards of oil blocks, oil field licenses and oil lifting licenses under its emphasis on increased entrepreneurship and domestic assets. The law set a target to increase the use of indigenous labour, materials and resources to 70% in all oil and gas projects in the country, as opposed to the previous 28%. Contracts between IOCs and the government include local content provisions ensuring that Nigerians hold 75% of managerial positions within the first 10 years from the date that the contract was granted. 15 and 20 years after the contract, the percentage should increase to 80% and 85%, respectively. The act requires all operators of oil field licenses to submit a Nigerian content plan at the time of their bidding, showing how they will give first consideration to local companies and services, as well as a training and employment plan. With regards to procuring of goods and service, preference should be given to indigenous companies if it does not exceed the lowest bid by 10%. The table below summarises the details of the law and its provisions.
To facilitate the implementation of the law, the government relies on its industry watchdog, the Nigerian Content and Development Monitoring Board (NCDMB), headed by executive secretary Simbi Wabote. It documents the short, medium and long-term targets on its 10-year roadmap, which rests on five pillars: technical capability development; compliance and enforcement; enabling business environment; organisation capability and sectorial and regional market linkage. The NCDMB is targeting the creation of over 300,000 jobs by 2027. “The NCDMB, in conjunction with stakeholders, has put together a 10-year strategic road map aimed at developing and utilizing local capacity and capabilities, driving domiciliation and growth of O&G activities and ensuring incremental retention of oil and gas annual spending in-country,” stated Chief Dr. Davies Ikanya, managing director of Hopeup Integrated Industries, an indigenous gas and barite producer.
The NCDMB established a Nigerian Content Intervention Fund (NCIF), in addition to a Nigerian content consultative forum. The fund is financed via a sum of 1% of any contract awarded to any operator, contractor, subcontractor, alliance partner or any other entity involved in any project. The objective of the NCIF is to provide accessible credit to oil and gas service companies at a single digit interest rate for a period of five years, with a single obligator limit of US$10 million. “The NCDMB has been instrumental in nurturing local companies by providing funding options to indigenous companies at competitive rates,” elaborated Kayode Adeleke, CEO of RusselSmith, an integrated oil field service provider.
Companies must submit annual reports to the NCDMB, known as the Nigerian Content Performance reports, showing their compliance. Non-compliance is punished through penalties consisting of either the project cancellation or a fine that is equivalent to 5% of the project sum for each project in which the offence is committed. Such penalties are rare due to the high rate of compliance; hence the law is praised for its effectiveness and the NCDMB is widely respected and appreciated for its monitoring efforts. “The number of local players in the industry prior to the local content initiative was minute. The law facilitated the growth of the industry and allowed the local community to benefit from this growth,” stated Ohioze Unuigbe, managing director of Bureau Veritas in Nigeria, an international certification agency.
Such has been its success, that the National Assembly is considering the law’s extension to other industries, such as information and communication technology, power, solid minerals and construction, through the Nigerian Content Development and Enforcement Bill (NCDE) which commenced its first reading in December 2019. “It is important to note that legislation is not the key, but rather implementation and execution,” highlighted Dr. Timi Austen-Peters, chairman of Dorman Long Engineering, an indigenous EPC service provider.
The law’s current implementation must be strengthened before extending it to other sectors. For example, the NCDMB is not as transparent as it should be with regards to accessing its fund. “There is a process to access funds from the NCDMB and companies have to demonstrate their readiness. There is probably not enough understanding on how this process works and how to access these funds,” stated Michele Branco-Aiyegbusi, principal consultant at SLC Resources, a management consulting firm.
Many businesses still rely on borrowing from banks at double-digit interest rates. The high cost of funding jeopardizes indigenous oil service companies’ abilities, as Foluso Aribisala, CEO of Workforce, a Nigerian human resources consulting firm, explained: “Over the last few years, there have been several interventions and a significant emphasis on making capital more easily accessible to local entrepreneurs. However, there is still a bit more that can be done about the tenure and conditions attached to such funds.”
Nonetheless, fostering a relationship with the banks seems to be a strategy that works for some service providers such as Deep Blue Energy Services, as highlighted by Anita Omoile, managing director and president of the consultancy and engineering company: “Since our establishment, Deep Blue has had a relationship with Zenith Bank as well as First Bank of Nigeria and we have had a fantastic experience with both. We are very transparent with our bankers and for every project we embark on, we will first have a meeting with our bankers who have never turned us down and are always excited to progress with us.”
The reason behind the NCDMB’s inability to effectively communicate the availability of the fund could be credited to its over-involvement in other aspects of the industry, such as licensing and certifications, which are already undertaken by the DPR and the Ministry of Petroleum Resources. “The NCDMB seems to be overwhelmed, as their activities continue to grow daily and overlap with other institutions, which is time consuming,” confirmed George Okoyo, managing director of Point Engineering, a wholly-Nigerian engineering consultancy firm. “It is my opinion that NCDMB should instead focus solely on monitoring and compliance, ensuring that the local content act is enforced without creating so many hurdles for smaller companies.”
The NCDMB is currently working alongside the NLNG to ensure local participation on the Train 7 project. “The success of Trains one to six did not echo to local service providers due to the weak emphasis placed on local content, which is not the case with the Train 7 project,” stated Patricia Simon-Hart, managing director/CEO of AFTRAC, a specialised well-service company.”
The NLNG and the NCDMB signed the Nigerian Content Plan for the Train 7 project in March of 2019. The project’s total in-country engineering man-hours is set at 55%, which exceeds the minimum level stipulated in the Nigerian Content Act. According to Tony Attah, CEO of the NLNG: “Train 7 is anticipated to create over 10,000 jobs and stimulate capacity building of local industries along the LNG value chain.”