Oil & Gas IQ: Local Content

4 Ways In Which Local Content Can Lead To Local Contentment

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In developing countries from Timor-Leste to Trinidad & Tobago, national governments are enshrining in law, local content targets of varying percentages to encourage home-grown jobs and industry.

Essentially, local content is about securing direct and indirect opportunities for employment and procurement to home nationals, at the same time as fostering the development of local skills, technology transfer, and use of local manpower and local manufacturing in capital projects.

The theory behind this is laudable, but in the words of Willy Olsen, Former Advisor to the President and CEO of Statoil: "Maximising the benefits of local content is not the same as to maximise local content.”

Nigeria's Local Content Act 2010

Ratified and signed into law in April 2010 by acting President Goodluck Jonathan, the Nigerian Oil and Gas Industry Local Content Development Bill 2010 placed stringent obligations on upstream oil companies in the areas of finance, community and the local workforce.

Amongst the provisions laid down in the act were requirements obliging upstream oil companies operating in Nigeria to place ten percent of their annual profit in Nigerian banks and contract their legal and insurance services to Nigerian companies.

In early 2010, Shell Petroleum Development Company (SPDC) of Nigeria Ltd won an award for its work within the field of local content as the best local content policy implementer in the country, thanks to the "visible steps" it has taken to involve local companies in the industry.

The upstream oil company allocated $718 million in funding to Nigerian contractors of 2009, $373 million of that number invested into the fractious Niger Delta region.

Despite clear advances in Nigerian local content, in the troubled Delta region where conflict has been rife since the early 1990s, prominent activists are citing a local content programme with clear provisions for social and community development as the only antidote to a resurgence of military action.

Ghana: 90 per cent or bust?

Commercially viable quantities of offshore oil reserves were discovered in as early as the 1970s, but it has only been during the past two decades that Ghana has really ramped up production.

The West African nation started exporting oil in 2010 and with the opening up of further fields in Ghanaian territory its reserves are predicted to reach 5 billion barrels by 2015.

There is no doubt that in a country with a GDP per capita of $2,500 and more than seven million people living below the poverty line, local content, with all the potential socio-economic benefits it can bestow, is of inarguable importance.

As such, in 2010 recommendations laid out in the Local Content and Local Participation in Petroleum Activities Policy Framework for Ghana set a target of 90 percent local content and participation in the upstream oil and gas industry by the year 2020.

To make this proposition more than numbers on a page, Ghana will have to improve its offering to IOCs in the areas of finance, human resource capacity and technological capability, and the government must face these facts as realistically as possible. For example, disruptions in the procurement process created by SMEs unable to comply with industry expected norms in service delivery, could lead to delays and cost increases that would be detrimental to IOC/NOC relations.

Getting it right for local contentment: the Rule of Four

Badly enforced local content policy may be anathema to economic growth. So for countries like Ghana to get it right they would do well to make sure a number of boxes are checked:

  • Ensure transparency and openness in the tendering process: To guarantee accountability, safeguard against bias and stave of tensions, there must be total visibility in the criteria for award of contracts, basis for the award, contract costs and itemization of activities. Closely following the guidelines of the Extractive Industries Transparency Initiative (EITI) will go a long way to meet this end.
  • Create a neutral agency for the apportioning and outlay of oil revenue: Currently, Ghana's Oil and Gas Business Development and Local Content Fund for social development, education and training is administered by the Ministry of Energy. An approach akin to Norway's Achilles organisation, working outside of government, would be an ideal way to promote objectives without suffering from allegations of corruption and cronyism.
  • Follow the example of Brazil and actively foster the development of SMEs: You can't boost local content unless the businesses are there to support it. In Brazil, Petrobras has set up two funds to stimulate SMEs, of which there are now 14 million, accounting for 21 per cent of the nations GDP. To become leaders in the African oil and gas sector, Ghana would benefit from doing the same.
  • Invest in infrastructure: The often poor infrastructure in developing nations can be a major stumbling block in making sure that local content potential is realised. Countries like Angola have taken stock of this and spent much in recent years to make sure that their infrastructure is fit for purpose.
Following these four steps is not a guaranteed win for countries like Ghana in the local content field, but sticking to the precepts outlined above will certainly help light the way on the path to  future prosperity.

 
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Timothy Haïdar, EIC Contributor: Timothy Haïdar, EIC



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