Local Content in the Oil and Gas Industry



Joe Asamoah
09/22/2010

Lately, local content has become very topical, and most countries are enacting laws to make it mandatory for all stakeholders of specified industries. But, what is local content, and why has it become such a hot issue in the natural resource industry in general and the oil and gas sector in particular?

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Local content is the development of local skills, oil and gas technology transfer, and use of local manpower and local manufacturing. For a more practical definition, one could say that local content is building a workforce that is skilled and building a competitive supplier base (Oil and Gas, 2010). It has become a very important issue due to the fact that in this day and age, every country would like its citizens to capture the commanding heights of its economy and thus assist to keep its wealth within its borders, as well as providing jobs to the ever increasing population. This is achieved through capacity building, creating SMEs as well as offering products and services locally.

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It can be argued that in developing countries, local enterprises are the drivers of economic activity and development. Whereas the technology gap between developing and developing countries is widening, the spread of local technologies in developing countries is being fast-tracked. Also, technological advancement underpins the rise in incomes as seen in developing countries, and has assisted to reduce poverty levels from 29 percent in 1990 to 18 percent in 2004 (Arizona-Ogwu, 2008).

Fundamentals of Local Content

Governments of rentier economies have increasingly been looking beyond revenues that accrue to them from the economic rent. The aim is towards maximization of the national value creation by means of the oil and gas value chain through employment, value-addition, technology transfer and the acquisition of knowledge. The prerequisites for enhancing local content are rule of law, skilled workforce, and investment-friendly atmosphere. However, there are opposing forces to government efforts to create the enabling environment. These forces are the divide between national and commercial interests, delays, HSE challenges and corruption.

Local Content Practices

The principle of outsourcing has increasingly been applied by oil & gas companies; and it is interesting to note that oil companies expend up to 80 percent of their investments on products and costs that are supplied from without. Thus, indirect employment in the sector accounts for a large proportion of total employment and value-addition. Considering the fact that opportunities for building local content may vary along the value-chain, the market for maintenance, modification and operation (MMO) is often undervalued. Thus, only a succinct definition of the methods for the identification and quantification of local content will delineate properly its key components—value-addition and growth capability. In view of this, employment as well as direct and indirect value-addition must be identified and accounted for separately.

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The procurement of local goods and services is very important due to the fact that it establishes a multiplier for local economic development through contribution to employment, skills strengthening, supplier and local enterprise development. While some countries have a multiplier effect of investment in the oil sector of about 3.0, that of Norway is 2.5. It is worthy of note that a lot of countries can hardly attain a multiplier of 1. The multiplier of Kazakhstan is 0.45 as at 2003, despite being an industrialized country (Petrad, 2009). Mention is made of Norway for the simple reason of being a country where local content in the oil and gas industry has been successfully implemented.

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In Africa, countries like Ghana and Uganda, which have lately found oil in commercial quantities, are crafting local content bills. Norway is assisting several developing countries with the indirect development of local content through an initiative called Oil for Development (OfD). The OfD initiative is predisposed to assisting developing countries, on the basis of their request. This initiative is to enhance the bid to administer petroleum resources in a way that create economic growth; and encourage the welfare of the whole population in an environmentally sustainable way (Norad, 2010).

References

Watch this CNBC Video on Nigerian Local Content:

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Sumit Dutta heads up Marketing at Oil & Gas IQ. Contact him at Twitter or Google Plus