Despite the successes arising from the implementation of the Oil and Gas Industry Content Development Act 2010, the act has been criticised within the Nigerian oil and gas industry for its inconsistency and the impracticability of some of its provisions.
In a bid to address these issues, the House of Representatives' Local Content Committee, chaired by Asita Honourable, embarked on a legislative reform process and drafted the Bill for an Act to Amend the Nigerian Oil and Gas Industry Content Development Act 2010 and for Purposes Connected Therewith 2015.
The bill had its first reading in the House of Representatives on February 27 2013. It then proceeded to second reading on March 27 2013 and on June 2 2015 had its final reading and was passed by the lower house.
On June 3 2015 the Senate of the Seventh House of Assembly transmitted to the presidency for assent a total of 46 bills, including the new oil and gas bill.
Although the explanatory memorandum of the bill notes that it seeks to amend the act by "extending the waiver window, removing difficulties to access to funds and correcting an obvious heading error", this part of the proposed legislation is left over from the version of the bill which passed second reading in 2013. The scope of the bill now significantly exceeds that of the explanatory memorandum and the initial proposal to remove difficulties in accessing funds – by removing Section 52(1) of the act, which requires entities in the oil and gas industry to retain only the services of Nigerian financial institutions – has been abandoned.
The bill now covers the following issues.
Authorisation to import goods and services
Section 11(4) of the act provides that where there is insufficient capacity to meet the Nigerian content targets (ie, man hours, tonnage, volume or spend) set out in the schedule to the act, the minister of petroleum resources may authorise the continued import of relevant goods and services for no more than three years from tentry into force of the act – a period which expired on April 22 2013.
Since that date, operators have found it hard to adhere to the Nigerian content spend requirements set out in the act, as local contractors and service providers have yet to develop the requisite skills and do not own the equipment required to execute certain projects in the oil and gas industry.
Against this background, the amendments in the bill seek to reinstate the waiver window by requiring the Nigerian Content and Development Monitoring Board to recommend to the minister for approval relevant items and services where there is inadequate capacity to meet the Nigerian content targets included in the schedule.(1)
Verification of in-country capacity and capacity development initiative
To ensure that goods and services are not outsourced indiscriminately following reinstatement of the waiver window, the bill provides for a substantiation process which may culminate in the operator developing a capacity development initiative (CDI) or, where necessary, partnering with an existing CDI with the aim of building relevant capacity where there is a shortage.
Before submitting an application to the board, under the bill an entity desirous of importing goods and services must advertise on the board's Joint Qualification System platform for a period of not less than 30 days and where a Nigerian company is able to demonstrate its ability to provide the relevant goods or services, such company shall be engaged accordingly.(2)
However, it is unclear whether the Joint Qualification System will be utilised to determine contractors' competencies as the bill seeks to expunge Section 56(b) of the act, which provides for the "verification of contractors' capacities and capabilities".(3)
Nevertheless, where there is a dearth of in-country capacity, an application to the board must state:
- the quantity and description of the goods or services to be imported;
- evidence of the shortage for the duration of the relevant project; and
- the outcome of the advert placed on the Joint Qualification System platform.(4)
An entity that intends to outsource goods and services is also required to submit a CDI or to develop a collaboration plan with a related and existing CDI. The CDI or collaboration plan shall indicate:
- existing local capacity;
- a list and the roles of stakeholders;
- expected outcomes; and
- project timing.(5)
Subsequently, the board may proceed to hold a joint evaluation with the applicant entity either to establish or disprove the case for import.(6) Additional conditions may be added to the CDI process in guidelines to be issued by the board.(7)
The bill mandates that, no later than January 31 each year, the board shouldo convene a stakeholders' meeting to determine areas of inadequate capacity, with the aim of identifying CDIs to upgrade or developing new capacity in specific demand areas in the oil and gas industry.(8)
First consideration in operator selection
Section 3 of the act provides that "Nigerian independent operators" must be considered first for the award of oil blocks, oil field licences and oil lifting licences, as well as for projects for which contracts are to be awarded in the Nigerian oil and gas industry. In addition, the bill seeks to grant Nigerian independent operators first consideration in "the selection of operator".(9)
The term 'operator', as used in the act and the bill, refers to entities with interests in Nigerian oil and gas assets (ie, entities the Nigerian National Petroleum Corporation, its subsidiaries and joint venture partners). However, the bill's amendment in this respect relates to bestowing 'technical operatorship' status on Nigerian entities which own interests in oil and gas assets.
It could be argued that this proposed inclusion has been brought about by the recent spate of divestments by certain international oil companies who had, before their respective sale transactions, exercised technical operatorship status over the relevant assets.
Indeed, granting Nigerians first consideration for operatorship can be seen as an indirect attempt to deepen Nigerian participation in the sector as an asset operator is primarily responsible for coordinating joint operations, which include staffing, procurement and engaging contractors.
Requirement for a Nigerian content plan
A literal interpretation of Section 7 of the act is that only an 'operator' (as defined) must submit a Nigerian content plan, which should contain provisions to ensure that first consideration is given to Nigerian goods and services, as well as to Nigerian workers with respect to training and employment in work programmes.
As this section applies to entities "bidding for any license, permit or interest and… carrying out any project in the Nigerian oil and gas industry", the bill extends the requirement for Nigerian content plans to contractors, sub-contractors, alliance partners or other entities involved in a project.
Although, in practice, a Nigerian content plan has always been mandatory for these entities, its express inclusion in the bill is intended to eliminate possible misconceptions. This reinforces an essential element of the legislation: the requirement to accord Nigerian workers, goods and services first consideration in oil and gas projects.
Utilisation of Nigerian Content Development Fund
Section 104(2) of the act, which creates the Nigerian Content Development Fund (NCDF), mandates that a sum equal to 1% of every contract awarded or transaction in the upstream sector of the Nigerian oil and gas industry shall be deducted at source and paid into the NCDF, which is managed by the board.
However, this provision has been criticised as it is unclear how the amounts accuring to the NCDF will be used or managed, as the act states it shall be "employed for projects, programmes and activities directed at increasing Nigerian content". The bill attempts to address this ambiguity by stating as follows:
- No more than 10% of the amounts accruing to the NCDF in any year shall be utilised by the board in its operations – this includes general and administrative expenses, whether incurred as operating or capital expenditure.(10)
- At least 70% of the amounts accruing to the NCDF are to be disbursed to qualified Nigerian indigenous companies for in-country capacity development. The grant can be by way of long-term, low-cost asset acquisition loans and infrastructure or facilities development support, equity investment, direct grants for in-country research and development, technology acquisition and in-country manufacturing.(11)
While apportioning such a high percentage for local capacity development is commendable, the basis for allocating 10% to the board for its operations is unclear, especially when considering that the board is already entitled to maintain a fund(12) comprising money from government subventions, budgetary allocations, donations, gifts, grants and revenue, and from which its expenditure is to be defrayed.
Evaluation of CDI applications and disbursement from NCDF
To ensure that funds are used judiciously, the bill sets out rules governing applications for funding support, as well as the evaluation and disbursement of such funds.(13)
To this end, the bill establishes the Standing Committee of the Nigerian Content Consultative Forum,(14) which is responsible for evaluating all proposals for capacity development funding from Nigerian indigenous companies based on selection and ranking criteria. The committee will also recommend qualifying CDI applications for funding on a quarterly basis.
Such qualifying proposals are to be forwarded to the executive secretary of the board for due processing and disbursement. However, the bill states that where such funds are not spent in that year, they may be reallocated and disbursed in succeeding years.
Definition of 'Nigerian indigenous company'
A major issue with the act is its inconsistent categorisation of entities in the Nigerian oil and gas sector. The act is not always clear as to which participants must adhere to which requirements. Section 106 of the act defines a 'Nigerian company' as "a company formed and registered in Nigeria in accordance with the provision of Companies and Allied Matters Act with not less than 51% equity shares by Nigerians", but never uses the term in the body of the legislation. Although the bill restates this definition,(15) the term is used only once in its text.(16)
However, the bill does introduce a new term, 'Nigerian indigenous company',(17) which refers to a company:
- whose entire issued share capital is owned by Nigerians;
- whose board of directors comprises only Nigerians; and
- whose assets are entirely owned by the company.
Although the term 'Nigerian indigenous company' is mentioned in Sections 3(2) (as "Nigerian indigenous service companies"), 16 and 49 of the act, its use in the bill centres on the amendments to Section 104, particularly as it relates to companies that may benefit from the NCDF.
The definitions of 'Nigerian company' and 'Nigerian indigenous company' do little to resolve the ambiguities that have always plagued the interpretation of several provisions of the act. The bill, like the act, is still littered with variants of both phrases, including 'Nigerian indigenous service companies', 'Nigerian indigenous contractors', 'Nigerian… contractors and service or supplier companies', 'indigenous Nigerian companies' and 'indigenous companies'.
As the act has yet to receive judicial interpretation and the minister is yet to provide regulations which give effect to the act's provisions, accepted and acknowledged practice has primarily driven the understanding of the act's requirements. At present, practice leans towards the 'Nigerian company' definition, as most entities with operations in the Nigerian oil and gas sector make an effort to preserve Nigerian interests at a minimum of 51% of the shareholding interests.
However, the introduction of the definition of 'Nigerian indigenous companies' may have further-reaching implications than intended – particularly for entities providing technical services in the industry. One interpretation of Section 3(2) of the bill (which refers to 'Nigerian indigenous service companies') may be that only service companies which demonstrate ownership of equipment, Nigerian personnel and capacity to execute work, and which are without foreign interests, shall be able to bid to carry out work on land and swamp operating areas.
Similarly, where such companies show that they have the capacity to execute any job, Section 16 of the bill ensures that they will have an advantage in bid evaluation, as they will not be disqualified based solely on the value of the bid, provided that their bid value does not exceed the lowest bid price by more than 10%.
While these two scenarios may be inadvertent implications of the definition, it is clear that the definition has been included primarily to benefit companies by deploying funds from the NCDF to in-country capacity development. In this way wholly owned and controlled Nigerian entities which have been duly screened and ranked can receive support to develop sufficient capacity.
Definition of 'operator'
An 'operator' is defined under the act as:
"Nigerian National Petroleum Company ("NNPC"), its subsidiaries and joint venture partners and any Nigerian, foreign or international oil and gas company operating in the Nigerian oil and gas industry under any petroleum arrangement."
The use of the term 'operator' in the definition section and in the body of the act appears to apply to companies that own some form of interest in Nigerian oil and gas assets and that are actively involved (either by way of funding or technical operations) in the operations of such assets. However, considering that the definition may not adequately capture entities which hold equity interest, but do not undertake actual petroleum operations (eg, those in carry and technical service arrangements), the bill extends the definition to entities "using any hydrocarbon as main input under any petroleum arrangement, contract or business venture".
Section 48 of the act provides that the minister shall consult with the relevant branches of government on an appropriate fiscal framework and tax incentives for companies with establishments or operations for the purpose of producing, manufacturing or providing goods and services that may have otherwise been imported.
Going a step further, the bill(18) provides that the minister, on recommendation of the board, shall approve definitive incentives to eliminate contractual and procedural impediments to local capacity developments. The board – which deals directly with operators, contractors and subcontractors – has first-hand knowledge of the challenges and impediments facing local content implementation and is well suited to recommend such incentives.
The bill recommends that the standing committee comprise a member from the board, two members from the Petroleum Technology Association of Nigeria, two members nominated by international operators, one member nominated by Nigerian independent operators and one member nominated by the board to represent the other sectors of the Nigerian Content Consultative Forum.(19)
Further, in light of the standing committee's function regarding the development of CDIs, the bill requires the Nigerian Content Consultative Forum to provide a platform for information sharing and collaboration in the Nigerian oil and gas industry with respect to screening and ranking of qualifying CDIs from indigenous Nigerian companies for financing support from the NCDF.(20)
Finally, Section 73(1) of the act grants the president ultimate discretion in appointing members of the governing council of the board. The bill adds an additional layer of scrutiny and makes such appointment by the president subject to the recommendation of the relevant organisation to be represented on the council.(21)
The act is overdue for amendment, particularly in light of recent developments in the Nigerian oil and gas industry such as the spate of divestments in the upstream sector and the investment appetite shown by indigenous participants.
The bill's effort to strike a balance by creating leeway for outsourcing while ensuring that local capacity is adequately developed through the CDI process appears to be a win-win situation for the Nigerian oil and gas industry and its participants. Better insight into the utilisation of sums accruing to the NCDF, and the creation of definitive incentives, are both laudable additions.
However, certain provisions of the bill still fail to deal with practical issues. Bestowing technical operatorship on less competent indigenous operators may result in failed or delayed projects, which will inevitably have an impact on national revenue. In addition, the complete exclusion of foreign participation in Nigerian service companies will serve only to deprive Nigerian entities of the much-needed finance and technical know-how required to grow capacity.
The bill has not yet been signed into law, which may be down to the fact that the new president has not yet had time to consider it. However, the implication of the delay is that the president intends to withhold assent, in which case the bill will be sent back to the National Assembly.(22)
Perhaps the goodwill enjoyed by the new president will ensure that the Eighth Senate and its committees take time to review the bill and to provide the level of scrutiny that such significant legislation deserves, rather than exercising the power (in conjunction with the lower house) to override the president's veto and pass the bill into law.
For further information on this topic please contact Folake Elias Adebowale, Dolapo Adesina or Dare Agbelese at Udo-Udoma & Belo-Osagie by telephone (+234 1 263 4831) or email (firstname.lastname@example.org, email@example.com or firstname.lastname@example.org). The Udo-Udoma & Belo-Osagie website can be accessed at www.uubo.org.
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