We all want things to be local. Whether its shops, banks (remember the HSBC advert about your local bank?), products etc. So it is only right that resource-rich countries should want to spread the wealth taken out of the ground locally. Hence local content is a theme that is becoming increasingly prevalent for investment in the oil and gas sectors in Africa. Whilst the concept has been around for some time, it seems to have crept up the agenda in a number of African countries of late . Most recently with Ghana passing its own local content rules (“LCRs”) – perhaps (dare I say it) – following Nigeria's path.
What is local content?
Whether you call it local content, local participation or beneficiation, the basic tenet is the same. That where foreign companies are looking to exploit local resources and opportunities, then “local” people and the local economy should benefit from these investments through:
- ownership and operation of assets in the sector;
- increased employment in the sector;
- transfer of skills and technology; and
- the manufacturing and production of materials and parts to be used in the sector (rather than being imported) and development and diversification of the manufacturing sector.
The final jigsaw in local content and the holy grail for a country is the ability to process the sector's output prior to export through, for example, the establishment of refineries, petrochemical industry, and the production of fertilizers.
For those in power, creating an environment whereby investors procure more services, labour and materials from local businesses which creates employment and wealth in a country is often a vote winner.
Local content and CSR
Whilst there may have been initial resistance in both Nigeria and Ghana to their respective LCRs, most companies have adapted or will adapt to these sorts of changes. Often LCRs sit quite well (in broad terms) with the corporate social responsibility (CSR) policies of the international companies involved in the oil and gas sectors. These CSR policies usually have sections dedicated to promoting local participation.
So LCRs can form the framework around which these CSR policies have to be implemented. The trick for governments in passing and implementing LCRs is to promote local content but not make LCRs so draconian that it stifles investment. Most investors now accept that LCRs are part of the landscape in the oil and gas sectors across the globe and are focused on complying with the LCRs and limiting any negative effects this compliance can have on their business.
Local content in Nigeria
The Nigerian Oil and Gas Industry Content Development Act 2010 aims to increase indigenous participation in the oil and gas industry through:
- requiring minimum thresholds for the use of local services and materials;
- requiring preference for Nigerian companies; and
- promoting transfer of technology and skills to Nigerian staff and labour in the industry.
For example the Act requires:
- “Nigerian independent operators” to be given first consideration in the award of oil blocks, oil field licenses, oil lifting licenses and all projects for which a contract is to be awarded in the Nigerian oil and gas industry; and
- “Nigerian indigenous service companies” be given exclusive consideration for contracts and services works on land and swamp operating areas in Nigeria if they can demonstrate ownership of equipment, Nigerian personnel and capacity.
Local content in Ghana
Ghana recently passed the Petroleum (Local Content and Local Participation) Regulation 2013. This has its aim of achieving 90% local participation in all aspects of the oil and gas value chain by 2020. This is a high benchmark. Is this an example of LCR setting targets which are too ambitious? Will it stifle foreign investment in the oil and gas sector in Ghana?
Other significant provisions of the Regulation include:
- indigenous companies will be given first preference in the granting of petroleum agreements/licenses;
- requirement for at least a 5% participating interest by an indigenous Ghanaian company in a petroleum agreement/license which interest is not transferable to a non-indigenous Ghanaian company;
- foreign companies who want to do business in the oil and gas sector in Ghana are required to incorporate a joint venture with a local partner who must hold at least 10% of the equity; and
- preference must be given to indigenous Ghanaian companies in awarding contracts for goods and services, provided that their bid does not exceed the lowest bid received by more than 10%.
The meaning of indigenous
What's in a word? Indigenous seems to mean different things in different jurisdictions. In Ghana an indigenous company is one incorporated in Ghana with Ghanaian citizens:
- owning at least 51% of the shares;
- filling at least 80% of its executive and senior management positions;
- filling 100% of other positions.
This required employment levels may be difficult to achieve – at least in the nascent stages of the oil and gas sector in Ghana where there is a gap in local skills and knowledge.
This can be contrasted to Nigeria, which does not require particular employment levels to constitute an indigenous company. The Nigerian LCR defines an indigenous company as a Nigerian company with not less than 51% equity shares owned by Nigerians.
Whatever the criteria is, structures are often put in place that comply with the these percentage rules (e.g. by splitting legal and economic ownership of shares) in spirit if not in reality.
A key to the success of LCRs is the manner in which they are regulated and implemented. This is often done through a regulatory body set up by the LCRs (e.g. the Nigerian Content Monitoring Board (NCMB) and the Local Content Committee in Ghana). These bodies often have powers to:
- pass regulations and procedures for the implementation of the LCR; and
- approve local content plans which operators are required to submit to the regulator.
The regulator's interpretation and enforcement of the LCRs is therefore critical to how LCRs are implemented in practice.
From an industry perspective, regulators should be independent (speaking of independence, see recent news on suspension of Lamido Sanusi) and comply with the key principles of good regulation. That is to say that regulators should:
- ensure that enforcement and implementation is PROPORTIONAL;
- be ACCOUNTABLE;
- be CONSISTENT in the enforcement of the regulations;
- be public and TRANSPARENT and give timely reasons for their decisions whilst keeping things simple, open and user-friendly; and be TARGETTED and focused on the relevant issues and not encroach into areas which are not part of their regulatory ambit.
That's PACTT as my acronym for good regulation! PACTT is important because most LCRs have various concepts which are open to interpretation. For example the obligation to:
- provide “full and fair” opportunity to Nigerian goods and services;
- give “first consideration” to Nigerian goods and services;
- implement a bidding process for the acquisition of goods and services to “give preference” to indigenous Ghanaian companies.
As local content develops, it makes sense for the regulator to enforce the provisions of the LCRs more strictly as compared to the early years. Good regulation can make the difference between LCRs being successful or not. Regulatory uncertainty and delays will stifle growth as both local and international companies will not be able to plan investments properly.
Be green and come with “clean hands”
So you want to be a local content partner? Most IOCs and international oil and gas services companies have strict requirements on who they will partner with. These requirements range from compliance with safety and environmental standards to requirements for their partners not to be politically connected/exposed or have any hint of being involved in bribery and corruption. This is because of these companies own internal requirements;
- obligations to comply with laws and regulations in their home countries (e.g. Foreign Corrupt Practices Act in the US and Bribery Act in the UK); and
- the impact any “bribery/impropriety” scandal can have from a public relations and share price (in the case of listed companies) perspective.
In particular, potential local partners are often the subject of rigorous due diligence not only on themselves but also their business associates. Being a member of TRACE International and having gone through its anti-bribery and corruption course can also be a pre-requisite for an international oil and gas company taking on a local partner. So make sure you have no “skeletons in your cupboard” if you want to be the local partner and get on the local content train.
Fines and imprisonment!
LCRs are here to stay and non-compliance can have legal and political consequences. Significantly in Ghana, acting as a “front” to achieve local content status can result in a fine or imprisonment. Query whether splitting legal and economic ownership of shares to achieve the 51% requirements would be a “front” in breach of this requirement.
In addition, breach of various other local content requirements can result in a fine equal to 5% of the value of the proceeds from the relevant petroleum activity up to a maximum of USD 5 million.
Ignore LCRs at your peril
In 2011, the Niger Delta Indigenous Movement for Radical Change warned Shell Development to either encourage local investors or move out of the oil rich region and warned of civil protests and other actions if Shell failed to act.
In February 2014, Lagos Deep Offshore Logistics (LADOL), an indigenous oil servicing company in Nigeria, obtained an injunction in Lagos, restraining Samsung Heavy Industries, Total Upstream Nigeria Limited and NCMB over allegations that LADOL had been excluded from the execution of the local component of the $3.8 billion Egina Floating Production Storage Offshore (FPSO) vessel. The FPSO is meant to be deployed at Total's $15 billion Egina deep-water development. LADOL is claiming that a significant proportion of the steel fabrication and the integration of the FPSO topsides were meant to be carried out at its yard in the LADOL Free Zone in Lagos. LADOL is also seeking the disqualification of Samsung from bidding for or participating in any capacity whatsoever in any projects, operations, contracts or subcontracts in the Nigerian oil and gas sector. Effectively using the Nigerian Oil and Gas Industry Content Development Act 2010 to back the claim.
The lessons from the above is that, all parties working in the oil and gas sectors need to be mindful of the provisions of LCRs not only in their commercial dealings but also in their interaction with local communities. As a result of this, many companies are now employing teams to ensure compliance by themselves and their suppliers/partners of the relevant LCRs.
But does it work?
The general consensus is that the LCR in Nigeria has been successful in achieving its objectives of getting greater local participation in the oil and gas sector and has contributed to the creation of indigenous oil and gas companies such as Seplat, Shoreline, Afren etc. NCMB reported that Nigeria has saved capital flight of about $380 billion and a job loss of 2 million in the oil and gas sector as a result of its LCR. The impact in Ghana remains to be seen but its early days.
This article was first published in Financial Nigeria magazine, March 2014 edition.