The 2014 draft local content policy published by the Tanzanian Ministry of Energy and Minerals begins with the statement: “Natural gas resource found in Tanzania belongs to the people of the United Republic of Tanzania, and must be managed in a way that benefits the entire Tanzanian society.” Based on the fundamental premise that petroleum resources belong to a nation and its people, it is perfectly reasonable to expect them to be developed for the benefit of the communities of such nations. In reality, the value of petroleum exploration and production is rarely translated into economic and social benefits for indigenous workers and supply industries, even in the most resource-rich African countries. This is particularly the case in emerging frontiers such as East Africa.
While the investment from international oil companies (“IOCs”) through expertise-sharing and finance remains essential to the success of Africa’s oil and gas producing countries, national governments are seeking to maximise social and economic benefits from petroleum extraction activities by overhauling their existing, and often out-dated, petroleum laws and introducing new petroleum legislation. Such legislative overhauls have resulted, in many cases, in an increased focus on local content compliance and related obligations.
The case for local content
Local content carries an expansive meaning, but within the oil and gas industry it is generally recognised as an intervention by a national government aimed at ensuring that the majority of the goods and services required at each stage of the oil and gas value chain are locally supplied. For instance, in the context of indigenous employment, local content policies (“LCPs”) are about far more than securing an immediate increase in the percentage of local employees. Their aim is to compel IOCs to actively engage the local workforce as part of their conduct of petroleum operations, thereby facilitating the transfer of valuable skills and knowledge to the benefit of the indigenous communities as a whole.
There are many valid reasons why countries wish to employ LCPs. A country with a fledgling oil and gas industry will not have the specialised labour sector or pool of expertise required by the industry. To overcome this, IOCs necessarily have to bring in foreign workers and service providers with the relevant skills and knowledge. However, this leads to a vicious cycle where the local labour force is not employed because it does not have the required skills, but it will never be able to gain those required skills without the opportunities to learn on the job. Furthermore, international service providers have existing, well-established relationships with IOCs which makes it easy for them to displace small local firms from the value chain of the oil and gas industry.
This is not an issue that is unique to developing African countries. Both the UK and Norwegian governments took an active role in developing local content in the early days of their respective oil and gas industries. Both countries had highly educated workforces with technical competence in manufacturing, shipbuilding and engineering. What they did not have was a domestic oil and gas industry. The UK government used a number of measures such as discretionary licensing, strict audits of purchases by oil companies to ensure that domestic suppliers were used, transfer of R&D and the encouraging of joint ventures with domestic players. Predominantly through Statoil (the then national oil company), Norway undertook similar initiatives that essentially made it mandatory for IOCs to transfer technology and expertise to their Norwegian counterparts in order to participate in the Norwegian oil and gas industry. Neither the UK nor Norway set out specific employment or local content targets, and both focused on value addition rather than mere local incorporation or local ownership. Local content in the UK is today estimated at around 85% with nearly 100% in post-development operations.
Local content instruments
There are various channels through which national governments set out the guiding principles and objectives of their LCPs.
Primary legislation: Many countries use primary legislation aimed purely at enhancing local content in the oil and gas industry. A prime example of this is Nigeria’s Oil and Gas Industry Content Development Act 2010 (“NCDA”), which applies to all transactions or operations carried out in connection with the Nigerian oil and gas industry, as well as to all operators in the industry. The central aims of the NCDA are described to be:
- developing indigenous skills across the oil and gas value chain;
- promoting indigenous ownership of assets and use of indigenous assets in oil and gas operations;
- enhancing the multiplier effect to promote the establishment of support industries; and
- creating customised training and sustainable employment opportunities.
The NCDA goes on to specify targets and requirements in respect of local content, alongside detailed implementation and monitoring mechanisms to ensure compliance. Nigeria’s long-awaited Petroleum Industry Bill (the implementation date for which remains uncertain) is likely to bring further changes to the laws regarding local content in Nigeria’s oil and gas industry.
Ghana has followed the Nigerian example by codifying its LCP in primary legislation, namely the Petroleum (Local Content and Local Participation) Regulation 2013. The 2013 Regulation is presented in a similar format to that of the NCDA, and it begins by setting out fundamental guiding principles such as enhancing value-addition and job creation through local expertise, goods and services, local capacity development and increasing the capability and international competitiveness of Ghanaian businesses. Specific targets to achieve the guiding principles are then stipulated, followed by establishment of the Local Content Committee to act as a watchdog and oversee the implementation of the 2013 Regulation.
Secondary legislation: Countries like Angola and Mozambique have established their LCPs within broader legislation governing the oil and gas industry. The Petroleum Activities Law of 2004, the key legislation governing Angola’s petroleum sector, imposes an obligation on the Angolan government to “guarantee, promote and encourage investment in the petroleum sector by companies held by Angolan citizens and create the conditions necessary for such purpose” along with an obligation on Sonangol (the national oil company) to cooperate with the government in promoting the “socio-economic development” of the country. The Angolan government has since 2004 approved a number of ministerial orders that impose specific local content obligations on companies carrying out oil and gas activities in the country.
Similarly, the new Mozambican Petroleum Law issued on 18 August 2014 sets out the local content requirements that the government seeks to impose on the oil and gas industry to promote “the involvement of national entrepreneurship in petroleum enterprises” and to reinforce the role of the state and ENH (the national oil company) in the conduct of all petroleum activities. The industry awaits regulations setting out the details of how these wide-ranging policies will actually be implemented.
Upstream agreements: Some countries enshrine their LCP objectives and principles in broad statements of government policy, such as the 2011 report on Enhancing National Participation in the Oil and Gas Industry in Uganda. Such policy statements are combined with agreements such as concessions, leases and production sharing agreements (“PSAs”) which contain the legally binding requirements in respect of local content. Tanzania’s local content obligations are enshrined in its new model PSA and natural gas policy (both of which were published in 2013), and significantly, in the recently published first draft of the “Local Content Policy of Tanzania for Oil and Gas Industry”.
Kenya’s local content laws for the oil and gas industry are currently contained in the Petroleum (Exploration and Production) Act, chapter 308 and its model PSA. Following the examples set by its East African counterparts, the Kenyan Ministry of Energy and Petroleum has issued a 2014 draft National Energy Policy in which it highlights “inadequate manpower, technical capacity and local content in gas exploration and production activities” as key challenges facing the upstream sector, and sets out an implementation plan for the development of an LCP in the medium to long-term (2014-2030).
Local content design
Simply put, local content refers to value-add that is created anywhere in the domestic economy as a result of the actions of an oil and gas company. The terms of the value-add (which generally fall within two broad categories of capacity development and local procurement) vary from country to country, but typically include:
- Employment – minimum targets for the employment of local labour. Angola imposes a requirement for all companies to have a workforce consisting of at least 70% Angolan nationals, and restricts the hiring of foreign workers to circumstances in which no national worker with the equivalent qualifications is available. In Tanzania, where a foreign national is employed, a succession plan to a Tanzanian national must be submitted alongside any work permit application.
- Participation of local and locally-owned entities – local participation is usually expressed as either a preference or a mandatory requirement, and IOCs wishing to undertake petroleum activities in Africa will usually be required to form partnerships with local entities. Foreign companies who wish to do business in Libya are required to enter into a joint venture with a local entity, in which the foreign entity can hold a maximum equity stake of 49%. Similarly, in Uganda, where goods and services required by a contractor or licensee are not available in the country, they will need to be obtained from a company which has entered into a joint venture with a Ugandan company (provided the Ugandan company has an equity stake of at least 48% in the joint venture).
- Incentivising local participation in bidding rounds – local companies (and the IOCs in partnership with them) may receive preferential treatment in bidding rounds. Liberia’s 2014 bid round includes innovative “Local Content Participation” provisions which provide that bidding groups that include a significant West African company or a company operating in the Economic Community of West African States (along with a Liberian partner) will have their bids evaluated with a 20% uplift in their signature bonus proposal.
- Requirement to prioritise local suppliers – preference to be given to the procurement of local goods and services, with the aim of boosting local supply chain development. This requirement is often qualified by a condition that goods and services are of comparable quality and quantity to international materials and services, and that their price does not exceed foreign goods and services by more than 10%. This is the case in countries such as Angola, Mozambique and Kenya (although Kenya does not include reference to a 10% excess). In Nigeria, indigenous service companies must be given exclusive consideration if they can demonstrate the requisite capacity.
- Fiscal incentives – tax incentives may be given to companies establishing facilities to manufacture goods or provide services which would otherwise be imported. The NCDA provides that the oil minister will consult with the relevant arms of government on an appropriate fiscal network and tax incentives in such situations (although this appears to be discretionary as no further detail is provided in the legislation).
- Foreign investment in training programmes – a specified amount of expenditure to be invested in training programmes (which IOCs will often also be required to plan and implement) for local personnel involved with petroleum operations, to increase knowledge and technology transfer at all stages of hydrocarbon extraction. In Angola, companies are required to contribute US$0.15 for every dollar per barrel of oil produced each year towards the training of Angolan personnel, with companies in the exploration stage being obliged to contribute a fixed amount of US$200,000 each year.
- Increasing managerial opportunities for local personnel – a specific percentage of senior managerial positions to be reserved for nationals. In Ghana, for a company to be labelled as indigenous, 80% of its executive and senior management positions must be held by Ghanaian citizens (among other requirements).
Local content implementation
The increase in the rate of enactment of LCPs across Africa is a significant achievement in the campaign for local content, but national governments must overcome a number of hurdles relating to their implementation before the benefits of these policies can be fully realised.
A significant challenge with local content implementation relates to defining precisely what the localization requirements are. For example, Mozambique’s 2014 Petroleum Law currently provides that all “oil and gas companies” must be registered on the Mozambique Stock Exchange. While “oil and gas companies” is not defined, the law goes on to state that only foreign companies registered on the Mozambique Stock Exchange can carry out petroleum operations. “Petroleum operations” in turn is defined very broadly. This has the effect of creating confusion among IOCs currently active in Mozambique as to whether they are “oil and gas companies” for the purposes of the Petroleum Law, and whether they will need to be registered on the Mozambique Stock Exchange irrespective of whether they are carrying out “petroleum operations”.
Local content goals are inherently aspirational. In recognition of the need for substantial capacity building in some African countries, local content obligations are typically qualified by caveats. For example, IOCs are required to prioritise the procurement of local goods and services and the hiring of local service providers, but only to the extent that no better alternatives in terms of price or quality are internationally available. As many LCPs are in the early stages of their inception, the reality is that local capacity is often lacking, and IOCs who are (understandably) unwilling to procure sub-standard materials or hire unqualified personnel are able to easily opt out of their local content obligations. Even Shell (the oldest private sector energy company operating in Nigeria), whilst fully embracing its local content obligations under the NCDA, expressed in a report last year that waivers of local content obligations may continue to be needed from time to time until domestic capacity is in place.
Having an LCP in place is all well and good, but true value-add is impossible without establishing mechanisms for effective monitoring and enforcement. The reason that Nigeria is viewed as a local content success story is that its LCP is backed by the Nigerian Content Development and Monitoring Board (“NCDMB”) which is mandated to oversee, monitor and implement the provisions of the NCDA. The NCDMB has proven that, where necessary, it will wield its power to ensure compliance with the OGICDA. Earlier this year, it banned Hyundai Heavy Industries from participating in Nigeria’s petroleum industry until it started complying with the requirements of the NCDA with regards to the employment of local personnel. Ghana has followed Nigeria’s example in establishing its own “Local Content Committee”, mandated to monitor and coordinate all aspects of the implementation of Ghana’s 2013 Regulation. Tanzania’s 2013 Local Content Policy similarly evinces an intention to establish a “National Local Content Committee” which will be chaired by its Ministry of Petroleum.
Embracing local content
Local content is the right way forward for Africa, and it is here to stay. The importance of ensuring that countries with emerging oil and gas industries are able to efficiently implement an LCP has been globally recognised, with the World Bank making a loan of US$50m at zero interest to Kenya earlier this year to support the Kenyan government’s efforts in building capacity.
Compliance with, and the implementation of, local content is the joint responsibility of IOCs and national governments. Although the main responsibility for compliance necessarily rests with foreign investors, there is clear need for a collaborative effort from all stakeholders involved to achieve local content goals at all levels of an oil and gas project. National governments cannot simply enact an LCP, sit back and leave its implementation to the IOCs. Many LCPs already place an onus on governments to create an enabling environment for local content laws and to play an active role in facilitating the success of local content objectives. This requires ensuring a stable macro-economic environment is in place, for example, through improving public administration procedures and the strengthening of the education sector.
What is clear is that the value-add from local content will not happen overnight. However, the long-term advantages of enhanced local development, alongside the empowerment of a generation to participate directly in their nation’s wealth of resource, are well worth pursuing. The ultimate aim is simple: to ensure that natural resources are not a curse but a blessing, bringing sustainable social and economic benefits within the oil and gas sector and the wider economy.