Local Content: How Nigeria loses $8 billion dollars annually to capital
flight
With an estimated annual spending of about $10 billion going into the
Nigerian oil and gas industry, and still fast rising, only about 20 per cent
or $2 billion of that amount is domiciled in Nigeria. About $8 billion of
this amount goes out of the economy in things that could ordinarily be done
locally.
And with proven oil reserve of about 35 billion barrels and 187 trillion
standard cubic feet of gas (scfg) Nigeria is termed in some quarters as “a
gas province with a drop of oil”. It is, therefore, no surprise that Nigeria
has the biggest investment in Natural Liquefied Gas (NLG) in the world.
But, that has made little impact in adding to Nigeria’s Gross Domestic
Product (GDP). This is because, most of the engineering, technical, supplies
and other skilled aspects of the business are either done abroad or carried
out in-country by expatriates and their firms.
Apart from creating thousands of jobs through direct and indirect
engagements of Nigerians if Nigeria acquires the capacity to carry out these
jobs, a value chain in economic activities would lead to more prosperity.
It is with this in mind that the Federal Government initiated the Nigerian
Content Initiative. The target of government is to meet 45 per cent of the
local content of the production of oil and gas by 2006 and 70 per cent by
2010 in which, apart from employment, the same proportion of investment and
sundry economic activities will be domesticated.
To show its resolve, the Presidency, six years ago, directed the Nigerian
National Petroleum Corporation (NNPC) to put in place a comprehensive, and
workable Nigerian Content realization strategy in the industry.
The NNPC actually complied, creating a Nigerian Content Division (NCD), but
its effectiveness is still a matter of controversy in the industry.
Insurance and shipping companies are worried that almost all the insurance
businesses and oil lifting are carried out by foreign firms with little or
no input from Nigerians. Also, the National Assembly is on the last stage of
passing the Nigerian Content Bill into an Act - if the utterances of some
members of the law-making body is anything to go by.
This is because it has been said that the Presidency hid the Bill for nearly
four years before presenting it to the National Assembly in 2004, and that
the National Assembly is under pressure by some forces to frustrate its
hearing and passage.
The Bill when passed, will lead to the establishment of the Nigerian Content
Development Agency to be run by the Nigerian Content Management Board that
will oversee the running and affairs of Nigerian Content “police.”
But that is for the future.
Meanwhile, as the NNPC and other related arms of government are busy
applauding themselves and ascribing high scores over their contribution to
the realization of the Nigerian Content dream, some indigenous industry
participants have lambasted their claims.
For example, the Petroleum Technology Association of Nigeria (PETAN), an
association of Nigerian Indigenous Technical Oilfield service companies in
the upstream and downstream sectors of the Oil industry, formed to bring
together Nigerian oil and gas entrepreneurs, have come short of laughing off
such claims.
Contrary to claims by government that Nigeria has now attained 45 per cent
Nigerian Content, PETAN said not even by 2010, can Nigeria even attain 30
per cent Local Content if things stand the way they are today.
PETAN, with total employment figure of about 20,000 Nigerians, also said
that the crisis in the Niger-Delta will persist unless government mandates
oil firms to broaden indigenous participation in oil jobs, establish decent
educational facilities, build infrastructure and improve on the well-being
of host communities.
Speaking to Energy Correspondents in a Press conference in Abuja recently,
the Chairman of PETAN (made up of 28 indigenous firms in the oil and gas
industry), Mr. Shawley Coker, said that multinational oil companies are
trying to stiffen the conditions for getting oil contracts and employment
opportunities to the extent that the present local content in the industry
is just about 15 per cent, and not the figure touted by government
officials.
On contracts, he said that since the issue of Nigerian Content came to the
fore, multi-national oil firms have come up with frustrating terms before
engaging Nigerian servicing companies.
According to him, oil majors have now adapted a term called off-contract, in
which one is placed under a contract, but with no job to execute. He
explained that if one is placed under an off-contract, one is certified as a
contractor of an oil major. In this case, he may rush to his bank for a
credit line, to import equipment, recruit and train personnel, but may end
up getting a job or two in a year, or may never get any at the end.
He lamented that it is always not the business of the oil companies how
indigenous firms handle the liabilities that always ensued. “They are
forcing us out of business indirectly,” he said.
According to him, it was not the practice before the issue of local content
came up. “There is no way we can hit even 30 per cent Nigerian Content by
2010, given the present foundation,” he said.
“How can you achieve 50 per cent local content by 2010, when you have not
built the foundation to receive 30 per cent of it?” he asked. “How do you
want to achieve 70 per cent?”, he asked further, “you should have started
yesterday, that is 10 years ago, to get to 70 per cent by 2010. Right now as
I speak, Nigeria is still not preparing for it. That is why we are
addressing you today; to tell government not to say what it is not acting
on.”
Coker, who is the Chief Executive Officer (CEO) of Ciscon Nigeria Limited,
noted that most of the contracts in the upstream oil sector come with some
research contract, but that because no Nigerian university is equipped to
carry out such research at the moment, that portion of the contract is
always done overseas.
“Which of the Nigerian Polytechnics today can boast of a decent welding
diploma that can fetch its graduates jobs in the oil industry? None!”, he
said. “So there are lots of things that government needs to do before
talking about 70 per cent Local Content, he said.
But, the Executive Secretary of the Petroleum Technological Development Fund
(PTDF), Kabir Abdullfatah Mohammed at the just-concluded workshop by
stakeholders on local content in Abuja, asserted that the issue is being
tackled headlong.
In a paper presented at the Nigerian Content Development Stakeholders'
Workshop on Harnessing Local Competencies and Capabilities for National
Economic Development, organized by the House of Representatives Committee on
Petroleum Resources (Upstream) last week, Mohammed said that the PTDF has a
wholesome solution to the manpower issue.
He said that the PTDF has carried out an audit of the manpower need of the
Nigerian oil and gas industry and confirmed that about 5 million man-hours
would be needed in 2010 to meet the 70 per cent Local Content. According to
him, that translates to about 2,600 well trained engineers in all the
engineering aspects of the business.
He declared: “The training of 2,600 Nigerian engineers has commenced with
the use of HYSYS (software for process simulation) and PDMS (Plant Design
and Management Systems) and other software packages to enable them acquire
the skills to participate effectively in Front-End Engineering Designs
(FEED) and Detailed Engineering Design (DEED).
Another 250 engineers have been trained in the pilot phase in the use of
HYSYS and PDMS sponsored by NNPC while 2,350 engineers are being trained in
the main phase sponsored by PTDF. The main phase commenced with the training
in PDMS and the use of HYSYS in June 2007, while training in the other
engineering software packages will continue shortly. In effect, 1,009
engineers have been trained under this scheme in the other identified
software packages.
“For the advancement of the skills of Nigerian engineers, a structured
framework has been put in place to ensure continuous deployment of the
skills that have been acquired by trainees. Of this framework, engineering
design companies were enjoined to create openings for attachment opportunity
to use the acquired skills pending availability of live projects, without
which the skills would be lost,” he said.
Whatever the arguments are, it has become a phenomenal scandal for example,
that today, we still have to import 80 per cent of refined petroleum
products, mainly Premium Motor Spirit (PMS), in which the Petroleum Products
Pricing Regulatory Authority (PPPRA) is asking for not less than N300
billion to subsidize its import, after spending N275 billion on the products
last year.
This is simply because successive governments have refused to improve on the
capacity of localized refining, which could have not only seen to the saving
of these huge amount of money, but would have created hundreds of
petrochemical and aggro-allied industries for a country where most of its
educated, able-bodied men and women are idle. It is, therefore, imperative
that all stakeholders cooperate for the realization of the Nigerian Content
initiative.
Oil & Gas underwriting skills Mr. Prosper Okpue, Managing Director/CEO,
Insurance Brokers of Nigeria, in a paper titled: Matters Arising in Nigerian
Energy Insurance Market, Challenges and Recommendations, said: “If we must
be sincere to ourselves, our local insurance industry has not developed any
mechanism to evolve appropriate local content initiatives that will create
value for their shareholders other than the excitement that the 45 per cent
local content target for 2007 will bring dollar windfall to their balance
sheet without consideration of the real potential catastrophic claims of
energy exploration and exploitation operations.”
Some players had criticized his position on local content on the grounds
that his argument that the policy is unworkable the way insurers conceive,
is based on his company. Insurance Brokers of Nigeria has its hands in the
oil sector and would not want to yield grounds to competitors. However,
there are many who agree with Okpue’s position that absence of skills for
this specialized area is lacking and if Nigerian underwriters must
participate, they must move beyond raising capital and acquire the necessary
skills. But till date, Okpue pointed out that most insurers’ and brokers’
involvement in the national oil company, NNPC, is largely based on political
connections. In conclusion, he advised that local content be interpreted
carefully to ensure that the market does not sink.
Financial capacity: Already, most companies have realized that N3 billion
and N5 billion represent a small percentage in dollar terms of what is
actually required to write a significant proportion of the oil risks. There
is increasing move to raise additional capital. Even with the overall market
capital base, much needs to be done. For instance, a typical oil production
platform may be valued at US$500 million. Labor, removal of debris and other
standby charges, control of well insurance and third party liabilities, may
push the limit/sum insured to US$900 million. Thus, the industry requires
both good capital as well as the skill, plus the law to guide operations in
the energy sector.
Government directive on implementation of insurance local content: In
pursuit of local content, the Insurance Act states: “Henceforth, all
projects and operations as relates to the insurance of risk in the oil and
gas industry, must involve Nigerian
Insurers/Reinsurers/Brokers/Adjusters/Surveyors and demonstrate strict
compliance with the provisions in the Insurance Act 2003 as well as
Guidelines for the insurance of risk associated with oil and gas operations
in Nigeria and submit a certificate of compliance issued by NAICOM to
Nigerian Content Division as part of the technical evaluation requirements
for insurance or reinsurance contracts.”
This, in Insurance circles, is often referred to as “Directive No 21" of the
Federal Government which is the summary of the major component of the local
content policy with regards to the insurance industry. Following this
directive is an additional empowerment for the industry regulator, National
Insurance Commission (NAICOM) to guide the orderly transaction of business
in this area. It says, “NAICOM-verified gross underwriting capacity of
Nigerian registered insurance companies must be fully utilized to the
satisfaction of NAICOM to maximize Nigerian Content before ceding risk
offshore.”
It is imperative to note that the last recapitalization announced by
government was in pursuance of this local content policy and to help
insurance companies raise the needed capital to do business in this area.
Initially, much resistance by oil multinationals to local underwriting of
their operations stems from inadequate capital as well as lack of skill in
oil and gas underwriting.
NAICOM guidelines Now, realizing that the first hurdle towards maximum local
participation in oil and gas, that is, low capital, was going to be bridged
at the end of the recapitalization exercise, the immediate past NAICOM
administration drew up a guideline to protect local players, small and big,
from being shortchanged in the emerging oil and gas underwriting. The NAICOM
guideline had as its overall framework, the monitoring of offshore insurance
as provided in section 72 of Insurance Act 2003.
Thus, item 6 of the guideline stipulates “for efficient monitoring and
adherence to these guidelines, each company (oil and gas and all
energy-related companies) shall make available to the Nigerian Content
Division (NCD) of NNPC (where applicable), DPR (where applicable) NAPIMS
(where applicable) and NAICOM, full details relating to any insurance
package being proposed together with the identities of proposed co-insurers
not later than 90 days prior to the anticipated attachment of such policies.
Failure to adhere to the guidelines by insurers is punishable with
sanctions. The same applies to oil and gas companies. However, the situation
today is that no company has been punished for ceding risks abroad neither
has NAICOM sanctioned any oil company for taking its insurance overseas.
The target has been put at 45 per cent by the end of 2006 and 70 per cent by
the end of 2010. For the insurance component of the local content policy,
the record of attainment is less than 10 per cent. Some factors frustrating
the realization of the local content initiative in the insurance sub-sector
include bickering among players, absence of legal framework on local content
as well as under-capacity in technical skills and capital.
NASS urged to pass the Nigerian Content Bill Concerned with the low
involvement of Nigerians in the booming oil trade, the National Assembly
last week organized a stakeholders' forum. At the end of the workshop, the
leadership of the National Assembly was again urged to ensure a fast, smooth
and successful passage of the Nigerian Content Development Bill that has
been pending at the Assembly as a panacea to the full implementation of the
Federal Government initiative at bringing about an active participation of
local industries in the oil and gas sector. This was the position of
delegates at the just-concluded Nigerian Content Development Stakeholders'
Workshop organized by the House of Representatives Committee on Upstream
Petroleum in Abuja.
Some of the delegates posited that it is the non-passage of the bill that
has hindered the growth and development of the Nigerian Content Initiative
of the Federal Government.
Former Governor of Akwa Ibom State, Obong Victor Attah, who was a delegate,
stated that the major problem facing the development of that laudable
initiative of the Federal Government is the lack of punitive measures for
erring International Oil Companies (IOCs) and the seeming unwillingness on
the part of government to enforce measures even when put in place.
He cited the example of flare down order issued by the Federal Government to
all oil Exploration and Production (E&P) companies operating in the country,
which was thwarted by the operators in the face of government's willingness
to continue shifting the dates, an action which according to him, suits the
operators' exploitative measures.
He submitted that the National Assembly should as a matter of urgency,
ensure the quick passage of the bill while government should see to its
implementation once passed into law.
Also speaking, Dr.Henry Okolo, the vice-chairman of Doorman Long, stated
that the oil and gas industry runs approximately three times the capital
budget of the Federal Government. He stated that indigenous companies need
assurances and a guaranteed work-load to keep them in business for a long
time. Okolo referred to the oil industry as the bastion of colonialism in
Nigeria as the IOCs seem ready to go to any length to continue dominating
the highly lucrative but controversial sector. He said:
“The current National Assembly should pass the Nigerian Content Bill which
has been there since 2005 no matter the defects. There are always
opportunities to effect amendments on any law later on in the case of any
defects. He stated that the scope of Nigerian content should be expanded to
fully cover the entire upstream and downstream sectors of the oil and gas
industry as well as other sectors such as power.
This is in view of the fact that the petroleum industry has the impetus to
grow other sectors such as agriculture, general manufacturing, and defense,”
he said.
Speaking on behalf of the IOCs, the Managing Director of Shell Producing
Development Company (SPDC), Mr. Mutiu Sunmonu stated that the IOCs should
have a higher referral limit of more than the N10 million which it currently
operates upon. Sunmonu explained that Shell was proposing N65 million as
this is aimed at fast- tracking the projects' tenure and it will enable the
avoidance of the conventional bottle-necks attached to getting approval for
projects.
Specifically, Sunmonu stated that it does not help the nation in any way if
heavy bureaucracies are attached to projects which are only within the
limits of N10 million, while other countries are getting bigger projects
executed with less stress attached “and in view of this, we are proposing
that the limits be increased to N65 million," he enthused.
Local content is not a Nigeria invention, it obtains in all oil- producing
countries.
When oil was discovered in large quantities in Norway in 1969, it lacked
technical know-how and capital to develop the industry. Despite widespread
skepticism, it decided to develop its local oil and gas industry via a
three-pronged strategy:
*Focus on building human capacities through training and establishment of
the Statoil School of Business and Technology (Statoil is Norway’s State Oil
Company). The school’s development activities cover about 900 programs and
it had trained over 75,000 students by 2003.
*Enablement of traditional maritime, mining and processing companies to cope
with the transformation into oil and gas sector suppliers. Supplier
Development Program.
Statoil went into link-ups with private companies to develop new products
for which they and Statoil receive royalties. The products were developed by
the private companies, but Statoil defined product requirements, ensured
overall project control, and provided technical skills and advice on the
newly developed products.
The government invested large sums of money in research and development in
oil and gas, infrastructure development projects.
Venezuela Venezuela successfully adopted market-friendly policies to provide
the local industry with the much needed technological strength to become
involved in increasingly sophisticated sectors.
In the mid-1970s, local inputs were only 15 per cent and local technological
skills were weak. Only five local construction firms were capable of
undertaking major assignments. The government embarked on a program of
capacity development through research and development, particularly in
engineering and construction services via the creation in 1976, of the
National Institute of Petroleum Investigation (INTEVEP). Today, INVETEP has
over 184 patents registered to its credit.
A supportive framework was created for engineering and construction firms,
foreign companies were required to collaborate with local suppliers; and
joint ventures between foreign oil field services providers and local
companies were encouraged. However, performance requirements for the
international firms were non-mandatory. Contracting rules were reformed to
introduce project desegregation, whereby tenders for smaller projects could
be won by local contractors. Continuous improvement and quality-control
practices were adopted for all contracts, with one important goal being to
ensure that local companies were able to meet the quality requirements of
international clients.
Thirdly, direct support was given to domestic suppliers of capital goods and
services. Focused programs for enhancing the quality and competitiveness of
small and medium enterprises, including the promotion of exports of capital
goods and services, were undertaken. The government’s program led to
increased participation by local enterprises in the provision of engineering
and construction services to the oil industry.
Nigeria The Nigerian National Oil Corporation (NNOC) was established in
1971, transformed to NNPC in 1977 and was reorganized in 1988 as a
commercial integrated oil company with a mission statement to profitably
explore, develop, produce, process and market crude and refined petroleum
and their by-products and derivatives at internationally competitive prices
both at home and abroad.
Today, it would hardly be an understatement to say that the NNPC has not
accomplished this mission. Its under- performance in the downstream sector,
where it has a virtual monopoly in distribution assets (pipelines and
depots) and refineries, has been a cause of serious national concern due to
negative impact on vital sectors of the national economy.
It’s wholly-owned exploration and production subsidiary, the Nigerian
Petroleum Development Company Limited (NPDC), established in 1988, has
production assets of less than 50,000 barrels a day and even this is in
association with a foreign multinational. Why then has NNPC not been able to
secure achievements comparable to those found elsewhere in the developing
oil-producing countries, as is the case with Petronas in Malaysia, Petrobras
in Brazil, PDVSA in Venezuela or Pemex in Mexico?
Industry experts and other stakeholders attribute NNPC's lack of achievement
and problems to the overarching control of the central government and insist
that only the granting of full autonomy to the corporation will enhance its
competitiveness and efficiency.
