FUELING INDIGENOUS OIL COMPANIES

Nigeria 2015 | ENERGY | FOCUS: THE LOCAL CONTENT ACT

After years of letting the IOCs run the show in the petroleum industry, the Nigerian Federal Government passed a bill in 2010 that opened up the sector to indigenous participation and value retention.

Endowed with an abundance of oil and gas reserves, oil was only discovered in Nigeria in 1956 by Shell-BP after an exploration phase of 50 years. In the decades after this discovery, Nigeria's Petroleum Industry was heavily dominated by the IOCs, which controlled both the onshore and offshore segments of the industry in Africa's largest oil exporting country, much to the detriment of local Nigerian firms.

Since petroleum production and export account for roughly 90% of Nigeria's export revenue and 14% of GDP, with a daily production of 2.26 million barrels as of August 2014, the government was keen to find a way to promote indigenous participation in the sector as a way of building local capacity with the ultimate aim of ending the outflow of Nigerian oil revenue to other parts of the world.

Bent on retaining (part of) the oil revenues, the government designed a legislative policy that would turn out to be a watershed in Nigeria's petroleum sector, drastically changing the nation's oil and gas landscape. Called the Nigerian Oil and Gas Industry Content Development Act 2010, but more popularly known as the Local Content Act, the Act's main goal is the systematic development of capacity and capabilities through the deliberate utilization of Nigerian human and material resources, and services in the Nigerian oil and gas Industry. The Act specifies that “Nigerian independent operators will be given first consideration in tenders of upstream contracts and Nigerian service companies will be given exclusive consideration for contracts and services." Furthermore, multinational companies using their Nigerian subsidiaries need to prove that at least 50% of the equipment used in projects in Nigeria is owned by these subsidiaries.

The Act has resulted in increased participation by indigenous companies, as data demonstrates that these companies controlled over 30% of activities in Nigeria's upstream sector in 2013, as opposed to 10% in 2010. According to Executive Secretary Ernest Nwapa of the Nigerian Content Development and Monitoring Board, the government entity responsible for overseeing the implementation of the Act, “More Nigerians are playing critical roles in the leadership of Nigeria's Oil and Gas industry."

Recent developments in the sector have been playing into the hands of the Local Content promoters, as IOCs have increasingly been divesting onshore and shallow-water offshore assets away from Nigeria as a result of the possible implementation of the Petroleum Industry Bill, which would bear negative fiscal consequences for IOCs. Another major issue is the ongoing oil theft that costs Nigeria and the oil companies approximately $1 billion every month. This divestment naturally results in more room for indigenous companies to operate in, and local operators have been acquiring stakes in oil blocks that are being sold by the IOCs. Tunde Afolabi, Managing Director & CEO of Amni International Petroleum Development Company, points out that “As indigenous players, we bring a different perspective to operating in these environments than the IOCs' current way of doing business. There are opportunities for people who know the terrain to make a significant impact." It remains to be seen, however, if the time is ripe for indigenous companies to fill the big shoes of the IOCs.

According to Nwapa, the future for the oil and gas sector is bright. “We are confident of increasing the level of indigenous participation. Now, we have to get back to grassroots. Our focus is to translate what is being done by Nigerian companies to more directly and positively impact the Nigerian people", he says. For Nwapa and the NCDMB, the next step is to reach out to other sectors of the economy and show the beneficial effects of the Local Content Act with the aim of replicating the model that has invigorated indigenous participation in Nigeria's oil and gas sector.