Is regulation the right recipe to enforce local content
Some LCRs are extremely detailed. The Nigerian Content Development Bill (2003) reinforced targets of O&G activity localization with specific national content (NC) indicators. For example, the NC indicator for man hours in the FEED stage of a large capital project should reach 90 percent. For the tonnage, umbilicals should reach an NC indicator of 60 percent. In the Nigerian Local Content Act (2010), nationalization targets reach 90 percent for management positions, and 100 percent for junior and intermediate positions. In Brazil, regulation is so sophisticated that it requires a dedicated public administration unit to monitor its enforcement due to all the red tape involved.
Such stringent policies have delivered mixed results. In some cases, implementation has been successful and local content policies have allowed financing education programs and infrastructure, with local suppliers benefiting from national preference. However, in cases in which local content targets have been impossible to reach due to inadequate local business ecosystems or educational systems, such regulations have generated severe unintended consequences.
Angola, for example, went through a dramatic salary inflation in the mid-1990s when quotas for nationals were abruptly introduced without the local education system having been prepared (+4,145 percent in 1996, +220 percent in 1997 2 ). In Nigeria, local content raised inflation costs sharply. As an illustration, an analysis undertaken by an oilfield service company on the cost of subsea wells pointed out 60 percent inflation due to local content regulation 3 . (See Figure 1.) Another illustration is the time to tendering, which has doubled on average in countries such as Angola and Nigeria because of lengthy local content procedures. Quota policies without adequate pre-existing networks of suppliers often lead to the syndrome of the middleman, in which local importers purchase goods and services from foreign suppliers and resell them locally at higher prices. In such situations, local content regulation becomes a hidden generator of inflation for the benefit of only a few importers.
Beyond the difficulty in aligning with quotas, companies also struggle to obtain and report local content data from their own suppliers. Indeed, under most regulations, operators are accountable for reporting accurate data based on information provided by their tier-one suppliers. Not to mention the variety of interpretation that the definition of “local company” can have. In some countries, a company is local if the equity owned by domestic stakeholders exceeds 51 percent of the capital (Kenya, Nigeria). In other countries, “local” companies are simply those incorporated in the country (Brazil). Often, the definition is missing or so vague that uncertainty prevails.
It is worthwhile to note that the most stringent and complex regulations have been passed in countries with limited economic ecosystems, by governments facing huge poverty challenges, among populations with little experience of large capital projects or understanding of the oil and gas value chain. When facing western oil giants, their first reaction is often defensive and politically driven by systematic mistrust in oil operators’ intent. What results is a lack of cooperation from day one in trying to reach balanced local content policies between stakeholders – government and international oil companies
(IOCs) – that do not trust each other.
This initial bias against oil and gas companies is due to the historical reputation of O&G companies plundering natural resources without leaving anything positive and lasting behind, an image largely amplified and tarnished by populist local press. The defensive reaction of lawmakers is sometimes the result of ideological rhetoric against former colonial powers. Finally, the influence of the Norwegian “oil diplomacy” in a number of oil-rich developing economies is not neutral. A number of local content policies have been prepared by Norwegian advisors (most of whom are university professors or former public servants, not executives from Statoil) with a somewhat naïve belief that the same policy approaches which worked in Norway could also work in Sub Saharan Africa, where nothing is similar except the presence of oil.