Introduction
Local content regulations have increasingly become a
significant aspect of the petroleum sectors of some African states, including
the emerging petroleum states. The rationale for this is the underlying belief
that local content policies are crucial for the development of the local
economy of the petroleum state and a critical tool in achieving technological
development. To some extent, this belief is justified, and this justification
arises from the fact that at different times, various countries have attempted
local content policies in some sectors of their economy with the sole aim of
increasing local capacity in such target sectors. For instance, India had
attempted local content in her automobile sector, the United States of America
had attempted local content in her tobacco sector, China and Canada had
attempted local content in her renewable sector, Japan had attempted local
content in her distilling sector, to mention but a few.
In the early days, local content and local
participation took the draconian approach of nationalisation of foreign oil
companies, which took place mostly after the establishment of the Organisation
of Petroleum Exporting Countries (OPEC) in 1960. According to Professor Yinka
Omorogbe,[1]
“the primary reason for the creation of these companies [2] is
invariably the same as what led to the creation of Statoil and BNOC; to advance
and promote state policy, mainly in these instances by effecting state
participation in the oil industry, promoting investment in the oil sector, and
encouraging exploration”.[3] In
recent years however, a more liberal approach has been attempted. Laws,
regulations and policies have been put in place to ensure that developing local
economies, stimulating industrial development, increasing local capability,
building a skilled workforce and creating a competitive supplier base – also referred
to as local content – are minimum requirements for doing business with host
countries and national oil companies.[4]
On the surface, it is safe to conclude that the
decision of some African petroleum states to introduce local content
regulations in their petroleum sectors is welcomed, in so far as there is a
well articulated plan towards implementing the local content regulations,
because history has shown us that the success of a local content regulation
depends on its implementation, not just on its enactment.
In this paper, we would look at how local content
regulations have been attempted in Africa’s Petroleum States and their outcome.
The importance of this cannot be overemphasised as it would assist those States
desirous of enacting and reviewing their petroleum sector local content laws,
make balanced decisions based on lessons learnt from the States where local
content has been attempted and implemented.
This paper, in identifying the States where local
content has been attempted restricts itself to only African States. This is
intentional. The reason for this is that African States should be considered in
perspective when assessing the effect of policies especially where such
assessment is intended to be used as a blueprint for other African States. It
is very easy to make reference to Norway as a country where local content has
been successful. It is important however to acknowledge that the prevailing
circumstances in Norway at the time local content was introduced in her
petroleum sector is not the same in most African countries today. As aptly
captured by Per Heum, “an important, if not decisive prerequisite for Norway to
develop offshore oil and has related competence to meet international standards
without prior industrial experience in this area, was that relevant industrial
competence of high international standards was already present in the Norwegian
society”.[5] This
is not the case in Africa where a lot of the petroleum States have little or no
indigenous technological capability directly relevant to the petroleum sector.
Defining Local Content
It is often difficult to define local content. This
is because the term “local content” has its tentacles spread out between two
colossal pillars of human existence – law and economics. The complexity of law
and the broadness of economics ensures that the term carries with it traits of
complexity and broadness which cannot be conveniently sheltered under a finite
umbrella of definition. However, for the purpose of convenience, local content
has been defined as “the activities of the actors in a country’s petroleum
sector carried out in every chain of petroleum operations that is channelled
towards achieving effective and reasonable local participation in the petroleum
industry of a country”.[6] In
simple terms, local content means the use of local personnel, goods and
services in petroleum operations.
Establishing the
importance of local content
The question has often always been asked if local
content policies are really important or necessary to achieving development of
the local economy. It is submitted that local content is a potent tool for
local development. This is a knowledge that seems to have gotten quite
notorious and has necessitated their adoption by States seeking to develop
their country or a sector of the country. For instance, in 2009, the Province
of Ontario in Canada introduced local content requirements for her renewable
energy sector. The Government of Ontario enacted the Green
Energy and Green Economy Act, 2009, which, inter alia, added Section 25.35 to the Electricity
Act, 1998,
providing the legal basis for the Feed-in
Tariff Programme which stipulated mandatory domestic content requirement which
contractors must comply with to win a contract from the Ontario Power
Authority. Also, in 1997, India introduced local content policies into her
automobile sector through Public
Notice No. 60 ((PN)/97-02) of the Indian Ministry of Commerce. The notice
stipulated local content requirements that must be adhered to by companies
operating in the automobile sector, including requirement to establish
production facilities in India, to bring in a specified minimum of foreign
equity, and an indigenization of components up to a specified minimum.
Similarly, in August 1993, the United States enacted the 1993 Budget Act which
included the Agricultural Reconciliation Act of 1993 containing, in Section
1106, four measures concerning tobacco, one of which is the Domestic Marketing
Assessment which mandated local content in the manufacture of tobacco. China
also has strong local content laws and policies in place. For instance, Article
10 of the Government Procurement Law 2002 makes it mandatory for the Chinese
government to patronise domestic goods and services unless they are not
available in China, or where it is not commercially viable to purchase them in
China or the items meant to be procured are to be utilised abroad. [7]These
are just a few instances out of so many.
The reason for this is quite simple. Local content
are seen as protectionist measures, and part of a broader category of policy
interventions referred to as Productive Development Policies (PDPs).[8]
According to a World Bank study,[9]
PDPs could be justified in order to promote market diversification, correct
market failures, and promote employment and other social benefits.[10]
Various ways in which local content regulations have
been attempted
Local content regulations have been attempted in
various forms conveniently discussed under the following headings:
i.
Form of
regulation
ii.
Orientation of regulation
iii.
Administration
a.
Form of regulation
There are two forms which a local content regulation
could take. It could take the form of a stand-alone regulation, in which case
the local content provisions are contained in a separate piece of legislation that
exclusively provides for local content, or it could take the form of an
incorporated regulation, in which case the local content provisions are not
contained in a separate piece of regulation but are incorporated into existing
laws and policies.
Countries with
stand-alone local content laws and regulations
i.
Angola
Angola, as stated earlier on, has different laws
regulating local content. First is Order 127/03 of 25 November which provides
the general regulatory framework for hiring of services and goods from National
companies by companies in the oil industry. It sets out the conditions for the
hiring of foreign contractors by oil companies operating in the Angolan
petroleum industry. Second is Decree No. 48/06 of 1 September, which lays down
the rules and procedures governing public tenders within the field of petroleum
operations. Third is Decree-Law No. 17/09 of 26 June, also referred to as the
Angolanisation Decree. This law defines the rules and procedures to be followed
in recruitment, integration, training, development of Angolan personnel and the
hiring of foreign personnel for the execution of oil operations.
ii.
Ghana
Ghana’s local content regulation was passed into law
on 19th November, 2013 and seeks to inter alia develop local capability in all aspects of the oil and
gas value chain through education, skills and expertise development, transfer
of technology and know-how and an active research and development portfolio.
Ambitiously, it also seeks to achieve 90 percent local content and local
participation in all aspects of oil and gas industry value chain within a
decade. It applies to all activities related to the exploration, development
and production of petroleum, engaged within or outside Ghana.[11]
It requires companies to give preference to indigenous Ghanaian companies in
the award of contracts for supply of goods and services.[12]
It also requires them to submit a local content plan, which is a plan detailing
compliance with local content requirements as relate to employment and training
of Ghanaians and patronage of local goods and services. The Minister for Energy
and Petroleum is to determine the fiscal incentives that would be given to
companies that comply with the local content obligations.[13]
Regulation 46 establishes different penalties for non compliance, which ranges
from imprisonment to payment of fines.
iii.
Nigeria
The Nigerian Oil and Gas Industry Content
Development Act was signed into law on the 22nd of April 2010, thus
formally establishing the local content regime which had been in existence in
the industry for close to a decade earlier in the form of Directives issued by
the Nigerian Content Division in the Nigerian National Petroleum Corporation.
The purpose of the Act is to provide for the development of Nigerian content in
the Nigerian oil and gas industry.[14]
The Act establishes the Nigerian Content Development and Monitoring Board as
the regulator of local content in the industry. It fixes the minimum Nigerian
content that would be contained in any project to be executed in the Nigerian
oil and gas industry, which are elaborately listed in the Schedule to the Act.
The Act imposes a number of obligations on operators[15]
including the obligation to submit a Nigerian Content Plan, obligations to
train and employ Nigerians, to develop research and development, to transfer
technology and to patronise local suppliers of goods and services. It also
establishes the Nigerian Content Development Fund into which would be paid the
sum of one percent of every contract awarded to any operator in the upstream
sector. Fiscal incentives for compliance are to be determined by the Minister
of Petroleum Resources, while the penalty for non-compliance is a fine of five
percent of the project sum for each project in which the offence is committed,
or in extreme cases, outright cancellation of the project.[16]
Countries with
incorporated local content regimes
Countries in this group do not have distinct local
content laws or regulations. They include:
i.
Uganda
Uganda’s local content regime is governed by
National Oil and Gas Policy approved in February 2008, the Petroleum
(Exploration, Development and Production) Act, 2013 as well as its Petroleum
Sharing Agreements. I am aware that the country has reached an advanced stage
in the process of creating a separate local content law. Together, these
various documents impose local content obligations on the licensee, its
contractors and subcontractors, including the obligation to use Ugandan goods
and services, the obligation to train and employ Angolans and the obligation to
transfer technology.
ii.
Tanzania
Tanzania also has a National Gas Policy which sets
local content targets, and a 2013 Model Petroleum Sharing Agreement which
contains quite elaborate local content provisions. Like most local content
provisions, it places obligations on contractors to purchase Tanzanian goods
and services, train and employ Tanzanians, and ensure that all tenders are
advertised.
iii.
Liberia
Liberia’s National Petroleum Policy imposes on the
Liberian government the duty to develop a local content strategy that would
strengthen and protect local businesses, as well as develop a competent
Liberian workforce. The country is still working on a Petroleum Law which would
replace the 2002 Petroleum Law. It is not certain yet if these strategies to be
developed by the government would be contained in the Petroleum Act or in a
separate piece of local content legislation.
iv.
Kenya
The principal instruments that establish local
content in the Kenyan petroleum sector are the Petroleum (Exploration and
Production) Act (CAP 308) Laws of Kenya, 1986 (Revised 2012) and the Model
Production Sharing Contract. Beyond imposing the usual employment, training and
local patronage obligations, the Petroleum law also establishes a Training Fund
into which contractors shall pay a training contribution for the purpose of
training Kenyan nationals in petroleum operations.
v.
Mozambique
Mozambique’s local content provisions are contained
in the Petroleum Law No. 21/2014. The law requires petroleum exploration
companies to ensure they train and employ Mozambican nationals, and also ensure
goods are purchased through a public tender published in major newspapers in
circulation in the country as well as on their websites. Interestingly, the Law
introduces a novel local content obligation which requires all oil and gas
companies operating in the country to be registered on the Mozambican Stock
Exchange.[17]
It also contains elaborate provisions on host community content by requiring
that in considering to employ Mozambicans, inhabitants of the host community be
given preference. It also requires that the host communities be first consulted
and their authorization obtained before the commencement of petroleum
activities.[18]
There is also the Decree Law for Offshore Areas 1 and 4, published on 2nd
December, 2014 (Decree Law No. 2/2014). This Decree Law which provides a clear
and comprehensive legal framework for the development of offshore areas,
clarifies some of the local content provisions contained in the 2014 Petroleum
Law.
vi.
Egypt
Egypt’s local content policies are incorporated into
her Model Agreements, which establishes and imposes the duty to employ
Egyptians and patronise Egyptian goods and services.
b.
Orientation of Regulation
Local content orientation is used to refer to eh
direction of a country’s local content policy with respect to what it
ultimately seeks to achieve or what it places emphasis on. Three different
types of local content orientation have been identified.[19]
They are: the control orientation, the participatory orientation and the value
orientation.
i. i. Control Orientation
A local content
policy would be said to have a control orientation when it emphasises, promotes
and sets out to achieve local ownership and control over oil and gas facilities
and operations. In such instances, it places local ownership of the companies
or equipments that is to be used for operations in the country’s oil and gas
sector as a condition for participating in activities in the country’s the oil
and gas sector. For instance, the Nigerian local content law adopts a control
orientation. It gives first, and in other instances, exclusive consideration to
companies and equipments owned by Nigerians.[20]
Also, the Marine Vessels and Vendor Categorization Scheme put in place by the
Nigerian Content Development and Monitoring Board, pursuant to the local
content law, seeks to ensure the utilization of indigenous owned marine vessels
in the Nigerian oil and gas industry.
ii.
Participatory Orientation
The participatory
orientation advocates or emphasises on co-operation between local and foreign
firms in form of encouraging joint venture and partnership agreements, or
Special Purpose Vehicles in which the local firms have participatory interest.
This orientation is seen as a viable tool for technology transfer as it would
enable the locals participating with the foreigners to learn from them in the
conduct of operations. An example of this orientation is seen in Ghana’s
Petroleum (Local Content and Local Participation) Regulations 2013. The
Regulation mandates local partnership but not local ownership. Regulation 4(2)
for instance requires foreign companies who seek to be qualified to enter into
petroleum agreements or obtain a petroleum licence to have at least five
percent of their equity participation owned by an indigenous Ghanaian company.
Also, Regulation 4(6) requires non-indigenous Ghanaian companies or foreign
companies intending to provide goods or services to a contractor, licensee, the
corporation or other allied entity within the country to incorporate a joint
venture company with an indigenous Ghanaian company and afford that indigenous
Ghanaian company an equity participation of at least 10 percent.
iii.
Value Orientation
Unlike the
control and participatory orientation, the value orientation only emphasises
value added irrespective of where the value is from. It does not mandate local
ownership or local participation, and is more interested in value adding to the
local sector by the entities, whether foreign or local, operating in its oil
and gas sector. The closest to this orientation in Africa is the Angolan local
content regime. One characteristic of the Angolan local content regime is that
it isn’t established by a single piece of regulation, but by different pieces
of regulations. One of such is Order 127/03 of 25 November.[21]
The Order aims to establish the basic rules to be complied with by companies in
the oil sector in the contracting of national companies for the supply of goods
and services. With respect to the items that come under the competitive scheme
as created by Article 2(3), the value orientation applies.[22]
The competitive scheme includes all oil activities (offshore and onshore) which
require a high level of capital in the oil industry and in-depth specialist
know-how. Under this scheme, there are no requirements as to ownership or
participation, as any company registered in Angola can bid under this category.
Also, the Mozambican Petroleum Law No. 21/2014 seems
to adopt this orientation when it provided that Mozambican or foreign legal
entities that are registered in Mozambique and who demonstrate that they have
the technical capability and adequate financial resources for the effective
conduct of petroleum operations may be holders of the right to carry out
petroleum operations.[23]
c.
Administration
Administration of local content laws has taken
different forms in different countries. In some countries, separate and
independent agencies are responsible for the administration and enforcement of local
content provisions. In Ghana for instance, it is the Local Content Committee,
while in Nigeria it is the Nigerian Content Development Monitoring Board. In
other countries, there is no separate body responsible for the administration
and enforcement of local content provisions as same responsibilities are vested
in existing government agencies like the Ministries of Petroleum or even the
National Oil Company.
Outcomes of the
various local content attempts
A close appraisal of the various countries considered
herein would disclose a number of outcomes arising from the way they have
attempted local content.
Countries with stand-alone local content laws have
achieved higher local content than those with incorporated local content laws
A consideration of Angola and Nigeria, the two
countries whose stand alone legislations have been in existence for a longer
while verifies this position. In Nigeria
for instance, the introduction of the local content law significantly
transformed the industry from a foreign dominated industry to one where
indigenous companies are now significant players, with an admirable 90% local
content achieved in engineering and 50% local content achieved in fabrication.
This is a sharp contrast to the pre-local content law regime, where though
there were incorporated local content provisions existing at the time, they
didn’t have the capacity to achieve local content.[24]
In Angola, while it cannot be said that Angola has achieved high local content
in terms of indigenous participation in upstream activities, Angola has
recorded a high percentage of local integration into positions in the oil
companies through its employment maxim ‘Angolanisation’. To the extent that
employment of locals is an integral constituent of local content, it can be said
that in this regard, Angola has achieved a greater percentage of local content
than it did before the enactment of the Decree-Law No. 17/09 of 26 June.
On the other side of the divide, while it can be
said that almost all of the countries with incorporated local content
regulations are relatively new and even hopeful entrants into the oil and gas league,
and as such it would be premature to evaluate the extent of their local content
success vis-Ã -vis their existing local content framework, same cannot be said
of Egypt. Egypt is in the family of old oil sisters in Africa. In a recent
discussion with one of the representatives of the Egyptian oil company, he
decried the absence of a local content law in Egypt and how the absence of same
has stifled the attainment of local content in the Egyptian oil sector. The
Egyptian oil sector is still foreign dominated despite the many years of oil
production and the existing local content requirements in her Model Agreements.
A stand-alone local content law would have significantly made a difference as
the Nigerian case shows.
Countries that have a separate body for
administering and enforcing local content have fared better than those that
don’t
Of all the countries considered herein, it is only
Nigeria and Ghana that have a separate body for administering and enforcing
local content. The success recorded by Nigeria thus far in her local content
drive is largely because there is a separate body created by the local content
law to carry out that responsibility. This affords the body the chance to
specialise and focus on local content thereby developing the required
competence needed to achieve the country’s local content aspirations. In Ghana,
the Local Content Committee is the body given the responsibility to implement
the local content law. However, the Local Content Committee is established by
the Petroleum Commission pursuant to the powers of the Commission to establish
committees as contained in section 8(1)
and (2) of the Petroleum Commission Act, 2011 Act 821. Acknowledging the
importance of an independent and autonomous body in actualising local content aspirations,
the African Centre for Energy and Policy in a report released in December 2014[25]
complained that the powers of the Local Content Committee has been subsumed
into the wider function of the Petroleum Commission. According to the report,
this threatens the achievement of the core objectives and targets set out in
the local content law. The report recommended that the Local Content Committee
be given complete autonomy in order to be able to effectively implement the
local content law without interference.[26]
With respect to Angola, the country does not have a separate body charged with
the duty to monitor and enforce local content. This explains why the country
hasn’t fared as well as Nigeria in her local content aspirations.
The outcome of
an orientation is relative. Countries with an established petroleum sector
would cope with a control orientation, while countries with a relatively new
petroleum sector would fare better with a participatory orientation
Nigeria adopts the control orientation. This can be
tolerated as a result of the country’s position as a top oil producer. Its
petroleum sector is well established and it has what it takes to call the
shots. This orientation is working for the country, and a lot of indigenous
companies have become owners of oil and gas companies and facilities. The same
orientation won’t work for Ghana or any of the other emerging petroleum States,
rather a participatory orientation would. Accordingly, the participatory
orientation adopted by these countries has continued to ensure foreign
investments in their petroleum sectors in areas of exploration and subsequent
production.
A local content
regime with fiscal incentives earns more compliance
The outcome of a survey conducted based on the
question “what would be the best method of encouraging companies to develop
local content” showed that a regulatory
system that offered fiscal incentives for compliance with local content
requirements would be the most effective to actualise local content
aspirations. The mandatory and voluntary approach came 2nd and 3rd
respectively and lagged far behind the fiscal incentive approach.
Conclusion
There is no doubt that local content has come to
stay in Africa because it has been proven to be a tool for economic and
technological development. Of course, no legal system is perfect. Lessons would
continue to be learnt from existing local content laws and regulations in order
to make future improvements. It is hoped that the issues considered herein
would assist emerging African petroleum States in drafting their own local
content laws. It is also hoped that the issues would be of assistance to
countries desirous of reviewing their local content laws and strategies. In the
end, our greatest responsibility is to see that we have in our countries local
content laws and policies that balance the tripartite interest of the
government, the oil companies and the locals.
[1] Y. Omorogbe The Oil & Gas Industry: Exploration and Production Contracts (Florence
& Lambard, 2008).
[2] i.e. the National Oil Companies (NOCs) which
were a nationalisation of the foreign oil companies.
[3] Ibid, p.28.
[4] See ‘Developing Local Content Programs –
Insights from Accenture for global players to achieve high performance in
today’s competitive energy landscape’, http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_Energy_Developing_Local_Content_Programs_EiaB5.pdf,
last accessed 11th November, 2014.
[5] Per Heum, Local Content Development – Experiences from Oil and Gas activities in
Norway, SNF Project No. 1285, Institute for Research in Economics and
Business Administration Bergen, February 2008, retrieved 27th
August, 2013.
[6] Harrison Declan, ‘Local Content in Africa’s Petroleum States: Law and Policy’, Hybrid
Consults, 2014, Lagos, Nigeria, p. 6.
[7] See Peter Kayode Oniemola ‘Legal Response to Support Renewable Energy
in China’, Journal of Energy and Natural Resources Law, Vol 32 No 2 May
2014, p. 179.
[8]
See Tordo, Silvana, Michael Warner, Osmel E.
Manzano, and Yahya Anouti. 2013. Local Content Policies in the Oil and Gas Sector. World Bank Study. Washington, DC: World
Bank. doi:10.1596/978-0-8213-9931-6. License: Creative Commons Attribution CC
BY 3.0
[9] Ibid.
[10] Ibid.
[11] See Regulation 4.
[12] See Regulation 11.
[13] Regulation 25(4).
[14] This is as stated in the preamble to the
Act.
[15] The meaning of “operator” under the Act is
quite different from its meaning in the petroleum industry. By the definition
under the Act, the term incorporates every entity carrying out operations connected
directly or indirectly with the petroleum operations, by whatever nomenclature
they are known, including project promoters, alliance partners, Nigerian
indigenous service companies, Nigerian indigenous companies, International Oil
Company, foreign company, Nigerian company, etc. See section 106.
[16] See section 68 of the Act.
[17] See Article 13 of Law No. 21/2014.
[18] Article 11 of Law No. 21/2014.
[19] See ibid.
[20] See for instance sections 3 of the Nigerian
Oil and Gas Industry Content Act, 2010. The section provides thus: 3(1) –
“Nigerian independent operators shall be given first consideration in the award
of oil blocks, oil field licences, oil lifting licences and in all projects for
which contract is to be awarded in the Nigerian oil and gas industry subject to
the fulfilment of such conditions as may be specified by the Minister”. 3(2) –
“There shall be exclusive consideration to Nigerian indigenous service
companies which demonstrate ownership of equipment, Nigerian personnel and
capacity to execute such work to bid on land and swamp operating areas of the
Nigerian oil and gas industry for contracts and services contained in the
Schedule to this Act”.
[21] Quotations on this Decree are from a copy of
the law translated into English by Miranda, Correia, Amendoeira &
Associados, Sociedade de Advogados.
[22] Article 2 of the Order establishes three
different schemes. Article 2(1) establishes the exclusive compliance scheme,
under which only companies owned by Angolans can be given a business opportunity;
and Article 2(2) establishes the semi-compliance scheme, under which only
foreign companies that participate with Angolan companies can be given a
business opportunity.
[23] See Article 26(1) of Law No. 21/2014.
[24] Before the Nigerian Content Act was enacted,
local content was being driven by the Nigerian Content Unit (NCU) in the
Department of Petroleum Resources, and latter by the Nigerian Content Division
(NCD) in the Nigerian National Petroleum Corporation (NNPC). The NCD issued
local content policies, but these were flagrantly violated by the oil
companies. See H. Declan, Local Content
in Africa’s Petroleum States: Law and Policy, Chapter 4. See also J.S.
Ovadia Indigenization versus Domiciliation: A Historical Approach to National
Content in Nigeria’s Oil and Gas Industry, in T.Falola & J. Achberger
(Eds) ‘The Political Economy of Development and Underdevelopment in Africa’,
Routledge, New York, 2013.
[25] ‘Local Content Development in the Petroleum
Upstream sector – A Comparative Analysis of Ghana, Nigeria and Angola’. Africa
Centre for Energy Policy, December, 2014.
[26] See page 22 of the Report.
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