Local Content Oil and Gas Law in Africa

Lessons from Nigeria and Beyond

Pereowei Subai

• Publisher: Routledge
• Year: 2019
• ISBN:
  9781351068062
• Edition: 1
• Topic: Law
• Subtopic: Law Theory & Practice
• Index: Law

Examining local content law and policy in the oil and gas industry, this book uses Nigeria as a primary case study, comparing its approach to countries such as Brazil and Norway which have also adopted local content laws in relation to their gas and oil industries. In considering various aspects of local content law and policy as they apply to the oil and gas industry, the book examines the factors behind the formulation of local content policies by petroleum producing states, and the various strategies they have employed to implement them. It analyses arguments against local content requirements from the perspective of international trade and investment law, and from liberal market economic theorists, who argue against its overall usefulness. The book highlights salient aspects of the oil and gas industry such as regulation, national oil companies, treatment of minorities, and policy formulation and implementation.

1 Local content in petroleum producing countries: strategies and approaches

1.1 Background to the rise of local content requirements in petroleum producing countries

Petroleum resources are usually trapped in underground or sea basins.¹ For purposes of administration and extraction, these basins are usually divided into geographic parcels or blocks. Rights or licenses to explore for and develop these blocks are customarily awarded by petroleum producing countries (PPCs) to exploration and production (E&P) firms or national oil companies (NOCs), either discretionarily or after a competitive bidding process.² The firms to which these E&P rights are awarded may be referred to as ‘concessionaires’ or, in some cases, as operators or contractors.³ These concessionaires do not work alone, though. From the time they commence exploration activities to the point of extraction, production, transportation, and eventual abandonment of the concession, concessionaires would require the assistance of a number of service and supply firms which would operate as sub-contractors, under their co-ordination.⁴

In other words, while established concessionaires such as Shell or Mobil will focus on their core mandate of oil and gas production, they will decidedly require ‘external support’ in areas such as fabrication, construction, and engineering, from supply and service firms. This will require them to make major investment and operational decisions in the award of contracts to these supply and service firms. For example, in order to explore an oil block, a concessionaire may require external support in gathering seismic data, as well as in drilling, and field appraisals. Offshore firms may also require floating, production, storage and offloading facilities (FPSOs) as well as external support in the laying of underground cables and pipelines.⁵ Field operation and production services, such as well services, facilities hire, and operations and maintenance, may also be required from third parties.⁶ Other ancillary services required by concessionaires in their operations, include: banking, law, insurance, catering, and transportation. These contracts usually run into billions of dollars in payment for services rendered as well as for equipment that would have to be manufactured or acquired.⁷ It is therefore understandable that a PPC which desires to optimize the benefits associated with its petroleum industry would seek to ensure that a large chunk of these contracts are executed locally by indigenous firms.

The irony is that international oil companies (IOCs), particularly firms such as Shell, Total, Mobil, Chevron, etc., which are domiciled mainly in America and Europe, have dominated the petroleum industries of a number of PPCs. In Africa, for example, they dominate extensively in countries such as Angola, Nigeria, Equatorial Guinea, and Gabon. In addition to this, the most critical supplies and services required in upstream projects are outsourced to European- and American-based service and supply firms such as Schlumberger, Wilbros, Transocean, Baker Huges, Weatherford International, and Halliburton.⁸ The fall out of the dominance of foreign-based firms in a number of developing PPCs is a low indigenous participation by the citizens of those countries. For many of these PPCs, colonial, financial, and technological factors, as will be shown to be present, are largely responsible for weak local content in their petroleum industries.

Perhaps the first is the colonial factor, which shaped the interactions between most PPCs and IOCs prior to their being independent after the Second World War. Virtually every PPC in Africa, for example, was at one time or the other colonised by a European power. Nigeria and Sudan were colonised by Britain; Angola and Equatorial Guinea by Portugal; Algeria and Gabon by France, etc. And while PPCs in the Middle East were not colonised like African countries, a number of them were actually governed under a mandate system supervised by the League of Nations following the defeat of the Ottomans in the First World War.⁹ Colonial dominance in Africa saw the petroleum resources of colonial territories subjected to extensive and exploitative control by the colonial powers, primarily Britain, Portugal, and France. These countries gave to IOCs which were owned or managed by their nationals or subjects, extensive dominance over the natural resources of their colonies with scant regard for the interests of these territories. Because these firms were largely regarded as extensions of their home states, they became heir, naturally perhaps, to concessions whose terms bordered on near ownership of any petroleum they discovered in these colonial territories. For example, a concession granted to Shell-BP by the British government in 1937 covered the whole Nigerian land mass. Besides, the concession was for an unduly long period of time.¹⁰ These privileges gave Shell-BP a stronghold over the NPI and ensured that Nigeria, which became politically independent in 1960, remained ‘tied’ to the yoke of arrangements designed to secure British dominance over its petroleum industry, post-independence.¹¹ In a similar vein, Algeria, which fought a bitter liberation war with its French masters, obtained its independence only after it made significant concessions designed to safeguard the interests of French petroleum firms,¹² which were already operating in Algeria at the time.¹³

The second factor is that PPCs lacked, and still lack, the financial wherewithal to fund major petroleum-related projects as well as the technological capacity to explore, extract, and process their petroleum deposits.¹⁴ This explained why for a time, many were contented with corporate taxes and minor social initiatives of foreign firms. The issue was that IOCs, and their supply and service counterparts operating in Africa and elsewhere, understandably repatriated most of their profits away from the countries in which they operate, to their home countries. This meant that the outsourcing of critical jobs in the petroleum industry resulted in the loss of revenues to host PPCs. For instance, it has been estimated that of the $18 billion spent annually for petroleum contracts in Nigeria, less than 20 percent is retained internally.¹⁵ Moreover, it has been reported that the country lost $380 billion to capital flight due to its weak local content in the petroleum industry from 1956 to 2006, besides losing the opportunity to create two million jobs.¹⁶ Besides loss of revenues, it deprived local African industries of opportunities to develop capacity and expertise through hands-on experience, as well as loss of opportunities for technology transfer.

But the dominance of IOCs was not to go unchallenged forever. The end of the Second World War saw a rise in the clamour for greater control of natural resources by developing countries. Newly independent African and Middle Eastern countries teamed up with some South American countries to clamour for permanent sovereignty over their natural resources. They were given impetus by the passage of some United Nations resolutions, notably 1803 of 1962 and 2158 of 1966.¹⁷ Led by Venezuela, Iran, Iraq, Kuwait, and Saudi Arabia, which together controlled (and still control) most of the world’s petroleum deposits, they arranged themselves under the banner of the Organisation of Petroleum Exporting Countries (OPEC) which was formed in 1960.

OPEC’s primary aim was the protection of its members’ interests and for control of the petroleum industry.¹⁸ It canvassed for better terms of engagement with IOCs and pushed for the stabilisation of petroleum prices.¹⁹ The rise of OPEC resulted in the decline of the control of IOCs over the global petroleum industry. Emboldened by its formation, some PPCs expropriated the assets of IOCs operating in their countries,²⁰ while others renegotiated downwards the terms under which they operated or increased the royalties and taxes payable by IOCs.²¹ In pursuance to OPEC’s directives, a number of these countries began to directly participate in their petroleum industries via NOCs.²²

The growth of NOCs effectually challenged the dominance of IOCs significantly and gave PPCs greater say in their petroleum industries all over the world. Today, NOCs control over 75 percent of the world’s petroleum resources, although most continue to partner with IOCs.²³ In spite of these developments, the outsourcing of crucial jobs has continued in developing PPCs all over the world. In essence, foreign service and supply firms continue to play dominant roles in the petroleum industries of quite a number of PPCs all over the world, with attendant loss of revenues and opportunities for development of technical capacity as well as jobs.

Keen to arrest the outsourcing of critically important jobs in their petroleum industries, some PPCs have resorted to local content development through the formulation of local content policies. Initially, these local content policies were confined to the creation of backward linkages through the supply to local economies via technology transfer, job creation, and the increase of local ownership. Recently, several PPCs have increasingly sought to create forward linkages such as processing petroleum products prior to export as well.²⁴ To that end, a number of them have established refineries and petrochemical industries, and ventured into the production of fertilizers. Still, some other local content policies are now formulated with the aim of diversifying the petroleum industry beyond the oil and gas sector value chain.²⁵

Lately, some African PPCs such as Nigeria, Angola, and Equatorial Guinea have resorted to imposing more deliberate local content requirements (LCRs) on petroleum firms operating in their terrains in order to encourage local participation. To that end they have formulated policies, devised initiatives, or required firms to comply with minimum local content either via contract or legislation. New entrants to the petroleum industry such as Ghana, Tanzania, Uganda, and Kenya have also welcomed the local content movement. These countries have either formulated LCRs, or are in the process of doing so.²⁶ But what is local content, and what form does it assume?

Simply put, it is conditioning the grant of benefits on the use of local goods and/or services in producing goods and/or services in a particular country or locality.²⁷ It ranges from deliberate government patronage of local industries in the award of procurement contracts, to requiring firms operating in a particular country or locality to utilise specified percentages of local goods and services in their operations. Furthermore, local content development may entail the design of government processes in order to discourage the influx of foreign firms, in a bid to promote domestic industries. In relation to the petroleum industry, the term is all-encompassing, gathering to itself the extent to which human and material resources, as well as services provided in a PPC, are employed and utilised in a country’s petroleum industry.²⁸ As such, a PPC may require concessionaires or service firms operating in its domain, to attain minimum local content targets, which may be measured as a percentage of investment, hours worked, equipment supplied, or jobs created in the industry. A PPC may, in addition, require foreign-based firms operating on its turf to establish subsidiaries locally, or to engage in local production of the goods they require for their operations in that country.

Local content policies as designed by PPCs may be implemented through government-related initiatives, or local requirements contained in legislations or contracts. Some LCRs are comprehensive, embracing material aspects of the petroleum industry with a view to opti...