![Local Content Opportunities In Oil & Gas Industry By Emeka Ene](http://mmsplusng.com/wp-content/uploads/2015/04/emeka_ene.jpg)
I will be speaking on what I have called – “Khaki-no-be-Leda” which in Nigerian english means, “Khaki is not leather”, and roughly translates to – “things are not as they seem”. I intend to address as briefly as possible, three core areas of interest or opportunity
The jist of the Nigeria Content law as it relates to the oil service industry
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What and where are these opportunities and
What business models are out there to take advantage of these opportunities?
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The Nigerian Content Law – The jist of the matter
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The Nigeria Content Law is so pivotal to capturing value from the rise in oil prices this past decade driven by the “insatiable” growth of the economies of China and India. If this global trend continues, I predict that over the next decade, measurable GDP growth in our economy will be directly attributed to this law provided its implementation is pursued with the same vigor and consistency that led to its passing. Unfortunately, our policy makers and industry operators have historically not fully appreciated this phenomenon and rather focused on the outcome of the process (Selling oil, collecting and sharing the cash, royalties etc) rather than the process itself (working at various levels to stimulate activities that produce the oil). Oil and its close cousin gas are no longer commodity products but represent key strategic enablers for Nation building.
From the perspective of Nigerian oil service companies, the local content law seeks to leverage existing and future investment in the oil industry in a legislative effort to stimulate the growth of Nigerian or Nigeria located enterprise. The “rough and tumble” idea is to give Nigerian companies contracts and they (the contractors) will in-turn employ more Nigerians to do these jobs; creating increased local economic activity and ultimately impacting our GDP. The law breaks down service-by-service what proportion of work must be domesticated or reserved 100% for Nigerian companies. It prescribes capacity limits, regulates the recruitment into key technical and executive positions and even provides for capacity-building funding through the new regulator, the Nigeria Content Management Board. Obviously, such a bold initiative has created sharply divided opinions in the public domain. It’s proponents insist that Nigeria’s economy will be completely transformed when the impact of over 15 billion dollars industry-spend is invested annually through the local Nigerian economy as envisaged by the law; while opposing voices contend that the law will stifle foreign investment, enthrone mediocrity and poor service quality and escalate costs etc. The latter thinking is driven by a mindset that Nigerians simply do not have the capacity to deliver “techno-centric” services. “Period”.
Both sides to the debate, including players in the oil service industry, recognize that regardless of its flaws; the Nigeria content law translates into serious business for the savvy and tenacious entrepreneur.
So, show me the money!
Before we launch into money matters, let us examine the local content opportunity-space from a macro-economic and a micro-economic perspective; If we are to believe CIA’s Factbook and World Bank data, Nigeria has a large working population of 53% and current GDP growth is 5.3% (our central bank puts it at 7.4%) with the economy based largely on the oil and gas industry.
However, Nigeria’s GDP contribution from domestic entrepreneurship in the oil industry is a paltry 5% (from oil services) compared with 54% (from ICT) in India.
This suggests that Nigeria is virgin territory for local content and it is obvious that successful implementation of the new law can and should rapidly grow Nigeria’s GDP contribution from our Oil and Gas sector over the long term.
The micro-economic view indicates that at current activity levels the industry invests over 5 billion dollars annually in direct local-content service opportunities. This amount was determined at pre-local content law levels.
For example, a single EPIC contract for the design and fabrication of topsides required for an FPSO or oil production facility domesticated in Nigeria, can generate over five million manhours of engineering design work, employ over 300 electrical, mechanical and facilities engineers for over three years, deploy over 3000 skilled technicians, coded welders and fitters, not counting the hundreds of artisans, safety personnel, catering people and support staff gainfully employed. A contract like this will create a noticeable socio-economic impact at the grassroots level, while generating value-added business for the investing parties. Such opportunities represent only the tip of the iceberg.
With these perspectives in mind, we do not need rocket-science to establish that Nigeria is virgin territory for opportunities in the oil industry. It may sound counter-intuitive, but the law actually represents an economic game-changer not designed to create barriers-to-entry or stifle competition or Foreign investment as some “nay-sayers” have suggested.
Several opportunities exist in drilling services, Engineering design, Studies and consulting which are mostly 100% domesticated. Heavy ticket contracts such as EPC and fabrication, pipeline construction etc have now opened up to Nigerian players on a level playing field. Natural barriers to entry such as funding, track record, access to technology will continue to play an important role in trimming down the field of contenders.
Value Preposition Models for successfully operating in the Nigerian Oil Service Industry
I will now briefly describe six strategic models available to existing or new entrants to the Nigerian oil service market. The list not exhaustive and folks have also successfully entered the market with other non-traditional innovative business models not covered in this presentation. These models include;
These models include;
– Think within the box
– Think outside the Box
– “Gemba”
– Collateral Social responsibility (CSR) model
– The BRIC local content Model
– “The friend of my friend is my friend”
The first model which I have termed “Team think” or “Thinking within the box”; is the concept describing the strategy of service companies coming together to build temporary or ongoing economics of scale targeting larger projects in our industry. For example, EPC contracts involving multiple fabrication shops and engineering contractors are a perfect example where this can be effectively implemented. A number of PETAN member companies have executed large EPC or Integrated contracts for Major operators and marginal field companies by adopting this “consortium” strategy;
The second model, “Think outside the box” is simply a partnering model that seeks to link up with a strategic partner to facilitate entry to the industry. It is key to think through this model and structure a strategic fit when seeking out partners from across the globe. You must strive to add value in the equation otherwise you end up as a briefcase agent often sidestepped in the process.
“Gemba” is the next key strategic model for harnessing local content. Gemba is the Japanese word, which translates roughly as “the core of the matter”. It drives focus, which in turn gives rise to the development of key competencies. This concept has been successfully implemented in Malaysia. Stay within your area of focus to identify opportunities for providing services to the industry. The tendency to branch out and bid for every inconceivable tender published simply does not work. Gemba strategies are best suited for consulting work, which require relatively low levels of capital and are focused on knowledge.
The fourth model is the Collateral Social responsibility (CSR) model, which is tied to Education and technical skills development opportunities, which arise out of CSR initiatives by operating companies. This model ties into bundles of training and skills development modules usually executed in parallel with technical or engineering or drilling activity at the community level. Such contracts are usually reserved for contractors from the catchment areas; however, it could provide a good springboard to enter the industry particularly if you are from the Niger Delta area.
The fifth model is the BRIC model: (or the Chinese or Russian or Indian or Malaysian model) for selective local entrepreneurial empowerment. This is essentially driven by Government policy and involves the identification of certain areas of the industry in which competencies must be developed. Financial and human resources particularly in capacity building are targeted at developing these “local” strategic competences. Again, this concept does not stifle competition nor does it limit other Nigerian companies from competing for work. Rather it creates a level playing field for every one to participate as entrepreneurs in the oil industry. Strategies like this one grew companies such as Daewoo and Hyundai in South Korea, Tata and Reliance groups in India. The model is best suited for existing major niche players in the industry who have made their mark working with major operating companies. PETAN companies fall into this category and should be supported through deliberate government policy and industry initiatives.
The sixth strategic model and by no means the least important is simple – “The friend of my friend is my friend”; this revolves around leveraging your network within the industry to partner horizontally adding incremental value as opportunities arise. It is this network of “connections” within the context of an enabling business environment that companies can take advantage of. Professionals in the Diaspora can easily project their expertise into the Nigerian oil industry by partnering this way. This network model operating in local oil economies helped develop oil cities such as Houston, Aberdeen, Stavanger, Kuala Lumpur and Baku.
Operating in the Nigerian Oil Service Industry
I need to sound a note of warning here, that the Nigerian oil industry as attractive as it sounds, can be a treacherous mine field! Operating conditions can be tough, rough and unforgiving with an unpredictability enough to reduce a grown man to tears.
Key challenges remain the absence of access to long term, low cost capital to service providers, poor infrastructure, corruption and general insecurity.
Moreover, industry fundamentals and the following structural barriers need to be tackled if the Nigerian content act is going to be successful in transforming our economy;
– Contract processing and approval cycles need to be reduced with the industry wide adoption and deployment of contracting and bidding “vehicles” such as NIPEX (Nigeria Petroleum Exchange), and the proposed Local Content Services Portal.
– Contract tenures should be increased from the current 2+1 contract cycles to 5 and 10 year durations which encourage long term Project and Contract Financing,
– There needs to be a more permanent solution to peace in the Niger Delta,
– Investment in long-term technical and professional training and capacity building for the industry and regulators,
– Adoption of common and enforceable engineering standards across the industry,
– Implementation of a simplified tax regime and fiscal structure as envisaged in the Petroleum Industry bill.
– Access to Capital and Tax incentives by Nigerian Oil Service companies.
For example, the U.S. tax code allows domestic US companies to defer taxes on “unrepatriated income.” In other words, revenue that companies earn through their overseas subsidiaries goes untaxed by the US tax authorities.
In Norway, a government-sponsored initiative called OG21—Oil and Gas for the 21st Century— has created a partnership between the Government, the oil companies, the supply industry, the research institutions, and academia. The OG21, was established to assure that Norway’s hydrocarbon reserves will last profitably for the next 100 years. The companies have worked together to develop, test, and implement new technological solutions in various oil industry projects. The result has been significant value creation for the Norwegian society.
Governments can create an environment that nurtures cluster development, as has happened in Aberdeen through the activities of government-supported bodies such as Scottish Enterprise. With North Sea oil in decline, both the Scots and Norwegians want to protect and expand their existing business ecosystems. Scottish Enterprise is expanding its geographic (export) of oilfield expertise and building capabilities in adjacent industries. Similar initiatives can be successfully applied in cities like Yenegoa and Port Harcourt.
I also want to throw out a challenge to independent and homegrown operators in the industry who mostly prefer to stay below the “radar” of local content support ” To whom much has been forgiven, should forgive little”. It is ironic that some benefactors of local content E&P farm-out programs often do not support the engagement of local technical service providers.
A link to local content support and historical compliance should be embedded in future mature field farm-out programs such as envisaged in the Petroleum industry bill.
In concluding, it is a well-known adage that “charity begins at home.” It is no surprise then some oil majors and many Nigerian entrepreneurs operating in Nigeria for decades, have remained committed and continue to strive to grow their businesses within a turbulent environment. They have consistently remained the best promoters of Nigerian expertise and ingenuity in the oil and gas industry. A good number of these companies have established a level of credibility and professionalism consistent with international industry standards and expectations. They offer services ranging from drilling and completion services, reservoir studies, environmental services, marine services, data acquisition services and engineering design, training and fabrication services etc.
According to a Goldman-Sachs study first published in 2003, Nigeria has the potential to emerge as the 11th largest global economy in GDP terms by 2050, ahead of countries like France, South Korea, Canada and Italy!
Imagine a city like Yenegoa in the year 2050. Remember that it started with the local content law.
The Chinese say that “the best time to plant a tree was twenty years ago, but the next best time is now”. However, in Nigeria, “Khaki no be letha” ; All that glitters is not gold!
Success in the Nigerian oil industry requires savvy, tenacity, a ‘shant-gree” (Shall-not-give-up) attitude and above all an unshakable belief in the potential of the divinely endowed country called Nigeria.
I thank you all for listening
God Bless you.