Nigeria: Local Content Update for the Oil and Gas Industry

The recent requirement for the delivery of operators' reports detailing local content compliance of drilling rigs used in their operations is a timely reminder that Nigeria is looking to enforcement of local content rules put in place back in 2010.

The Nigerian Oil and Gas Industry Content Development Act 2010 (the "Local Content Act") was enacted to enhance local content in Nigeria's developing oil and gas industry. "Nigerian Content" is elaborately described as the "quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the Nigerian oil and gas Industry". Put simply, the main driver is to employ Nigerian skills and resources in local projects, creating jobs and deepening the local supply chain.

The other central aims of the Local Content Act are to:

  • Develop indigenous skills across the oil and gas value chain;
  • Promote indigenous ownership of assets and use of indigenous assets in oil and gas operations;
  • Enhance the multiplier effect to promote the establishment of support industries; and
  • Create customised training and sustainable employment opportunities.

The Local Content Act contains various provisions commonly found in developing-country petroleum sharing contracts, designed largely to ensure that a country's resources provide tangible benefits to the local population, and that projects have a positive and lasting legacy. By way of example, the Local Content Act provides that "Nigerian independent operators shall be given first consideration in the award of oil blocks, oil field licences, oil lifting licences and all projects for which contract is to be awarded in the Nigerian oil and gas industry [subject to conditions specified by the Minister]", and requires that all international or multinational companies working through their Nigerian subsidiaries demonstrate that at least 50% of the equipment deployed for execution of work is owned by the Nigerian subsidiaries.

Responsibility for oversight and enforcement of the Local Content Act rests with the Nigerian Content Development and Monitoring Board (the "NCDMB"), the goals being to ensure continuous and measurable growth of Nigerian content in all oil and gas projects, operations and transactions. In May 2012, the NCDMB highlighted marine vessel utilisation as an example of the success that the Local Content Act had already enjoyed; it estimated that an additional $1.8bn had been retained in the Nigerian economy due to indigenous companies operating certain specialised marine vessels, and that a further $1.5bn could be retained by application to other vessels too.

The recent notice issued by the NCDMB to operators requiring the reporting of Nigerian Content compliance relating to rigs being used in their operations hints that the NCDMB is keen to keep up the momentum, and that enforcement could be on the way. In the notice, the NCDMB stated that it would adopt measures to ensure that only rigs meeting the Nigerian Content requirements would be used in drilling campaigns, and that companies failing to comply with the requirements would be suspended from operating until their activities were brought into compliance. The reports from operators were due by 28 April 2014, so the results of the exercise should soon be apparent.

As well as the momentum in the oil and gas arena, Nigeria is clearly committed to retaining locally as much as possible of the spend associated with other projects too, that being clear from the Local Content in Building and Construction Industry Bill (the "Bill") (which appears to be based on the Local Content Act). As drafted, the Bill would widely impose Nigerian Content requirements on construction projects. Whether it will survive in its current form is unclear, but the intention and trend are quite evident. And, set alongside the results of the local content drive to date, it is easy to see why Nigeria is keen to keep pushing: at the start of 2014, the NCDMB estimated that the implementation of the Local Content Act had attracted $5bn worth of investments into the country and created around 38,000 jobs. Added to the growing value of the Nigerian Content Development Fund (established under the Local Content Act, and collected from one per cent of all contracts awarded in the upstream oil and gas sector), used for guaranteeing lending to Nigerian service companies and for infrastructure and training investment by the NCDMB, which reached $350m at the turn of the year, the tangible benefits of the strong local content policy are significant.

With Nigeria stepping up its efforts to further boost the local economy and ensure that value from projects is captured in-country, and with the NCDMB reporting requirement as the first stage of a potential enforcement program, this is a critical time for international companies operating in the country. Given the fierce penalties for non-compliance, international operating companies should be careful to ensure that they closely monitor publications from the NCDMB and that they remain compliant with Nigerian Content requirements in all aspects of their operations.