Going local: Indigenous firms are responsible for a greater volume of services

Implementation of the 2010 Nigerian Oil and Gas Industry Content Development Act has raised the share of in-country sector spending, contracting and funding. While international oil companies (IOCs) are making efforts to comply with the act, foreign contractors are increasingly establishing local ventures, and local firms are gaining a larger share of investment.

The Nigerian Content Development and Monitoring Board (NCDMB), established to monitor compliance and develop local capacity, is fostering cooperation amongst all stakeholders, but compliance is not always exact. Most domestic activity is in front-end engineering and design (FEED) and fabrication, while real local manufacturing remains hindered by structural bottlenecks. “While producers and contractors want to source more services locally, an ecosystem must be developed to support local manufacturing,” Olusola Ogunsakin, general manager of Nigerian content development at ExxonMobil’s Mobil Producing Nigeria, told OBG.

INSTITUTIONAL FRAMEWORK: Passed in April 2010, the act aims to increase local asset ownership, supplier and infrastructure development, manufacturing, training, and research and development (R&D). Establishing local content requirements for 285 separate goods and services, the NCDMB aims to retain $10bn locally of the annual $20bn in oil and gas investment and create some 300,000 new direct jobs. Operators must give first consideration to local contractors and award them contracts if their pricing is within 10% of the cheapest rates available internationally. “All else equal, local firms with a proposal 10% more expensive should still win the contract,” Steve Judd, managing director of Ascot Flowlines Nigeria, a services firm that acquired Willbros’ Nigerian operations, told OBG.

LOOPHOLES: The act limits the use of expatriates to 5% of total staff and requires operators to train local staff, but contractors are still allowed to use expatriates resident in Nigeria. “The interpretation of the law has been diluted and a Nigerian employee has come to mean any employee based in Nigeria,” Seun Faluyi, managing director of local contractor Global Oceon Engineers Nigeria, told OBG. “This allows firms to import as many expatriates as before to execute projects.”

Although the requirements remain an executive act rather than a law, the NCDMB established a rating system for contractors according to their compliance with the rules. Nigerian National Petroleum Corporation’s (NNPC) Nigerian Petroleum Exchange (NIPEX), established in 1995, runs an electronic contracting platform that pre-qualifies service providers and aims to increase the visibility and capacity of the local supply chain.

A three-year waver of import restrictions expired in April 2013, although a bill being debated in parliament in mid-2013 is expected to extend this by two years. This is particularly significant for the import of manufactured goods, such as pipeline parts. A 1% levy on the value of contracts awarded for any project is earmarked for the Nigerian Content Development Fund, which had amassed some $150m by January 2013, according to NCDMB. The fund aims to support local contractors’ capacity expansions through subsidised bank lending, with 30% of funds earmarked for direct equity participation and 70% to provide guarantees on bank loans.

LOCAL FEED: The first three years of implementation spurred rapid growth in the registration of local contractors, especially in FEED and local fabrication. The number of local FEED firms rose from an estimated 40 prior to the act to between 160 and 200 by 2013. Indeed, capital requirements for FEED contractors are far less onerous than for oilfield services or manufacturing ventures. This covers a wide range of firms, from bona fide local contractors to local joint ventures (JV) by foreign suppliers and small firms that act as feeders for larger contractors. “The definition of a Nigerian company in the 2010 Nigerian Content Act has had unintended consequences as many have limited it to meaning majority Nigerian ownership,” Faluyi said. “In practice, many firms act as feeders or agents to foreign companies. NIPEX could play a more active role in validating contractors’ claims of technical capacity.”

Foreign firms have in the past two years begun incorporating Nigerian JVs in which they hold 49%. France’s Technip established locally owned engineering firm CrestTech, Italy’s Saipem partnered with Nigerian investors in Saidel and WorleyParsons established DeltaAfrik. “There is definitely a trend for global service firms to participate in indigenous JVs, in an effort to comply with Nigerian content rules,” Vito Testaguzza, managing director of Saipem Contracting Nigeria, told OBG. “While this remains a strategic consideration specific to each firm, the pressure to domicile more work in Nigeria will only grow.”

LOGISTICS & SERVICES: Local capacity has not been limited to engineering and design, and more firms are expanding their reach. “Much of the local content development taking place in Nigeria is beyond simply FEED,” Uzoma Akalabu, Nigerian content development manager at local operator Septa Energy, told OBG. Dahiru Mohammed, chairman and CEO of Damagix, echoed this sentiment. “Technical partners have been aligned closely with local partners since the inception of the Nigerian Content Act. They are still transferring knowledge to indigenous players, which are moving up the value chain, breaking into new and more involved activities like fabrication,” Mohammed told OBG.

Support from IOCs has helped, with Shell Petroleum Development Corporation establishing a $5bn contractor support fund with five Nigerian banks to subsidise the cost of funding contractors. ExxonMobil is also set to establish a finance facility in 2013, supporting banks by pledging to transfer part of contractors’ payments to the banks involved, reducing the risk of diversion.

While foreign giants still dominate the deepwater offshore services segment, local players’ share of onshore and shallow-water work is increasing. Larger local firms like Aveon Offshore, Global Oceon (a JV between Petrolog and UK-based Subsea 7), Cakasa and Dovewell are expanding their engineering, procurement and construction portfolios for oil producers and have even won contracts for submarine engineering and marine services on upcoming deepwater projects.

In 2012 the world’s largest drilling firm, Transocean, incorporated a local venture, Indigo Drilling, in Nigeria. “As a result of the Nigerian Content Act and relatively high oil prices, there is significant growth in the acquisition of drilling rigs and marine vessels,” Samuel Egube, corporate banking director at Diamond Bank, told OBG. “Typically, swamp rigs could cost anything from $25m to $80m depending on their specification, class status and age. Funding these assets has continued to attract the support of banks, even with much lower equity contributions from drilling and logistic companies.”

MANUFACTURING: Many contractors still depend on imports for most materials, particularly steel products. While new floating production, storage and offloading facilities contain a larger component of fabrication and assembly in Nigeria, the platforms themselves continue to be produced abroad. Nonetheless, some new capacity in pipe mills has come on-line as of late, and the NCDMB forecasts local capacity to grow gradually to fully meet domestic pipe needs by 2017. From 2008 to 2012 ExxonMobil worked with SCC Pipe Mill in Abuja to upgrade human resource and technical capacity to produce pipes, with the mill expecting to meet some 10% of Nigeria’s annual demand for pipes, which is estimated at about 1m-1.2m tonnes.

In June 2013 Shell announced its intention to build a $5m jetty in Polaku, Bayelsa State to support the planned construction of a second pipe mill, which will have a 250-tonne capacity once completed in 2014. More substantial investments have also been announced, with Norway’s Aker Solutions planning a $150m investment in a local umbilicals factory, although progress was still uncertain as of mid-2013.

While substantial investments remain contingent on progress in addressing Nigeria’s structural problems, local participation in services, contracting and financing is increasing. Shell had $2.4bn worth of contracts in 2012, and 90% of the total were awarded to Nigerian firms. The NCDMB estimates that local servicing has grown from 10% of the total in 2010 to 30% by 2013. Although there is not yet full compliance with the act, stakeholders are demonstrating willingness to comply.