The government is looking to expand the role of domestic players in the industry

Four years after the passage of the Nigerian Oil and Gas Industry Content Development (NOGICD) Act in April 2010, the results are clearly visible. In terms of in-country spend, the changes have been especially dramatic, although there is still ample room for Nigerian firms to expand in services, fabrication and integration particularly. The pace of local content expansion may accelerate yet further as the Nigerian Content Development and Monitoring Board (NCDMB) stiffens its enforcement of the act, but it will have to strike a balance between support for domestic service contractors and the need for technology transfer from foreign suppliers and contractors. With a growing pool of funds available, from both international oil companies (IOCs) and the government, capacity-building for local ventures will take centre stage in the years to come.

Carrot & Stick

Passed in April 2010 by executive decree, the Nigerian Content Act (NCA) sets minimum local content requirements for 285 goods and services, measured by work-hours, tonnage or spending. It’s broad aims are to raise the Nigerian component of work programmes to about 70% and create some 300,000 new jobs in the process. It limits foreign staff to 5% of the total, though exemptions can be negotiated with the Nigerian National Petroleum Corporation’s National Petroleum Investment Management Services (NAPIMS), and requires operators to give “right of first consideration” to Nigerian majority-owned firms, provided their prices are within 10% of international ones. “The bidding process has improved significantly: while the Nigerian Petroleum Exchange statutorily qualifies companies, NAPIMS together with the IOCs check the technical capacity and commercial competitiveness of bidding service companies,” Taofik Adegbite, CEO of Marine Platforms, a local services firm, told OBG. “The NCDMB, on the other hand, evaluates the local content component of bids and ensures compliance with the NOGICD Act.” The NCA remains ambiguous about deepwater work programmes, where cutting-edge technology is required, and allows a three-year waiver for services unavailable in Nigeria.

Foreign companies are required to keep 10% of their annual profit in Nigerian banks. They must also submit plans to the NCDMB showing efforts to expand the in-country share of spending, or face a penalty of 4% of contract values or outright cancelation for failure to do so, according to a statement on Nigeria’s investment climate by the US State Department. In 2013 alone, a study by the Federal Ministry of Petroleum Resources released in May 2014 found that $6.45bn of the total $10.19bn in contracts awarded went to majority Nigerian-owned firms. However, progress across different segments of the oil and gas value chain has been uneven.

Local Feed

The most visible impact has been in front-end engineering and design (FEED), where the number of Nigerian-incorporated companies rose from roughly 40 prior to 2010 to between 160 and 200 in 2013, according to estimates by the NCDMB, which considers that by 2014 some 90% of all engineering work can now be completed onshore. The capital-light nature of FEED has allowed both bona fide indigenous firms to emerge, as well as majority Nigerian-owned affiliates of foreign contractors.

Companies like France’s Technip, Australia’s WorleyParsons and Italy’s Saipem have all launched firms of this kind (named CrestTech, DeltaAfrik and Saidel, respectively), in which they hold a minority stake. Meanwhile, British firm Subsea-7 partnered with Petrolog to launch Global Oceon Engineering. These companies, alongside larger domestic players like Dovewell, Aveon Offshore and Cakasa, have expanded their FEED and engineering, procurement and construction work to bid for offshore subsea engineering and marine services. While concerns have been raised by groups like the Nigeria Union of Petroleum and Natural Gas Workers over potential fronting – where local shell companies win contracts, which they then flip to foreign partners for a fee – the NCDMB claims it has increased on-site visits and oversight of potential abuses of the system.

Oilfield Services

Foreign oilfield services firms like Schlumberger, Baker Hughes, Halliburton and Weatherford still dominate deepwater offshore work, given that the NCA does not explicitly set quotas for this more complex work, reliant as it is on more advanced technology. Onshore and in shallow waters, however, services companies expect the growing role of Nigerian operators to benefit local firms. “As indigenous oil companies gain market share in exploration and production (E&P), they are eager to employ more local services companies,” Jan Baan, COO of Arco Petrochemical Engineering, a domestic player, told OBG. Indeed, the NCDMB estimates that indigenous firms’ share of services grew from roughly 10% in 2010 to 30% in 2013. Oil majors have also striven to comply with the Nigerian local content rules, with Shell claiming it had awarded 96% of contracts by value to domestic firms in 2013.

The most visible developments have been in oil-rig ownership. “A number of energy services, such as crane maintenance, have grown very saturated by local players,” Usman Mohammed, managing director and CEO of New Energy Services Company, told OBG. “Many have tried to diversify their operations offshore into rig services.” Although the number of active rigs in Nigeria has declined from 43 in August 2013 to 31 in February 2014 and 25 as of early 2015, according to the monthly Baker Hughes rig count, an industry benchmark, the share of locally owned rigs has risen steadily from virtually nil in 2010. Of the rigs in operation in February 2014, Nigerian firms owned 14 land rigs, nine swamp rigs (four inactive) and three shallow-water rigs ( jack-ups), according to the Nigerian chapter of the International Association of Drilling Contractors. In total, Nigerian services companies invested $1.6bn between 2010 and 2014, overwhelmingly financed by Nigerian lenders. Of this, some $800m was spent on the nine locally owned swamp rigs, which cost up to $90m each, depending on their specifications, according to the association. The rules on local rig ownership have prompted a similar trend in FEED: the world’s largest drilling company, Transocean, incorporated a local joint venture in 2012 called Indigo Drilling. Other leading local rig owners include Seawolf Oilfield Services, Depthwize Drilling, Cardinal Drilling Services and Shelf Drilling, all operating out of Warri.

Nigeria has likewise seen growth in marine services, a segment that is still dominated by foreign companies. “In the vessel services segment, we still have a roughly 80:20 split in favour of foreign owned vessels, although indigenous services companies’ share has started growing,” Adegbite told OBG. The two main players in marine services are Marine Platforms and Century Energy Services. The former was the first to handle deepwater offshore construction when it installed a flow-line for Eni, and it owns two construction vessels itself. The domestic marine services firms tend to focus on segments less covered by larger foreign companies like Delta Atlantic ( formerly Manalko) and France’s Bourbon, including tugboats, crew vessels and security boats.

Fabrication & Manufacturing

While significant progress has been made in engineering and other services, there is still ample scope to expand local fabrication and manufacturing, even if bottlenecks like power supply and availability of key materials remain a key constraint. “Issues in power supply and reliability still pose a significant challenge to local manufacturing,” Dayo Akanni, CEO of Dovewell Oilfield Services, told OBG. “While recent developments, such as Total’s Egina floating production, storage and offloading (FPSO) facility, have been beneficial for local content, the reality is that many parts will still have to manufactured abroad.”

The NCDMB estimates that while 90% of Nigeria’s engineering projects are conducted in-country, the proportion falls to 55% for fabrication and only 10% for manufacturing. Indeed, between 70% and 87% of contracts (by value) were awarded to Nigerian companies in 2013, yet only 12-18% of these were directed towards locally produced goods. “There has been significant improvements in local capacity for FEED and drilling; the impact of the NCDMB is quite substantial,” Uzoma Akalabu, Nigerian content development manager at Septa Energy, an indigenous operator, told OBG. “The next step, which the NCDMB is eager to support, is the development of more manufacturing in-country.”

Fabrication has traditionally been clustered at the 26-sq-km Onne free trade zone in Port Harcourt, established in 1996 by Intels and attracting cumulative investments of N930bn ($5.67bn) from 150 investors by 2013, including Saipem’s 700,000-sq-metre fabrication yard, according to the Ministry of Industry, Trade and Investment. The zone has a monopoly over support-based services, which other fabrication yards are trying to do away with. For fabrication destined for deepwater projects, however, it is facing increasing competition from Lagos-based zones, given their equidistance from offshore blocks. The main fabrication facilities in Nigeria include Nigerdock on Snake Island, the biggest facility of its kind in Nigeria with over 3000 employees, which is expanding its fabrication of topsides and wellhead platforms for ExxonMobil; Dorman Long’s three fabrication yards in Lagos, which are particularly active in pressure vessels; Acergy’s Globestar yard in Warri; and Aveon Offshore and Ascot Offshore, both located in Port Harcourt.

In 2013 the Lagos Deep Offshore Logistics Base, which has traditionally focused on services rather than fabrication, secured a partnership with Samsung Heavy Industries to fabricate the topsides and the 330-metre-long platform for Total’s Egina FPSO facility. The deal, valued at $3.8bn, is already two years behind schedule due to contractual issues. In August 2014 the parties reached an out-of-court settlement that enabled construction to begin in October. “One of the biggest problems given industry stagnation and more fabrication facilities coming on-line is project consistency,” Lloyd Crisp, managing director of Nigerdock, told OBG. “With not enough projects to go around, the only option is to lay off staff, and then retrain a new workforce later once projects come on-line. This becomes quite costly and inefficient.” New entrants among the fabrication yards include South Korea’s Daewoo, Kaztec Engineering (part of the Chrome Group) and Energy Works Technology (part of Nestoil).

Nigeria’s pipe mill production capacity is also expanding. The first local pipe mill, SCC Pipe Mills in Abuja, was supported by ExxonMobil in the four years to 2012, which helped upgrade its capacity to produce helical submerged arc welded (HSAW) pipes. Now meeting some 10% of Nigeria’s total HSAW needs, it will be joined by three new pipe mills by 2015, each costing over $150m. Technova Africa Group launched construction on a new $200m HSAW plant in mid-2013 in Edo State, with assistance from PSL, India’s largest pipe mill. The plant will also include a 10-MW power plant and a jetty, for total output of 200,000 tonnes annually. Two other pipe mills are under planning phases, including one in Bayelsa, backed by China’s Jiangsu Yulong Steel Pipe and supported by a $5m jetty to be built by Shell.

Support

While Nigerian firms have gradually been expanding their capacity, they face significant constraints ranging from inadequate power supply to difficulties with accessing finance. To ease the latter, the NCA established a Nigerian Content Development Fund (NCDF), funded through a 1% levy on every contract awarded in Nigeria. By the end of 2013 the fund had accumulated $334m, 70% of which is earmarked for providing a partial guarantee on commercial bank debt and 30% for technical assistance in upgrading capacity. The risk guarantee covers 30% of the value of the loan, of up to $10m, and sets annual interest rates at 7% for dollar loans and 15% for loans in naira over tenors of up to 10 years. Various IOCs have established their own contractor financing support funds: one by Shell covering loans of up to $5bn, one by ExxonMobil lending up to $8.6bn and one by Total covering up to $7.5bn. These funds provide contractors with partial risk guarantees on commercial loans from Nigerian lenders.

Stricter Enforcement

While such funds aim to support local firms’ growth, the NCDMB was notably stricter in its enforcement of existing rules in 2014, penalising a number of well-known contractors in high-profile cases. In March 2014 the board suspended the licences of Italy’s Saipem and South Korea’s Hyundai Heavy Industries (HHI), both involved in Total’s Ofon-2 project on oil mining licence 102 offshore, and banned both from participating in future tenders. It accused HHI of contravening rules requiring majority Nigerian staffing, alleging that 182 of the 184 HHI employees on the project were Korean without approval from the board. Meanwhile, Saipem was reprimanded for allegedly fabricating some 2900 tonnes of workload offshore and only 700 tonnes in Nigeria, and was accused of sourcing goods directly offshore, including 31 cladded and southern swamp pressure vessels, when it could have sourced them through Nigerian firms representing vendors locally. As the operator of the project, Total responded that these contracts had been signed prior to the NCA in 2007 and directed HHI to switch to domestic staff. By May 2014, it claimed some 65% of HHI staff were Nigerians.

While such disputes reveal the challenges of expanding local capacity in the face of supply constraints and cost competitiveness, in-country spending has increased significantly since 2010. Support from the NCDF and IOCs is important for easing bottlenecks on growth, while stricter enforcement of the rules will also help. Nevertheless, the board will need to strike a fine balance between developing local capacity and sustaining investment in new E&P.