Oman's in-country value scheme expected to broaden domestic industry

Companies working in Oman’s oil and gas sector are currently adjusting their operations in line with a government scheme aimed at making more of the extractive industry’s potential to benefit the broader national economy. The scheme, known as the ICV Blueprint Strategy, was unveiled in late 2013 and builds on previous successful practices to date which were aimed at achieving optimal value from the country’s petroleum resources.

The Omani government defines ICV as “the total spend retained in country that benefits business development, contributes to human capability development and stimulates productivity in Oman’s economy”. The ICV scheme comprises a comprehensive set of policies designed to maximise this sum, and increase the total from 18% to 32% by 2020. According to the Ministry of Oil and Gas, there is the potential for $64bn of additional opportunities in the oil and gas value chain between 2013 and 2020.

Local Content

The ICV Blueprint Strategy was developed with the assistance of a number of international consultancies and falls under a broad family of economic development policies known as local content requirements (LCRs). LCRs have been used since the 1970s by both developed and developing markets to try to retain more of the value created by extractive industries within the domestic economy. As the World Bank notes in a recent study on NOCs and value creation, LCRs have evolved from encouraging backward linkages – like technology transfer, local employment and increased local ownership – to also creating forward linkages, downstream investments like refineries, petrochemical industries and fertiliser production. More recently, LCRs have also come to include economic diversification which has effects beyond the extractive industries’ value chain.

The policy tool-kit for LCRs may vary and the World Bank has identified at least nine different policy parameters. Some of these guidelines have already been included in Omani policy for a number of years. For instance the Omani tendering law requires that public tenders apply a 10% price preference to bids containing a high proportion of local goods. The ICV strategy goes further, however, and applies certain specific requirements to the oil and gas industry and covers seven specific elements: investment in fixed assets; Omanisation; training of Omanis; local sourcing of goods; local sourcing of sub-contracted services; the development of national suppliers; and the development of national training, education, and research and development institutions.

Adding It Up

Companies involved in the oil and gas sector must conduct an evaluation which details the percentage of local spending in all of these areas. In the case of Omanisation, the figures also must include a percentage of total headcount as well as the number of man hours used, while training is considered as a percentage of local training in total national man hours.

Support for development of local suppliers, meanwhile, is divided into short-term and long-term categories. It is arguably in this area where ICV represents the biggest departure from previous Omani LCRs. As part of the blueprint for ICV the Omani authorities identified a total of almost 50 supply chain development opportunities, most of which had been quantified in terms of the size of the business opportunity and the potential contribution to ICV over the 2013-20 period, as well as the number of jobs likely to be created and the feasibility of implementation. In particular, the list of opportunities focuses on a number that would be suitable for small and medium-sized enterprises, such as health, safety and environment advisory services, or even the planting and harvesting of Guar seeds for use in drilling chemicals.

Key Opportunities

Some of the most significant opportunities identified by the scheme include localising the development of drilling rigs (where the size of the potential business opportunity is identified at $1.4bn-1.5bn), and the reshoring of engineering and engineering management services ($2.5bn-2.7bn). Localising the sourcing of construction materials and equipment, meanwhile, is seen as having the potential to create $3.9bn-4.3bn of business and 577-639 jobs.

Cost

While the ICV scheme will place additional short-term burdens on companies operating in the sector, most nonetheless look favourably on the policy as having the potential to reduce supply chain costs in the long run. Speaking at a forum on ICV organised by the Oman Economic Review, Shell’s head of local content development, Simbi Wabote, said the time and effort invested in developing local content can create social and commercial benefits that facilitate economic growth and contribute to sustainable development. In particular, Wabote emphasised the long-term horizon on which such cooperation must focus. “A local content strategy is not a quick fix and does not provide a route to achieving short-term benefits,” he told delegates. “ICV improvements are often realised in the longer term and require planning, coordination, resources and perseverance.”

Clear Goals

It is with a long-term horizon in mind that the ICV strategy’s main objectivities are addressed towards two particular goals: sustainable and balanced industrial growth, and human resources development. The ICV blueprint identifies more than 50,000 potential job positions including training development opportunities where Omanis could be employed and developed in the oil and gas sector by 2020, compared to the 22,369 locals employed in the sector at mid-year 2013. In total, four out of the seven elements included in the ICV programme can be considered as directly relating to the improvement of human capital among Omani nationals. Such strong emphasis on training and knowledge transfer should help to ensure that the ICV scheme avoids some of the traditional pitfalls associated with LCRs. Where local industry lacks the capacity – in terms of both capital formation and workforce – to meet the demands of a highly specialised sector, bottlenecks and cost inflation can rapidly occur. Oman is already equipped with a solid base of skills and industrial capability. It also has the attendant infrastructure to ensure that the new activities which emerge from ICV can quickly reach a competitive level.

Alongside retaining as much of the oil and gas value chain as possible in-country, building an internationally competitive services industry is another long-term goal of the programme. However, the key challenge will be to ensure that ICV is implemented in a coordinated manner which is not overly burdensome to the sector – particularly at a time of falling oil prices. The authorities’ own policy mandates that the ICV criteria are clear and simple.