If Nigerian local content law is not complied with Requires licensee to submit a detailed programme for recruitment and training of Nigerians
(Nigerian Local Content Policy)
2.3. History of the LCL
The Local Content Law was signed into law in April 2010 by acting President Goodluck Jonathan. In brief, the Nigerian Oil and Gas Industry Local Content Development Bill 2010 places "…obligations on upstream oil companies in the areas of finance, community and local workforce" (Examining Nigeria's Local Content Act). The process that led to this Bill began in 2007. The initiator of the Bill, Senator Lee Maeba, provides some interesting insight into the originating impetus that led to the final acceptance of the Act. He states,
I saw that there is no law guiding the activities of Nigerian companies in the oil and gas industry and because of that, there has been a capital drift...and that is the reason why there is poverty in Nigeria in spite of the fact that we are the sixth largest producer of crude oil
(Examining Nigeria's Local Content Act).
The above is illuminating for a number of reasons; not least is the fact that there has been considerable 'capital drift 'as a result of previous oil policies and discontent with this fact has been reflected not only in the industry but also politically and in the society as a whole.
The act therefore ensures in its many provisions, for instance, that upstream oil companies operating in Nigeria are required to place ten percent of their annual profit in Nigerian banks and contract their legal and insurance services to Nigerian companies, among other aspects and provisions. (Examining Nigeria's Local Content Act). However, while in theory this law has been welcomed in Nigeria and elsewhere, there are still some concerns about its actual implementation.
Some key developments in the progress towards the Local Content Law enactment are as follows. These will be further expanded on in the sections below.
In 1989, the Minister of Petroleum Resources, Professor Jibril Aminu, was "…displeased at the virtual lack of Nigerian presence in the upstream sector of the oil industry" (Nigeria: At Last, the Local Content Act!). This was to result in an invitation to Nigerians to take oil prospecting licenses. Prior to this initiative the only Nigerian indigenous company involved in the industry was Dubri Oil. (Nigeria: At Last, the Local Content Act!). The Minister of Petroleum Resources' initiative was to result in the involvement in the industry of more than thirty companies that were indigenously Nigerian. Professor Aminu also "…forced the oil majors to start awarding contracts for oil services to Nigerian companies" (Nigeria: At Last, the Local Content Act!).
This initiative was an important event that would eventually evolve into the recently promulgated Local Content Act. In the first instance it was a departure from the previous trend of awarding oil contracts to foreign concerns and companies. As a result of these early initiatives "Nigerians were formally introduced to the upper sector of an industry that has earned the nation well over $600 billion dollars since the first oil well was struck at Oloibiri in today's Bayelsa State in 1958" (Nigeria: At Last, the Local Content Act!).
However, the road towards the establishment of regulated local content has not been direct or consecutive. Political in-fighting and corruption have played their part in the history of this country in often retarding the development of a viable governmental culture to maintain the drive towards local content. Since the 1980s "…governments came and left, choosing to pay only lip service to the need to deepen the involvement of Nigerians in their oil industry" (Nigeria: At Last, the Local Content Act!). The dominance of the oil market by foreign companies has also resulted in political problems in the country which has highlighted the difference between rich and poor in the society. This fact has also been a factor in the need to develop a more stable and sustainable economy through the promotion of local content.
The recent signing into law of the Nigerian Oil and Gas Industry Local Content Development Act has meant an important step towards as more independent economy and greater capacity building in industry. This legislation "…marked another giant leap towards putting the upstream sector more into the hands of Nigerians" (Nigeria: At Last, the Local Content Act!). There has not been an effective law that could act as a definitive guideline for oil companies until the inception of this Act.
The issue of improved capacity building is clearly evident from the fact that increased local content is linked to increased economic production. For example, the Nigerian government set itself "… an oil reserve target of 40bn barrels and production level of 4.5m barrels by 2010 & #8230;This coincides with the government's intention of increasing local content in the industry…. local content participation in the nation's oil and gas sector would rise to 70% by 2010, up from the mandatory 10% as it existed (Sheyin, 2005, p. 38). These goals seem to bode well for the positive outcomes of this Act.
JOA or the Joint Operating Agreements are essentially the basic or standard agreement or agreements that have existed between the Nigerian National Petroleum Corporation (NNPC) and the operators ( Joint Operating Agreements (JOA) for Nigerian Joint Venture Arrangements). The JOA has set the guidelines and outlined the various modalities with regard to the running of oil operations in the country. However, there has been consistent criticism of the Joint Operating Agreements as the operator is required to give "...preference to a contractor that is organised under the laws of Nigeria to the maximum extent possible as long as there is no significant difference in price or quality between such contractor and others" (Adefulu et al. ).
The main elements of the JOA can be summarized as follows:
One of the partners is designated the operator.
The NNPC reserves the right to become an operator.
All parties are to share in the cost of operations
Each partner can lift and separately dispose its interest share of production subject to the payment of Petroleum Profit Tax (PPT) and Royalty.
The operator is the one to prepare proposals for programme of work and budget of expenditure on an annual basis, which shall be shared on share-holding basis.
Each party can opt for and carry on sole risk operations.
Technical matters are discussed and policy decisions are taken at operating committees where partners are represented on the basis of equity Holding.
( Joint Operating Agreements (JOA) for Nigerian Joint Venture Arrangements).
The JOA is modeled after partnership agreements, in which the JOA "...operates as a form of partnership between the joint venture partners, which spells out the participatory interest of each of the partners and also designates one of the partners as the operator of the venture" (Ameh). In this scenario the NNPC represents government interests. The respective MNCs or oil multinationals operate the different ventures with varying participatory interests (Ameh). The relationship between the various parties is controlled and mediated by the JOA. This also includes aspects such as the budget, supervision and funding by the different partners (Ameh).
It should also be noted that an additional aspect, the Memorandum of Understanding (MOU) is related to the governance of revenues between the partners. This includes taxes, royalties and industry margin (Ameh).
There are a number of challenges and problematic areas associated with the JOA. These include poor funding,"... due mainly to the imbalance in the financial capacity of the different joint venture partners..." which has also been linked to a reduction of operations and loss of revenue (Ameh). A further problem is linked to "... allegations of gold plating of operating costs by the non-operators of the venture, which often leads to mutual suspicion between the parties, and the rather unfair distribution of revenues..." (Ameh).