Nigerian local content law's impact on oil and gas sector capacity building

Oil

To what extent would the Nigerian local content law improve capacity building in the oil and gas sector?

Nigeria local content

To what extent would the Nigerian local content law improves capacity build in the oil and gas sector?

A rather simple definition of the term local content is; "…the use of local skills and materials in constructing and/or maintaining an asset or service" (Local Content) This includes aspect such as employment and skills development as well as the important aspect of local procurement of goods and services, and "….enhancing the capacity of local suppliers and contractors…"( Local Content).

Another definition that is often encountered in the literature is; "local content is building a workforce that is skilled and building a competitive supplier base" (Asamoah ) the issue of local content that has many ramification both economically and politically.

From the point-of-view of developing countries like Nigeria local content has become an important issue in terms of national identity and the emergence and independence from the colonial past. The following quotation encapsulates something of the importance of the concept of local content.

It has become a very important issue due to the fact that in this day and age, every country would like its citizens to capture the commanding heights of its economy and thus assist to keep its wealth within its borders, as well as providing jobs to the ever increasing population. This is achieved through capacity building, creating SMEs as well as offering products and services locally.

(Asamoah)

Nigeria is an especially oil rich region, and an important area of oil exploration for upstream oil companies. According to the Organization of Petroleum Exporting Countries, the oil sector of the country "…provides 20% of the country's gross domestic product (GDP) and around 65% of budget revenues" ( Examining Nigeria's Local Content Act). It is ninth largest oil producer in the world, as well as being the fifth largest OPEC producer. The country also has extensive gas reserves (Adefulu).

Figure 1. Nigeria has the most offshore fields expected to come onstream in West Africa between 2011 and 2015.

( Source: http://www.epmag.com/Magazine/2011/3/item78470.php)

However, there has been a strong movement within the country in recent years towards the implementation of greater local control and indigenous control of the oil and gas industry; often as a result of what is perceived as being exploitation of their natural resources by outside companies.

In effect, the origins of the oil industry in Nigeria began in 1956, when oil was discovered by the Shell Company. Prior to this period the oil issues and exploration in the country was developed in terms of a concession given to Shell. Therefore, the Shell Oil Company has played a dominant role in the Nigerian Oil industry.

However, over the years there have been efforts by the Nigerian government and industry to exert a greater measure of control over this resource. These efforts also coincide with the countries' membership of the Organization of Petroleum Exporting Countries (OPEC) in 1971. After 1971 one sees the emergence of "…National Oil Companies (NOCs) across OPEC member countries, with the sole objective of monitoring the stake of the oil-producing countries in the exploitation of the resource" (Ameh ).

In the case of Nigeria, the Multinational Oil Companies (MNOCs) were "...allowed to continue with such operations under Joint Operating Agreements (JOA) which clearly specified the respective stakes of the companies and the Government of Nigeria in the ventures" (Ameh ). These Multinational Oil Companies included ChevronTexaco, Elf Petroleum (now Total), ExxonMobil, as well as Shell. These companies were operating under the Joint Operating Agreements with the NNPC.

Until recently these companies were the main players in the Nigerian oil industry.

To date, the above companies constitute the major players in Nigeria's oil industry, with Shell accounting for a just little less than 50% of Nigeria's total daily production, which currently stands at about 2.4 million barrels of oil per day

(Ameh ).

Recently there has been legislation implemented in Nigeria aimed at decreasing outside control of Nigerian oil and introducing local content requirements and provisions. This purpose and aims of this legislation is clearly summed up in the following overview:

The Nigerian Government has set a minimum local content target of 75% by 2010 for all works and contracts to be undertaken in or on behalf of all oil & gas companies operating in the Nigerian oil & gas industry. This target is fully supported by the oil & gas companies operating in Nigeria. To meet this target a number of processes are now in place including a contract evaluation and award criteria which favours bids which meet or exceed the minimum local content target. The Nigerian government, via the NCD (Nigerian Content Division) of the NNPC, has issued a list of 23 categories of work which must be executed in Nigeria.

The following chapters will explore the move in Nigeria towards local content implementation and its concomitant link to capacity building.

Chapter 2

In the past there was a relative lack of governmental and local interest in the oil industry."In the 1960s, government interest in the oil industry was limited to the collection of taxes, royalties and lease rentals" (Akinjide-Balogun, 2001). However, many developing countries like Nigeria began to exert pressure for more control over natural resourced like oil in response to the colonial hegemony of the past.

One could therefore link the origins of recent development towards autonomy in Nigeria, as well as in other developing countries, to the 1962 Resolution on Permanent Sovereignty over Natural Resources adopted by the General Assembly of the United Nations. This resolution stated that it is the right of people to "...freely use and exploit their natural wealth and resources is inherent in their sovereignty" (Akinjide-Balogun, 2001).

The spirit of this resolution could in turn be linked to the 1969 the Petroleum Act which "... vested the entire ownership and control of all petroleum in, under or upon all land or Nigerian territorial waters in the Nigerian government" (Akinjide-Balogun, 2001).

A central event in the progression towards greater control over natural resources like oil was when Nigeria joined OPEC or the Organization of Petroleum Exporting Countries in 1971. One should also bear in mind the 1968 and 1971 resolutions by OPEC, which were aimed at acquiring ownership in the concessions held by foreign companies.

Another important landmark was the establishment of the Nigerian National Oil Corporation (NNOC) in 1971. NNOC was empowered by the government of the country "...to acquire any asset and liability in existing oil companies on behalf of the Nigerian government, and to participate in all phases of the petroleum industry" (Akinjide-Balogun, 2001). This was to lead to a number of acquisitions that continue today and to the Local Content Act.

In essence, the Local Content Act that has recently been legislated in Nigeria is a legal process that provides for Nigerian companies to be given priority and primary consideration in the awarding of oil blocks as well as oil lifting contracts and "…any other contract available in the Nigerian oil industry" (Nigeria: At Last, the Local Content Act!, 2010). Furthermore, this Act "...demands that in bidding for any license, permit or interest or in the industry, an operator must show proof of compliance with the local content Act" (Nigeria: At Last, the Local Content Act!, 2010).

The consequence of this Act for the country seem be extremely positive. According to studies it will generate more than 30,000 jobs within five years (Nigeria: At Last, the Local Content Act!, 2010). It is also envisaged that the LCL will " also turn the fortunes of Nigeria around from a net importer of petroleum products, such as petrol, diesel, kerosene and others, to a self-sufficient oil producing country as obtains in other OPEC countries such as Iran and Venezuela"(Nigeria: At Last, the Local Content Act!, 2010).

2.2. Goals of LCL

Some of the initials goals of the LCL, as described in a 2005 report, were as follows:

Formalising the Nigerian content policy and pushing for its passage at the National Assembly

Defining technology levels to be awarded to indigenous companies to ensure steady growth in competence and capacity.

Encouraging Nigerian contractors to pool their resources together either as joint ventures, joint enterprises or new limited liability companies

Setting up a local content unit in the NNPC business units to monitor the implementation of graduated local content growth.

(Sheyin, 2005, p. 38)

More specifically, the aims the moves towards local content are: "To increase value… with regard to the local oil industry and especially to the distribution of funds provided by upstream oil companies within the country "(Examining Nigeria's Local Content Act). This has led to various reforms in the oil industry of the country and the Local Content Legislation and Act is paramount in this regard. (Examining Nigeria's Local Content Act)

The core and most important elements of the LCA are as follows:

The Establishment of a Nigerian Content Monitoring Board to monitor the achievement of local content in the oil and gas industry

Operator must submit Nigerian Content performance report which would be assessed and verified by the Board

Board may issue directives to facilitate reporting Nigerian content plan to be submitted and approved in the bidding for any license and before carrying out any project

Minimum Nigerian content in projects in the oil and gas industry specified

"First consideration" to be given to Nigerian goods and services

Bidding process for acquiring goods and services shall give "full and fair" opportunity to Nigerian

Succession plans for positions not held by Nigerians

• Maximum of 5% of management positions for expatriates

Nigerians to constitute a minimum of 60% of the Board

Minister required to make regulations to require any operator to invest in or set up factory to carry out any production, manufacturing otherwise imported into Nigeria

All insurable risks to be insured with Nigerian insurance companies

Only services of Nigerian lawyers or law firms to be Retained

Imposes an obligation on the Nigerian government to promote the use of indigenous companies in the petroleum industry

Empowers the Petroleum Inspectorate to revoke a license, permit etc. 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.

2.3.1. JOA

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).

With the development and evolution of the Nigerian oil and gas industry offshore opportunities, both shallow and deep, for mining arose. This provides further opportunities and challenges to the industry and in particular to the legislation needed to control and administer the growing industry. This in turn led to the introduction of PCSs or Production Sharing Contracts, which became an increasingly important aspect of the industry. (Ameh)

The introduction of the PSC is also linked to certain negative aspects of JOA.

JOA. These include the following;

Delayed cash calls and projects because all crude oil sales are paid into the Federation account therefore subjecting it to the whims of government bureaucracy

The Joint Operating Agreement (JOA) which regulates the Joint Venture deal does not have review clause which makes the contract to be in favour of the operators.

Personnel recruitment and expatriate quota are grossly abused. For instance, at this time and age of our development, some companies still have expatriates as community liaison officers.

Perpetration of corruption through a community liaison officer.

(Ogbeifun, 2009)

2.3.2. 2005 PSC

As noted above, the PSC emerged as an alternative to many of the shortcoming of JOA. Furthermore,

The PSCs enable a sharing formula to be implemented which allows the operators to pay statutory tax and royalty and keeps the larger part of the profit. The contract period is usually for 30 years (inclusive of 10 years exploration and 20 years OML ( Oil Mining Lease) period and governed by the PSC agreement). (Ogbeifun, 2009)

In terms of the progression toward local content, the 2005 PSC and its history can be described as follows: The PSC or Production Sharing Contract "...provides that NNPC and the contractor aspire to maximise local content in all areas of petroleum operations under the PSC (Adefulu et al. ). The functional and contentious word in the above statement is 'aspire'.

As the history of the countries' oil exultation developed there arose a new set of circumstances that required another set of legal provisions. In essence, this refers to the expansion of the Nigerian oil and gas industry and the start of allocations of areas or acreages in the shallow and deep offshore areas (Ameh).

These allocations obviously necessitated a new set of contractual and legal protocols; which in turn led to the introduction of PSCs in the new offshore and inland basin acreages. Furthermore, PSCs became extremely prominent in the oil and gas industry of Nigeria. It also "...brought its own unique challenges in terms of funding and technical complexity" (Ameh). In brief PSCs are mainly aimed at the sharing of output oil as well as gas operations (Ameh). The PSCs functioned in terms of "...agreed proportions between the Oil Company, as a contractor to the government, and the NOC, as the representative of government interests in the venture"(Ameh).

It is worth noting that the PSC form of contract had its origins in Indonesia in 1966 (Ameh) and was "… modelled along the lines of share cropping in agriculture, where the owner of the land grants a farmer the rights to grow crops on his land and shares the proceeds with the farmer in agreed proportions after the harvest" (Ameh). In terms of this contractual agreement, the contractor which is usually an outside concern only receives benefits after a mining venture has proved to be commercially successful (Ameh).

In terms of the PSC contract, the contactor recovers the costs of mining (known as "Cost Oil') from the allocation of oil; royalties are also made from oil production. The remainder of the oil production, known as 'Proft Oil' is shared by the mining company and the NOC or National Oil Companies, as a representative of the government (Ameh). A third component of the PSC contract is the corporate income tax, which this is in most cases applied to the investor's split of the profit oil (Onaiwu).

In Nigeria the main operators in the mining of oil are still holders of PSCs. However this situation is changing. In recent years a number of independent foreign oil companies, "…which enter into partnerships with indigenous companies to bid for oil blocks, and thereafter operate it in line with predetermined contractual arrangements" (Ameh).

A number of negative factors surrounding PSCs have been noted. The following are the most common referred to.

Agreement stresses cost recovery rather than paymentv Loaded costs

Possible underpayment of royalty, due partly to the lack of a clearly defined point of assessment of royalty.

Possible underpayment of PPT, due to a practice of self-assessment that has not been adequately validated by FIRS

(Ogbeifun, 2009)

2.3.3. 1993 PSC

According to the literature, the first PSC was signed by IIAPCO an Indonesian National Oil Company in August 1996. The concept became popular in many other developing countries, including Nigeria. As briefly noted above, the fundamental aspect of PSC is that it provides for state ownership of the resources. In essence, "The Contractor receives a share of production for services performed after payment of Royalty, recovering of operating costs, and payment of tax oil. The remainder is shared as profit oil in an agreed ratio" (Ogbeifun, 2009).

The emergence of PSC was aimed at improving the Joint Venture agreement, and to allow for a more advantageous position in contractual arrangements being given to the Nigerian Government. As one pundit summarizes this aspect

PSC emerged as one of the fiscal regimes in the Nigerian Oil and Gas sector as a concerted attempt to improve on the traditional Joint Venture agreement to the advantage of the government which lacks adequate technical base and sufficient financial resources.

(Ogbeifun, 2009).

Furthermore, deepwater and offshore exploration began to develop in Nigeria in the 1980s. This development followed from the "... 2D Speculative seismic data acquisition by TGSI-MABON under the guidance of the Department of Petroleum Resources" (Enu). The exploration period under the PSC document was for the duration from 1993 to 2003. The 1993 PSC Law that was emended in 1998 allowed oil companies access to export and production from Nigeria's deep offshore field for at least five years "… without paying any form of revenue to government, until it recoups its exploration and development cost"(House Committee Seeks Nigeria's Withdrawal from OPEC) http://www.napims.com/opec.html)

2.3.4. REG 26 PETROLEUM (DRILLING and PRODUCTION)

The Reg. 26 of the Petroleum (Drilling and Production) Regulations includes the following aspects. It provides for "…the holder of an OPL within 12 months of the grant of his license, and the holder of an OML upon the grant of his license to submit a detailed programme for the recruitment and training of Nigerians for the approval of the minister (Adefulu et al. ) in more formal terms, Reg. 26(1) states that, the licensee of an oil prospecting license shall within twelve months of the grant of his license, and the lessee of an oil mining lease shall on the grant of his lease, submit for the Minister's approval, a detailed programme for the recruitment and training of Nigerians" (Nigeria - Deductibility of Expenses in Computation of Profits).

Importantly, in terms of the progression towards the increase in control of the oil industry and local content, the Petroleum Act 1969 provides for the "Nigerianisation" of the labour force in terms of the oil and gas industry in the country (Nigeria - Deductibility of Expenses in Computation of Profits).

2.3.5. PARAGRAPH 37, SCHEDULE 1 of the PETROLEUM ACT

In brief, Paragraph 37, Schedule 1 of the Petroleum Act provides that

Within ten years of grant of OML:

• Nigerians in managerial, professional & supervisory grades in connection with lease must be 75% of total staff;

• Nigerians in any one grade must not be less than 60 per cent of the total, and all skilled, semi-skilled and unskilled workers are citizens of Nigeria.

(Adefulu et al. )

2.3.6. Petroleum Act 1969

One of the major legislations guiding the petroleum industry in Nigeria, especially in the areas of oil exploration is the Petroleum Act 1969 and the Petroleum (Amendment) Decree 1996. In summary this Act "…provides for the exploration of petroleum from territorial waters and the continental shelf of Nigeria and to vest the ownership of, and all on-shore and off-shore revenue from petroleum resources in the Federal Government" (Nigeria - 1969 Petroleum Act). The act is divided into five related section; these include: Oil Exploration Licences, Oil Prosepection Licenses and Oil Mining Licenses; Rights of Pre-Emption; Repeals; and Transitional and Savings Provisions (Nigeria - 1969 Petroleum Act).

The origins and impetus behind this act can be traced to the Nigerian civil war of 1967-70 when the Federal Military Government promulgated a decree known as the Petroleum Decree. This decree asserted or rather re-asserted state ownership of oil resources. Section 1 of this Decree provides for "…the entire ownership and control of all petroleum in, under or upon any lands to which this section applies shall be vested in the state" (Ebeku)

This decree was added to by the Exclusive Economic Zone Decree in 1978, which "…vests in the federal Republic of Nigeria sovereign and exclusive rights with respect to the exploitation of natural resources (including oil) of the seabed, the subsoil and superjacent waters of the Exclusive Economic Zone (EEZ) (Ebeku).

These decrees were the precursors to the formulation and promulgation of the Petroleum Act.

…the provisions of the Petroleum Act [the Decrees were later re-designated as Acts by a civilian government to bring them into conformity with the terminology of a civilian system of government] combined with those of the EEZ Act invest in the federal government a 'complete' right of ownership over oil resources." This 'complete' right is 'securely quaranteed' by section 44(3) of the present constitution of Nigeria

(Ebeku)

In essence, the Petroleum Act places final authority over oil production and contracts in the hands of the state. In this respect the federal government has "…absolute right and control over oil resources in the country, & #8230; it farms out oil mining rights to oil companies and receives rents and royalties from them" (Ebeku).

2.3.7 Indigenous Concession Program

The Indigenous Concession Program was initiated expressly in order to "…retain ownership and control of indigenous concessions in Nigerian hands and thereby encourage the growth of local expertise production in exploration, development and operations" (Akinjide-Balogu). For example the first indigenous grant was given to Henry Stevens Company, Nigus Petroleum and Niger Delta Oil Co in the 1980s (Akinjide-Balogu). Despite the overt nature of this concession to provide indigenous ownership "…it was not until 1991 that Professor Jubril Aminu, the Minister of Petroleum at the time, awarded eleven concession blocks to Nigeria entrepreneurs on a discretionary basis" (Akinjide-Balogu). Further allocations followed in the 1990s, with "…more than 40 Indigenous E & P. companies holding OPLs under the programme" (Akinjide-Balogu). In the 2000 Licensing Round a total of 22 blocks were offered to both the offshore and onshore players in the industry through a process of competitive bidding (Akinjide-Balogu).

2.3.8. Marginal Field Development Programme

Legislation relating to marginal fields was promulgated in August 1996, as the Petroleum (Amendment) Decree 1996 (Akinjide-Balogu, 2001). In essence, this legislation ensured that those who hold an oil mining lease may "...farm out any marginal field within the leased area with the consent of the Head of State" (Akinjide-Balogun, 2001). There are further aspects to this legislation, such as the fact that the government may farm out a marginal field if it has been unattended for a period of time; namely, ten years. The "Guidelines for Farm-out and Operations of Marginal Fields" (1996) provide for the following aspects:

1. Current holders of OPL/OML, except indigenous oil companies, are excluded from farming into marginal fields. Indigenous companies must relinquish existing OPL/OML to be eligible.

2. Only technically qualified Nigerian citizens who own locally incorporated companies may apply.

(Akinjide-Balogun, 2001).

Furthermore, "The oil majors view any compulsory acquisition of portions of their OMLs as an act of expropriation and in breach of the terms under which the Leases were granted" (Akinjide-Balogun, 2001).

2.4. Key provisions in LCL

Local content is defined by NNPC as the …quantum of composite value added or created in the Nigerian economy through the utilization of Nigerian human and material resources for the provision of goods and services to the petroleum industry within acceptable quality, health, safety and environmental standards in order to stimulate the development of indigenous capabilities.

(Nwaokoro, 2011)

In the context of the above description, local content adds value to the economy of the country through employment and the use of indigenous resources by the people of the country.

It is perhaps important to note that the key provision in the LCL Act is intended to make up for and remedy the rather weak initiatives and efforts of the past to retain control of the Nigerian oil industry. Among the considerations that underlie and form the incentive for the provision of the LCL are the following.

No focus on where services are initiated;

Obligations are contractual not statutory or regulatory;

Stronger terms with regards to the employment of Nigerians but evidence suggests that this was not been successful;

Obligations are imposed on the holder of the OML and no requirement to ensure that contractors are similarly obliged;

(Akinjide-Balogun, 2001).

These and other considerations led to the LCL Act, which included the following aspects.

2.4.1. Consideration to Nigerian operators

Central to the LCL is the utilization of Nigerian material and operators, as well as Nigerian resources and services. This includes the employment of nationals.

The Act specifically caters for the inclusion of local operators; for instance.

Section 16 of the Act provides "…that the award of contracts shall not be based solely on the principles of the lowest bidder. Where a Nigerian indigenous company has capacity to execute a job, the company shall not be disqualified on the singular basis that it is the lowest financial bidder… (the Local Content Act, 2010 politically correct (Part 2))

2.4.2. Labor Clauses

Section 34 of the Act makes especial provision for a labor clause. This clause mandates "… the use of minimum percentage of Nigerian Labor in all projects or contracts with a total budget exceeding $100 million" (the Local Content Act, 2010 politically correct (Part 2)). This is aimed at capacity building in the industry. Furthermore, the Act also contains mandatory regulations concerning all operators, project promoters and contractors in the oil industry that ensures that all infrastructure work, fabrication as well as welding should take place using indigenous services and labour (the Local Content Act, 2010 politically correct (Part 2)).

2.4.3. Content Plan

Sections 7-8 of the NCA requires that in any bids for licenses, permits or Interests the operator must submit a Nigerian Content Plan which has to be

Approved by the Nigerian Content Development and Monitoring B. o a r d (NCMB ) (Adefulu, 2010). This content plan must also be submitted before an operator carries out a project in the Nigerian oil industry and must be followed by the assurance of a certificate of authorization (Adefulu, 2010).

The act also provides details with regard to the "first consideration" clause for Nigerian labor and operators. Among others, the Content Plan that is also expected to contain an "Employment and Training Plan" (E&T Plan). This plan is intended to make provision for the following aspects. "An outline of the hiring and training needs of the operator/project promoter and major contractors, with a breakdown of skills required and anticipated shortage in the Nigerian Labour force; as well as" a time frame for employment opportunities for each phase of project development and operations to enable members of the Nigerian workforce prepare themselves for such opportunities" (the Local Content Act, 2010 politically correct (Part 2)). Furthermore, operators are also required to report back on their Employment and Training Plan on a quarterly basis.

2.4.4 Penalties

The Act includes a range of penalties relating to non-compliance. The Act "… declares contravention of the provisions of the Act in the conduct of any project in the industry an offence and prescribes the payment of a fine of 5% of the project sum or cancellation of the project as punishment upon conviction"(the Local Content Act, 2010 politically correct (Part 2)).

2.4.5 NCMB

Nigerian Content Management Board (NCMB) plays an essential role in the moderation and upholding of the provisions of the Act. The NCMB has "…pledged to uphold the law and wield the big stick on any operator who flouts any provision of the Act" (Osayande, 2010). This is especially the case with regard to Section 33 of the Act. In terms of this Section, the NCMB "…will now have the responsibility to approve every application for expatriate quota before such an application is made to the Ministry of Internal Affairs or any other Agency or Ministry of the Federal Government"(Osayande, 2010).

Chapter 3

Nigerian Content Law and interface with International Trade Agreement

The recent promulgation by the Federal Government of Nigeria of the Oil and Gas Industry Content Development Act 2010 ("NCA") is aimed at and intended to foster the " & #8230; development of indigenous service providers and utilization of Nigerian goods thereby creating economic linkages between the oil and gas industry, which had hitherto functioned as an enclave economy, and the wider Nigerian economy" (Adefulu: Nigeria: National Treatment & Nigeria's New Local Content Legislation").

In terms of this Act, a variety of provisions and measures have been implemented and introduced that gives preference to indigenous service providers; which in effect can be interpreted as a form of discrimination or prejudice against foreign operators and providers from outside the country in terms of various international agreements and obligations. As one pundit notes;

These measures prima facie appear to conflict with Nigeria's international obligations, particularly in relation to "national treatment obligations," which are included in some bilateral investment treaties ("BITs") as well as the World Trade Organisation ("WTO") Agreements, in particular Agreement on Trade Related Investment Measures ("TRIMs") & General Agreement on Trade in Services ("GATS").

(Adefulu: " Nigeria: National Treatment & Nigeria's New Local Content Legislation").

What this means, in essence, and in terms of the present discussion in this study, is that there seems to be a conflict or discrimination between the intentions and objectives of the new Local Content Law in Nigeria and larger legal aspects and requirements in terms of international trade and treaties.

In enacting this law the intention is obviously to create or provide the legal facilitation for the promotion of economic linkages and interconnections between the oil and gas industry and the wider Nigerian economy. These measures require in the first instance various forms of preferential treatment for locals or indigenous service providers for these industries, which also means that there is the possibility of prejudicial and discriminatory treatment of Foreign Service providers and investors. Therefore, these measures prima facie appear to "….conflict with Nigeria's international obligations, particularly in relation to obligations which are included in some bilateral investment treaties" (Adefulu: " Nigeria: National Treatment & Nigeria's New Local Content Legislation").

3.1. BIT (bilateral investment treaties)

Nigeria has entered into a number of bilateral investment treaties with various countries in order to "...facilitate and protect FDI "or foreign direct investment (Adefulu, 2010). These include treaties with, among others, the United Kingdom, the Republic of Korea, Spain, Finland, Germany, and Turkey (Adefulu, 2010). In terms of the national treatment obligations, which is central to the present discussion, "Nigeria's BITs are quite similar and are likely to be interpreted to convey like benefits to the investors of the relevant countries as that given to Nigerian investors" (Adefulu, 2010).

In brief, bilateral investment treaties emerged in the 1950s when developed capital-exporting countries negotiated bilateral investment treaties (BITs) with many developing countries. These treaties arose "...in response to the ongoing failure of diplomatic efforts to conclude a broader multilateral agreement, as well as deep disagreement as to the customary international law standards of treatment owed to foreign investors" (Luke E. And Gray K. 2003). The origins of these treaties were often motivated by fears of nationalization in developing countries, among other motivating aspects (Luke E. And Gray K. 2003).

In general, bilateral investment treaties usually have two central objectives. These are "... To protect foreign direct investment (FDI) flows by elaborating a series of rights and guarantees, and to encourage further economic cooperation, including the promotion of enhanced flows of FDI into developing states" (Luke E. And Gray K. 2003). They also provide a form of lex specialis, which is intended to add to customary international law related to the treatment of aliens as well as alien property (Luke E. And Gray K. 2003).

Furthermore, as Luke and Gray ( 2003) emphasize in their study entitled International Human Rights in Bilateral Investment Treaties and in Investment Treaty Arbitration, with the evolvement of bilateral investment treaties over time contemporary treaties tend to contain the following provisions and rights.

• National Treatment (investors enjoy similar treatment to nationals of host state)

• Most-Favored Nation Treatment (treatment similar to that accorded to most favored third-nation)

• Absolute Standards of Treatment (for example, "fair and equitable treatment" and "protection & security")

• Provisions guaranteeing transfers and repatriation of profits

• Guarantees against Expropriation or Nationalization without Compensation and due process.

(Luke E. And Gray K. 2003).

In terms of the present discussion and study on the interface between Nigerian Content Law and international treaties, it is the aspect of National Treatment that is a focal point of the discussion.

3.1.1. Background

The issue of the interface between Nigerian Content Law and international trade agreements must take into account the National Treatment Standard in International Law. This refers to the fact that a number of standards have come about in international laws which have become an important and integral part of various trade treaties. Among these standards is the National Treatment Standard.

In short, the National Treatment Standard is defined as "…the principle whereby a host country extends to foreign investors treatment that is at least as favorable as the treatment that it accords to national investors in like circumstances" (Adefulu, 2010) .

In essence, the purpose of this standard is to ensure a certain 'competitive quality', between foreign and national investors. In this context, and in the wider and contemporary context of increased globalization, the Nigerian Government entered into a number of investment and trade agreements and treaties, which include variations and aspects of the National Treatment Standard. These include two world Trade Organization Treaties, namely -- the TRIMs and the GATS, which include national treatment obligations for WTO member countries, of which Nigeria is one ( Adefulu, 2010) .

3.1.2. BIT and LCL

Among the bilateral treaties that have been entered into between Nigeria and other continued are the following. There is a BIT between Nigeria and the United Kingdom. However, it is important from a legal standpoint to note that this BIT like many other bilateral international treaties,

.... has not yet been incorporated into Nigerian law by an act of the National Assembly, and as such, following the provisions of Section 12 of the Constitution ... does not have the force of law in Nigeria and its provisions cannot be enforced by recourse to Nigerian courts (Adefulu, 2010) .

In this regard to it important to note that the Nigerian constitution stipulates that in terms of the issue of the enforceability of treaty obligations, a treaty entered into by the Government of Nigeria "…would not have the force of law, except to the extent to which any such treaty has been enacted into law by the National Assembly" (Adefulu, 2010). However, if we take into account international law relating to National Treatment Standard of this BIT, then there seems to be a contradiction or discrepancy between Nigerian legal praxis and international law. In terms of this law; "Neither Contracting Party shall in its territory subject investment or returns of nationals or companies of the other Contracting Party to treatment less favorable than that which it accords to investments or returns of its own nationals" . . . (Adefulu, 2010) .

As Adelfulu ( 2010) clearly states; "The effect therefore, in the context of our discussion, is that the BIT requires that those oil and gas service providers from the United Kingdom must be extended treatment no "less favorable" than those of Nigerian investors" (Adefulu, 2010) . This clearly seems to contradict the intentions and aims of the local content law legislation discussed in the previous sections of this dissertation.

One could go on to discuss the many other BITs that Nigeria has with other countries. The Fundamental issue is summarized as follows:

The effect of the majority of these clauses is that Nigerian investors are not to be accorded preferential treatment in relation to their investments over the nationals of the BIT countries. In the position that they are, liability would arise for Nigeria, where a dispute is referred to international arbitration. (Adefulu, 2010)

3.2 GATT (general agreement on tariffs and trade)

The General Agreement on Tariffs and Trade (GATT) is a set of multilateral trade agreements aimed at the abolition of quotas and the reduction of tariff duties among the contracting nations (General Agreement on Tariffs and Trade (GATT)). In 1947 GATT was initially considered to be only an interim measure that would be absorbed into the United Nations as an agency of this body. However, this did not occur and came into its own and "….subsequently proved to be the most effective instrument of world trade liberalization, playing a major role in the massive expansion of world trade (General Agreement on Tariffs and Trade (GATT)).

In relation to the above discussion, and in terms of National Treatment and Nigerian Treaty Obligations, the relevant article ( XV111) under GATT reads as follows:

In the sectors inscribed in its Schedule, and subject to any conditions and qualifications set out therein, each Member shall accord to services and service suppliers of any other Member, in respect of all measures affecting the supply of services, treatment no less favourable than that it accords to its own like services and service suppliers.

( WHO: Part III -- Specific commitments)

Under GATT provisions and arrangements, "...the national treatment obligations of each country are determined by the commitments made in its country schedules" (Adefulu: " Nigeria: National Treatment & Nigeria's New Local Content Legislation"). In this regard, the Nigerian schedule refer to four sectors, which include telecommunications, financial, tourism and travel related services and transportation services; which in turn refers to the Nigerian oil and gas industry (Adefulu: " Nigeria: National Treatment & Nigeria's New Local Content Legislation").

5.2. Indonesia

In 2009 Indonesia applied some forceful and far-reaching local content regulations. These have been described by some parties as "draconian" in terms of local content in E&P activities. (Industry fights Indonesian 'local content' requirements). These local content provisions fall under the Ministry of Industry's 'Technical Guidance of Usage of Local Production' Regulation 49 (Industry fights Indonesian 'local content' requirements). This refers to the regulations imposed by the Indonesian regulatory agency for oil and gas, BPMIGAS.

The outcry against the new local content regulations in Indonesia is fuelled by what is seen by foreign companied as being 'excessive' demands for increases in local content indices. For example, the following from one report;

Although current local content is at most 20%, BPMIGAS is insisting that all contracts held by agencies or joint ventures (JV) representing foreign drilling companies have a minimum of 35% local content. This essentially forces a JV equity stake in their drilling rigs. Failure to achieve 35% means immediate disqualification to participate in operators' tenders. The regulation has wreaked havoc for operators and drilling contractors. A majority of tenders offered in December failed because the 35% threshold couldn't be met.

(Industry fights Indonesian 'local content' requirements)

The above reference is quoted at length as it provides insight into a possible problem when local content provisions are enforced too rapidly or rigidly for the indigenous companies and providers, and when these companies and providers cannot comply with necessary demand.

Furthermore, as was discussed in the previous sections with regard to the Nigerian local content legislation and international trade treaties, there is often a disparity between local legislation and international trade obligations. In this respect a number of studies point out that Indonesia has been shown to be in violation of its World Trade Organization (WTO) commitments regards to this regulation

This is an issue that has wide ramifications. "The issue has been raised with the United States Trade Representative, which is concerned about this and similar oil industry "local content" initiatives in Brazil and Nigeria (Industry fights Indonesian 'local content' requirements).

The Indonesian Government is also motivated towards radically increasing its local content in other industrial sectors. For example, "Indonesia has approached international partners to request technological help so that the country's automotive industry can increase the local content of its products to 60% in the next five years" (Indonesia to achieve 60% local content in automotive manufacturing).

However, as one study notes, simply providing for legislation to increase the domain and influence of local content may not in and of itself necessarily lead to positive economic outcomes for the future of the country. This view is echoed in contemporary research which notes that there are many factors and variables that have to be carefully weighed and balanced in the process of obtaining optimum returns and results in the promotion of local content. However, on the other hand there are many studies that strongly suggest the importance of the promotion of local content legislation (Local Content).

Increasing the level of local content can make a major contribution to economic growth and the achievement of the Millennium Development Goals.

Procuring services and goods from local contractors and suppliers and using techniques adapted to the local resource endowment, will generate income locally and make a substantial contribution to economic growth.

( Local Content)

5.3 Malaysia

Malaysia has also implemented local content regulations and provisions in order to protect and promote local industries and economy. This can be seen in the automotive industry where there is extensive support and encouragement to have vehicles assembled locally ( MALAYSIA). These regulations and provisions "… include requiring a certain percentage of a vehicle to have parts and component that are manufacture locally, imposing import taxes and putting a tariff system on CBU imports" (MALAYSIA). Furthermore, "Apart from the protective tariffs that was announced in February 1966, all distributors and dealers were required to obtain import licenses that had to be renewed every six months"( MALAYSIA). Another example of the increase in local content is the following: "Kuah said its Toyota Vios sub-compact sedan was now being assembled with 40% local content and the company planned to increase this to 50% in the next-generation model" (Toyota to assemble Camry sedan in Shah Alam, 2010).

A number of other factors relating to the issue of local content in this region are:

Local content is based on a point system, not on volume (different parts are assigned a point value by the GOM).

Malaysia has not defined its policy commitment to eliminate mandatory parts and local content requirements as part of the WTO TRIMs Agreement. Malaysia Market Summary

The last mentioned point is particularly significant and reiterates the previous references and discussion of the discrimination between local content regulations and the WTO TRIMs agreement. It should also be noted in this regard that Malaysia has a relatively extensive network of preferential trade relationships (MALAYSIA TRADE SUMMARY). Malaysia is a member of the Association of Southeast Asian Nations (ASEAN), as well as bilateral trade agreements with Japan, Pakistan, and New Zealand (MALAYSIA TRADE SUMMARY).

5.3. Equatorial Guinea

Equatorial Guinea is situated on the oil rich Gulf of Guinea and comprises the Rio Muni coastal enclave, the island of Bioko and the islands of Annobon, Corisco, Elobey Grande and Elobey Chic ( Equatorial. Guinea - energy industry overview). This country has extensive and proven oil reserves, which are estimated at 1.28 billion barrels ( Equatorial. Guinea - energy industry overview). In terms of the influence of oil on the economy, the oil industry accounts for 60% of GDP and 90% of total exports (Equatorial. Guinea - energy industry overview). The share of petroleum industry FDI in 2004 amounted to 93% in Equatorial Guinea (Subramanian).

Oil was first discovered in Equatorial Guinea forty years ago. The first offshore production began in 1991 from the Alba oil field discovered by the Mobil ( Exxonmobil) Company. Mining and production have increased rapidly since then and in 1995 the Zafiro field was discovered, with an eventual production rate of 100,000 bpd (Equatorial. Guinea - energy industry overview). Foreign companies from the United Sates and other regions have exhibited considerable interest in the rich oil reserves of the country.

Equatorial Guinea has only recently begun to implement local content regulations and requirements with regards to the oil industry. The Hydrocarbon Law which was instituted on 2006 makes provision for local content. This includes the clause that "Oil companies and their Associates shall preferentially use local goods, services, human resources and capital" (Tavora et al.). The regulations also require oil companies to integrate and train local personnel (Tavora et al.).

Like Nigeria, this region also makes use of PSCs as the basis for negotiation for oil blocks contains a lengthy clause relating to local content (Tavora et al.). In terms of the New model PSC, oil companies and their subcontractors' "…must give preference to EG Services, materials, equipment, consumables and other goods, whose quality and time of delivery are comparable to those available internationally…" (Tavora et al.). This is also a point that was referred to above; where a problematic situation arises in the allocation of local content in which local content is unable to provide the required services or goods effectively. In terms of the PSC, the oil companies must train local staff for a minimum of one year (Tavora et al.).

There are many other examples of beginnings of a suitable and cohesive local content policy developing on the country. As the literature notes, the trend towards local content is increasing in the region.

On a somewhat negative note however, there is an extremely high level of criticism that has been directed at the administration and government of the country. This includes accusations of extreme corruption, as well as other negative factors such as nepotism. Many commentators also refer to the extreme disparity between rich and poor in the country. For example, Arvind Ganesan, the director of the business and human rights program at Human Rights Watch, states that," Here is a country where people should have the per capita wealth of Spain or Italy, but instead they live in poverty worse than in Afghanistan or Chad" (Oil Corruption in Equatorial Guinea). This view emphasizes the dire need for an increase in local content in the oil and gas industry of the country.

The future of Equatorial Guinea lies to a great extent in the use and management of its richest resource - the oil and gas industry. This also means an increased understanding of the importance of foreign interest and investment as well as the negative aspects and pitfalls of these associations. As one study notes, "Within a few years, Equatorial Guinea has become the fourth-biggest destination of American investments in Sub-Saharan Africa -- after South African, Angola and Nigeria"(Oil Corruption in Equatorial Guinea). Taking into account the problem that the country is experiencing with regard to internal corruption and political strife, one commentator states that, . "Without meaningful international pressure, the immense wealth of Equatorial Guinea will continue to be a private cash machine for a few instead of the means to improving the lives of many." (Oil Corruption in Equatorial Guinea). In this light, the value of local content legislation and management can be seen to have as very high level of importance for the country and its future development.

Conclusion

The need and desire in many developing countries for the standardization and increase of local content in expanding industries such as oil and gas is understandable and laudable. This motivation towards local content regulation is in fact imperative if a country is to maintain and manage its own resources in a way that improves capacity building in that country. This is the reason why the Private Enterprise Foundation (PEF) recently called on governments to "… focus on standardization and skills development for local operators in the emerging oil industry in order to achieve 90 per cent local content by 2020"( Government should pursue local content targets in oil industry- PEF).

The PEF has also recommended that governments should develop their local content policies by following international best practices in order to actively encourage local input and participation of indigenous and local content ( Government should pursue local content targets in oil industry- PEF).

However, as was noted in the above research, there are at the same time a disparity and conflict in some instances between the goals and imperatives of local content legislation and international trade agreements. As one study reiterates, "…local content requirements are perceived by some as being trade-distorting and are generally not favored under trade agreements"( Government should pursue local content targets in oil industry- PEF). In this light, the recent legislation of the Local Content Act in countries like Nigeria has been noted as creating a potential dispute with various international trade agreements and stipulations.

Another negative factor that is noted in the literature with regards to the formation and addition of local content law is that it has the potential to be abused by corrupt governments and administrators. "They can also create opportunities for corruption and rent seeking behavior if not correctly designed and administered" "( Government should pursue local content targets in oil industry- PEF). This is a particular cause of concern in governments such as Equatorial Guinea, where there is an extensive history of political strife, internal corruption and nepotism.

Notwithstanding the critiques of local content legislation it is also clear that developing countries have to protect their resources and industry ensure that these resources can be translated into building capacity for a viable and dynamic economy. Foreign companies have also begun to realize the benefits of local content legislation. This includes factors such as "Building sound relationships with project affected communities and establishing and maintaining a social licence to operate " ( Local Content); as well the role of content law in developing cost-effective, efficient and responsive supply chains ( Local Content).

There is also the concern noted above that local content may not be adequate to meet industry demands. Despite the many criticisms of local content legislation "… leading companies in the industry have demonstrated that it is possible to develop effective local content programs that meet the expectations of key stakeholders and deliver significant strategic and commercial benefits to the companies concerned" ( local Content).

In the final analysis, the surge towards local content legislation is a positive aspect of contemporary capacity building, which has to be balanced against the external requirements of other countries and the stipulations of international trade agreements in an increasingly globalized world.