Nigerian local content law and capacity building in oil and gas

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").

3.3 TRIMS (Trade related investment measures)

TRIMs is concerned with the fact that "…a number of investment measures can have trade restricting or distorting effects" (Adefulu: " Nigeria: National Treatment & Nigeria's New Local Content Legislation"). In terms of the issue of national treatment, "...Article 2(1) provides that, "[w]ithout prejudice to other rights and obligations under GATT 1994, no member shall apply any TRIM that is inconsistent with the provisions of Article III... Of GATT 1994" (Adefulu: " Nigeria: National Treatment & Nigeria's New Local Content Legislation"). This in turn refers to certain measures, which include local content obligations. Furthermore,

Developing country members such as Nigeria may deviate from the national treatment obligations to the extent and in such a manner as Article XVIII of GATT 1994 permit the member to deviate from the provisions of Article III of GATT 1994. (Adefulu: " Nigeria: National Treatment & Nigeria's New Local Content Legislation").

3.4. Conclusion: Does Nigeria's Oil & Gas Industry Content Development Act breach its National Treatment Obligations?

In the first instance, one must take into account the exclusive content clause of the Local Content legislation. Section 3(2) of the Act provides that Nigerian indigenous service companies which demonstrate ownership of equipment and "exclusive consideration" in terms of Nigerian oil and gas industry for contracts and services. The relevant section reads as follows:

… there shall be exclusive consideration to Nigerian Indigenous service companies which demonstrate ownership of equipment, Nigerian personnel and capacity to execute such work to bid on land and swamp operating areas of the Nigerian oil and gas industry for contracts and services contained in the attached schedule of services.

(Fashola, 2010)

In terms of the above, a Nigerian company is defined as a".... company formed and registered in accordance with the provisions of the Companies and Allied Matters Act with no t less than 51% shares by Nigerians " (Adefulu: " Nigeria: National Treatment & Nigeria's New Local Content Legislation").

Section 3(1) of the Oil and Gas Industry Content Development Act 2010, provides that "Nigerian independent operators shall be given first consideration in the award of oil blocks, oilfield licenses. Oil lifting licenses & #8230;.subject to the fulfillment as such conditions as may be specified by the Minister: (Adefulu, 2010). This therefore seems to go against or is in conflict with international treaty provisions and clearly seems to a prejudicial infringement.

As noted briefly above, section 7-8 of the Oil and Gas Industry Content Development Act 2010, requires that any bids with regard to licenses or permits or before an operator can become involved in a project in the Nigerian oil and gas industry, they must submit a content plan. This content plan has to be approved by the Nigerian Government, or more specifically, the Nigerian Content Development and Monitoring Board ( N. CMB ); and a certificate of authorization has to be received for the project's initiation. (Adefulu, 2010). The plan has also to contain details of how the proposed operator will provide "first consideration" to Nigerian expertise, as well as goods and services.

While the above may seem to be discriminatory in terms of International treaty law and National Treatment Standard in International Law, section 15 of the Act seems to offer more equability. Section 15 states that a bidding process should take place for operators in terms of acquiring goods and services, and which will provide "full and fair" opportunity to indigenous Nigerian contractors. This provision does not in essence appear to be discriminatory in that all operators have to bid on an equal basis. The only proviso is that Nigerian companies are treated on a fair and equitable basis. This section of the Act would therefore seem to confirm to the ethos of international treaty agreements in terms of National Treatment requisites.

However, in the final analysis there seem to be a number of problematic areas that need to be dealt with in terms of the interface between Nigerian content law and International trade agreements. As can be clearly seen from the above brief discussion, a common characteristic of this interface between the aims of Nigerian content law and the spirit and intent of international trade treaties is that Nigerian content law requires some form of discrimination or preferential treatment as a fundamental aspect of the intention and economic trajectory of this law. This bias and preference is always in favor of indigenous Nigerian goods and services, which is providers and operators. In particular, one could refer to a few of the dimensions of the Act; for example, the exclusive consideration of Nigerian service providers in land and swamp operating areas, the Content Plan as well as the preferential awarding of licenses and permits to Nigerian applicants. As one commentator notes; these factors "…are not compatible with Nigeria's national treatment obligations in international treaties" (Adefulu, 2010).

The commentator goes on the conclude that, "In our view, the requirements for "full and fair opportunity" for Nigerian goods and services as well as the provisions in relation to labor and research conflict with the national treatment obligation…(Adefulu, 2010). Furthermore, there is also a strong view that the proviso of the Nigerian National Content Act with regard to the preferential treatment of goods can be arguably seen to be in conflict with the Nigerian national treatment obligations under TRIMs & #8230;(Adefulu, 2010). This is as view that is also applied to the issue of Nigerian goods and their treatment, which are also deemed to be in conflict with international treaty standards. In this regard, Adefulu ( 2010) states that, and "…as such an act ion may be brought by a WTO member country under the WTO dispute resolution mechanisms"…(Adefulu, 2010). Similarly, Adefulu ( 2010) also refers to the issue of services which "…also appear to be incompatible with Nigeria's national treatment obligations under GATT" "…(Adefulu, 2010).

CHAPTER 5.

Lessons from Developing Countries.

5.1 BRAZIL

A 2009 report succinctly summarizes the development and growth of the Brazilian oil and gas industry in the following quotation.

As the huge scale of Brazil's pre-salt oil reserves becomes clear, the country is attracting more and more interest from international operating companies. At the same time, overseas service companies and suppliers, particularly in the offshore and subsea sectors, are looking to capitalize on growth in demand for their products.

(Rhodes and Londres, 2009)

However, an essential factor in the progression and development of the Brazilian oil and gas industry is the local content provisions that are applied to operators and suppliers who wish to enter the Brazilian market. Among others, these rules and requirements, …. require operators to procure a minimum proportion of goods and services for exploration and production from local sources. They affect operating companies when bidding for licences and may encourage international service companies and suppliers to establish manufacturing operations within Brazil.

(Rhodes and Londres, 2009)

In 2003 the Brazil's National Petroleum Agency (ANP) Friday released local content requirements for its next sale of oil exploration licenses. Among these local content requirements are the following.

The ANP raised "…local equipment and services requirements to 30% of the bid's value for deepwater exploration and development blocks" and "…shallow water exploration blocks, local content was set at 50%, and for shallow water development blocks, at 60%" ( Brazil Sets Local Content, 2003). It is also noteworthy that with regard to onshore exploration and development, the local content prerequisites were that the bidder was required to show seventy percent local allocation ( Brazil Sets Local Content, 2003). Brazil's National Petroleum Agency was of the view that these regulations would have the effect of prioritizing the local content of bids. "Local content would count 40%, the signing bonus 30% and the proposed exploration program 30% in awarding bids " ( Brazil Sets Local Content, 2003).

To a great extent the necessity and importance of making provision for the inclusion and protection local content and services, especially in the oil industry has been realized by Brazil. This is, for example, evidenced by the following report. "Brazil has instated heavy local content rules for production of equipment such as oil platforms to ensure the development of the deep-sea reserves provides jobs and economic growth while fortifying domestic industry" (Local content may slow Brazil oil push: Petrobras).

It is clear from the above reference that the aims of intention of the provision for local content are in essence the same as the incentives that we find in the case of Nigeria; namely, to provide economic growth and employment for the local market and to fortify and promote local industry.

Therefore, the bidding for oil contracts, among others, will be "… heavily determined by the capacity of domestic industry to provide goods and services for the gigantic investment program" (Local content may slow Brazil oil push"( Petrobras). This however is seen from some quarters as being somewhat problematic in terms of the adequacy and sufficiency of resources. This is also indicative of a certain area of concern that is related to the issue of local content and which may offer clues to problems in terms of local content provision experienced in other countries.

On the one hand using the provisions in law that promote local content, Brazil has " ...promised to create hundreds of thousands of jobs by using Brazilian companies and workers to build key equipment such as floating storage, production and offloading (FPSO) terminals" (Local content may slow Brazil oil push: Petrobras).

On the other hand, it is also clear that there are some sectors of the local industry that are slow to produce the necessary goods and are falling behind in the provision of certain aspects. Some critics are of the opinion that this "… could slow subsalt development if equipment cannot be provided on time, or could vastly boost the costs of production if the government pressures Petrobras to prioritize employment creation over efficient procurement" (Local content may slow Brazil oil push: Petrobras). In other words, relying too much on local content could, in the estimation of some, retard the acceleration of future growth. This in clearly explicated in the following report: