NIGERIAN OIL & GAS INDUSTRY CONTENT ACT:Impact On The Engineering Family
Paper by
ENGR (Sir) CHRIS OKOYE FNSE, FASCE, FNSME, FNICA, FITN, FIoD
Chairman, Nigerian Content Committee
Nigerian Society of Engineers (NSE)/Chairman, Fegno Construct Nig. Ltd
At the
20TH COREN ZONAL ENGINEERING ASSEMBLY
ENUGU: 2nd – 3rd August, 2011
1
Nigerian Oil & Gas Industry Content Act :Nigerian Oil & Gas Industry Content Act :Impact on the Engineering Family Impact on the Engineering Family
2
3
Table of Contents
IntroductionOverview of the ActBenefits of the ActChallengesThe Role of CORENRecommendationsConclusion
4
The Nigerian Oil & Gas Content Act: Introduction
5
Nigerian Content : Definition
Nigerian Content means the quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the Nigerian oil and gas industry.
Strategies for value addition
therefore shall include:
Capacity BuildingCapacity enhancementCompetency DevelopmentTechnology and knowledge transfer
6
7
Before the Act, the only legal basis for Nigerian Content pressures was the Petroleum Act, and the JOAs/PSCs in the Industry.
7
PETROLEUM ACT
(1969)
JOA (1991)AND PSC
(1993 ONWARDS)AGREEMENT
S
NIGERIAN CONTENT
POLICY (2005)
Protection for indigenous Nigerian companies on the basis of reciprocity (Pet Act. 1st Schedule Section 23 (1),(2))
Human Capacity Development (Pet Act. 1st Schedule Section 37; Pet Regulation, Part IV, Paragraphs 26, 27, 28 and 29);
Patronage and involvement of indigenous companies in the supply of goods and services (JV-JOA, Section 5.5.1 of Schedule C (Uniform Project Implementation Procedure)
Premium on commercial offers of locally sourced goods and services over imports (JOA Schedule C and PSC, Article 5.5 of Annex E)
Domiciliation of the certain services Consignment of low tech onshore supply of goods and services to
indigenous companies Patronage of local sources of goods and services
Source: NNPC-NCD/G.Osahon
8
Economic Imperatives
o Average Annual Industry Spend : $8 billion
o Contribution to National Revenue : 71%
o Contribution to Export Earnings: >90%
o Contribution to GDP: 12%
o Local Value addition (Local Content): 10 - 15%
o Local Refining Capacity : 445,000 bopd
o Increased use of Expatriate Workforce
*
High industry spend, coupled with low retention within Nigerian economy, High industry spend, coupled with low retention within Nigerian economy, with its consequences on local value creation /addition, and massive youth with its consequences on local value creation /addition, and massive youth unemployment, made this law a political and economic necessity.unemployment, made this law a political and economic necessity.
9
The Nigerian Content Law: HistoryThe Nigerian Content Law: History
The Chibudom Nwuche Bill (1999-2003) Legislature. Failed to pass.
The Ofodili Bill (2004-2007) Legislature. Failed to pass.
The Lee- Maeba Bill. (2007-2011) Legislature. Passed and signed into law on 22/April.2010.
Other Laws with strong local content implications:Cabotage Act 2003 Insurance Act 2004
10
Nigeria Oil & Gas Industry Content Act :Overview
Nigerian Oil & Gas Industry Content Development Act
The components of the Act that will drive growth and domestication of engineering practice in Nigeria include;
1. First Consideration:
(i) First Consideration shall be given to Nigerian independent operators in the award of oil blocks, oil field licenses, oil lifting licenses and in all projects for which contract is to be awarded in the Nigerian oil and gas industry subject to such conditions as may be specified by the Minister.
(ii) First Consideration shall be given by operators to Nigerian goods & services and the Nigerian Content Plan submitted to the board by an operator shall contain a detailed plan, satisfactory to the board setting out how the operator and his contractors intend to achieve this (Section 3, 12)
11
(iii)First Consideration shall be given to Nigerians for employment and training in any project being executed by any operator or project promoter in the oil and gas industry. (Section 28)
2. Full and Fair Opportunity: All operators and alliance partners shall maintain a bidding process for acquiring goods and services which shall give full and fair opportunity to Nigerian indigenous contractors and companies. (Section 15)
3. Employment and Training: The plan submitted by any operator or project promoter for any project shall contain an Employment & Training Plan (E&T Plan) which shall include:
(a) an outline of the
i) hiring and training needs of the operator or project promoter and operator’s major contractors with a breakdown of the
skills needed,
ii) anticipated skill shortages in the Nigerian labour force,
iii) project specific requirements and 12
iv) anticipated expenditures that will be made directly by the operator in implementing the E& T Plan as a forecast and actual expenditure (Section 29-30)
4. Succession Plan: For each of its operation, the operator shall submit to the board a Succession Plan for any position not held by Nigerians and the plan shall provide for Nigerians to understudy each incumbent expatriate for a maximum period of four years at the end of that period, the position shall be Nigerianized. (Section 31)
5. Research & Development Plan: The operator shall submit to the board and update every six months, the operator’s Research and Development Plan which shall
a) outline a revolving three to five year plan for all oil and gas related research and development initiatives to be undertaken here in Nigeria, together with a breakdown of the expected expenditures that will be made in implementing the R&D Plan; and
b) provide for public calls for proposals for research and development initiatives associated with the operator’s activities (Section 36-39) 13
6. Growth of indigenous capacity: The Minister shall make regulations setting out targets to ensure full utilization and steady growth of indigenous companies engaged in exploration; seismic data processing, engineering design, reservoir studies, manufacturing and fabrication of equipment and other facilities as well as the provision of other support services for the Nigerian Oil and Gas Industry. (Part 1:41)
7. Registration with Nigerian professional bodies: The Minister shall make regulations which shall require any operator or company or its professional employees engaged in the provision of engineering services in the industry to be registered with the relevant professional bodies (Part 1:42)
8. Technology Transfer: Each operator shall carry out a programme in line with the country’s own plans and priorities, to the satisfaction of the board to the promotion of technology transfer to Nigeria in relation to its oil and gas activities. (Section 43-46)
14
9. Establishment of operation: Operators shall be required to invest in or set up a factory, facility or production units or other operations in Nigeria for the production, manufacturing or provision of a service otherwise imported into Nigeria. (Section 47)
10.Welded products: All operators, project promoters, contractors and any other entity engaged in the oil gas industry shall carry out all fabrication and welding activities in the country. (Section 53)
11.Petroleum e-marketplace: The board shall establish an e-marketplace which shall
(a)Provide a virtual platform to facilitate the transactions required for efficient delivery of goods and services in the industry.
(b)Track and monitor the Nigerian content performance of operators, project promoters as well as suppliers and service providers with the provision of relevant feedback (Section 54)
15
12.Responsibility to communicate Nigerian content policies to contractors: Operators shall effectively communicate its Nigerian content policies and procedures to its contractors and subcontractors and to monitor and enforce their compliance. (Section 66)
13.Nigerian Content Consultative Forum (NCCF): It shall be a consultative body set up by the board to provide a platform for information sharing and collaboration in the industry with respect to;
a) Upcoming projects in the industry
b) Information on available local capacities; and
c) Other policy proposals that may be relevant to Nigerian content development.
16
The NCCF shall comprise of key industry stakeholders, government and regulatory agencies and representatives from the following sectors; fabrication, engineering, information and communication technology, materials and manufacturing, petroleum technology association of Nigeria, etc. (Section 57-58)
14.Nigerian Content Monitoring Board: shall make procedures that will guide, monitor, coordinate and implement the provisions of this act.
15.Nigerian Content Development Fund: shall be established for purposes of funding the implementation of Nigerian Content development in the industry. (Section 104)
17
18
Impact 1 – The NC Monitoring BoardImpact 1 – The NC Monitoring Board
ImpactImpact
The Board shall assume all NCD/NNPC responsibilities, in The Board shall assume all NCD/NNPC responsibilities, in accordance with this provision.accordance with this provision.
Imposes a whole new layer of requirements and Imposes a whole new layer of requirements and administrative controls. administrative controls.
Reporting requirements significantly increased.Reporting requirements significantly increased.Significant additional organizational requirements and Significant additional organizational requirements and
conditions will impact project delivery and operations and costsconditions will impact project delivery and operations and costs..Additionally, there are transition plan and timing issues that Additionally, there are transition plan and timing issues that
need to be addressed.need to be addressed.FGN currently undertaking agencies reforms initiatives to FGN currently undertaking agencies reforms initiatives to
streamline contract approval processes, improve efficiencies, streamline contract approval processes, improve efficiencies, reduce costs etc..reduce costs etc..
SectionSection
Sec 4, 69 Sec 4, 69 -70-70
Sec 106Sec 106
DescriptionDescription
Functions range from implementation Functions range from implementation of the Bill to supervision, of the Bill to supervision, administration, monitoring, administration, monitoring, institutionalization of procedural institutionalization of procedural guidelines and management of the guidelines and management of the development of Nigerian Content in the development of Nigerian Content in the industry.industry.
All functions/powers conferred on any All functions/powers conferred on any agency or department to carry out the agency or department to carry out the implementation of Nigerian Content implementation of Nigerian Content Development /policy in the industry is Development /policy in the industry is hereby transferred to the Board.hereby transferred to the Board.
•Affairs of the Board shall be conducted by the Governing Council.Affairs of the Board shall be conducted by the Governing Council.•Council shall consist of 9 members: Chairman (Min of Petr Res; representative of NNPC, Council shall consist of 9 members: Chairman (Min of Petr Res; representative of NNPC, rep of agency in charge of Tech regulation of the industry, rep of MPR, rep of PETAN, rep of rep of agency in charge of Tech regulation of the industry, rep of MPR, rep of PETAN, rep of
NCCF, rep of COREN, rep of NIC & Exec Secretary (doubles as Council Secretary).NCCF, rep of COREN, rep of NIC & Exec Secretary (doubles as Council Secretary). •The Council shall consult with the Minister in making its standing orders.The Council shall consult with the Minister in making its standing orders.
19
Impact 2 – First Consideration in all Operations and ContractsImpact 2 – First Consideration in all Operations and Contracts
ImpactImpact
• This will lead to awards of oil blocks and This will lead to awards of oil blocks and licenses.to more indigenous companies.licenses.to more indigenous companies.
• There will also be increase in the demand There will also be increase in the demand for IOCs to bid through LCVs.for IOCs to bid through LCVs.
• For the award of contracts on land and For the award of contracts on land and swamp, any default with this provision swamp, any default with this provision could be considered an offence under this could be considered an offence under this ActAct
SectionSectionSec 3(1) & Sec 3(1) &
(2)(2)
DescriptionDescription
Nigerian Independent Operators shall Nigerian Independent Operators shall be given first consideration in award of be given first consideration in award of oil blocks, oil fields, oil lifting licenses oil blocks, oil fields, oil lifting licenses and in all projects for which contract is and in all projects for which contract is to be awarded in the industry subject to to be awarded in the industry subject to the fulfillment of such conditions as may the fulfillment of such conditions as may be specified by the Minister.be specified by the Minister.
Exclusive consideration to Nigerian Exclusive consideration to Nigerian Indigenous Service Companies for Indigenous Service Companies for contracts on land and swamp.contracts on land and swamp.
•The Act provides that award of contract shall not be solely based on the principle of the lowest The Act provides that award of contract shall not be solely based on the principle of the lowest bidder.bidder.
20
Impact 3 – Retention of 10% of Revenue in Nigerian BanksImpact 3 – Retention of 10% of Revenue in Nigerian Banks
ImpactImpact
10% of total revenue means billions of dollars available in local 10% of total revenue means billions of dollars available in local banks impacting the inflow of foreign direct investment.banks impacting the inflow of foreign direct investment.
More availability of funds for lending to local businessesMore availability of funds for lending to local businessesIncreased liquidity of local banks will also benefit non-oil Increased liquidity of local banks will also benefit non-oil
businesses.businesses.
SectionSection
Sec 52Sec 52
DescriptionDescription
All Operators, contractors and All Operators, contractors and sub-contractors shall maintain sub-contractors shall maintain bank account (s) in Nigeria in bank account (s) in Nigeria in which it shall retain a minimum of which it shall retain a minimum of 10% of its total revenue accruing 10% of its total revenue accruing from it’s Nigerian operations from it’s Nigerian operations (sub-(sub-section d).section d).
21
Impact 4 – Establishment of Nigerian Content Dev FundImpact 4 – Establishment of Nigerian Content Dev Fund
SectionSection ImpactImpact
1% levy increases annual costs by hundreds of millions of 1% levy increases annual costs by hundreds of millions of dollars reducing government take through taxes and royalty.dollars reducing government take through taxes and royalty.
Has potential to cause cost escalations in operations.Has potential to cause cost escalations in operations.This fund is a potential source of funding for Capacity building if This fund is a potential source of funding for Capacity building if
well managed.well managed.
Sec Sec 107107
DescriptionDescription
The sum of 1% of every contract The sum of 1% of every contract awarded to any operator in the awarded to any operator in the upstream sector shall be deducted at upstream sector shall be deducted at source and paid into the fund for the source and paid into the fund for the purpose of funding the development of purpose of funding the development of Nigerian Content Nigerian Content (sub-section 2)(sub-section 2)..
•This implies that 1% of all Contract values and Purchase Orders awarded in any particular year This implies that 1% of all Contract values and Purchase Orders awarded in any particular year is payable to this Fund.is payable to this Fund.
22
Impact 5 – Minimum Nigerian Content in Projects (Schedule A)Impact 5 – Minimum Nigerian Content in Projects (Schedule A)
SectionSection ImpactImpact
All operators & contractors are to comply with Schedule A.Inadequate availability of local product or service will result in
breach of the Law and delay/stoppage of Projects. Any breach/default may trigger off the Penalty Clause.
Sec Sec 1111
DescriptionDescription
Minimum Nigerian Content in any project is as stated in schedule A however the Minister may recommend a waiver for items for a period not exceeding 3 years.
•The Minister shall conduct a review of Schedule A every two years, to ensure a measurable The Minister shall conduct a review of Schedule A every two years, to ensure a measurable and continuous growth in Nigerian Content in the industry.and continuous growth in Nigerian Content in the industry.
23
Impact 6 – An Operator is required to invest/set up facilities for Impact 6 – An Operator is required to invest/set up facilities for production/manufacturing.production/manufacturing.
SectionSection ImpactImpact
Level of exposure and amount of contribution unknown and Level of exposure and amount of contribution unknown and uncapped.uncapped.
Investors would be forced into areas of business that are not Investors would be forced into areas of business that are not core to their operations ; a good way to generate linkages to core to their operations ; a good way to generate linkages to non-oil activities . non-oil activities .
Leaves room for negotiations. Appropriate fiscal framework & Leaves room for negotiations. Appropriate fiscal framework & tax incentives may render investment attractive.tax incentives may render investment attractive.
Sec Sec 4747
Sec 48Sec 48
DescriptionDescription
The Minister shall make Regulations The Minister shall make Regulations which will require an operator to invest which will require an operator to invest in or set up a facility/factory for the in or set up a facility/factory for the production or manufacturing or/for production or manufacturing or/for providing any services otherwise providing any services otherwise imported into Nigeria.imported into Nigeria.
Minister shall consult with the relevant Minister shall consult with the relevant arms of govt on appropriate fiscal arms of govt on appropriate fiscal framework & tax incentives for framework & tax incentives for companies that establish facilities, companies that establish facilities, production units, etc in Nigeria for production units, etc in Nigeria for production and provision of services & production and provision of services & goods otherwise imported into Nigeria.goods otherwise imported into Nigeria.
24
Impact 7 – Prohibition of Importation of Welded ProductsImpact 7 – Prohibition of Importation of Welded Products
SectionSection
53
ImpactImpact
This is a major boost to this industrial activity . It will substantially increase
capacity to build structures in Nigeria.
..
DescriptionDescription
All Operators or Project Promoter All Operators or Project Promoter engaged in Nigerian oil and gas engaged in Nigerian oil and gas industry shall carry out all fabrication industry shall carry out all fabrication and welding activities in-country.and welding activities in-country.
25
Impact 8 – The Board’s Powers to enforce Cabotage ActImpact 8 – The Board’s Powers to enforce Cabotage Act
SectionSection ImpactImpact
The Cabotage Act has provisions that have The Cabotage Act has provisions that have remained a challenge to the industry, ranging from remained a challenge to the industry, ranging from procedural to operational.procedural to operational.
Lack of capacity in-country will affect strict Lack of capacity in-country will affect strict compliance with the provisions of Cabotage Act.compliance with the provisions of Cabotage Act.
The NC Act will view non-compliance of the The NC Act will view non-compliance of the relevant sections of the Cabotage Act as an offence relevant sections of the Cabotage Act as an offence under the NC Act.under the NC Act.
Sec Sec 108108
DescriptionDescriptionThe Board in conjunction with The Board in conjunction with
NIMASA, shall have powers to NIMASA, shall have powers to enforce compliance with relevant enforce compliance with relevant sections of CABOTAGE Act, in sections of CABOTAGE Act, in relation to matters pertaining to relation to matters pertaining to Nigerian Content development.Nigerian Content development.
26
Impact 9 – Penalty for Non-ComplianceImpact 9 – Penalty for Non-Compliance
ImpactImpact
• Non-compliance with the provisions of this Non-compliance with the provisions of this Bill is an offence under this Bill!Bill is an offence under this Bill!
SectionSection
6868
DescriptionDescription
An operator, contractor or An operator, contractor or subcontractor who carries out any subcontractor who carries out any project contrary to the provisions of project contrary to the provisions of this act, commits an offence and is this act, commits an offence and is liable upon conviction to a liable upon conviction to a fine of fine of 5%5% of the project sum for each of the project sum for each project for which the offence is project for which the offence is committed and or committed and or cancellationcancellation of of the project where applicablethe project where applicable .
•Can failure to obtain approval before advertisement trigger off this Clause?Can failure to obtain approval before advertisement trigger off this Clause?•In the absence of any express indication of which body or office will enforce this In the absence of any express indication of which body or office will enforce this clause and the specific procedure for obtaining a conviction, the Board may be clause and the specific procedure for obtaining a conviction, the Board may be the arbiter for cases of non-compliance.the arbiter for cases of non-compliance.
27
Other Provisions Other Provisions
SectionSection ImpactImpact
Provision to be made for Nigerians to understudy each Provision to be made for Nigerians to understudy each incumbent expatriate for a maximum of 4yrs, after which incumbent expatriate for a maximum of 4yrs, after which that position shall become Nigerianised.that position shall become Nigerianised.
Multiple reports to be generated for the Board’s review and Multiple reports to be generated for the Board’s review and approval.approval.
Sec Sec 3131
Sec 35Sec 35
Sec 18Sec 18
Sec 24Sec 24
DescriptionDescription
Operator shall submit to the Board a Operator shall submit to the Board a succession plan for any position not succession plan for any position not held by Nigerians. held by Nigerians.
All operators shall employ only All operators shall employ only Nigerians in their junior & intermediate Nigerians in their junior & intermediate cadre.cadre.
Operators shall submit to the Board a Operators shall submit to the Board a list of all contracts, subcontracts and list of all contracts, subcontracts and POs, exceeding $1m, 30 days prior to POs, exceeding $1m, 30 days prior to the first day of each quarter,the first day of each quarter,
Within 30 days of the end of each Within 30 days of the end of each quarter, a list of all contracts, quarter, a list of all contracts, subcontracts & POs exceeding $1m, subcontracts & POs exceeding $1m, shall be submitted to the Board.shall be submitted to the Board.
29
Nigeria Oil & Gas Content Act :Benefits to the Nigerian Economy
30
Benefits
Domestication of substantial volume of Industrial activities, especially construction of Oil field structures.
Domestication of services to the Oil & Gas sector, especially Insurance services
Boost to the Service sector , particularly the indigenous companies Increased employment opportunities for young Nigerians, as
engineers, geoscientists, welders, fitters, instrumentists..etc Increased in-country retention of Oil Industry spend and attendant
reduction in capital flight Increased local capacity building in diverse areas , such as,
Engineering studies, Seismic processing, structural fabrication, welding, project management, etc.
Increased use of local raw materials and finished products.
31
Nigeria Oil & Gas Content Act :Challenges
32
Challenges Capacity building to meet the sudden growth in work volumes in-
country. Finance for local contractors. Cost of borrowing makes local
contractors less competitive relative to foreigners. Skills gap : necessity to bridge the gap between Industry
personnel needs and available manpower Fiscal support : Need to remove laws that make local production
less competitive than imports Quality standards : Need for local contractors to meet the needs
of International oil companies Certification : Need to have local presence of certifying agencies Need to build-up Nigerian codes and standards in all spheres of
Engineering Massive retraining of Artisans and technicians/technologists to
make them acceptable for Local/Global Certification. Need to re-create our Engineering schools, trade centres,
polytechnics, etc.
33
Nigeria Oil & Gas Content Act :The Role of COREN
34
Role of COREN
Sec.72(b)(vi) : Empowers COREN to nominate a representative to the Council of the Nigerian Content Monitoring Board
Sec.49 : The Minister shall make regulations which shall require any operator or company or its professional employees engaged in the provision of engineering or other professional services in the Nigerian oil &gas industry to be registered with the relevant professional bodies in Nigeria such as COREN.
Several sections in the law dealing with technology issues such as : Succession planning Technology transfers
35
Nigeria Oil & Gas Content Act :Recommendations
36
Recommendations to COREN
Aggressive Registration of all professionals in the Industry, will generate funds for the Council’s professional activities
COREN’s pupilage schemes (SIWES and SITSIE) should be re-created and re-invigorated, using the provisions in this law for succession planning and mentorship
COREN has a major advocacy role to play on the Nigerian Content Board. Its position on the Board must be used to the maximum to promote the interest of Nigerian professionals
COREN should work with other professions such as Nigerian Content Committee (NSE), to sponsor a similar law for other sectors of the economy (Power, Telecom; construction, Infrastructural development…etc)
37
Conclusion
The Act, though severe, is a welcome development in Nigeria
Efforts need to be put into Capacity building, by using the Nigerian Content support fund judiciously
COREN has another profound and important instrument for regulating engineering practice in Nigeria.
38
ANNEX
39
Nigerian Content : Comparative dataNigeria Brazil Indonesia Malaysia Mexico Norway
1. Production 2001
1.1 Oil (Thousand barrels daily) 2148 1337 1410 788 3560 3414
1.2 Gas (Billion cubic meters) 13.4 7.7 62.9 47.4 34.7 57.5
2. Reserves 2001
2.1 Oil (Thousand mill. Barrels) 24.0 8.5 5.0 3.0 26.9 9.4
2.2 Gas (Trillion cubic meters) 3.51 0.22 2.62 2.12 0.84 1.25
4. National oil companies
4.1 State owned company?4.2 Operator or financial?
YesFinance
YesOper.
YesOper.
YesOper.
YesOper.
YesOper.
5. Oil policy
5.1 Member of OPEC? 5.2 Block auction or awarding?
YesAward
NoAuct.
Yes Award
No Award
No na
No Award
6. Local Content
6.1 Local content in supplies to upstream oil and gas
10-15% ca.70% 25% 70% ~ 90% 50%
40
Defining the right Focus
40
• More jobs created abroad from Nigeria oil and gas activities than created in
Nigeria
• Poor Nigerian GDP growth despite heavy expenditure
• Local companies seek subcontracts for Nigerian Projects abroad
• Youth restiveness from joblessness – Insecurity
• Absence of Skills acquisition and Technology transfer mechanisms
• Undeveloped industrial infrastructure
• Insufficient opportunity to anchor skills
• Insufficient funds in economy to service local companies
Operator’s
spend outside
Nigeria
Multi- national
Coys spend
outside Nigeria
~10 Billion Dollars AVERAGE ANNUAL SPEND
Few local fabricators
& contractors
Low In-country spend
little value added
Non-involvement of
Local service providers 95%
5%
Increase in industry spend on community related issues did not impact Nigerian Content attainment and did little to halt the new wave of militancy in the region.
Source: NNPC-NCD/G.Osahon
Thank You
41
