LOCAL CONTENT IN THE OIL AND GAS INDUSTRY OF NIGERIA, CHALLENGES: PROSPECT AND THE WAY FORWARD
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LOCAL CONTENT IN THE OIL AND GAS INDUSTRY OF NIGERIA, CHALLENGES: PROSPECT AND THE WAY FORWARD
Chapter one
INTRODUCTION
1.1 Background of the Study
Despite its abundance of natural oil resources, Nigeria remains the 20th poorest country in the world. Much of the country’s poverty and underdevelopment can be traced back to poor governance, resource mismanagement, different political concerns, and a lack of infrastructure (Adams et al., 2008).
The country’s GDP per capita was recently lower than it was when it gained independence 40 years ago, and income inequality was increasing (Boscheck, 2007). However, the oil and gas industry makes a significant contribution to Nigeria’s economy. It generates almost 90% of the federal government’s annual revenue (Nwosu et al., 2006).
However, the industry is dominated by foreign interests, and major activities such as exploration, drilling, production, well intervention, and service provision are primarily controlled and managed by foreign multinational corporations
with only minor contracts awarded to local contractors (ibid). Local content requirements (LCR) have been made legally mandatory in order to increase local industry participation in Nigeria’s oil and gas industry.
This means that foreign companies involved in exploring and exploiting Nigerian resources are required to include indigenous companies. With a few exceptions, the foreign firms are huge multinational corporations (MNEs).
For example, only five corporations account for 95% of Nigeria’s oil and gas production: Shell, Exxon, Chevron, Total, and Agip (Frynas and Paulo, 2007).
Foreign corporations’ involvement in developing countries has traditionally been motivated by a desire to exploit natural resources and large labour pools (Hansen et al., 2009).
The need for resource-rich Nigeria to take control of exploration, exploitation, and production activities in the oil and gas sector, as well as to harness the potentials of this most strategic industry to generate more value-added, appears to be receiving much-needed attention from all stakeholders.
This need is reflected in Nigeria’s desire to domicile a significant portion of the average $18 billion per year in exploration and production spending, as well as stem the tide of capital flight that has made Nigeria a junior partner in joint venture arrangements with international oil companies (IOCs).
For a country with over four decades of experience in oil and gas exploration and production activities, as well as proven recoverable reserves of approximately 37 billion barrels, the inability to use resource wealth for national development and poverty reduction has been perhaps the most difficult challenge facing successive administrations.
These issues are shown in how Nigeria might maximise the benefits of oil and gas operations by making the best use of indigenous competencies and resources, as is done in Indonesia, Brazil, Norway, and Venezuela, for example.
Although these countries began oil exploration and production activities after Nigeria, they have achieved exceptional success in their attempts to increase local content in this critical industry. The question is, why has Nigeria been unable to overcome its own challenges?
Local content is defined as “the quantum of composite value added to or created in Nigeria through utilisation of Nigerian resources and services in the petroleum industry resulting in the development of indigenous capability without compromising quality, health, safety, and environmental standards” by the Nigerian Oil and Gas Development Law of 2010.
It is placed in the perspective of Nigerian entrepreneurial growth and asset domestication in order to achieve Nigeria’s strategic developmental goals. The initiative, which has the potential to create over 30,000 employment over the next five years,
aims to increase the domestic portion of the $18 billion yearly spending on oil and gas from 45% to 70%, while also strengthening the multiplier effects on the economy through refining and petrochemicals.
Local content policy activity began in 1971 with the formation of the Nigerian National Oil Corporation (NOC). NOC was founded to promote Nigeria’s indigenization agenda in the petroleum sector.
In 1977, the NOC merged with the petroleum ministry to form the Nigerian National Petroleum Corporation (NNPC). The NNPC launched the actual local content strategy by acquiring shares in the operations of the IOCs. These interests increased to around 70%, with the duty for overseeing all acreages and activities.
Although explicit efforts were made in the past under Regulation 26 of the 1969 Petroleum Act, the enforcement of local content policy, which served as the foundation for Nigeria’s long-term economic development, was merely paperwork.
For an industry that accounts for 80% of Nigerian government income and 95% of foreign exchange, this is completely unacceptable to the Nigerian government, hence the call for change.
1.2 Statement of the Problem
Nigeria’s rise in oil and gas output was rapid and consistent, and she quickly established herself as a strong player in OPEC. Oil exploration, which began onshore, has significantly increased the country’s daily production capacity to roughly 2.3 million barrels per day and proven reserves to around 37 billion barrels.
Despite its expanding prominence and riches, Nigeria remains one of the world’s poorest and most technologically backward countries. This is mostly because the much-touted affluence has not resulted in better welfare.
One explanation for this is that more than 90% of annual industrial expenditures leave the domestic economy via capital flight. Despite the expanding number of local oil service companies, their yearly gross earnings still account for less than 5% of the industry’s total annual contracting budget.
1.3 Objectives of the Study
The primary goal of this study is to determine the issues, prospects, and future of local content in Nigeria’s oil and gas business. Specifically, the study intends to:
Learn about the issues local content faces in Nigeria’s oil and gas industry.
Assessing the potential for local content in Nigeria’s oil and gas industry.
· Provide solutions to identified issues.
1.4 RESEARCH QUESTIONS.
The following research questions were developed to help guide the investigation and reach a valid and accurate conclusion.
What are the hurdles for local content in Nigeria’s oil and gas industry?
What are the prospects for local content in Nigeria’s oil and gas industry?
· How can the identified issues be resolved?
1.5 Significance of the Study
The study will inform stakeholders involved in oil and gas policymaking, the government at various levels, and the general public about what local content in oil and gas means. It will also inform them about the challenges faced by Nigeria’s oil and gas industry, the industry’s prospects, and the solutions to the problems.
Furthermore, the findings of this study will help Nigerian policymakers develop a sensible strategy that will propel the business ahead. Finally, this research will serve as a guide for other researchers who want to conduct similar research in the near future.
1.6 Scope of the Study
This study paper focuses on the Nigerian oil and gas industry, including both its difficulties and its opportunities.
1.7 Research Methodology
This study focuses mostly on local content in Nigeria’s oil and gas industry. As a result, the study uses a traditional way of acquiring information, namely secondary sources.
A sizable portion of the secondary sources used came from published and unpublished works, including items taken from archives, newspapers, conversations, conference papers, magazines, the internet, books, and journal articles, among others.
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