The Nigerian Oil and Gas Industry has developed, focusing on increasing indigenous participation in the industry. This is reflected through the Nigerian government initiative of increasing Local Content and ensuring that indigenous companies have a greater part in developing oil and gas assets.
The current climate of the industry has largely been influenced by the passage of various laws and regulations that are administered by local, national and other government organizations representing the interests of state and country. Through these bodies, the Nigerian Government regulates exploration and production of natural gas and crude oil as a result of the authority provided through the Nigerian Constitution and the Petroleum Act (“PA”), which vests the entire ownership and control of petroleum in the Nigerian Government on behalf of the people of Nigeria.
Amongst the most notable government institutions are the Ministry of Petroleum Resources (MPR), Nigerian National Petroleum Corporation (NNPC) and the Department of Petroleum Resources (DPR) which ensure that operations within the industry are regulated to a specific standard.
It is with great input from these bodies that various laws and regulations that directly and indirectly regulate the Nigerian oil and gas industry are implemented and monitored. These laws and regulations vary from those applying to the operational aspects, to the fiscal aspects, such as the PA, the Petroleum Profits Tax Act (“PPTA”), the Deep Offshore and Inland Basin Production Sharing Contract Act (DIBPSA) and regulations which have been made pursuant to the PA, such as the Petroleum (Drilling &Production) Regulations (“PDPR”) which regulate operational aspects of the drilling and production of crude oil.
To consolidate the objective of increasing Indigenous participation, the Government introduced the Nigerian Oil and Gas Industry Content Development Act 2010 (the “Local Content Act”). This has brought about a significant shift in ensuring an increase in indigenous participation within the industry and therefore trying to achieve the government target of seventy percent (70%) use of indigenous labor, materials and resources in all oil and gas projects in country.
Even though the Local Content Act seems like it was introduced to consolidate the notion of increasing indigenous participation, it should be noted that this concept has always been at the forefront of the Government intention to implement. Through the Nigerian content Directives that were issued by the Nigerian National Petroleum Corporation (NNPC) as a pre qualification criterion for any contracts executed and the 1st Schedule of the Petroleum Act, the Local Content initiative is provided through specifically requiring the holder of an Oil Mining Lease (OML) to ensure that within a ten (10) year period from the grant of the OML, Seventy Five Percent (75%) of managerial professions and supervisory staff are Nigerian.
This is further utilized, in contracts between the Government and International Oil Companies (IOCs) such as, Production Sharing Contracts (PSC) and Joint Operating Agreements (JOA). Both these contracts contain local content provisions specifically referring to Nigerian participation in employment and Nigerian service providers in the country. A typical provision in a PSC giving effect to increased Nigerian participation would read as follows:
“ten (10) years from the effective date of this contract the number of citizens of Nigeria employed by the CONTRACTOR in connection with the Petroleum Operations in managerial, professional and supervisory positions, shall reach at least seventy five (75%) percent of the total number of persons employed by CONTRACTOR in those positions. The CONTRACTOR shall further ensure that at the fifteenth (15th) and twentieth (20th) year after the effective date of this contract, the minimum level of the total number of Nigerian citizens engaged in Petroleum Operations in managerial, supervisory and other professional positions shall reach eighty (80%) percent and eighty five (85%) percent respectively;”
In furtherance of the above, to ensure compliance with the Local Content Act in the award or execution of a project or contract, the Nigerian Content Monitoring Board (NCMB) is established amongst others to monitor, issue directives, review all projects and activities.
Local Content in the Oil Industry
The Local Content Act was enacted on April 22nd 2010. It provides a framework, for increased Nigerian participation in the Oil and Gas Industry. It prescribes minimum thresholds for Nigerian participation in activities within the industry through the utilization of Nigerian human and material resources and services in the upstream sector of the industry. This includes all activities, connected with the exploration, development, exploitation, transportation and sale of Nigerian crude oil and gas resources.
The initial impact of the Act has seen great changes being made, with most IOCs making efforts to comply with the provisions of the Local Content Act. An initiative of which is provided amongst others, includes the opportunity for Nigerian independent operators to be given first consideration in the award of oil blocks, oil field licenses, oil lifting licenses and in all projects for which a contract is to be awarded in the Nigerian oil and Gas industry.
Exclusive consideration is also provided to Nigerian indigenous services 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. In furtherance of ensuring greater stability and growth in the Nigerian Oil and Gas sector the Act further mandates that a minimum of ten percent (10%) of total revenue accruing from operations in Nigeria is retained.
Bidding Process for Contracts
The Act requires project promoters and operators to consider Nigerian content when evaluating any bid. Where bids are within one percent (1%) of each other at commercial stage, the bid containing the highest level of Nigerian content shall be selected provided the Nigerian content is at least five percent (5%) higher than its closest competitors.
This initiative is also emphasized through ensuring that award of contracts are not solely based on the principle of lowest bidder and allows a Nigerian indigenous company who has capacity to execute a job not to be disqualified exclusively on the basis that it is not the lowest financial bidder, provided the value does not exceed the lowest bid price by ten percent (10%).
Employment and Training
The inclusion of Nigerians in oil operations provides a significant avenue through which skills can be acquired and subsequently the development of the industry and economy. This is substantiated through the Local Content Act which requires that for each of its operations, an operator or project promoter may retain a maximum of five percent (5%) of management positions as may be approved by the NCMB as expatriate positions to take care of the interests of investors.
It is also made mandatory for operators in the industry to provide a viable succession plan whereby Nigerians will understudy each incumbent expatriate position for a maximum period of four (4) years, at the end of which the positions shall become Nigerianised.
Furthermore, the Act mandates that operators and companies operating in Nigeria shall only employ Nigerians in their junior and intermediate cadre or any other corresponding grades designated by the operator or company.
Another interesting provision is the requirement that all project or contracts with a budget of more than $100 million are required to contain a ‘Labour Clause” mandating a minimum % of Nigerian labour in specific cadres.
Prohibition of importation of welded products
All operators, project promoters, contractors and any other entity engaged in the Nigerian oil and gas industry shall carry out all fabrication and welding activities in – country.
Where legal services are required to engage in any operation, business or transaction in the Nigerian Oil and Gas industry, operators are obligated to only retain the services of a Nigerian legal practitioner or a firm(s) Nigerian legal practitioners with its office located within Nigeria. This is implemented through the provision of a Legal Service Plan (LSP) to the board every six (6) months which shall extensively provide a report on the legal services utilized in the last six (6) months by expenditure, a forecast of legal services required during the next six (6) months and the projected expenditure for the services. In addition to the above a list should be provided highlighting the external solicitors utilized for legal services in the past six (6) months, the nature of work done and the expenditure made by the operator.
To engage in any form of business, operations or contract in the Nigerian Oil and Gas industry, operators and all interested parties must insure all insurable risks related to its oil and gas business with an insurance company, through an insurance broker registered in Nigeria under the provisions of the insurance Act as amended.
It is mandatory for operators to submit a Financial Services Plan (FSP), where financial services are required. Included in the FSP amongst others will be details of financial services utilized in the past six (6) months, a forecast of financial services required during the next six (6) months, projected expenditure; and the nature of financial services required.
It is also provided that operators, contractors and sub-contractors shall maintain bank accounts within Nigeria in where it shall retain a minimum of 10% of its total revenue accruing from its Nigerian operations.
Nigerian Content Monitoring Board (NCMB)
As stated earlier the NCMB is established under the Local Content Act to represent the industry watchdog for the implementation of Local Content across the Oil and Gas industry. To ensure compliance every operator bidding for any licence, permit or interest and before carrying out any project in the Nigerian Oil and Gas industry shall submit a Nigeria Content Plan to the NCMB demonstrating compliance with the Nigerian Content requirement. The NCMB shall review and assess the plan and if satisfied that the plan complies with the provisions of the Act will issue a Certificate of Authorization to the operator of the project.
An operator, contractor or subcontractor who carries out any project contrary to any of the provisions as highlighted under the Act, will be committing an offence and upon conviction will be liable to a fine of five percent (5%) of the project sum for each project in which the offence is committed or cancellation of the project.
To conclude the local content initiative is creating an ever more increasing commercial environment for indigenous companies. With the continuous enforcement of the Act by the NCMB IOCs are voluntarily complying with the provisions of the Act.
Etin Giwa Osagie is a lawyer and consultant with extensive experience in oil and gas and energy related matters.