What Nigeria's oil industry must do now

Jul 01, 2003 02:00 AM

Historically, petroleum was first discovered in 1956 in commercial quantities at Oloibiri in present day Bayelsa State after almost five decades of concerted search for crude oil. In 1971, Nigeria decided to participate in the budding petroleum industry through the establishment of the Nigerian National Oil Corporation, which later metamorphosed into the NNPC.
Using the NNPC, the country acquired participating interest in the operations of the multinationals, thus giving birth to the present-day joint venture operations. That decision enabled the country to have some say in the activities of the companies especially in the area of development of indigenous expertise. For instance in 1972 the first set of professionals were recruited into the Nigerian National Oil Corporation.

The corporation, conscious of the level of expertise required by and to sustain the industry, embarked on a well-planned, coordinated and intensive human resource development, which spanned several years and in different counties. This comprehensive development programme remains unparalleled even today because it was driven by national interest. I happen to be a beneficiary of that national development programme.
The planning scenario and projections at the time was that Nigeria would become the hub for petroleum activities in the sub-region and the Gulf of Guinea. Regrettably, since then, there has not been a comprehensive programme with well-articulated milestones for the development of in-country capacity such that Nigerians could effectively participate in the Nigerian Oil and Gas Industry. The timing of this forum and the chosen theme "Enhancing local content and benefiting from the Onne Oil and Gas Free Zone" is therefore, most appropriate especially now when we, as a people, are in search of how best to develop indigenous capacity, stimulate industrial development and grow the national economy.

As you all may be aware, the petroleum industry in Nigeria has grown in size and complexity since the commencement of oil production in the country. The industry has become more sophisticated technically, financially and in terms of required skill sets and expertise. Without doubt, the industry currently accounts for most of Nigeria's wealth. However, it also gulps a lot of money for high risk undertakings and cutting edge technology input, to which the country has had a subliminal level of contribution and with limited impact on the lives and living condition in the host environment.
As the nation pursues opportunities in the deep and ultra deep offshore where the financial and technological stakes are higher, the hope for nationals to participate effectively in terms of real input could be permanently dimmed unless something is done.

Given what has happened in the industry in the last four decades, our hope is that we should as a minimum, ensure that future generations of Nigerians are able to benefit from the present abundance in terms of infrastructures and industries that will continue to thrive even long after oil might have lost its place in the global energy supply. It is in this regard that the issue of our inability to participate effectively in the Nigerian Oil and Gas Industry gives us serious concern despite the huge investments made by the country in the industry.
The issue of local content has become topical in our national discourse to the extent that it was even tabled for public hearing at the National Assembly. While this may have been necessary to generate a pool of ideas from where appropriate solutions could be developed, it is the complexity and delicate nature of the matter, which should inform the type of solution to be prescribed.

Maybe we should take a cue from the issue of gas flaring. Initial effort at solving the problem concentrated on prescribing penalties for flaring but this had very limited effect, if at all. However, as soon as the issue was approached from a business perspective through the introduction of incentives for gas related projects the trend changed tothe extent that the industry has been able to set a target date of 2008 for extinguishing all oilfield flares.
It is in the same manner that the issue of local content needs to be addressed. In the past, there seemed to have been differences in understanding by players in the industry as to what constituted local content. Some understood local content as the increasing contribution of the Naira denomination in contracts awarded by the industry, while others believed that it is the extent of involvement of Nigerian resources (expertise, raw materials, finished goods/services, etc.). I am inclined to agree with the suggestion that local content is the utilization of the Nigerian human and material resources in the exploitation and development of Nigerian hydrocarbon resources.

Although policy exists for this, its application must however be holistic in the context of the Nigerian economy bearing in mind two fundamental requirements, namely:
-- Full and fair opportunities for Nigerian entrepreneurs either solely or in partnership/strategic alliances with foreign outfits to participate in the exploitation of the Nigerian hydrocarbon resources.
-- The above consideration should not have adverse impact on the commercial viability of the E&P activities.

In support of the above, the Nigerian Vision 2010, which has been endorsed by the present administration seeks to achieve at least 50 % Nigerian Content by 2010. This is a challenge to the industry and further underscores the need for us to look inwards and urgently identify specific areas, which can facilitate the achievement of this target. In order to do this, we as an industry, must encourage and support the development of an industry support infrastructures, utilities, local contracting capabilities, and accept Nigerian companies as service-providers where possible.
That the industry is technology driven and capital intensive is not in doubt but to imagine that forty-three years after the commencement of oil production in the country virtually every input is sourced from overseas leaves a lot to be desired. Unfortunately, this has not been helped by Nigerians' individualistic approach to business, which does not encourage partnerships and alliances kit without which the huge capital required to operate effectively in the industry cannot be raised.

The dearth of local technology and infrastructure is a problem as the industry still relies heavily on external sources for most of its material and technological input. The relevant industries that could supply materials to the oil and gas sector are generally lacking in the country whilst the required expertise necessary for the management of key activities especially offshore are glaringly absent.
The net effect of this is that most projects can hardly be executed within the country's shores and where they are, the benefits will still accrue largely to the external sources of equipment, machinery, parts and know-how. I believe that the present discouraging level of local content in theindustry is not as a result of inadequate policy provision, as government has instituted several policy measures for the realization of its objective of improved local content in the hydrocarbon business.

In this regard, it should be recalled that the Joint Operating Agreement (JOA) and the Production Sharing Contracts (PSC), all have provisions to enhance local content. The relevant agencies of government are also expected to ensure that only companies organized under Nigerian laws provide services in the petroleum sector.
In addition, the NNPC in association with its partners have also tried to ensure higher levels of local content in JV projects by reserving certain categories of activity, in which there are proven local expertise and availability, to indigenous companies. What has been lacking is commitment and concerted efforts by all parties to ensure the realization of the policy objectives of government.

The industry must blaze the trail in changing our economy to a productive one by addressing seriously the issue of improving local content in the industry and ensuring that:
-- E&P activities make substantial contribution to the economy by way of employment, investments and technology acquisition.
-- E&P projects contribute through such areas as the development of infrastructure (roads, electricity etc.), broadening the skills base and providing opportunities for the expansion and development of the Nigerian industry.
-- Whilst not compromising efficiency, certain roles where Nigerian expertise exist or potentials are identifiable, must be exclusively reserved for Nigerians.

In addition, the JV operators or PSC contractors must commit themselves to:
-- Maximizing opportunities for local industry participation and providing details of how this will be achieved.
-- Providing data, which will allow for analysis of value added in Nigeria for all projects executed in the country.
-- Undertaking research, development and design in Nigeria to the maximum extent possible.

It is therefore incumbent on the industry to work within existing policy framework to promote the use of local materials and services. I understand that several processing plants have been built to process bentonites and barites locally and that in mud-engineering companies are now patronizing these locally made products after the initial resistance. This is a welcome development and should be encouraged.1 am also aware that one of the major limitations to indigenous participation is the lack of resources as most of them are small single- owner companies.
My advice would be for them to pull resources together through mergers/strategic alliances in order to be competitive in the industry. The Manufacturer's Association of Nigeria (MAN) and other business associations in the country must take up this challenge as the high level of EPC activities in terms of material, technical and financial inputs clearly underscore the opportunities that we could avail ourselves to transform the Nigerian economy.

I also believe that the various planned development programmes of the industry in offshore West Africa should attract engineering construction companies and other service providers to set up their yards in the region. The impact of such a development on the Nigerian economy will be tremendous. The oil and gas free zone in Onne has been packaged to facilitate the realization of this, which would make Nigeria the hub for servicing the oil industry in the sub-region.
Permit me to dwell a little on why countries set up Free Zones and the benefits we could as an industry derive from our own Onne Oil and Gas Free Zone (OOGFZ). Free Zones have emerged as a consequence of recent developments in world trade -- from the era of excessive protectionism to these days of intense competition.

The development of export-oriented policies has frequently been considered a pre-condition to successful operation of Free Zones. Such policies need include incentives, specific subsidies and freedom from selected regulations. Free Zones do play a strategic role in the development of trade and many of such zones exist in the world today.
Depending upon the ultimate objectives of the host country, there exist different forms of Free Zones, the common ones being, Export Processing Zones (EPZs), Free Trade Zones (FTZs), Special Economic Zones (SEZs), Export Processing Units (EPUs) and Special Customs Privileged Facilities. Although these zones may vary in nature from country to country, some basic features apply. Any Free Zone is a well delineated, enclosed and policed area of a country, which operates under special conditions for the manufacturers of goods, and provisions of services. The characteristic features being geographic separation and focus on export processing activities with mainly foreign participation.

As would be expected, the evolution of EPZs occurred as a response to changes in the global pattern of investment. The advanced economies faced with declining competitiveness due to rising domestic production cost, which combined with ease of transport and communication, provided the impetus for relocating certain production activities -- particularly labour intensive ones -- to the developing world. Most developing countries have taken advantage of these to advance their economies. Ready examples are Malaysia and Indonesia.
In Nigeria, the Nigerian Export Processing Zone Authority (NEPZA) Decree 63 of 1992 enabled the Free Zone development strategy to commence with the first Export Processing Zone sited at Calabar. The task given then through the Federal Ministry of Commerce (FMC) was to support the rapidly growing Nigerian Oil and Gas industry and create a central point of distribution and logistics. The success of this strategy later facilitated the creation of OOGW.

Fully backed and supported by the Federal Government through the Decree 8 of 1996, the Zone has been operational since April 1997. It is therefore to sonic extent regarded as a foreign territory within Nigeria. The synergy betweenthe Government Public Sector, Oil and Gas Free Zone Authority and the Private Sector with leadership left to the private sector has enhanced efficiency of the free zone with minimal bureaucracy.
I believe that with the support of all stakeholders the Onne Oil and Gas Free Zone with its Logistics Support Centre (Onne Port Complex) could become the distribution hub for Oil and Gas activities in Nigeria and the sub-region given the available infrastructure in the complex and the following advantages amongst many others.

-- Prime infrastructural facilities with 2.6 km of jetty at 11.0 meters maximum draft in low water, warehouse space of 331,000 sq metres including an open area of about 1,000,000 sq metres.
-- Secured residential camp within the Free Zone with all recreational facilities.
-- Equipment and materials shipped to Onne under Free Zone status can be exported to other locations in the Sub Saharan region for company's activities and also back to country of origin if so required with no export duty payable.
-- No VAT and with holding tax chargeable on storage facilities, activities and services.
-- No corporate and personal income tax applicable.
-- Easy facilitation of expatriate employees working in the Free Zone.
-- Enterprises operating in the Zones are allowed to export into the Nigerian Customs territory up to 100 % of their products.
-- The amount of import duty on goods manufactured, processed or assembled in the Zones and exported into the Nigerian Customs Territory shall be the rate of duty applicable to the raw materials in the state in which they are originally introduced into the Free Zones.

Foreign investors, including manufacturing concerns, engineering outfits etc should find the above special operating conditions and incentives attractive enough to establish real presence in the Zone and carry out those support activities that would otherwise have been done outside the country. A policy -- no matter how well intentioned -- will fail if those affected by the policy are not willing to abide by it or do not understand or believe in it.
The Nigerian Oil and Gas industry must be willing and prepared to take advantage of the existing policies of Government and in particular that on the Onne OGFZ with a view to contributing meaningfully towards increasing the local content in the industry. Partnering and strategic alliancing are important ways of spreading some of the benefits of the Onne OGFZ from the foreign participants to the local players in the industry.

One of the primary objectives of seeking improved local content in the oil and gas industry is the transfer of technology that would link the oil industry to other sectors of the national economy. The industry must provide the necessary leadership in this regard.
Capacity and sustainable development cannot be achieved without participation and education of people. Take for instance Malaysia. The resources that the big multinational oil corporations brought to Malaysia including technical skills and experiences in managing complex high risk investments and strong financial assets played a significant role in enabling Malaysia to join the ranks of industrial nations.

The expansion of their industry also boosted the development of steel fabrication in Malaysia as local companies built structures such as platforms and decks to support offshore petroleum operations. Local fabrication has not only created additional employment opportunities for Malaysia but has saved the country substantial foreign expenditures.
Working with these multinationals, Malaysians succeeded in gaining knowledge and achieving technology transfer such that they have now mastered petroleum technology sufficiently enough to offer their services elsewhere in the world. This is what the Nigeria oil and gas industry must do for Nigeria.

In less than a decade, if the industry is committed to capacity building, Nigeria will be able to fabricate structures such as platforms, decks, etc., required for offshore operations whilst educating Nigerians on highly sophisticated technology and operating systems. The industry can support its operations without jeopardizing cost, schedule, quality, safety or the environment by developing specific business practices to maximize participation of local businesses like:
-- Providing business advice and assistance to encourage the development of local businesses with potential for long term economic viability.
--- Interacting with local businesses to ensure they are aware of opportunities, bidding procedures and safety requirements of the industry.
-- Local content as a specific determinant of contract awards in the contracting process.

Good infrastructure is vital for economic and social progress. This is true of any country in the world. The OOGFZ is well positioned to act as catalyst for the development of the required support infrastructures for Nigeria.
As success of the industry is ultimately linked to that of the society, the industry must act responsibly by maintaining and enhancing social capital as well as contributing to the nation's economic capacity to generate and distribute wealth meeting the needs of the presence without compromising the ability of future generations to meet their own needs.

Source: Vanguard
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