Risks of going local by Nizar Manek*

The Federal Government of Nigeria through the Nigerian National Petroleum Company (NNPC) recently awarded 60 percent of its 2014-2015 crude oil lifting contracts worth approximately US$40bn. to local oil companies (LOCs) as per the Nigerian Oil and Gas Industry Content Development Act (NOGICD) 2010. The announcement came in a 27 April 2014 statement by the Minister of Petroleum Resources Diezani Alison-Madueke. A year earlier, Alison-Madueke noted that some indigenous contractors ‘lack proper business structure; they are small, fragmented and often times incapable of packaging or attract loans. Only a few of them can deliver turnkey projects without resorting to some form of partnership agreement for equipment, expertise or technical support.’

The NOGICD affects operating companies, contractors, sub-contractors, and service providers, given minimum requirements for non-indigenous companies to use local services and materials. International companies must partner with local companies in joint venture (JV) arrangements. The NOGICD requires ‘Nigerian independent operators’ (i.e. with not less than 51% equity shares owned by Nigerians, as per section 106) to be given first consideration in the award of oil blocks, oil field licences, oil lifting licences, and all projects for which a contract is to be awarded in Nigeria’s oil and gas industry. As per section 3(2), the Act also requires ‘Nigerian indigenous services companies’ to be given exclusive consideration for contracts and services works on land and swamp operating areas in if they can demonstrate ownership of equipment Nigerian personnel, and capacity.

The NOGICD has its roots in former President Olusegun Obasanjo’s plan to create a new policy to push the country’s industrial development forward through indigenous ownership and operation of assets in the oil and gas industry. The policy sought to increase local employment levels and help develop and diversify the local manufacturing sector. Following Nigeria, the local content philosophy is gaining traction with the Republic of Congo, which has been producing oil since 1957 and is now considering driving up the participation of indigenous companies in the supply chain. In November 2013, Ghana passed its Petroleum (Local Content and Local Participation) Regulation, under which Ghanaian companies will be given first preference in bids for petroleum licences. A five percent minimum equity stake for local companies in every oil contract awarded to an international investor will be mandatory.

Sanctions for non-compliance can be severe. Hyundai Heavy Industries (HHI), the contractor on the Ofon Phase II deep-water field in Oil Mining Licence (OML) 102 – a joint venture between the NNPC and France’s Total – was banned from bidding for oil and gas projects in Nigeria. The Nigerian Content Monitoring Board (NCMB), which passes regulations and procedures for implementing local content rules and approves local content plans submitted to it by operators, accused the Korean contractor of gross violations of the NOGICD because it employed expatriates who did not have approvals from the NCMB and whose job functions could otherwise be performed by Nigerians.

For various reasons, international companies face risks where they must select indigenous JV partners from a pre-approved short-list. As notes the draft of the August 2012 Report of Nigeria’s Petroleum Revenue Special Task Force (PRSTF) signed by its Chairman Mallam Nuhu Ribaduthe conduct of past NNPC bid rounds ‘undermined the stated goals of boosting ‘local content’ and nurturing series Nigerian operators. Of the 24 marginal fields awarded in the early 2000s, less than 10 have produced oil. Marginal field production is around 10,000bpd, according to the NNPC.’ To identify whether a local JV partner is appropriate, due diligence may be required with respect to manufacturing capabilities and expertise, scale of operations, financial resources, and more broadly business strategy, corporate governance, and integrity of board members. Nigeria is uniquely expensive due to security problems, equipment sabotage, local content requirements, and industry delays; all of which arguably add to costs. This, notes Ribadu’s PRSTF report, makes it more difficult for authorities to evenly compare costs in Nigeria with those in other countries to assess reasonableness. ‘It also means companies can more easily inflate costs.’

Why was the third-party short-listed? Is the IOC certain it is not financing companies belonging to local officials or ownership by a political party candidate, which would be tantamount to bribery? What is the shareholding structure of a local JV partner? These are among the most important questions to consider. After the introduction of local content rules in Nigeria and the emergence of international anti-corruption legislation and treaties, led by the United States Foreign Corrupt Practices Act (FCPA) in 1977 and the OCED Convention Against Bribery of Foreign Public Officials, a shift was required by IOCs, LOCs, and middlemen. For an IOC to pay off a local partner in the form of a corporate entity or middleman was previously a ‘cultural’ cost common in Nigerian industrial practice; not illegal by local standards. ‘Cultural meetings’ came to light in the recent Nigeria FCPA case involving Halliburton, where middlemen opened the doors to procurement contracts. The case also involved non-US corporations, such as Technip and Maurubeni, which US prosecutors could pursue because they had a corporate entity listed in the US.

One live Nigerian case has involved an indigenous oil company (Malabu Oil & Gas Ltd) connected to the Minister of Petroleum Resources under the late General Sani Abacha, Chief Dan Etete, aka Dauzia Loya Etete, who, during his tenure as minister, awarded a licence off the Gulf of Guinea (OPL 245) to the company he played a role in incorporating and came to control, and for which he hired Russian and Nigerian middlemen to help him negotiate the sale of the licence to IOCs. Other questions to consider are whether there are any undisclosed third-party transactions, material misrepresentations, commissions, unreported financial difficulties, criminal or regulatory sanctions, or undisclosed legal or bankruptcy proceedings Another consideration may be the existing relationship between the potential JV partner and the NCMB. Has the NCMB, established by President Goodluck Ebele Jonathan following the signing into law of the Act on 22 April 2010, undertaken its own adequate checks as regulator?

*Nizar Manek is a journalist.

Risks of going local by Nizar Manek*

The Federal Government of Nigeria through the Nigerian National Petroleum Company (NNPC) recently awarded 60 percent of its 2014-2015 crude oil lifting contracts worth approximately US$40bn. to local oil companies (LOCs) as per the Nigerian Oil and Gas Industry Content Development Act (NOGICD) 2010. The announcement came in a 27 April 2014 statement by the Minister of Petroleum Resources Diezani Alison-Madueke. A year earlier, Alison-Madueke noted that some indigenous contractors ‘lack proper business structure; they are small, fragmented and often times incapable of packaging or attract loans. Only a few of them can deliver turnkey projects without resorting to some form of partnership agreement for equipment, expertise or technical support.’

The NOGICD affects operating companies, contractors, sub-contractors, and service providers, given minimum requirements for non-indigenous companies to use local services and materials. International companies must partner with local companies in joint venture (JV) arrangements. The NOGICD requires ‘Nigerian independent operators’ (i.e. with not less than 51% equity shares owned by Nigerians, as per section 106) to be given first consideration in the award of oil blocks, oil field licences, oil lifting licences, and all projects for which a contract is to be awarded in Nigeria’s oil and gas industry. As per section 3(2), the Act also requires ‘Nigerian indigenous services companies’ to be given exclusive consideration for contracts and services works on land and swamp operating areas in if they can demonstrate ownership of equipment Nigerian personnel, and capacity.

The NOGICD has its roots in former President Olusegun Obasanjo’s plan to create a new policy to push the country’s industrial development forward through indigenous ownership and operation of assets in the oil and gas industry. The policy sought to increase local employment levels and help develop and diversify the local manufacturing sector. Following Nigeria, the local content philosophy is gaining traction with the Republic of Congo, which has been producing oil since 1957 and is now considering driving up the participation of indigenous companies in the supply chain. In November 2013, Ghana passed its Petroleum (Local Content and Local Participation) Regulation, under which Ghanaian companies will be given first preference in bids for petroleum licences. A five percent minimum equity stake for local companies in every oil contract awarded to an international investor will be mandatory.

Sanctions for non-compliance can be severe. Hyundai Heavy Industries (HHI), the contractor on the Ofon Phase II deep-water field in Oil Mining Licence (OML) 102 – a joint venture between the NNPC and France’s Total – was banned from bidding for oil and gas projects in Nigeria. The Nigerian Content Monitoring Board (NCMB), which passes regulations and procedures for implementing local content rules and approves local content plans submitted to it by operators, accused the Korean contractor of gross violations of the NOGICD because it employed expatriates who did not have approvals from the NCMB and whose job functions could otherwise be performed by Nigerians.

For various reasons, international companies face risks where they must select indigenous JV partners from a pre-approved short-list. As notes the draft of the August 2012 Report of Nigeria’s Petroleum Revenue Special Task Force (PRSTF) signed by its Chairman Mallam Nuhu Ribaduthe conduct of past NNPC bid rounds ‘undermined the stated goals of boosting ‘local content’ and nurturing series Nigerian operators. Of the 24 marginal fields awarded in the early 2000s, less than 10 have produced oil. Marginal field production is around 10,000bpd, according to the NNPC.’ To identify whether a local JV partner is appropriate, due diligence may be required with respect to manufacturing capabilities and expertise, scale of operations, financial resources, and more broadly business strategy, corporate governance, and integrity of board members. Nigeria is uniquely expensive due to security problems, equipment sabotage, local content requirements, and industry delays; all of which arguably add to costs. This, notes Ribadu’s PRSTF report, makes it more difficult for authorities to evenly compare costs in Nigeria with those in other countries to assess reasonableness. ‘It also means companies can more easily inflate costs.’

Why was the third-party short-listed? Is the IOC certain it is not financing companies belonging to local officials or ownership by a political party candidate, which would be tantamount to bribery? What is the shareholding structure of a local JV partner? These are among the most important questions to consider. After the introduction of local content rules in Nigeria and the emergence of international anti-corruption legislation and treaties, led by the United States Foreign Corrupt Practices Act (FCPA) in 1977 and the OCED Convention Against Bribery of Foreign Public Officials, a shift was required by IOCs, LOCs, and middlemen. For an IOC to pay off a local partner in the form of a corporate entity or middleman was previously a ‘cultural’ cost common in Nigerian industrial practice; not illegal by local standards. ‘Cultural meetings’ came to light in the recent Nigeria FCPA case involving Halliburton, where middlemen opened the doors to procurement contracts. The case also involved non-US corporations, such as Technip and Maurubeni, which US prosecutors could pursue because they had a corporate entity listed in the US.

One live Nigerian case has involved an indigenous oil company (Malabu Oil & Gas Ltd) connected to the Minister of Petroleum Resources under the late General Sani Abacha, Chief Dan Etete, aka Dauzia Loya Etete, who, during his tenure as minister, awarded a licence off the Gulf of Guinea (OPL 245) to the company he played a role in incorporating and came to control, and for which he hired Russian and Nigerian middlemen to help him negotiate the sale of the licence to IOCs. Other questions to consider are whether there are any undisclosed third-party transactions, material misrepresentations, commissions, unreported financial difficulties, criminal or regulatory sanctions, or undisclosed legal or bankruptcy proceedings Another consideration may be the existing relationship between the potential JV partner and the NCMB. Has the NCMB, established by President Goodluck Ebele Jonathan following the signing into law of the Act on 22 April 2010, undertaken its own adequate checks as regulator?

*Nizar Manek is a journalist.

0 réponses

Répondre

Vous souhaitez vous joindre à la discussion ?
N'hésitez pas !

Laisser un commentaire

Votre adresse de messagerie ne sera pas publiée. Les champs obligatoires sont indiqués avec *

Vous pouvez utiliser ces balises et attributs HTML : <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>