Local content in the oil and gas industry of nigeria, challenges: pros

Thesis Overview

<p> </p><p><strong>INTRODUCTION</strong></p><p><strong>1.1 BACKGROUND TO THE STUDY</strong></p><p>Despite the richness of natural oil resources, Nigeria is ranked the 20th poorest country in the world. Much of the country’s poverty and underdevelopment can be contributed to the misguidance in governance, mismanagement of resources, various political issues and lack of infrastructures (Adams et al., 2008). The country’s level of GDP per capita was, a few years back, below the level at independence 40 years ago, and income inequality was widening (Boscheck, 2007). The oil and gas industry is, however, a major contributor to the Nigerian economy. It accounts for about 90% of the federal government’s annual revenue (Nwosu et al., 2006). The industry is, however, dominated by foreign interests and major activities like exploration, drilling, production, well intervention and service provision remain primarily controlled and managed by foreign multi-national companies, and only minor contracts have been awarded to local contractors (ibid). In order to increase local industry’s participation in the oil and gas industry of Nigeria, local content requirements (LCR) have been made legally mandatory, which implies that foreign companies involved in exploring and exploiting the resources in Nigeria, are forced to include indigenous companies. With a few exceptions, the foreign companies are large multinational enterprises (MNEs). For example, 95% of Nigeria’s oil and gas production is generated by only five companies; Shell, Exxon, Chevron, Total and Agip (Frynas and Paulo, 2007). Historically, the involvement by foreign companies in developing countries has been motivated by a desire to exploit natural resources and abundant labor pools (Hansen et al., 2009).</p><p>The need for resource-rich Nigeria to assume control of the exploration, exploitation and production activities in the oil and gas sector and to harness the potentials of this most strategic industry in order to generate more value-added, seems to be receiving much desired attention from all the stakeholders. This need is equally expressed in Nigeria’s desire to domicile a substantial amount of the average $18 billion per annum exploration and production spending and stem the tide of capital flight which, over the years, has made Nigeria a junior partner in her joint venture arrangements with the International Oil Companies (IOCs). For a country with over four decades’ experience in oil and gas exploration and production activities and proven recoverable reserves of about 37 billion barrels, her inability to use the resource wealth as a means for national development and poverty reduction has perhaps been the greatest challenge facing successive administrations. These challenges have their expression in how Nigeria can derive maximum benefits from oil and gas operations through optimal use of local competences and resources as practiced in Indonesia, Brazil, Norway and Venezuela, for example. Although these countries started oil exploration and production activities after Nigeria they have largely recorded remarkable success in their efforts to grow the local content in this strategic industry. The question is: why has Nigeria been unable to surmount her own challenges?</p><p>The Nigerian Oil and Gas Development Law 2010 defines local content as “the quantum of composite value added to or created in Nigeria through utilization of Nigerian resources and services in the petroleum industry resulting in the development of indigenous capability without compromising quality, health, safety and environmental standards”. It is framed within the context of growth of Nigerian entrepreneurship and the domestication of assets to fully realize Nigeria’s strategic developmental goals. The scheme, which has the potential to create over 30,000 jobs in the next 5 years, is geared to increasing the domestic share of the $18 billion annual spending on oil and gas from 45% to 70%, in addition to enhancing the multiplier effects on the economy, through refining and petrochemicals. The local content policy action started in 1971 through the establishment of the Nigerian National Oil Corporation, (NOC). NOC was established as a vehicle for the promotion of Nigeria’s indigenization policy in the petroleum sector. It later became Nigerian National Petroleum Corporation (NNPC) in 1977 through NOC’s merger with the petroleum ministry. NNPC flagged off the actual local content initiative through acquisition of interests in the operations of the IOCs. These interests grew to about 70%, with the responsibility of controlling all acreages and other activities. Although conscious efforts were made in the past through Regulation 26 of the 1969 Petroleum Act, enforcement of local content policy, the springboard for sustainable economic transformation of Nigeria, was mere paper work. For an industry that contributes 80% of Nigerian government revenues and 95% of its foreign exchange this is entirely unacceptable to the Nigerian government hence the clamor for change.</p><p><strong>1.2 &nbsp; &nbsp; STATEMEMT OF THE PROBLEM</strong></p><p>Nigeria’s rising profile in oil and gas production was rather fast and steady such that she soon became a formidable force within OPEC. Oil exploration, which started onshore has tremendously improved the nation’s daily production capacity to about 2.3 million barrels per day, and raised her proven reserves to about 37 billion barrels. However, despite Nigeria’s ever-growing profile and wealth, the country remains one of the poorest, and technologically backward, nations in the world. This is basically because the much-taunted wealth has not translated into improved welfare. One reason for this is that over 90 percent of the yearly industry expenditures escape the domestic economy as capital flight. Despite the ever growing number of local oil service companies the latter’s annual gross earnings still account for less than 5 percent of the sector’s aggregate annual contracting budget.</p><p><strong>1.3 &nbsp; &nbsp; OBJECTIVE OF THE STUDY</strong></p><p>The main objective of this study is to find out the challenges, prospect and way forward of local content in the oil and gas industry in Nigeria; specifically the study intends to:</p><p>· &nbsp; &nbsp; &nbsp; Find out the challenges faced by the local content in the oil and gas industry in Nigeria</p><p>· &nbsp; &nbsp; &nbsp; To anticipate the prospect of the local content in the oil and gas industry in Nigeria</p><p>· &nbsp; &nbsp; &nbsp; To proffer a way out to the problems highlighted.</p><p><strong>1.4 &nbsp; &nbsp; RESEARCH QUESTIONS</strong></p><p>The following research questions was formulated to guide the study to arrive at a valid and reliable conclusion.</p><p>· &nbsp; &nbsp; &nbsp; What are the challenges faced by the local content in the oil and gas industry in Nigeria</p><p>· &nbsp; &nbsp; &nbsp; What is the prospect of the local content in the oil and gas industry in Nigeria</p><p>· &nbsp; &nbsp; &nbsp; What is the way out to the problems highlighted?</p><p><strong>1.5 &nbsp; &nbsp; SIGNIFICANCE OF THE STUDY</strong></p><p>The study will expose the stakeholders involve in oil and gas policy making, the government at various levels, and the society at large to what local content in oil and gas means, will also expose them to the challenges face by the oil and gas industry in Nigeria, the prospect of the industry and the way out to the problems. Also the conclusion made in this research will serve as a guide to the policy makers in Nigeria to formulate a reasonable policy that will take the industry forward. And finally this research will serve as a guide to other researcher who will embark on the same research in the nearest future.</p><p><strong>1.6 &nbsp; &nbsp; SCOPE OF THE STUDY</strong></p><p>This research work covers the oil and gas industry in Nigeria, the problems and the prospects of the industry will be deeply investigated on in this research.</p><p><strong>1.7 &nbsp; &nbsp; RESEARCH METHODOLOGY</strong></p><p>This study is basically on the local content in the oil and gas industry of Nigeria. The study therefore adopts one of the traditional methods of gathering information, i.e. the secondary sources. A sizeable percentage of secondary sources that is used came from published and unpublished works which include materials extracted from: Archives, Newspapers, discussions, Conference papers, Magazines, Internets, Books, and Articles in journals e.t.c.</p> <br><p></p>