Lessons for Uganda from Nigeria’s oil and gas experience
A few months ago, I was honored to be part of a delegation that visited Nigeria on an Oil & Gas local content study tour, the group was drawn from both the public and private sector. The trip was funded by the World Bank – Uganda office. We visited 11 institutions including: the Nigerian Content Development & Monitoring Board (NCDMB), the Petroleum Technological Development Fund (PTDF), the Nigerian Content Development Fund (NCDF), the Nigerian Petroleum Exchange (Nipex) -an electronic one-stop transaction centre developed to improve the contracting and procurement processes in the Nigeria upstream Oil and Gas industry, DeltaAfrik Engineering Limited – an engineering procurement and construction company that is a 51:49 joint venture between Delta Tek an indigenous company and WorleyParsons, the Industrial Training Fund (ITF), Shell Nigeria Exploration & Production Company Limited (SNEPCo), banks and insurance companies.
Nigeria first discovered oil in 1956, as production commenced Nigeria became the poster child for the woes of a resource rich economy. Academics talk about the Resource Curse or a Paradox of Plenty and research shows that oil rich countries in the developing world grow more slowly than their peers do. According to Nicholas Shaxson, in his book ‘Poisoned Wells’, as the oil cash tumbles in, agriculture silently suffers and the cost of living as well as the poverty levels often rises. When we visited the country was experiencing resurgence in violence and sabotage in the Niger Delta.
Despite all the above challenges Nigeria is experiencing a renaissance of sorts in the petroleum industry. At the heart of this turnaround is the ‘Nigerian Oil & Gas Industry Content Development Act (NOGICD) 2010. The NOGICD Act sought to reverse a trend where the bulk of the Nigerian annual Oil & Gas spend, estimated at USD 20bn per annum in material/equipment, fabrication and engineering design were supplied by foreign sources.
Sections 106 of the Act defines Nigerian content as the “quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the Nigerian oil and gas industry.”
The Act has stimulated manufacturing, human capital development and asset ownership. Global corporations have started adding value to their goods and services within Nigeria. These include General Electric Corporation, Thompson and Grace Investment and AOS Orwell.
The Act is also fostering closer collaboration between industry players. A sterling example is the USD 5bn Contractor Fund Scheme that was established by Shell affiliated companies in Nigeria and 5 Nigerian banks. This scheme supports companies with contracts from Shell to deliver the required goods and services efficiently.
Tripartite arrangements between IOC’s, contractors and bank’s help to significantly de-risk lending to local services providers, such agreements ensure that here is three-way communication between the IOC’s, contractors and bankers. The other benefit is that all parties are aware of performance concerns, warnings and penalties awarded.
Any variations in the contracts are communicated to the respective banks while notices to terminate are shared and discussed in advance. It also ensures that all parties are fully aligned on matters of debt capacity and cash flow management.
According to the NCDMB, Nigerian Content level has increased from less than 5% before 2010, to 14% in 2014 and 35% in 2015. The key lesson that they have learned is that developing local content is a long journey not a “sprint”. It must be structured and sustained.
James Karama is the Sector Head for Oil & Gas at Stanbic Bank Uganda