On December 18, 2019, about four months before the tenth anniversary of the enactment of the Nigerian Oil and Gas Industry Content Development Act (the Local Content Act)1, 9 members of the National Assembly, including the current speaker of the House of Representatives, sponsored a bill for legislative consideration that, if enacted into law, would repeal the Local Content Act and enact a new ''Nigerian Content Development and Enforcement Act'' (the Bill).2
In addition to proposing new requirements and regulations that would further increase and support indigenous participation in the petroleum sector, the Bill ambitiously proposes similar reforms for the Nigerian mining, Information Communication Technology (ICT), construction and power sectors. Legislative deliberation on the Bill may be protracted, even without factoring in the unprecedented impact of the Coronavirus pandemic. This is due to its multi-sector focus, the increased stringency of its compliance and enforcement prescriptions and the extensive stakeholder engagement that public consultation requires before it may be enacted.
Global COVID-19 era developments, including significantly decreased demand, the current oil glut, the slump in oil prices and low cash reserves raise significant viability considerations for a sector that, from a Nigerian economic perspective, currently accounts for approximately 60% of government revenue and 90% of foreign exchange earnings. These factors demand an exhaustive economic and legislative consideration of the wider implications of the changes proposed by this material legislation for the immediate and long-term sustainability of the Nigerian oil and gas sector and its economy.
In this note, 'Folake Elias-Adebowale, Mesuabari Mene-Josiah and Amarachi Okewulonu assess key themes and potential implications of the Bill for the Nigerian petroleum sector.
Scope and clarity
Currently, the Local Content 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 utilisation of Nigerian human, material resources and services in the Nigerian oil and gas industry".
The Bill preserves the Local Content Act's philosophy that Nigerian content be considered an element of project development, management philosophy and execution. Also, like the Act, it sets minimum Nigerian Content prescriptions based on criteria such as the number of man-hours relative to the duration of the project, size, tonnage and volume of certain goods, level of certification and the percentage of spending for the procurement of local goods and services, among other standards.
Drafting ambiguities and inconsistencies around various terms and provisions of the Local Content Act have, since its enactment, fostered uncertainty as to the scope and interpretation of its prescriptions for petroleum sector participants. It is not always clear which of its requirements apply to which participants, and these concerns do not appear to have been fully resolved by the Bill which, as presently drafted, introduces various additional undefined terms.
Interpretation: The Local Content Act
Section 106 of the Local Content Act defines a ''Nigerian company'' as "a company formed and registered in Nigeria in accordance with the provision of the Companies and Allied Matters Act with not less than 51% equity shares by Nigerians". Having defined the term, however, the Local Content Act does not use the term "Nigerian company'' at all. Instead, it uses various undefined variations including ''Nigerian indigenous operator'' (section 3(1)), ''Nigerian indigenous service companies''(section 3(2)), ''Nigerian indigenous contractors''(section 15), "Nigerian contractors and service or supplier companies''(section 45), and "indigenous companies'' (sections 41(1)(a), 48 and 49(1)) to reference sector participants envisaged by each relevant provision.
In the absence of ministerial regulations and case law to provide definitive interpretation, intending and existing petroleum sector stakeholders have tended to rely either on their understanding of industry practice in determining compliance requirements, which is far from ideal, or to independently engage the Nigerian Content Monitoring Board (NCDMB) for clarification on a case-by-case basis. This latter tendency is further to section 70(l) of the Local Content Act, which empowers the NCDMB to ''provide guidelines, definitions and measurement of Nigerian content and Nigerian content indicator to be utilised throughout the industry''.
Interpretation: The 2015 Bill
The same uncertainty had pervaded previously proposed amendments of the Local Content Act, including a failed attempt to enact a ''Bill for an Act to Amend the Nigerian Oil and Gas Industry Content Development Act 2010 and for Purposes Connected Therewith'' in 2015 (the 2015 Bill). The 2015 Bill had also failed to address most of the existing ambiguities but had proposed to introduce a new definition for the term, "Nigerian indigenous company'' (where all shareholders and board members are Nigerian and all assets are entirely owned by such companies).
While the intention under the 2015 Bill appears to have been to increase indigenous eligibility for the receipt of Nigeria Content Development Fund finance and support to increase capacity, the implication of that definition would have been that only such companies would have qualified exclusively to bid to carry out work on land and swamp operating areas in Nigeria. Similarly, the 2015 Bill had also proposed an expanded definition of the term "operator'' that included not just the state national oil company and interest holders that also provide finance and/ or act as technical operators of petroleum assets. It also proposed to include other parties involved in petroleum arrangements, contracts and business ventures such as passive interest holders in petroleum assets that do not have responsibility for or undertake operational or technical activities.
Interpretation: the Bill
The Bill uses a variety of terms such as ''Nigerian indigenous company and/ or firm'' (sections 2, 23 and 95), ''Nigerian independent operators'' (section 11), ''indigenous engineering companies and/ or firms''(section 7(2)), " Nigerian indigenous service companies" (section 12), ''Nigerian companies and firms'' (sections (g), 225). Section 5(k) of the Bill, however, preserves the provisions of section 70(l) of the Local Content Act and similarly empowers the Nigerian Content Development and Enforcement Board to provide ''guidelines, definitions and measurement of Nigerian content indicator to be utilised in the oil and gas industry in Nigeria.'' In summary, the Bill proposes definitions including the following:
- An ''indigenous company' is defined as a company incorporated in Nigeria and registered with the Corporate Affairs Commission (CAC) with ''a minimum of 90% equity stakes and voting rights by Nigerians, with at least 80% Nigerian staffers in management positions, or at least 90% technical and R&D employees being Nigerians''. This term is used, for instance, in (section 23) as a basis for determining eligibility for the award of contract, where a Nigerian indigenous company has demonstrated capacity to execute such work to bid on land and swamp operating areas of the Nigerian oil and gas industry. Notably, the Bill still does not offer a definition for ''Nigerian indigenous service companies'' (our emphasis), notwithstanding its wholesale reproduction of clause 3(2) of the Local Content Act as its own section 12. A possible interpretation is that it is service companies that meet the thresholds set out in this definition of 'indigenous companies' that are intended. If this is correct, as was the case with the 2015 Act, there is a risk that section 12 may have much wider implications than may have been intended, potentially for participants providing technical services within and to the petroleum sector. The language of section 12 may be read to suggest that only indigenous companies that are service companies and which meet the high thresholds indicated above-with no more than 10% non-Nigerian shareholders and no more than 20% non-Nigerian board members-which can also demonstrate their ownership of equipment, personnel and capacity to execute work, may bid to carry out work on land and swamp operating areas.
The Bill's other definitions include the following:
- a '''Nigerian company'' is defined as ''an entity registered in Nigeria under the Companies and Allied Matters Act 1990 or any succeeding legislation and shall include Business Names and the equity share in the said company shall not be less than 90% owned by Nigerians and the management positions of the company shall be composed of not less than 90% of Nigerians'';
- a "multinational company" or ''MNC'' is defined as a company that has its head office located in a country other than Nigeria and operates in more than one country; and
- the term, ''Nigerian services'', is currently only defined to mean services offered by Nigerian professional companies and Nigerian professionals.
The term ''foreign company'' is frequently used but is not defined in the Bill. The Act also capitalises, but does not define, several terms that it utilises frequently (please see sections 2, 219, 225 and 226) including ''Ministries'', ''Extra Ministerial Departments'', ''Agency of the Federal Government of Nigeria'', ''Federal Government Owned Companies (either fully or partially owned)'', ''Federal Institutions'', ''Public Corporations'', ''Private Sector Institutions'' and ''Business Enterprises''. The absence of clear explanations and definitions for each capitalised term potentially introduces more uncertainty and may have the unintended effect of suggesting a more limited scope of application for the relevant obligations.
2. Number HB 621 in the Nigerian National Assembly Journal number 58 of December 17, 2019.
Originally published 18 May 20
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