The Nigerian Oil and Gas Industry Content Development Act (the "Act") which has just been signed into law is the cumulative result of decades of attempts by the government and stakeholders in the petroleum industry to ensure that the industry provides local value and maximized benefits to Nigerians. In over fifty years since the discovery of oil in Nigeria, the petroleum industry has functioned as an "enclave" economy, with very little linkages and contribution to the wider Nigerian economy.1 Previous efforts to give effect to the local content policy2 include establishment of various research, development, training, education and support funds; provisions in the Petroleum Act3 on mandatory employment and training of Nigerians by petroleum operators, provisions on technology transfer, local content utilization, recruitment and training of Nigerian personnel contained in various contractual arrangements with International Oil Companies ("IOCs"), and the establishment of a Nigerian Content Division ("NCD") of the NNPC to monitor and give effect to government's Nigerian content policy.
This paper seeks to provide a concise analysis of additional obligations, if any, imposed on oil and gas operating companies, their contractors and sub-contractors in the implementation of projects in the petroleum industry. We will further highlight the advantages of this Act for indigenous companies and areas in which foreign companies with local subsidiaries can take advantage of its provisions.
The scope of this Act includes all activities carried out in the oil and gas industry. "Oil and gas industry" is defined in the Act as all activities connected with the exploration, development, exploitation, transportation and sale of Nigeria's oil and gas resources including upstream and downstream oil and gas operations.
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 definition which focuses on value addition to the Nigerian economy requires that considered efforts must be made on the part of stakeholders to utilize and/or where appropriate, ensure the utilization of Nigerian human and material resources and services.
The Act, takes precedence over all other existing enactments and laws in respect of all matters pertaining to Nigerian content in respect of all operations and transaction in the petroleum industry4 and the functions of the NCD as well as all other Nigerian content regulatory bodies shall be taken over by the Nigerian Content Monitoring Board (the "Board") to be established under the Act.5
3. NIGERIAN CONTENT OBLIGATIONS UNDER THE ACT
Section two of the Act gives a strong directive which requires Nigerian content to be considered as an important element in the overall project development and management philosophy for project execution.6
The Act indicates that all subsequent arrangements7 in the petroleum industry must comply with its provisions.8 This appears to suggest that existing arrangements may continue to follow the status quo.
Some of the relevant provisions which must be complied with are set out below:
Submission of Nigerian Content Plan
Operators9 are required to submit a Nigerian Content Plan as part of the condition for bidding for a licence, permit or other oil and gas interest. Such a Plan, showing compliance with the Nigerian content requirements of the Act, is also required to be submitted before the execution of any project in the industry.10 The Plan must contain provisions giving:
- first consideration11 to the utilization of Nigerian goods and services;12
- first consideration for the training and employment of Nigerians in the work programme for which the Plan was submitted.13
Furthermore, the Plan must contain details as to the criteria to be used by the operator and its contractors in assessing how first consideration is to be given to Nigerians in the process of evaluating bids for goods and services required by the project,14 including details as to how the use of locally manufactured goods which meet industry standards is to be ensured.15 It is not clear how the Board will determine whether the criteria used by the operator in determining first consideration are acceptable. Are these subjective criteria to be determined by the Board on a case by case basis or is the Board to take advantage of the provision authorizing it to conduct a public review in relation to the exercise of any of its functions under the Act to determine the proper criteria for "first consideration" where questions arise? Regardless of the stance taken by the Board, it is required to issue or deny the Certificate of Authorisation for that project not later than 30 days from the date of commencement of the assessment.16 The Act is silent on whether the certificate would be deemed approved if the Board fails to issue or deny the certificate of authorization within 30 days.
Compliance with Minimum Nigerian Content Specifications
Operators are mandated to comply with minimum specifications for Nigerian content as contained in the schedule to the Act.17 The schedule specifies certain criteria to be followed which includes the number of Nigerian man hours utilized in relation to the duration of the project, tonnage, size and volume of certain goods, level of certification obtained and the total amount of local expenditure in relation to the procurement of local goods and services. Certain services such as Directional Surveying Services, Cutting Injections/Cutting Disposal Services, Waste Disposal/Drainage Services and industrial Cleaning Services requires the use of 100% Nigerian man hours while services such as Disposal/Distribution and Waste Transport Services, procurement of Sickline, Well Head Safety Panels and certain Seismic Data Acquisition and Interpretation Services requires 100% Nigerian spend. Operators are permitted to deviate from these specifications where local capacity is inadequate upon authorization by the Minister. Such authorization shall not be given for a period exceeding three years within which time local capacity is expected to have been built in the relevant area.18
Additionally under section 34 of the Act, where a project or contract value exceeds $100 million (USD), it shall contain a labour clause mandating the usage of a minimum percentage of Nigerian labour in specific cadres as may be stipulated by the Board. Section 41(2) also requires that a minimum of 50% of the equipment deployed for execution of work carried out by local subsidiaries of international/multinational companies are owned by the subsidiaries.
Consideration of Nigerian Content in Bid Evaluation
Nigerian content shall be a major factor in bid evaluation and where bid tenders are within 1% of each other, priority shall be given to the bid containing the highest level of Nigerian content provided such Nigerian content is at least 5% higher than that of the closest competitor.19 Furthermore, full and fair opportunities must be given to Nigerian indigenous contractors and companies20 and indigenous companies shall be allowed a 10% margin against the lowest bidder provided it has capacity to execute the specified job.21 The concept of full and fair opportunity as required under the Act has not been specifically spelt out and is thus subjective. This makes it difficult for an operator to ascertain whether it has complied with the requirement of the Act in this regard and appears to give the Board unfettered discretionary powers in determining compliance.
Submission of Certain Documentation for Bid Tenders and Contract Awards for Projects in Excess of $1,000,000 (USD)
Sections 17 to 24 of the Act make provisions for documents which must be submitted by operators for the approval of the Board in this regard:
- advertisements, pre-qualification criteria, technical bid documents, technical evaluation criteria and the proposed bidders lists as well as other relevant information;
- notification of all contracts, subcontracts and purchase orders which will be bidded for or executed in the upcoming quarter containing specific information as provided under the Act (this must be done 30 days' prior to the first day of each quarter);22
- prior to the issuance of adverts or pre-qualification notification to prospective bidders, operators shall submit details of the scope of work, the relevant notification where necessary, list and head office locations of targeted companies and time frame for the pre-qualification stage. This procedure is also required prior to the issuance of an invitation to tender and prior to the award of contract, subcontract or purchase order to the selected bidder with specific information required for each stage;23
Establishment of a Project Office within the Project Catchment Area and Community of Operations Run by Approved Personnel
By virtue of sections 25 to 27 of the Act, prior to the carrying out of project in Nigeria, an operator might be required to establish a project office in the catchment area24 where the project is to be located, managed by approved personnel who shall exercise decision making powers with regard to the project execution and the Board might also require an operator to maintain offices in a community where the operator has significant operations. The application of these provisions appears to be based on the discretion of the Board and is to be determined on a case by case basis.
Employment and Training of Nigerian Personnel and Expatriate Quota Regulation
Provisions in this regard include the following:25
- operators must give Nigerians first consideration for employment and training in respect of all executed projects and may be required by the Board to maintain a reasonable proportion of employees from areas of significant operations;26
- submission of an Employment and Training Plan which shall include hiring and training needs of the operator, and its contractors, breakdown of required skills and shortages in the Nigerian labour force and anticipated training requirements and expenditure for such training;27
- a time frame for employment opportunities for each project phase;
- specific quarterly reports of the employment and training activities of the operator;
- evidence of reasonable efforts by operator to within a reasonable time, train Nigerians to fill skills shortages in the industry;
- submission of succession plan for the Nigerianisation of expatriate positions;
- Approval of the Board must be sought prior to the application to the relevant authority for expatriate quota positions;28
- a maximum of 5% of expatriates may be maintained by an operator for management positions in respect of each project. The Act also empowers the Minister to make regulations requiring compulsory registration of operators, companies, or its professional employees engaged in the provision of engineering or other professional services in the petroleum industry with relevant professional bodies in Nigeria.29 This presents another avenue for monitoring importation of expertise and ensuring that this only happens where such expertise is not available locally;30
- operators are mandated to employ only Nigerians in their junior and intermediate cadre.
Research and Development Obligations
The operator is required to carry out a research and development programme in relation to its work programme and activities for every project. This shall include a bi-annual update of the operator's R and D Plans and a quarterly report of operator's R and D activities.31 The R and D obligations of the operator shall be in conformity with the provisions of regulations to be made by the Minister with respect to targets to be met for the growth of R and D in the industry.32 We expect that such regulation, when published, will set out the procedure and criteria to be followed in respect of the Operator's R and D programme.
Technology Transfer Obligations
- development of an acceptable programme for the promotion of technology transfer;
- submission of an annual plan for promoting the effective transfer of technologies from the operator and alliance partners to Nigerian individuals and companies;
- active encouragement and facilitation of strategic collaboration between Nigerian and foreign contractors and service or supplier companies with the submission of an annual report of such initiatives.
Compliance with Insurance, Financial and Legal Services Provisions
Sections 49 to 53 of the Act mandate operators to utilize local insurance, financial and legal services in their project implementation. Operators must also submit a bi-annual report to the Board detailing the nature of the services so utilized, the budget as well as actual and projected expenditure.
Submission of Annual Nigerian Content Performance Report
This is required to be submitted by the operator to the Board for evaluation within sixty days of the beginning of each year covering all its projects for the relevant year and specifying its category of expenditure and its employment and procurement achievements.34 To facilitate proper monitoring and verification of the reported activities, operators and their contractors are required to allow access to their facilities and provide relevant documentation to the Board and its designated agents.35
Failure by operators and their contractors and sub-contractors to comply with the provisions of the Act in their operations is an offence punishable by a fine of 5% of the project sum for each of the projects in which the violation occurs or the total cancellation of the project.36 It is noteworthy also that t operators' eligibility for the award of licenses, permits and other interests in petroleum operations would be based on the operators' compliance with provisions of the Act.
What we have in essence under the Act is a more stringent regime which subjects the activities of operators to considerable scrutiny by the Board. The success or otherwise of the provisions of the Act would thus be substantially influenced by the rigour and political will exercised by the Board in carrying out its task.
4. IMPLICATIONS FOR INDIGENOUS OPERATING COMPANIES
For Nigerian operating companies, the Act offers a great opportunity for growth and expansion. A Nigerian company is defined under the Act as a company registered under the Companies and Allied Matters Act and having not less that 51% Nigerian shareholding. Such a company is to be given first consideration in the award of oil blocks, oil field licences, oil lifting licences and in all project awards in the Nigerian oil and gas industry.37 These provisions should ensure a steady growth in Nigerian participation in the industry as well as increase local capacity and industry knowledge and expertise.
5. IMPLICATIONS FOR INDIGENOUS SERVICE COMPANIES
Indigenous service companies stand to benefit tremendously from the provisions of the Act. This is because they are one of the key targets of the Nigerian content policy. Skills development and capacity building in core competencies such as Petroleum Engineering and Engineering Support Services, Engineering Designs, Fabrication, Manufacturing and Installation, Seismic Data Processing, Drilling and Exploration Services, Maintenance Services, Health, Safety and Environment etc., will ensure increased employment opportunities, minimal deployment of foreign expertise in project execution, and overall economic development.
By virtue of section 3(2) of the Act, exclusive consideration is to be given to Nigerian indigenous service companies which demonstrate ownership of equipment, Nigerian personnel and capacity to execute the required work to bid on land and swamp operating areas of the Nigerian oil and gas industry for contracts and services as contained in the schedule to the Act.38 The more compliant they are in relation to Nigerian content i.e. their management, shareholding, personnel, etc, the better their chances are at being awarded bids.39 This is so even when they are not the lowest financial bidder provided, the company in question has the capacity to execute the job.40 The same goes for Nigerian indigenous contractors and companies in the supply of goods to the industry.
Aside from these special considerations in project awards, regulations and an enabling framework is being put in place to ensure utilization and steady growth of Nigerian companies in the industry's service sector. These include:
- The establishment of an oil and gas e-marketplace which shall facilitate the effective implementation of the Nigerian content policy.41
- The establishment of a Joint Qualification System which shall constitute an industry data bank.42
- The establishment of the Nigeria Content Consultative Forum to provide a platform for information sharing and collaboration in the industry.43
- Establishment of the Nigerian Content development Fund to fund the implementation of the Nigerian Content policy.44
This would involve training and empowerment programmes for local service providers as well as deployment of funds for the various government initiatives directed at increasing Nigerian content in the industry. These are areas where the NNPC has also developed several key initiatives such as the launch of the Nigeria Content Support Fund and the introduction of the Nigerian Petroleum Exchange.
In addition to these, prospective investors can take advantage of the special consideration given to Nigerian companies especially in the award of bids to form strategic alliances and partnerships which will be beneficial to all parties concerned.
1. According to NNPC's Nigerian Content Policy Implementation Division ("NCD"), over 80% of work value in the industry is executed outside the nation's shores. See also "Local Content Growth: The Role of NIPEX", A presentation delivered at the Nigerian Content Summit in Oil and Gas/Exhibition, December 10, 2007.
2. To date, these efforts have not been effective in achieving the desired goal.
3. Sections 26-29, Petroleum (Drilling and Production) Regulations CAP 10, LFN 2004
4. Section 1 of the Act
5. Section 69 of the Act
6. See section 2 of the Act.
7. Such as Joint Venture Agreements, Production Sharing Contracts etc.
8. Section 6 of the Act.
9. Companies in this category include NNPC, its subsidiaries and joint venture partners and any Nigerian or foreign or international oil and gas company operating in the Nigeria oil and gas industry under any petroleum arrangement. See Section 109 of the Act.
10. Section 7 of the Act.
11. It should be noted that "first consideration" is not specifically defined in the Act, the Board expects the operator to indicate how first consideration is considered and assessed by it in the evaluation of bids. In practice, we expect that the import of this provision is that where Nigerian goods and services meet the required industry standards in terms of quality and market value, then they should be considered first in the award of a bid before any foreign services or goods taking also into consideration the provisions of sections 14 and 16 which gives Nigerian companies a margin of advantage preventing them from being disqualified solely on the basis of not being the lowest bidders.
12."Nigerian goods and services" is also not specifically defined in the Act.
13. Section 10 of the Act.
14. Section 12 of the Act.
15. Section 13 of the Act.
16. Sections 8 & 9 of the Act.
17. Section 11(1) of the Act. We note that this section does not specifically indicate that these tasks are to be carried out by "Nigerian Companies" as defined in the Act.
18. Section 11(4) of the Act.
19. Section 14 of the Act.
20. Section 15 of the Act.
21. Section 16 of the Act.
22. See section 18(2) of the Act. Section 24 also requires the provisions of specified information in this regard with respect to bids awarded in the previous quarter.
23. Sections 21 and 22 of the Act.
24. "Catchment Area" is not defined in the Act.
25. Sections 28 to 35 of the Act.
26. Whilst not defined, this is likely to mean geographical locations where the operators carry out a substantial level of its petroleum operations.
27. Bearing in mind that that by virtue of section 66 of the Act, it is the responsibility of the operator to communicate the Nigerian content policies and procedures to its contractors and subcontractors and to monitor and enforce their compliance, the obligation to obtain information as regards not just its own hiring and training needs/requirements and expenditure but also that of its contractors, places an onerous responsibility in form of time and expense involved in gathering such information from third parties in an effective manner on the operator which is solely responsible for fulfilling its obligation in respect of submission of an Employment and Training Plan in a timely manner.
28. This gives legal backing to directives which the Department of Petroleum Resources have tried to effect in recent times.
29. Section 42 of the Act.
30. See also sections 30 and 31 of the Act on local training and succession plans which aims to ensure that lack of local expertise in a particular field is identified and remedied as soon as practicable.
31. Sections 37 to 39 of the Act.
32. Section 36 of the Act.
33. Sections 43 to 46 of the Act.
34. Sections 60 t0 61 of the Act.
35. Section 64 of the Act.
36. Section 68 of the Act.
37. Section 3(1) of the Act.
38. It is not clear from the provisions of the Act, how such capacity is to be demonstrated.
39. Section 14 of the Act.
40. See section 16 of the Act.
41. Section 54 of the Act.
42. Section 55 of the Act.
43. Section 57 of the Act.
44. Section 107 of the Act.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.