By Tolulope Aderemi ACI Arb(UK)
28th June 2010
The recent enactment of the Nigerian Oil and Gas Industry Content Development Act (“the Act”) has apparently settled an age long issue in Nigeria’s Oil & Gas industry. In one form or another, enhancing indigenous participation has long been a key goal of successive Nigerian Government.
The stated intention of the law is to increase indigenous participation (otherwise known as local content) in the Nigerian Oil & Gas sector. This Act has therefore created a Nigerian Content Monitoring Board to manage the co-ordination, monitoring and implementation of the local content provisions.
The quest to enhance local content has long been the policy of successive Nigerian governments. An issue has been the extent, not the rationale per se, of incorporating local content in a sector which remains the highest income earner for the Nigerian Government. Previously, there were various policy regulations of the Department of Petroleum Resources (DPR) and the Nigerian National Petroleum Corporation (NNPC) setting forth local content requirements.
Those policies have now been consolidated into a law with the passage of this Act.
The sub-text to this Act is the grave security, environmental and social situation in the Niger Delta of Nigeria. Aside from some other considerations; in a manner of speaking, this Act is therefore “politically correct” as it creates an impression of creating jobs and opportunities for Nigerians in the Oil & Gas sector particularly and in the economy as a whole. The new legislation directly affects operators, contractors, subcontractors and service providers in the Oil & Gas sector.
A consequential effect of this Act is also that the use of professional services (such as legal and financial services) is now required to have a significant local content. Overall and despite this Act, there is nothing to suggest that either the Nigerian economy or its Oil & Gas sector has suddenly become autarkist or closed to non-Nigerians nor is there a wave of economic nationalism sweeping the country. To be sure and regardless of this Act, non-Nigerians are still at liberty to incorporate a company in Nigeria, subscribe to shares therein and participate in the Nigerian economy.
What the Act simply means is that in such regulated sectors of the Nigerian economy as Oil & Gas, as much local content/capacity utilization must be seen to be exploited in compliance with the prescriptions of the Act.
The Nigerian Content Act takes precedence over all other existing enactments and laws pertaining to Nigerian content in the petroleum industry and 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 contemplates that the provision of the Act is expected to have a binding effect on all matters pertaining to all operations and transactions carried on in the Industry. In addition, the Act seeks to sensitize all Regulatory authorities, operators, contractors, subcontractors, alliance partners and other entities involved in any project on the importance of taking the Nigerian Content as an important element of their overall project development and management philosophy for project execution.
On the award of oil blocks, fields’ licenses, lifting license, Section 3 (1) of the Act stipulates that first considerationshould be given to Nigerian Independent operators, subject to the fulfilment of certain conditions as may be specified by the Minister. This priority of place is a sine qua non to qualification for any Operator bidding for a licence, permit or interest. Interestingly, the Act does not define ‘firstconsideration’ neither did it spell out the guidelines for determining the criteria employed for determining ‘first consideration’ within the provisions of the Law.
Where this is to be determined by the Board whilst conducting a public review as authorized under the Law for the exercise of any of its functions, it brings to question the feasibility of this all-important element of the Local Content policy. This is without prejudice to the Minister’s power to authorize the continued importation of relevant items notwithstanding the provisions of Section 1 of the Act, though such importation must not exceed three (3) years.
Highlights of the Act
Setting Minimum Nigerian Content Level Requirement
The Act specifically imposes an obligation for the maintenance of a required Nigerian Content level on all subsequent contracts and agreements carried out by companies trading in the Nigerian oil and gas industry. The Act specified the inclusion of at least the minimum Nigeria Content in any project to be executed in the oil and gas industry. It is clear about its expectations for the different category of goods and services relevant to the industry. This includes 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 procurement of local goods and services.
Under the Act, services like general Banking, Life Insurance, Pension Funds, Securities Brokerage and Fund management services are also required to have 100% Nigerian Content. This requirement also extends to the procurement of steel pipes, plates, pipeline systems and Risers. Seismic Data Acquisition for 3D and 2D, Field Development Plan, Marine moving services, Waste Disposal/Drainage Services and industrial Cleaning services are also required to apply 100% local content in the use of 100% Nigerian Content.
Interestingly, the provision of legal advisory and consultancy services in this industry which has developed exponentially in recent times was allowed only 50% of Nigerian content.
The establishment of the Nigeria Content Development Board (NCDB)
For effective implementation of the intents and purposes of the Act, the Act established a body known as the Nigerian Content Monitoring Board. The functions of this board inter alia will be to
Implement the provisions of the Act;
Implement the regulations made by the Minister;
Supervise, coordinate, and administer the implementation and development of the Nigerian content as specified in Schedule A;
Make awards of the necessary certificate to carry on activities in the Nigerian oil and gas, to the operator; and
Assist local contractors and Nigerian companies to develop their capabilities and capacities to further the attainment of the goal of developing Nigeria.
The Bidding process
The Act in its Section 14 of the Act requires the consideration of Nigerian Content during the evaluation of a bid. It stipulates that where bids are within 1% of each other at commercial stage, the bid containing the highest level of Nigeria content should be selected provided it is at least 5% higher than its closest competitor in terms of its Nigerian content provisions.
Section 16 of the Act provides further that the award of contracts shall not be based solely on the principles of the lowest bidder. Where a Nigerian indigenous company has capacity to execute a job, the company shall not be disqualified on the singular basis that it is the lowest financial bidder, provided the value does not exceed the lowest bid price by 10%.
Additionally, for the purposes of the bidding process, the Act further provides that the operator shall also provide for approval by the Board, all proposed projects, contracts and subcontracts and purchase orders estimated by the operator to be in excess of $1,000,000 (USD).
The Act further provides in its Section 22 that prior to the award of contracts, subcontracts or purchase orders to the selected bidder, the operator shall further submit certain documents listed out in the Act.
Employment and Training/Development
In order to engender the incorporation of Nigerian content in employment matters in the industry, the Act in its Section 34 provides for the inclusion of a labour clause, mandating the use of minimum percentage of Nigerian Labour in all projects or contracts with a total budget exceeding $100 million. In pursuit of building technology capacity in Nigeria, the Act, as from the commencement of the legislation, makes it mandatory for all operators, project promoters, contractors engaged in the Nigerian oil and gas industry to carry out all fabrications and welding activities in-country.
As an additional requirement, it is expected that the Nigerian Content Plan submitted during the bidding process should contain an “Employment and Training Plan” (E&T Plan) which must make provisions for the following:
An outline of the hiring and training needs of the operator/project promoter and major contractors, with a breakdown of skills required and anticipated shortage in the Nigerian Labour force; and
A time frame for employment opportunities for each phase of project development and operations to enable members of the Nigerian workforce prepare themselves for such opportunities.
For effective supervision of compliance with this provision, operators/project promoters are expected to report to the Board on their “E&T” activities on a quarterly basis. In addition to the hiring and training needs and the time frame for employment opportunities which have to be clearly stated in the E&T Plan, the efforts and procedure for their execution must also be included.
It is also important to note that the Act also empowers the Board to ‘Nigerianise’ all positions in the industry after four (4) years as contained in the Succession plan to be submitted by the operator. This is without prejudice to the grant of expatriate quota to the operator under the Act. In the same vein, the Act makes it mandatory for the operator to employ only Nigerians in its junior and intermediate cadre or any other corresponding grades designated by the operator or company.
Another provision of the Act, worthy of note is Section 38 which introduces the submission of Research and Development Plan (R&D Plan) to the Board by the operator. It is expected that the R&D Plan would:
Outline a revolving three(3) to five (5) year plan for oil and gas related research and development initiatives to be undertaken in Nigeria, together with a breakdown of the expected expenditures that will be made in implementing the R and D plan; and
Provide for public calls for proposals for research and development initiatives associated with the operator’s activities.
The Act also requires each operator to conduct programmes for the promotion of technology transfer to Nigerians in relation to its oil and gas activities. It is also expected to submit an annual plan setting out a programme of initiatives aimed at promoting the effective transfer of technologies from the operator and alliance partners to Nigerian individuals and companies.
In furtherance of the provisions of section 43 , the operator is also required to encourage and facilitate the formation of Joint Ventures and the execution of licensing agreements between Nigerians and foreign contractors and service or supplier companies. Accordingly, for effective supervision of the process, Section 46 requiresoperators to submit annual reports to the Board detailing their technology transfer initiatives and results.
In the spirit of Nigerian content, the Act also enjoins operators, alliance partners and indigenous Nigerian companies engaged in any form of business in the industry to insure all transactions with insurance companies, and through Insurance brokers registered in Nigeria. In order to ensure that the Nigerian local capacity which is prescribed as 100% is exhausted, the Act prohibits the offshore placement of insurance risks in the without the written approval of the National Insurance Commission.
Procurement of Legal Advisory Services
Operators and contractors in the industry are expected to retain only the services of a Nigerian legal Practitioner, or a (firm) of Nigerian legal practitioners whose office is located in any part of Nigeria.. In furtherance of this obligation, all operators must submit a “Legal Services Plan” (LSP) which shall include:
Comprehensive report on legal services utilized in the past six months by expenditure and a forecast of legal services required during the next six months and the projected expenditure for the services;
A list of external Solicitors utilized for legal services in the past six months, the nature of work done and the operator’s expenditure; and
An annual legal services budget for the past one year in different currencies including Naira.
Procurement of Financial Services
In order to achieve an all-round effect of Nigerian Content in the industry, the Act also mandates the retention of Nigerian financial institutions or organisations only, except where in the opinion of the Board, it is impracticable to do so. Adherence to this is expected to be monitored by the bi-annual submission of a Financial Services Plan. This FSP will detail:
Financial services utilized in the past six(6) months by expenditure and a forecast of financial services required during the next six months and the projected expenditure for the services;
A list of financial services utilized in the past six (6) months, the nature of financial services provided and the expenditure for financial services;
A list of financial services utilized in the past six (6)months, the nature of financial services provided and the expenditure for financial services made by the operator or its main contractors; and
All operators, contractors and sub-contractors shall maintain bank account(s) in Nigeria in which it shall retain a minimum of 10% of its total revenue accruing from its Nigerian operations.
Assessment of the Nigerian Content Initiative
Perhaps to ensure that the intendments of the Act are achieved, operators in the industry are expected to submit annually, within 60 days of each year, a “Nigerian Content Performance Report” covering all projects and activities undertaken. This report must specify expenditure on Nigerian content on a current and cumulative cost basis and will undergo regular assessment and verification by the Board. The Act also makes it the operators’ responsibility to communicate its Nigerian Content policies and procedures to its contractors/sub-contractors and monitor and enforce their compliance.
The Act establishes a fund to be known as the “Nigerian Content Development Fund” to support the implementation of Nigerian Content development in the industry. The Fund is to be financed by the deduction at source of 1% of every contract sum on any contract awarded to any operator in the upstream sector of the industry.
Offences and Penalties
Finally, the Act declares contravention of the provisions of the Act in the conduct of any project in the industry an offence and prescribes the payment of a fine of 5% of the project sum or cancellation of the project as punishment upon conviction.
Tolulope Aderemi ACI Arb (UK) is an Associate with Perchstone & Graeys Solicitors, Lagos. He is also an Arbitrator, Author, co-Author of several papers and book and a Masters Degree Holder in Oil & Gas from the University of Aberdeen ,Scotland, United Kingdom.