Wednesday, July 4, 2012


1. Introduction
Local or Nigerian Content has been defined as the ‘quantum of composite value added or created in the Nigerian economy through the utilization of Nigerian human and material resources for the provision of goods and services to the petroleum industry within acceptable quality, health, safety and environmental standards in order to stimulate the development of indigenous capabilities.’ It therefore entails creating value to the economy, utilizing local resources and building local capacities.
On the 22nd April 2010, the Nigerian Oil and Gas Industry Content Development Act (“Local Content Act/the Act”) which was enacted, essentially designed to increase the level of indigenous participation in the Nigerian oil and gas industry as all oil and gas arrangements, contracts and operations are now required to comply with minimum Nigerian content standards and thresholds specified in the Act. Upon the commencement of the Act, all subsequent oil and gas agreements, contracts or memoranda of understanding relating to any operation or transaction in the Nigerian Oil and Gas Industry must conform to the provisions of the Act.
The scope of the Act is extensive and all Operators, contractors, sub-contractors and other entities carrying out projects, operations, activities or transactions in the Nigerian Oil and Gas Industry are required to consider Nigerian Content as an essential factor in their project conceptualization, development and management.[2] The implications and application of the Act, therefore cuts across all sub-sectors of the industry. It has however been applied mostly in the upstream and midstream sub-sectors, which have historically been noted for its paucity in de facto local capacity, expertise and stewardship. This article will focus on the critical legal considerations for an upstream operator[3] or company.

2.   Implementation and Monitoring
The Nigerian Content Development & Monitoring Board (NCDMB) is entrusted with the responsibility on implementing the Act and any regulations made as a result by the Minister of Petroleum. Amongst other things, it is also to award Certificates of Authorization and review the statutory reports submitted by operators.[4] The NCDMB must also provide required guidelines, definitions and measurements to be used in regards to Nigerian Content.
Section 104 of the Act creates the Nigerian Content Development Fund (“the Fund”) to be managed by NCDMB for the purpose of funding the implementation of the Act. The Fund consists of 1% of every contract awarded to any operator, contractor or sub-contractor, alliance partner or entity engaged in projects or transactions the upstream sub-sector.  The model to be adopted in applying the Fund is 30% for direct intervention in capacity development and 70% to provide partial guarantee for low interest lending for contractors and suppliers.[5] This is essential as the Act not only demands that ‘Nigerian independent operators’ must be given first consideration in the award of oil blocks, oil field licenses, oil lifting licenses and contracts for projects,[6] it also compels the industry operators to grant first consideration to Nigerian goods and services in their bid evaluations for specified projects which a Nigerian Content Plan (NCP) has been or will be submitted.[7] In otherwords, were an indigenous E&P company A wins the bid for an oil block or a licence due to the principle of ‘first consideration’, it must in turn develop an NCP which will detail how it has and will utilize Nigerian oil field services and goods in its field development plans and projects. Therefore, the Fund may help in providing ‘partial’ guarantee for loans sought by ‘financially feeble’ but firstly considered Nigerian suppliers of the required goods and services.

The key question that still remains unanswered as at now is- whether the Fund will be sufficient to guarantee required funding as the local industry expands? And if not, what are the available and plausible guidelines and regulations in the Banking and finance sector in this regard?  And what are the guidelines for determining ‘first consideration’ from the regulator to operators and from operators to service providers and suppliers of goods. It must also be noted that although Section 3(2) of the Act demands exclusive consideration to be given to Nigerian indigenous service companies that demonstrates ownership of equipment, Nigerian personal and capacity to execute projects for land and swamp areas, foreign or international oil company participation through equity holdings in such ‘Nigerian service companies’ are not forbidden, as long as such companies are registered under the Companies and Allied Matters Act, 2004. 

Another critical provision of the Act that stimulates proper implementation and attainment of the lofty objectives of Nigerian Content is that Section 41(2) states that all international and multinational companies working through their Nigerian subsidiary must demonstrate that at least 50% of the equipment deployed for execution of work is owned by that Nigerian subsidiary. These Nigerian subsidiaries are now allowed to bid for work offshore.
The Act also grants exclusive consideration to Nigerian indigenous service companies for all oil and gas projects in land and swamp water areas, subject to proof of ownership of equipment, Nigerian personnel and capacity to execute such work.[8] The NCDMB has produced an Equipment Components Manufacturing (ECM) Initiative which entails the domiciliation of equipment manufacturing and the issuance of the Nigerian Content Equipment Certificate (NCEC).[9]

2.1. Nigerian Content Certification For Oil & Gas Equipment, Systems and Packages

The NCDMB in line with its powers under Sections 5, 11, 12, 13 and 70 of the Act recently issued a Notice on Mandatory Certification for Equipment’s and Components. This Notice was issued with a view to stimulating the structured development of capabilities for manufacturing and/or assembly of equipment and systems required for Oil & Gas industry including parts and components for after-sales support.

The Notice provides that with effect from the 1st Day of October 2011, all Operators, Contractors, Vendors, Original Equipment Manufacturers (OEM), Suppliers and Manufacturers Representatives shall be required to present the NCEC issued by the NCDMB or evidence of application for all equipment, system or packages to be supplied to the Nigerian Oil and Gas industry.

For the purpose of obtaining the NCEC, all Operators, Contractors, Vendors, OEMs, Suppliers and Manufacturers Representatives planning to procure/supply equipment, systems and packages for new projects and/or existing facilities in the industry shall request for the certificate of the given equipment, systems and packages from the NCDMB.  All requests for NCEC shall be submitted in duplicates accompanied by detailed information including but not limited to the following:  

a. Name of OEM; 
b. Country of origin of OEM; 
c. Other countries with manufacturing facilities; 
d. Cost of Equipment/Components/Parts supplied to Nigeria in the past 10 years; 
e. Name of Manufacturers representative in Nigeria with evidence of clean report; 
f. Details of facilities and/or investments of manufacturer or representative in Nigeria; 
g. Location of Manufacturing Equipment Components;
h. Components identified by OEM or Representative to site the manufacturing of these components in Nigeria ( i.e. if this is not currently in place); 
i. Percentage cost of components over cost of equipment; and 
j. Any other information that will demonstrate investment commitment. 

As from the effective date, any Operator, Contractors, Sub Contractor and/or vendors, that procures equipment systems and packages for use in the Industry without a valid NCEC shall be deemed to be in breach of the Act.

 3. Local Content Specification
Section 11 provides that the minimum Nigerian content in any Project to be executed in the Nigerian oil and gas industry shall be as listed in the Schedule to the Act. Activities and services covered by the Schedule include: 

a. FEED, detailed and other engineering services; 
b. Fabrication and Construction; 
c. Materials and procurement; 
d. Well and drilling services; 
e. Petroleum Technology; 
f. Exploration, subsurface petroleum engineering and seismic data processing ; 
g. Transportation, supply and disposal services; 
h. Marine Operations and Logistics Services; 
i. Research and development services; 
j. Project management and consulting services (including legal services); 
k. Finance and insurance services; and 
l. Shipping

However, section 11(2) states that where a project description is not specified in the Schedule, NCDMB shall set the minimum content level for that project or project item pending the inclusion of the minimum content level of that project or project item through an amendment of the Schedule by the National Assembly. Although, the Minister of Petroleum is also empowered to conduct a bi-annual review of the Schedule and its requisite Nigerian content levels, to ensure a measurable and continuous growth.[10] It is opined that modern regulatory efficiency paradigms suggests that such reviews is best left apolitical, to be handled by the regulator whose independence or semi-independence in statutorily guaranteed.

4.   Nigerian Content Plan
It is obligatory for all regulatory authorities, operators, contractors, subcontractors, alliance partners and other entities involved in any project, operation, activity or transaction in the Nigerian oil and gas industry to consider Nigerian content as an important element of their projects. When bidding for licenses, permits or other interests, and before carrying out projects, Operators are required to submit their NCP. This must contain provisions demonstrating that the Operator submitting same intends to ensure that first consideration will be given to:

a. services provided from within Nigeria and to goods manufactured in Nigeria; and 
b. Nigerians, with regards to training and employment for the work programmes in respect of which the Plan is submitted.[11]

Where NCDMB is satisfied that the submitted NCP complies with the provisions of the Act, it shall issue a Certificate of Authorization for the Project in respect of which the NCP is submitted. The NCP shall set out details of how the operator, its contractors and alliance partner would give prior consideration to Nigerian goods and services including specific examples showing how ‘first consideration’ is considered and assessed by the Operator in its evaluation of bids for goods and services required by the Project, as well as the use of locally manufactured goods where such goods meet industry specification.

5. Procurement of Goods and Services and Selection of contractors

Operators must give full and fair opportunity to Nigerian indigenous contractors and companies, when procuring goods and services and also consider Nigerian content when evaluating bids. They must select a  bid containing the highest level of Nigerian content where competing bids are within One Percent (1%) of each other at the commercial stage, provided that the level of Nigerian content in the selected bid is at least five percent (5%) higher than the closest competing bid.[12]
Furthermore, contracts should not be awarded solely on the basis of the lowest bid price submitted; and indigenous companies that have capacity to execute contracts should not be disqualified because they did not submit the lowest financial bidder unless the value of their bid exceeds the lowest and/or the most competitive bid by more than ten percent (10%).[13]

Where an operator estimates that projects, contract, subcontracts and purchase orders will be in excess of US$1,000,000, the Operator must submit advertisements, pre-qualification criteria, technical bid documents, technical evaluation criteria and a list of proposed bidders to the Board for approval. Operators must also submit sufficient supporting information to enable the Board determine that the Operator has complied with Nigerian content requirements.

The Act prescribes reporting obligations for various stages in the contracting process. For example Operators must, not later than 30 days before the first day of each quarter, submit a list of all contracts, sub contracts and purchase orders in excess of US$1,000,000 to be bided for or executed in the upcoming quarter to the Board. In addition, Section 24 requires Operators to submit to the Board within 30 days of the end of each quarter, information on all contracts, subcontractors and purchase orders exceeding US$1,000,000 or such other limits as may be prescribed by the Board.

6. Establishment of Project Offices and Technology Transfer

An Operator must establish a project office in the catchment areas where their Project is to be located and project management and procurement decisions must be taken at such project offices to the satisfaction of the Board.[14] From the wording of this section, it appears that personnel with decision making authority must be stationed in the Project Office. Thus, the list of personnel for the project office must be approved by the Board.
Section 44 of the Act stipulates that an operator must submit on an annual basis, a technology transfer plan setting out a programme aimed at the smooth transfer of technologies from the Operator to Nigerian individuals and entities.

7. Employment and Training

The Act provides that Nigerians shall be given prior consideration for employment and training in any project or work to be executed by any operator.[15] Even where such Nigerians are not employed because of inadequate training, the Operator is required to ensure that reasonable effort is made within reasonable time to supply such requisite training.
However, Section 32 and 33 makes allowance of a maximum of 5% of management positions as expatriate positions to appease investor interests, which is available pursuant to an application for approval made by the operator to the NCDMB. This is to be done before any application is made for expatriate quota to the Ministry of Internal Affairs. Applications for clearance of the Board must indicate job titles, description of responsibility and duration of the proposed employment and any other information required by the Board.

There is also a mandatory “Labour Clause” in Section 34 for contracts exceeding US$100 million. It stipulates a minimum percentage of Nigerian labour in specific cadres as may be directed by the NCDMB as well as the requirement under Section 35 that only Nigerians can be employed in the junior and intermediate cadre grades of every Operator. The NCP submitted by Operators while bidding for licenses and permits or for the award of contracts to carry out projects must also contain an Employment and Training Plan (E & T Plan).[16] The E&T Plan should include an outline of the: 

a. hiring and training needs of the operator or project promoter and operator’s major contractors, with a breakdown of skills needed; 
b. anticipated skills shortage in the Nigerian Labour Force; 
c. project specific training requirements; 
d. anticipated expenditures that will be made directly by the operator in implementing the E and T Plan as forecasted and actual expenditure; and 
e. 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. 

Where Nigerians cannot be employed due to lack of training or expertise, Operators must ensure, to the satisfaction of the Board that efforts are made within a reasonable time, to train Nigerians either locally or elsewhere. Steps taken in this regard must be detailed in the E&T Plan. Although there is yet to be any positive act by the Minister of Petroleum Resources, Section 42 empowers her to make regulations which shall require an Operator or its professional employees to be registered with a relevant professional body in Nigeria. 

Furthermore, Operators MUST submit succession plans for positions not held by Nigerians. In such circumstances, Nigerians must understudy expatriate employees for a period not exceeding four (4) years. Thereafter, such positions must be held by Nigerians. 

8. Research and Development
Section 37 of the Act requires Operators to carry out programmes aimed at promoting education and research in Nigeria in relation to their work programmes and activities. Operators must also submit Research and Development Plans (“R&D Plan”) to NCDMB once every 6 months.

9. Insurance Services

All Operators, project promoters, alliance partners and Nigerian indigenous companies engaged in any form of business, operations or contract in the Nigerian oil and Gas industry shall insure all insurable risks related to its oil and gas business, operations or contracts with an insurance company, through an insurance broker registered in Nigeria under the provisions of Insurance Act as amended. In this regard, operators are required to submit returns indicating:[17]
a.    insurance companies and brokers through which insurance covers were obtained in the preceding six(6) months;
b.    class of insurance cover obtained;  and
c.     the expenditure incurred.
The Guidelines for Oil and Gas Insurance Business issued by the National Insurance Commission provides more details on the insurance sector and the oil and gas industry

10. Legal Services

According to Section 51, operators, contractors and other entities engaged in the operations, businesses or transactions in the Nigerian oil and gas industry must retain only the services of Nigerian legal practitioners or firms of Nigerian legal practitioners with offices located in Nigeria.
Operators are required to submit every six (6) months a Legal Services Plans (“LSP”) to the NCDMB. The LSP is expected to comprehensively render an account of legal services utilized by the operator in the preceding six (6) months and provide a forecast of legal services required for the subsequent six (6) month period. The LSP should also indicate the Operator’s annual budget for legal services for the preceding year (in naira and foreign currencies) a list of external solicitor(s) engaged by the operator in the past 6 months and the nature of work done by such solicitors.

11. Financial Services

Section 52 of the Act provides that Operators requiring financial services shall retain only the services of Nigerian financial institutions or organizations, except where; to the satisfaction of NCDMB it is impracticable to do so.
All Operators shall also submit to the Board every six (6) months its Financial Services Plan (FSP), which shall include:

a. Financial services utilized in the preceding six (6) months by expenditure and a forecast of financial services required for the subsequent six (6) months and projected expenditure therefore; 
b. A list of financial services utilized in the preceding six (6) months, the nature of financial services provided and the expenditure for the financial services; and 
c. A list of financial services utilized in the preceding six (6) months, the nature of the financial services provided, the expenditure therefore, made by the operator’s main contractors 

Operators, Contractors and Sub Contractors must also maintain bank accounts in Nigeria, where they must maintain a minimum of ten percent (10%) of total revenue accruing from their Nigerian Operations. Faithful implementation of this provision is (at least on paper) bound to have positive spillover effects on other economic sectors in Nigeria.

12. Offences

A legally worrisome penalty for non-compliance with the Act is provided in Section 68 especially with regards to its capacity to prevent actual compliance as opposed to cosmetic compliance. It provides that Operators, Contractors or Sub Contractors who carry out projects in the Nigerian Oil and Gas Industry without complying with the Provisions of the Act commit an offence, and is liable upon conviction to a fine of Five percent (5%) of the Project Sum for each project in which the offence is committed or the cancellation of the Project. Most companies may afford to pay 5% of the project sum and thus continue with actual non-compliance. It is advised that non-compliance should be differentiated and fundamental non-compliance should go to the root of the villain’s permit, lease or license.

13. Conclusion

The legislation is a holistic attempt by the government to increase indigenous participation and capacity building in the Nigerian oil and gas industry, especially the upstream sector’s provision of oil field services, equipment, engineering and procumbent etc. Interestingly, the Act does not provide a transition period within which Operators and other Parties are allowed to set up structures to comply with its provisions. However, by virtue of Section 6 of the Act, all ‘post-enactment’ oil and gas contracts/arrangements must comply with the provisions of the Act.
In terms of the potentials to boost cross-sectoral and economic growth, the Act is laudable. Its effectiveness and efficiency remains the responsibility of both the regulator and the regulated, with the former bearing the larger part.  Strategic periodic reviews and industry engagement will be required to sustain the momentum already gained.

[1] By Tade Oyewunmi, Head, Energy & Natural Resources Law practice at Kola Awodein & Co. Lagos, Nigeria. He is a member of the Nigerian Bar Association, Energy Institute (UK); International Association for Energy Economics (IAEE) and Association of International Petroleum Negotiators (AIPN).
[2] Section 2, of the Act.
[3] The term “Operator” under the Act is not limited to its conventional industry meaning as a Joint Operating Agreement’s operator. Section 106 defines an “operator’ means NNPC and its subsidiaries, its Joint Venture partners, Nigerian or foreign or international company operating in the Nigerian Oil and Gas Industry under any petroleum arrangement.
[4] See Section 69 & 70 of the Act.
[5] NCDMB, Nigerian Content Implementation Framework, 2012.
[6] Section 3 of the Act.
[7] See Section 12 of the Act.
[8] See Section 3(2) of the Act.
[9] NCDMB, Nigerian Content Implementation Framework, 2012.
[10] See Section 101(2) of the Act.
[11] See. Section 10 of the Act.
[12] See. Section 14 of the Act.
[13] See. Section 16 of the Act.
[14] See. Section 25 of the Act.
[15] Section 28 of the Act.
[16] See. Section 29 of the Act.
[17] See Section 49 of the Act.

1 comment:

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