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LOCAL
CONTENT IN THE OIL AND GAS INDUSTRY OF NIGERIA, CHALLENGES: PROSPECT AND THE
WAY FORWARD
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Despite the
richness of natural oil resources, Nigeria is ranked the 20th poorest country
in the world. Much of the country’s poverty and underdevelopment can be
contributed to the misguidance in governance, mismanagement of resources,
various political issues and lack of infrastructures (Adams et al., 2008). The
country’s level of GDP per capita was, a few years back, below the level at
independence 40 years ago, and income inequality was widening (Boscheck, 2007).
The oil and gas industry is, however, a major contributor to the Nigerian
economy. It accounts for about 90% of the federal government’s annual revenue
(Nwosu et al., 2006). The industry is, however, dominated by foreign interests
and major activities like exploration, drilling, production, well intervention
and service provision remain primarily controlled and managed by foreign
multi-national companies, and only minor contracts have been awarded to local
contractors (ibid). In order to increase local industry’s participation in the
oil and gas industry of Nigeria, local content requirements (LCR) have been
made legally mandatory, which implies that foreign companies involved in
exploring and exploiting the resources in Nigeria, are forced to include
indigenous companies. With a few exceptions, the foreign companies are large
multinational enterprises (MNEs). For example, 95% of Nigeria’s oil and gas
production is generated by only five companies; Shell, Exxon, Chevron, Total
and Agip (Frynas and Paulo, 2007). Historically, the involvement by foreign
companies in developing countries has been motivated by a desire to exploit
natural resources and abundant labor pools (Hansen et al., 2009).
The need for
resource-rich Nigeria to assume control of the exploration, exploitation and
production activities in the oil and gas sector and to harness the potentials
of this most strategic industry in order to generate more value-added, seems to
be receiving much desired attention from all the stakeholders. This need is
equally expressed in Nigeria’s desire to domicile a substantial amount of the
average $18 billion per annum exploration and production spending and stem the
tide of capital flight which, over the years, has made Nigeria a junior partner
in her joint venture arrangements with the International Oil Companies (IOCs).
For a country with over four decades’ experience in oil and gas exploration and
production activities and proven recoverable reserves of about 37 billion
barrels, her inability to use the resource wealth as a means for national
development and poverty reduction has perhaps been the greatest challenge
facing successive administrations. These challenges have their expression in
how Nigeria can derive maximum benefits from oil and gas operations through
optimal use of local competences and resources as practiced in Indonesia,
Brazil, Norway and Venezuela, for example. Although these countries started oil
exploration and production activities after Nigeria they have largely recorded
remarkable success in their efforts to grow the local content in this strategic
industry. The question is: why has Nigeria been unable to surmount her own
challenges?
The Nigerian
Oil and Gas Development Law 2010 defines local content as “the quantum of
composite value added to or created in Nigeria through utilization of Nigerian
resources and services in the petroleum industry resulting in the development
of indigenous capability without compromising quality, health, safety and
environmental standards”. It is framed within the context of growth of Nigerian
entrepreneurship and the domestication of assets to fully realize Nigeria’s
strategic developmental goals. The scheme, which has the potential to create
over 30,000 jobs in the next 5 years, is geared to increasing the domestic
share of the $18 billion annual spending on oil and gas from 45% to 70%, in
addition to enhancing the multiplier effects on the economy, through refining
and petrochemicals. The local content policy action started in 1971 through the
establishment of the Nigerian National Oil Corporation, (NOC). NOC was
established as a vehicle for the promotion of Nigeria’s indigenization policy
in the petroleum sector. It later became Nigerian National Petroleum
Corporation (NNPC) in 1977 through NOC’s merger with the petroleum ministry.
NNPC flagged off the actual local content initiative through acquisition of
interests in the operations of the IOCs. These interests grew to about 70%,
with the responsibility of controlling all acreages and other activities.
Although conscious efforts were made in the past through Regulation 26 of the
1969 Petroleum Act, enforcement of local content policy, the springboard for
sustainable economic transformation of Nigeria, was mere paper work. For an
industry that contributes 80% of Nigerian government revenues and 95% of its
foreign exchange this is entirely unacceptable to the Nigerian government hence
the clamor for change.
1.2 STATEMEMT OF THE PROBLEM
Nigeria’s
rising profile in oil and gas production was rather fast and steady such that
she soon became a formidable force within OPEC. Oil exploration, which started
onshore has tremendously improved the nation’s daily production capacity to
about 2.3 million barrels per day, and raised her proven reserves to about 37
billion barrels. However, despite Nigeria’s ever-growing profile and wealth,
the country remains one of the poorest, and technologically backward, nations
in the world. This is basically because the much-taunted wealth has not
translated into improved welfare. One reason for this is that over 90 percent
of the yearly industry expenditures escape the domestic economy as capital
flight. Despite the ever growing number of local oil service companies the latter’s
annual gross earnings still account for less than 5 percent of the sector’s
aggregate annual contracting budget.
1.3 OBJECTIVE OF THE STUDY
The main
objective of this study is to find out the challenges, prospect and way forward
of local content in the oil and gas industry in Nigeria; specifically the study
intends to:
· Find out the challenges faced by the
local content in the oil and gas industry in Nigeria
· To anticipate the prospect of the local
content in the oil and gas industry in Nigeria
· To proffer a way out to the problems
highlighted.
1.4 RESEARCH QUESTIONS
The
following research questions was formulated to guide the study to arrive at a
valid and reliable conclusion.
· What are the challenges faced by the
local content in the oil and gas industry in Nigeria
· What is the prospect of the local
content in the oil and gas industry in Nigeria
· What is the way out to the problems
highlighted?
1.5 SIGNIFICANCE OF THE STUDY
The study
will expose the stakeholders involve in oil and gas policy making, the
government at various levels, and the society at large to what local content in
oil and gas means, will also expose them to the challenges face by the oil and
gas industry in Nigeria, the prospect of the industry and the way out to the
problems. Also the conclusion made in this research will serve as a guide to
the policy makers in Nigeria to formulate a reasonable policy that will take
the industry forward. And finally this research will serve as a guide to other
researcher who will embark on the same research in the nearest future.
1.6 SCOPE OF THE STUDY
This
research work covers the oil and gas industry in Nigeria, the problems and the
prospects of the industry will be deeply investigated on in this research.
1.7 RESEARCH METHODOLOGY
This study
is basically on the local content in the oil and gas industry of Nigeria. The
study therefore adopts one of the traditional methods of gathering information,
i.e. the secondary sources. A sizeable percentage of secondary sources that is
used came from published and unpublished works which include materials
extracted from: Archives, Newspapers, discussions, Conference papers,
Magazines, Internets, Books, and Articles in journals e.t.c.
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