Onset of the Nigerian Local Content Development Policy

By Mabel Imoh Gab-Umoden

Oil and gas production in Nigeria commenced in 1958 after the first discovery two years earlier was made in Olobiri, which is now Bayelsa State. Over the years, the laws regulating this very important industry have not been comprehensively reviewed. The main laws are the amended Petroleum Act 1969, the amended Petroleum Profits Tax Act 1959, and the amended Nigerian Petroleum Corporation Act of 1977. These laws and other laws regulating the industry need to be compulsorily updated to reflect the changing dynamics of the oil and gas industry worldwide. The Nigerian Oil and Gas Content Development Act was signed into law on the 22nd of April, 2010. Before April 2010, there was no precise legislation for the Nigerian content in the oil and gas industry except the Petroleum Act of 1969 and NNPC directives which were just pocket provisions. The Petroleum Act of 1969 stated amongst many that those who have oil mines leased to them must within 10 years from the lease have employed at least 75% Nigerians at different levels such as managerial, professional and supervisory grades. The Nigerian National Petroleum Corporation (NNPC) before now already had short term temporary directives applicable to operators in relation to local content in the Nigerian Oil and Gas Industry. This is primarily why the Nigerian Content Development Act is built on these directives. 

The Nigerian content act primarily focuses on the buildup of value addition in the Nigerian Oil and Gas Industry through the application of local raw materials, products and services in order to encourage the growth of indigenous capacity. The Act has a framework that somewhat guarantees compulsory participation of Nigerians in the oil and gas industry without having to compromise the current standards before the local content act. To this end, the Act emphasizes that qualified Nigerians are to be considered first for employment and training and that all Nigerian indigenous operators be given primary consideration when contracts are awarded for oil blocks, licenses and all projects; and also that locally manufactured goods be given priority when operators are sourcing for materials. 

General Overview of the Nigerian Oil and Gas Industry 

 The history of the Nigerian oil industry dates back to 1908 when an affiliate of a German exploration company, the Nigerian Bitumen Company (NBC) explored for bitumen (Tar sand) deposit in the present day Ondo State. Exploration activities for oil resumed in 1937 by an Anglo Dutch Consortium known at the time as Shell D’Arcy (the forerunner of today’s Shell Petroleum Development Company of Nigeria Limited). In 1946 a Joint Venture between Shell Petroleum Development Company of Nigeria Limited (SPDC) and British Petroleum was created. In 1956 Oloibiri field was discovered and the company name was changed to Shell-BP. The first shipment of crude oil from Nigeria after the discovery of Oloibiri field was in 1958. 

Nigeria joined the Organization of the Petroleum Exporting Countries (OPEC) in July 1971 as its 11th member after attending the body’s deliberations in 1968 as an observer. Before Nigeria joined OPEC in 1971, oil companies in Nigeria were granted individual concessions to work and produce oil. Under the arrangement, the companies bore the risk and costs of exploration, development and production and had interest over the crude oil produced and were only required to pay royalties and Petroleum Profit Tax (PPT). After Nigeria joined the OPEC, government acquired participating interests in the International Oil Companies (IOC) operating in Nigeria through Joint Venture Partnership. Presently, the operating arrangements in the Nigerian oil industry are Joint Ventures, Production Sharing Contracts and Service Contracts. 

The Federal Government of Nigeria recognized the importance of increasing indigenous technological participation in the nation’s oil and gas industry as a way of ensuring that the benefits of the oil industry are also being enjoyed by the Nigerian people. The Government, through the Nigerian National Petroleum Corporation (NNPC) had earlier devoured to involve indigenous expertise in the oil and gas industry through the process of continuous technology acquisition and transfer. In line with this effort, three upstream subsidiaries of the NNPC were established in 1988. These are the Nigerian Petroleum Development Company (NPDC), the Integrated Data Services Limited (IDSL), and the Nigerian Engineering and Technical Company (NETCO). These are technology centres through which Nigerians are gradually acquiring oil and gas expertise. 

The NPDC is charged with exploration and production of crude oil and gas. IDSL has responsibility for geophysical data acquisition, geological and petroleum engineering data processing and interpretation. NETCO provides engineering service in oil, gas, petrochemicals and chemical sectors of the Industry.  The Nigerian Oil and Gas Industry Content Development Act was signed in 2010. The Local Content is applicable to all stakeholders in the Nigerian Oil and Gas Industry such as NNPC, DPR, the Ministry of Petroleum, operators, contractors and all companies involved in any activity in the Nigerian Oil and Gas Industry. It applies to both Local and International Oil Companies. The Act requires that primary consideration be given to Indigenous companies when contracts are awarded for oil blocks, licenses and all other projects. The Nigerian Oil and Gas Industry Content Development Act (2010) defines a Nigerian company as: 

“a company created and registered in Nigeria under the Companies and Allied Matters Act 1990 with not less than 51% equity shares owned by Nigerians’’. 

 This implies that International Oil Companies such as ExxonMobil, Shell, Petrobras, Agip, Chevron and all other International Oil Companies which have subsidiary firms registered in Nigeria under the Companies and Allied Matters Act (CAMA) but have majority of their equity shares in their foreign locations may not be seen as a Nigerian Indigenous company and will not have the privilege of being given primary consideration when contracts are being awarded. It is important to note that the Nigerian Oil and Gas Industry Content Development Act is only applicable to all contracts embarked upon after April 22nd 2010. This gives room for contracts that began before the Act not being affected by the various provisions in the Act. 

Nigerian Oil and Gas Industry Before the Local Content Act 

Under the Petroleum Act of 1969 (No. 51) as amended, the entire ownership and control of all oil and gas in place within any land in Nigeria, under its territorial waters and continental shelf are vested in the state of Nigeria. According to the Nigerian Investment Promotion Commission (2010) the ownership of oil and all minerals in the state of Nigeria is further reinforced by section 40(3) of the Constitution of the Federal Republic of Nigeria 1979. However, prior to 1971, the government had no participating interest in any of the International Oil companies in the country. These international oil companies were wholly owned by their foreign parent companies. 

From 1971, the government started direct acquisition of participating interests in the assets and operations of the International oil companies in the country. Four factors informed the government’s active participation in the oil industry: 

i. Petroleum became too critical to the well-being of producer nations to be left completely in the hands of private foreign interests 

ii. The desire to obtain fair share of the proceeds from the international oil companies 

iii. To foster the transfer of petroleum technology to Nigerians 

iv. National security 

After the acquisition of equity interest in the international oil companies in the country, the ownership structure of the industry changed from wholly owned ownership configuration to joint venture ownership. Today the government through the NNPC owns 60% equity interests in six major oil companies and 55% equity interest in Shell Petroleum Development Company Limited (the largest crude oil producer in the country). 

Before 1975, petroleum matters were handled by the Department of Petroleum Resources (DPR) in the Ministry of Mines and Power. The Department of Petroleum Resources has wide regulatory powers and its responsibilities include but are not limited to the following: 

i. Award of Oil Prospecting Licenses (OPL); 

ii. Administering conversion of OPL to Oil Mining Leases (OML); 

iii. Approval of field development plan; 

iv. Regulation of oil industry activities (drilling, constructions, operations, etc.); 

v. Setting production allowable for all wells; 

vi. Monitoring of industry work programmes; 

vii. Administration of fiscal incentives; 

viii. Monitoring of lifting and exports of oil at terminals (Department of Petroleum Resources, Nigeria, 2011). 

However, given the strategic importance of oil in Nigeria’s economy and increased government interest in the sector, the Ministry of Petroleum and Mineral Resources was created in 1975. The Ministry of Petroleum Resources has the responsibility to: 

i. Ensure that the oil and services companies comply with all petroleum laws and regulations; 

ii. Process applications for permits, licenses and leases; 

iii. Prepare aggregated returns and reports on the progress of petroleum operations 

iv. Enforce safety and pollution regulations; 

v. Control and supervise production processes to conserve the nation’s petroleum resources. 

Nigerian National Petroleum Corporation (NNPC) 

 The Nigerian National Petroleum Corporation (NNPC) is the government agency responsible for the public sector involvement in the Nigerian oil industry. It dates back to 1958 when exportation of crude oil commenced which necessitated that government set up an organisation for the co-ordination of the activities of the petroleum industry. The initial policy of the government was to refrain from direct participation in exploration, production and marketing of crude oil partly because of high risks, intricate technology and huge capital requirements which were not readily available to them. Besides at the inception of the industry, Nigeria had limited skilled power- which is quite essential. However, as oil became very predominant and more strategic to the economy, government had to review its policy of limiting itself to regulatory functions. 

In 1971, the policy of direct participation commenced with the establishment of the Nigerian National Oil Corporation (NNOC). The NNOC was charged with the responsibilities of carrying out all upstream petroleum operations which include: 

i. Exploring prospecting, winning or otherwise acquiring, processing and disposing of petroleum 

ii. Constructing and laying pipes for conveyance of crude oil, natural gas, water or any other liquid 

iii. Constructing, equipping and maintaining of tank farms, depots and other facilities 

iv. Managing government investment in the oil companies (Nigerian National Petroleum Corporation Act, 1977) 

In April 1997, government advanced further its participation policy with the establishment of the Nigerian National Petroleum Corporation (NNPC). The NNPC was formed to eliminate overlapping of functions between NNOC and the Ministry of Petroleum Resources and to optimise the utilisation of all resources, especially human which were only scantily available at the time. The NNPC reflects government’s attempt to have a unified and economically viable organisation with responsibility for the total government involvement in the oil industry. In addition to the functions of the defunct NNOC (earlier highlighted) NNPC was empowered to engage in the following as highlighted in the Nigerian National Petroleum Corporation Act (1977): 

i. Refining, treating, processing and generally engaging in the handling of petroleum for the manufacture and production of petroleum products and its derivatives 

ii. Carrying out research in connection with petroleum and its derivatives 

iii. Effecting government’s contractual agreements and obligations in the petroleum sector 

iv. Generally engaging in activities that would enhance the petroleum industry in the overall interest of the country 

v. Undertaking such activities as may be necessary or expedient for giving full effect to the provisions of the decree establishing the corporation. 

Presently, the operating arrangements in the Nigerian upstream oil industry are joint ventures, production sharing contracts and service contracts. These would be discussed in the next analysis segment. 

Nutshell: 

This analysis is the first in six instalments on Local Content in Nigeria. Mabel has set out to examine the Nigerian Local Content Development policy in great detail. Her analysis starts by taking a look into the history of the Nigerian Oil and Gas Industry so as to provide some answers as to why the Federal Government of Nigeria decided to develop a Local Content Policy to benefit the Nigerian People. In subsequent instalments, the various operating arrangements in Nigeria such as Joint Ventures, Production Sharing Contracts and Service Contracts will be discussed. The Nigerian Petroleum Industry Bill (PIB) will also be discussed highlighting the fact that it supports the Nigerian Oil and Gas Industry Content Development Policy. The Nigerian Content Act will also be reviewed while a cursory look will also be taken into the successes of other countries in the implementation of Local Content policy. For more information about this article and to view Mabel's professional profile click here -->