Peeking into oil local content proposals

At the beginning of their oil find in 1960s/70s Norwegians did not have the requisite capacity to operate their find locally and so they invited the Americans to help them explore and produce.

But after a few years, the Norwegian authorities realized that although the American International oil companies touted local content, they were not actually practicing local content. Government stepped in, put the right local content legislation in place, made it mandatory for all foreign international oil companies to have a local partner, and not an agent. In matters oil and gas, local content policies, and legislations are a sacrosanct way to ensure that citizens fully participate and benefit from their country’s oil.

To ensure maximum local participation in the oil sector, Uganda’s ministry of Energy and Mineral Development, in collaboration with Norwegian Bridge Consult and Prof Jackson Mwakali of Makerere University, did a national content study in the oil and gas sector.
Prosper looks at what the report, enhancing national participation in the Oil and gas industry, proposes and the arguments therein.

According to the report, local content, as an approach to how the extraction of oil and gas may expand the local industrial base, implies that higher priority is given to the employment of Ugandans and firms with infrastructure in Uganda.

“The host government will require the share in an open market to exceed what will result from the procurement of goods and services,” the report reads. “The idea behind is to take advantage of the opportunity to pair Ugandans and Uganda firms with leading international oil companies.”

However it is important for Uganda to recognize that national content requirements do not lead to severe violation of efficiency considerations in the industry. “When national content is given higher priority, goods and services will partly be provided at higher costs than necessary,” the report says. “Profits, in consequence, fall, and so do tax revenues to the government of Uganda.”

To achieve better and quality national participation, the report says government should define local content in terms of value addition in Uganda, by Ugandans in the oil industry, by the use of Ugandan materials, services produced by Ugandans and Ugandan firms and the use of facilities in Uganda. “This means that the ownership of the company performing the value added activities should not matter,” says the report.

“In a globalized industry a local subsidiary of a multinational company can be just as effective in using domestic inputs and developing capacity and competence in Uganda as a company in which Ugandans hold a majority of shares.”

But while addressing a group of journalists in Ghana last in October, Mr Kwame Jantua, a director at African Energy Consortium Limited, who defined local content as the quantum of locally produced materials, personnel, goods and services rendered to the oil and gas sector and which can be measured in monetary terms, advised that local companies must ensure that they deal with international oil companies “as partners and not just agents.”

“Giving preference to local suppliers makes economic and financial sense, but only where they can deliver on price, schedule and quality which then makes alliances between domestic and international companies be one of the most effective means of turning local content policies into effective economic development strategies,” he said.

Proposed measures to increase local content
The report proposes an establishment of a body for national content enhancement because it requires active participation by several ministries, institutions and private sector to be successfully developed. This, the report says should be centered on one institution preferably at the ministry of Energy.

The report also calls for the establishment of an Oil and gas industry suppliers Association to provide a platform for advocating the challenges of Ugandan supply and service providers to oil companies and government. This also enables government and other stakeholders to channel support to the right beneficiaries.

To enhance development, the report recommends that the National content policy should be an integrated pat of the National development plan and that government should ensure that it curbs corruption in the country.

“Uganda presently has a (corruption perception) rating that puts the country on par with Nigeria,” the report reads. “It is recommended that Uganda subscribes to the principles of Extractive Industries Transparency Initiative and that all oil companies operating in the country do the same,” the report adds.

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