Local content development – what will it take? - United Nations in ...

Local content development– what will it take?Willy H OlsenAdvisor to INTSOK, Norwegian Oil and Gas FoundationMember of the Governing Board, Revenue Watch InstituteCambodia March 2008

My focus areas:Governments drive towards local contentWhat are countries looking for?The required business climateThe stakeholdersCase illustrations Nigeria Yemen Papua New Guinea Chad Timor-Leste Your objectives

”Make it an epoch – not an episode”The petroleum resources belongto the nation – and should bedeveloped to the benefit of thewhole societyNorway’s s goals were long term National control and stateparticipation Resource management Building and fostering aNorwegian oil community Technology and competence

Governments want more value creationNorwayRussiaCanadaT&TAzerbaijanAlgeriaLibyaSaudiKazakhstanIranEcuador VenezuelaBoliviaBrazilNigeriaAngolaTanzaniaMalaysiaTimor LesteAustraliaNo laws PSAs etc Directives

Challenged by more stringentrequirementsInternational oil and gas companies are challengedby ever more stringent ‘local content’ requirementsIt is not only revenues that offer an opportunity toachieve economic development and povertyreductionCapital and operational expenditure represents adirect means for the sector to contribute to localeconomic and social developmentThrough direct and indirect employment,advancement of productive skills, a morecompetitive local enterprise sector, localinfrastructure development and more effective localinstitutions

But the industry is facing constraintsMiddle income countries may be able to deliver local contentThey may have an advantage because of lower operatingcostsSkilled workforceGrowing domestic customer baseBut most low-income countries are strugglingLocal firms are uncompetitiveLack of relevant experience and technical capabilitiesPoor production quality and reliability,Low health, safety and environmental standardsWeak public sector regulation and inefficient bureaucracies arealso major limiting factors.

Successful tools to build localcontentConcession policiesProduction sharing contractrequirementsTechnology transfer requirementsTax incentivesProcurement & contract strategiesSupport for SME’s s andentrepreneursMentor programsEnterprise centersCluster programs & use of freezones

Production sharing contracts can be animportant toolMost developing countries have signedproduction sharing contracts with oilcompaniesMost contracts tend to includerequirements that could be used to expandlocal development Recruit nationals except when qualifiedpersons not available Use local supplies, equipment, servicesand contractors if competitive onperformance, price and availability Provide trainingBut clauses can also be more specific ontargets

What are countries looking for?

The national development agenda• Government Revenue• Price Volatility• Supply Chain• Labour• Capital• EquipmentOil andGas Sector• EnergySupply•Feedstock• Impact on local communities• Instability & Conflict

The purpose of national (local) contentThe purpose is to increase nationalwealth through economic growth andmore employment of locals“Value creation in the country” was thedefinition used in the Norway, UK, Braziland the new Nigerian policyOther countries look at elements like Ownership Expenditure in the local economy EmploymentLocal content is a means – not a goal

What level to aim for?The most successful countries have achieved anational content level of 40% – 80% Brazil, Malaysia, United Kingdom, Norway Many are struggling to reach 25%-30% Nigeria, Angola, Trinidad and Tobago, SaudiArabia, Libya What will it take to reach a satisfactory level? It requires high Government commitment It requires international oil companies to besupportive It requires policies and contracts that will allowservice companies to invest in the country It will require high focus on developing human

Ownership addresses a small piece of thepieFocus on ownership discouragesforeign investment andaddresses a small part of the pieA balanced local contentindicator based on addedvalue is more effectiveLocal contentOwnerprofits

Local ownership is no guaranteeShell placed 70% of all contractswith Nigerian owned firms until2002-20032003Value creation in the country wasonly some 5 - 15%Local firms sourced most of theirwork outside NigeriaLocal firms acting as agents forinternational companiesOr as middle men with goodconnections aiming to get theirshare of the potential profitsOperator’sspend outsideThe case ofNigeria8 Billion DollarsAVERAGE ANNUAL UPSTREAM SPENDContractorsspend outside9 Billion DollarsANNUAL NATIONAL BUDGETOperator’sspend insideContractorsspend inside

The main obstacles to local contentLack of domestic manufacturing, fabrication andservice capabilities to support the oil and gas sector Few people with the required skills, lack of adequate power, water and otherinfrastructure to support an expandedmanufacturing base cumbersome bureaucratic obstacles todevelopment of small and medium sizedenterprises underdeveloped capital marketsSubstantial proportion of the equipment andexpertise must therefore be imported

Local content needs a good businessenvironmentFramework conditions:MacroeconomicenvironmentInstitutionsandlegislationInfrastructureforbusinessPredictabilityIncentivesreliabilityEnablingenvironmentValue addingactivities:Petroleumsector- Local contentPrivateNon-oilsectorNationalwealthSocialinfrastructureInclusionExclusionPublicsector

Good governance will add valueResource-rich rich countries around theworld tend not to score well ongovernanceMany resource rich countries lack Clear and stable laws andregulations Capacity and skills ingovernment Fiscal monetary and budgetdiscipline Dialogue between governmentand civil society Public sector/private sectorbalance

Not costless to introduce local contentpoliciesBadly enforced local content policy may impedeeconomic growth Consuming wealth rather than creating value Risk of permanent protection Corruption and red tapeIncreased local content in the oil and gas sectorimplies ”more eggs in the same basket”

The key stakeholders?

The key stakeholdersGovernmentPrivate sectorLocal contentAcademiaMajor companies

Will the oil companies deliver localcontent?Few international oil companies (IOCs) have a clear“local content strategy”Mainly addressed as part of the “corporate socialresponsibility agenda”The major IOCs have the capacity and thecapabilities to be key players in developing acountry’s s economySmaller IOCs seldom have the capacity to getengaged in developing national content

Contractors do the work on the groundSaipem:Over 30 000 peopleMore than 100nationalities.Schlumberger worksin 80 countries70 000 employees140 nationalitiesHalliburton has more than 45 000 employees in nearly 70 countries,BakerHughes:Operating in90 countriesAker Kvaerner:Some 35 000people in30 countriesThey spend 80% of the money in aproject

Tools used by oil companiesOil companies encourage localenterprises in their markets create jobs, use local suppliers,share business skills, supporttraining and promote furtherinvestment.They may set up Enterprise CentersThey may establish supplier forumThey will enter into mentor programs tosmall and medium-sized businessesThey may also be willing to assist inproviding seed capital to localentrepreneurs

Local content development– what will it take?Willy H OlsenAdvisor to INTSOK, Norwegian Oil and Gas FoundationMember of the Governing Board, Revenue Watch InstituteCambodia March 2008

A few illustrations

Chad: Training entrepreneurs to bidelectronicallyExxonMobil has identified localopportunities for 35 mill dollarsin the period 2007-0909Some 300 Chadian entrepreneurstrained in using the ebidding system18 bid rounds completed63 bids submittedMore than 50 Chadian businessesparticipated in the bidding14 contracts have been awarded todate worth 22 million USDSource: IFC

LNG - one of the few successes inNigeria Nigerian LNG is located on theBonny Island in the Niger Delta The country’s s first LNG companyis owned by NNPC, Shell, Totaland ENI It has a clear strategy for workingwith the local communities andemploy Nigerians and providesupport to local communities 80% Nigerianization for plantoperations by 2008 Reaching the target requiresmajor training programs

The local content strategyShareholders insisted on local content plan as an essentialcondition for final investment decisionsSubcommittee on local contentCommittee developed a plan and strategySurvey of potential suppliers and gasMonitored, evaluated and reported progressMeasured local goods and services and man hoursCalculated % Nigerian value for each subcontract

Corporate development activitiesInfrastructure activities Roads, shopping malls, schools, sportfacilities Electricity, waterEnterprise economic empowerment Micro Credits Scheme Youth Empowerment Scheme Monthly Stipend/Starter Packs/PostGraduation Mentoring and Monitoring Training in Aqua Culture and EnterpriseDevelopment Capacity Building for Local Contractors Business Development forEntrepreneursHealth and education support

The lessons learnedFocus on the objectiveCommunity Development is not a public relations activityCarry stakeholders along, even if they are slowing down theproject initially.Perseverance - no quick wins or resultsLead times of projects are longEnsure stakeholders’ understanding for continuedcommitment.Do not cluster projectsRather separate them into stand alone sub-projects to delivertangible milestonesExecutive Management support is critical for success

The biggest project ever in Yemen Yemen LNG is currently constructinga LNG and a 320-kilometer pipelinefrom the gas fields Project was authorized by theGovernment and shareholders inAugust 2005 Investment of US $ 3.7 billion The LNG plant construction isinvolving some 4 000 people andanother 1 000 along the pipeline Yemen LNG has two majorcontractors Total is leading the work Production expected in 2009

Two year on the job trainingOn-job training abroad aims to build the technicalworkforce in time for the start up and operation ofthe LNGOver 200 trainees from every governorate of Yemenare being trained for the technical and non-technicalskills required for employment18 trainees have been sent to in Egypt and 66 toIndonesiaThe trainees are exposed to hands-on experiencebefore they participate in the commissioning andstart-up of the LNG plant in Balhaf

A giant project don’t t match PNG’scapabilitiesPapua New Guinea is hoping for its firstLNG project to bring gas to world marketsExxonMobil and Oil Search are finalizingplansGovernment has legislation in place tosupport local content and training oflocalsHurdles are extremely high for local firmsA giant project does not match the smallindustrial baseDevelopers will be required to open aliaison procurement office in the countryto provide local firms fair access Get access to information Present their capabilitiesPapua New Guinea6 million people,600 islands,950 languagesand cultures

Small can also be beautifulTechnology and project size is often a majorhurdle for local suppliersBut local firms in Papua New Guinea may havecapabilities for substantial work Civil works for pipelines, field facilities etc Erection of facilities Construction of buildings Logistics Camp management, catering, security etc Engineering and consulting for smallertasks

The ambitions in Timor-Leste“Petroleum will be the dominant revenuestream in our nation’s economy for theforeseeable futureBut we look to it for more than a source offunds.The sector should be a much broader anddynamic contributor to the national economy.Contributing through capital investment, andemployment generation…..It will be seen in personnel training andeducation,It will be seen in infrastructure developmentIt will be an agent of change for theenhancement and development of Timor-Leste’s society as a whole.”Prime MinisterMari Alkatirigave anoptimisticperspective inSeptember 2005

The Timor-Leste content policyIdentification ofstrategic areasfor short and longterm developmentEstablishmentof Timor-LesteContentBodyManagementof Timor-LesteContentTimor-Leste definition of local content“Means work carried out to stimulate the economyof Timor-Leste by implementing sustainabledevelopment projects related to the petroleumsector and preferential purchases of Timoresegoods and services”Current policy is capacity building focusedRealizing that direct economic involvement will besmall min the coming few years

Contactors is required to assistConocoPhillips is operator for thefield that supports Timor-Leste’seconomyIts contract with the maincontractor Clough AMEC JV hasseveral specific local contentobligationsImplement a sub-contractordevelopment programProvide local suppliers with theopportunity and ability toclearly understand therequirementsCommit to a realistic programof practical local infrastructuredevelopment and sourcingfrom Timor-LesteThe Bayu-Undan fieldwas discovered in 1995.Production from thefirst phase beganin February 2004It is the money earnerfor Timor-Leste

Training commitments were in the bidThe Clough AMEC JV anticipate that by 2010 the oil and gasindustry in the Timor Sea will require a significant number oftrained personnel.The company said in its tender that it was prepared to invest ina national employee “pipeline” to train local people to meetfuture requirementsSharing of the investment costs among the private and publicsectors would be part of the planA training program has been initiated but only a handful hadbeen trained by the end 2007Many have to be trained outside the country at sites which iscertified for training people for the oil sector

The local capacity is limitedTimor-Leste has a very low levels of supportcapability for the oil and gas sectorLow skills base,Poor port facilities and critical physicalinfrastructureLack of basic storage facilities, andengineering, fabrication and manufacturingservices.Caltech is a Timorese-owned company anda major engineering contractor in Timor-Leste.Revenues are some US$500,000 perannumLess than 50 employeesCaltech is Clough AMEC JV satellite officein Timor-Leste.

Contracts can contain constraintsConocoPhillips’ priority is reliabilityand quality assuranceThat is more important thanpromoting sustainable developmentin Timor-LesteThe contractor also has to do costbenefit analysis of sustainabledevelopment initiativesBoth of these decision-makingcriteria are practical constraints forthe Clough AMEC JV to enhance itslocal economic and socialdevelopment.

Frustrated by lack of progress"It's quite clear the Timoresegovernment is frustrated by the lackof infrastructure and training themultinationals are providing whilethey are reaping billions fromTimorese resources," said one of theleading trade union executives afterthe meetings"Training and jobs are important forthe Timor's future peace andstability”, , he addedNew legislation may be introduced toback up the governments ambitionsSeveral internationalunions recently met inDili to celebrate thelocal unions first 5 years

Funding small firms a challengeeverywhereHigh financing costs can put local entrepreneurs at acomparative disadvantage. Small size of capital (USD 1 million or less) Limited experience in oil field services No or limited borrowing track record The corporate structure is sometimesconfusing International banks are unfamiliar with local firmsAll this makes it difficult for indigenous oil serviceproviders to provide terms compatible with theirinternational competitors

A local content fund in NigeriaNigerian Content Suppliers Fund is being set up with globaland local financial institutions participatingThe fund provides local companies with a lifeline to enableexpansion and growth necessary to compete for work in theindustryTailored specifically to the needs of Nigerian Oil & Gas serviceprovidersMore than 50 local companies with contracts-inin-hand haveapplied for the Fund in an ongoing process.

Local content development– what will it take?Willy H OlsenAdvisor to INTSOK, Norwegian Oil and Gas FoundationMember of the Governing Board, Revenue Watch InstituteCambodia March 2008

Your objective

Where is it possible to domesticate?Global competitionLocalcompetitionOperatorsDesign &EngineeringEquipment manufacturingMaintenanceMaterials & ComponentsConstructionJob creation potentialKnowledge& CapitalIntensiveLabour intensive

The goal: Deliver on time and budgetThe goal is to complete theproject to optimal cost,specified quality and withinagreed dateMost project leaders will preferan optimum number ofcontracts to enable them toControl of interfacesSecure/control costSecure/control scheduleMinimise changes to scope ofwork

No harm to people, equipment or theenvironmentImportant to set HSE goals atstart of a projectMake sure everybodyassociated with the projectunderstands and buys into thegoalsOil companies are nowscrutinizing potentialcontractor’s s corporate andHSE culture as closely as theydo their technological prowess

Project strategy must integrate localcontentContractplanningDefinecontractstrategyPrequalification&contractorselectionTendering&AwardPostawardmeetingCloseoutReviewlocalcontractorperformanceAnalyzeMarketcapabilitiesDevelopLocalContentplan forcategoryDevelopcapabilityScope foropportunitiesDefinestrategiesA pro-active approach is required to ensure LocalContent is an inherent part of the business andcontracting strategy

And don’t t only look at the short termProject developmentOperationsLasting 3-5 yearsLasting 15-40 years

What is your ambition?The oil companies will belooking for local supportfor the jobs that requireless skilled personnelMoving towards the corewill require technologytransfer and ability toabsorb the technologyGetting towards the coreis a 15-20 years processTechnologicallysimpler jobsTechnologicallyadvanced jobsTechnologycoreOrganizationallyadvanced jobsOrganizationallysimpler jobs

Final remarks

Designing a policy to enhance local contentFocus should be on reducing barriers to entry in theindustryStimulate a creative and demanding environment forbusiness developmentImprove local skills and capabilitiesProtection should only be temporary and must betransparent!

Don’t t expect to find simple answersThere is no simple answer to howimplement a policy to enhance industrialdevelopment with basis in the petroleumactivitiesPolicy makers should be aware of thetrade-offs and the pitfalls they may entailwhen developing a policy to enhance localcontentLocal content may be worth doing even ifit entails higher cost – but must makebusiness senseLocal content merely for the sake of localcontent wastes scarce developmentresources