Four years after Nigeria passed the Nigerian Content executive act (NCA) in April 2010, new government figures seem to indicate that it has helped stimulate a jump in activity by domestic firms in the country’s hydrocarbons sector.
Figures from the Nigerian Content Development and Monitoring Board (NCDMB), which is responsible for enforcing the act, have shown a significant increase in the number of local firms in the services sector, aided in part by the expanding presence of indigenous oil producers, along with a rise in the value of local contracts. However, this is still plenty of room for further growth in the years to come, particularly in services and fabrication.
Mandating local input
Passed in April 2010 by executive decree, the NCA sets minimum local content requirements for a set of 285 goods and services, measured by work-hours, tonnage or spending. While it remains ambiguous on deep-water work programmes, and allowed for a three-year waiver for services not available in Nigeria, the Act aimed to increase the Nigerian component of work programmes to roughly 70% and create some 300,000 new jobs in the process.
It limits foreign staff to 5% of the total, with exemptions negotiated with NNPC’s NAPIMS (National Petroleum Investment Management Services), and requires operators to give “right of first consideration” to Nigerian majority-owned firms, provided their prices are within 10% of international prices.
The act seems to have had the intended effect. In 2013 alone, a study by the Ministry of Petroleum Resources released in May 2014 found that $6.45bn of the total $10.19bn value of contracts awarded went to majority Nigerian-owned firms. Progress across different segments of the oil and gas value chain has been uneven however.
All industries are not equal
The most visible impact has been in front-end engineering and design (FEED), where the number of Nigerian-incorporated companies rose from roughly 40 prior to 2010 to between 160 and 200 in 2013 according to estimates by NCDMB. Encouragingly, the NCDMB figures comprise not only wholly indigenous companies but also majority Nigerian-owned affiliates of foreign contractors, such as France’s Technip or Italy’s Saipem.
Service activity has also seen an uptick locally. While deepwater work is still dominated by larger multination oilfield service providers such as Schlumberger, Baker Hughes, Halliburton and Weatherford, the NCDMB nonetheless estimates that indigenous firms’ share of services grew from roughly 10% in 2010 to 30% in 2013. Oil majors have also strived to comply with the Nigerian Content rules, with Shell claiming it had awarded 96% of contracts by value to local firms in 2013.
Rig ownership provides an excellent example: by February 2014, Nigerian firms owned 14 land rigs, nine swamp rigs and three shallow-water rigs (jack-ups) according to the Nigerian chapter of the International Association of Drilling Contractors – up from nearly zero in 2010.
In total, Nigerian services companies, which also includes ventures minority-owned by multinationals, have invested $1.6bn combined between 2010 and 2014, overwhelmingly financed by Nigerian lenders, of which $800m was for the nine swamp rigs costing between $25m and $80m each depending on specifications according to the association.
While significant progress has been achieved in engineering and some services, there is still significant scope to expand local fabrication and manufacturing, even if bottlenecks like power supply and availability of key materials remain a key constraint. The NCDMB estimates that while 90% of engineering is conducted in Nigeria, the share falls to 55% for fabrication and only 10% for manufacturing.
Indeed between 70% and 87% of contracts (by value) were awarded to Nigerian companies in 2013, yet only 12% to 18% of these went on locally produced goods.
Cultivating a competitive field
While Nigerian firms have gradually been expanding their capacity, they face significant constraints ranging from inadequate power supply to challenging access to finance. To ease the latter, the NCA established a Nigerian Content Development Fund (NCDF), financed through a 1% levy on every contract awarded in Nigeria.
By end-2013 the fund had accumulated $334m, 70% of which is earmarked for providing a partial guarantee on commercial bank debt and 30% for technical assistance in upgrading capacity. The risk guarantee covers 30% of the value of the loan, of up to $10m, and sets annual interest rates at 7% for dollar loans and 15% for Naira loans over tenures of up to ten years.
Various IOCs have established their own contractor financing support funds: a fund by Shell covering loans of up to $5bn, one by ExxonMobil of up to $8.6bn and one by Total covering up to $7.5bn. The funds provide partial risk guarantees on commercial loans from Nigerian lenders.