Nigeria's Local Content Rules Set High Goals For 2006

As ERHC On the Move warned it would last week, the Nigerian government has fast-tracked "local content" objectives that include a blanket prohibition against new joint venture projects that do not substantially benefit Nigeria and Nigerian companies, the energy intelligence service Platts reported Monday.

The new local content targets apply mainly to ExxonMobil, ChevronTexaco, Royal Dutch Shell, Total and Agip, and their overall effect should be to raise the percentage of the $8 billion spent annually by these companies to run their projects from the current 10 percent that is spent in Nigeria to something closer to 50 percent over time.

The new rules could be a significant benefit to ERHC Energy shareholders, as the company is about 51 percent owned by Sir Emeka Offor of Nigeria and Nigeria's First Inland Bank, a newly-consolidated entity that owns about 9 percent of ERHC Energy and is one of Nigeria's largest financial institutions.

The one possible problem with the proposal is that Nigeria must develop a a quality-control regime equal to the technical challenges presented, for instance, by fabricating Floating Production, Storage and Offloading platforms (FPSOs), which would be 50 percent fabricated in Nigeria under the new directives by mid-2006.

Much of that capacity is probably attainable - Nigeria recently delivered its first locally-fabricated base for an FPSO - but accidents resulting from workmanship issues could quickly take a costly toll on foreign investors and insurers.

The initiative will presumably help downstream Nigerian businesses, enhance employment and help stabilize regions of the country where angry residents feel they do not get a fair share of Nigeria's oil wealth, estimated at $30 billion per year.

The new rules signal a significant strengthening of Nigeria's resolve to lift itself out of poverty and enjoy the modern amenities - from simple things like electric power and clean water to well-constructed homes and a viable healthcare system - that many Westerners who are warmed and transported by the byproducts of Nigerian oil now take for granted.

Here is the Platts article, which was unsigned:

Nigeria fast-tracks target to raise local content in E+P sector
Lagos (Platts)--2Jan2006

The Nigerian government has issued new guidelines for the award of contracts by joint-venture oil partners that are largely tailored to fast-track the West African country's push for more local content in the upstream oil sector.

In a memo dispatched to the state oil company Nigerian National Petroleum Corp and obtained by Platts, the government said that projects submitted by Nigeria's multinational JV partners for approval must now include evidence of a binding agreement by the main contractor with a Nigerian local firm. In the absence of such an agreement, the NNPC has been directed to refusal approval.

Under the new guidelines, which mainly revised an earlier directive to the joint venture partners on the local content objective, Nigeria also directed the oil majors to immediately relocate project management teams and procurement centers for all projects in the Nigerian oil and gas industry to the country.

Nigeria's partners are Shell, ExxonMobil, Chevron, Total and Agip. They account for more than 90% of Nigeria's oil production of about 2.5-mil b/d. Also, while the earlier directive said construction of topsides for floating production, storage and offloading vessels must be done in Nigeria starting mid-2006, the new guidelines stipulate that starting January 2006, a minimum 50% of the total tonnage of an FPSO topside and modules should be fabricated in Nigeria.

The NNPC has also been directed not to honor tenders that did not include full participation of indigenous companies and also that did not show sufficient patronage of equipment and materials manufactured in Nigeria.

"Henceforth, all operators and project promoters must forecast procurement items required for operations and projects for inclusion in a master procurement plan to be submitted to the Nigerian Content Division of the NNPC on or before January 31 of every year," the memo stated.

"From January 2006, all topsides of fixed (offshore and onshore) platforms weighing up to 5,000 tons are to be fabricated in Nigeria," it added.

Already, the National Petroleum Investment Management Services, a subsidiary of the NNPC managing government's investment in joint venture projects, has been put on alert to ensure strict compliance with the new guidelines.

Nigeria, which is aiming to correct the huge capital flight in the strategic oil sector, where only 10% of the average $8-bil annual spending in the sector directly benefited the nation's economy. It aims to raise the local content to 45% this year, and to 70% by 2010.

Under a Nigerian Content Development Policy deleveloped in 2004, the government issued a set of directives in March 2005 to the oil industry. The memo however, stated that in issuing the new directives, it was "based on feedback from the oil and gas industry and the National Supplier Associations."