Local content development what will it take?

Willy H Olsen
Advisor to INTSOK, Norwegian Oil and Gas Foundation Member of the Governing Board, Revenue Watch Institute Cambodia March 2008

My focus areas:
Governments drive towards local content What are countries looking for? The required business climate The stakeholders Case illustrations Nigeria Yemen Papua New Guinea Chad Timor-Leste

Your objectives

Make it an epoch not an episode

The petroleum resources belong to the nation and should be developed to the benefit of the whole society Norways goals were long term
National control and state participation Resource management Building and fostering a Norwegian oil community Technology and competence

Governments want more value creation

Norway

Russia

Canada

Algeria Libya T&T Ecuador Venezuela Bolivia Brazil

Azerbaijan

Kazakhstan Iran

Saudi Nigeria Angola Tanzania Malaysia Timor Leste Australia

No laws

PSAs etc

Directives

Challenged by more stringent requirements

International oil and gas companies are challenged by ever more stringent local content requirements It is not only revenues that offer an opportunity to achieve economic development and poverty reduction Capital and operational expenditure represents a direct means for the sector to contribute to local economic and social development Through direct and indirect employment, advancement of productive skills, a more competitive local enterprise sector, local infrastructure development and more effective local institutions

But the industry is facing constraints

Middle income countries may be able to deliver local content They may have an advantage because of lower operating costs Skilled workforce Growing domestic customer base But most low-income countries are struggling Local firms are uncompetitive Lack of relevant experience and technical capabilities Poor production quality and reliability, Low health, safety and environmental standards Weak public sector regulation and inefficient bureaucracies are also major limiting factors.

Successful tools to build local

content
Concession policies Production sharing contract requirements Technology transfer requirements Tax incentives Procurement & contract strategies Support for SMEs and entrepreneurs Mentor programs Enterprise centers Cluster programs & use of free zones

Production sharing contracts can be an important tool

Most developing countries have signed production sharing contracts with oil companies Most contracts tend to include requirements that could be used to expand local development Recruit nationals except when qualified persons not available Use local supplies, equipment, services and contractors if competitive on performance, price and availability Provide training But clauses can also be more specific on targets

What are countries looking for?

The national development agenda

Government Revenue Price Volatility

Supply Chain Labour Capital Equipment

Oil and Gas Sector

Energy Supply Feedstock

Impact on local communities Instability & Conflict

The purpose of national (local) content

The purpose is to increase national wealth through economic growth and more employment of locals Value creation in the country was the definition used in the Norway, UK, Brazil and the new Nigerian policy Other countries look at elements like Ownership Expenditure in the local economy Employment Local content is a means not a goal

What level to aim for?

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

Ownership addresses a small piece of the pie

Focus on ownership discourages foreign investment and addresses a small part of the pie

A balanced local content indicator based on added value is more effective

Local content

Owner profits

Local ownership is no guarantee

Shell placed 70% of all contracts with Nigerian owned firms until 2002-2003 Value creation in the country was only some 5 - 15% Local firms sourced most of their work outside Nigeria Local firms acting as agents for international companies Or as middle men with good connections aiming to get their share of the potential profits
The case of Nigeria
8 Billion Dollars
AVERAGE ANNUAL UPSTREAM SPEND

9 Billion Dollars
ANNUAL NATIONAL BUDGET

r s o t a r e Ope outsid nd rs o spe t c e tra Con outsid nd spe

o r s t a r e Ope insid nd spe o rs t c a tr e Con d insid n spe

The main obstacles to local content

Lack of domestic manufacturing, fabrication and service capabilities to support the oil and gas sector Few people with the required skills, lack of adequate power, water and other infrastructure to support an expanded manufacturing base cumbersome bureaucratic obstacles to development of small and medium sized enterprises underdeveloped capital markets Substantial proportion of the equipment and expertise must therefore be imported

Local content needs a good business environment

Framework conditions:
Macroeconomic environment Institutions and legislation Infrastructure for business Social infrastructure Predictability Value adding activities: Petroleum sector - Local content

Incentives reliability Enabling environment

Private Non-oil sector

National wealth

Inclusion Exclusion

Public sector

Good governance will add value

Resource-rich countries around the world tend not to score well on governance Many resource rich countries lack Clear and stable laws and regulations Capacity and skills in government Fiscal monetary and budget discipline Dialogue between government and civil society Public sector/private sector balance

Not costless to introduce local content

policies

Badly enforced local content policy may impede economic growth

Consuming wealth rather than creating value Risk of permanent protection Corruption and red tape

Increased local content in the oil and gas sector implies more eggs in the same basket

The key stakeholders?

The key stakeholders

Government

Private sector

Local content

Academia

Major companies

Will the oil companies deliver local content?

Few international oil companies (IOCs) have a clear local content strategy Mainly addressed as part of the corporate social responsibility agenda The major IOCs have the capacity and the capabilities to be key players in developing a countrys economy Smaller IOCs seldom have the capacity to get engaged in developing national content

Contractors do the work on the ground

Saipem: Over 30 000 people More than 100 nationalities.
Schlumberger works in 80 countries 70 000 employees 140 nationalities

Halliburton has more than 45 000 employees in nearly 70 countries,

Baker Hughes: Operating in 90 countries

Aker Kvaerner: Some 35 000 people in 30 countries

They spend 80% of the money in a project

Tools used by oil companies

Oil companies encourage local enterprises in their markets create jobs, use local suppliers, share business skills, support training and promote further investment. They may set up Enterprise Centers They may establish supplier forum They will enter into mentor programs to small and medium-sized businesses They may also be willing to assist in providing seed capital to local entrepreneurs

Local content development what will it take?

Willy H Olsen
Advisor to INTSOK, Norwegian Oil and Gas Foundation Member of the Governing Board, Revenue Watch Institute Cambodia March 2008

A few illustrations

Chad: Training entrepreneurs to bid electronically

ExxonMobil has identified local opportunities for 35 mill dollars in the period 2007-09 Some 300 Chadian entrepreneurs trained in using the ebidding system
18 bid rounds completed 63 bids submitted

More than 50 Chadian businesses participated in the bidding 14 contracts have been awarded to date worth 22 million USD
Source: IFC

LNG - one of the few successes in Nigeria

Nigerian LNG is located on the Bonny Island in the Niger Delta The countrys first LNG company is owned by NNPC, Shell, Total and ENI It has a clear strategy for working with the local communities and employ Nigerians and provide support to local communities 80% Nigerianization for plant operations by 2008 Reaching the target requires major training programs

The local content strategy

Shareholders insisted on local content plan as an essential condition for final investment decisions Subcommittee on local content Committee developed a plan and strategy Survey of potential suppliers and gas Monitored, evaluated and reported progress Measured local goods and services and man hours Calculated % Nigerian value for each subcontract

Corporate development activities

Infrastructure activities Roads, shopping malls, schools, sport facilities Electricity, water Enterprise economic empowerment Micro Credits Scheme Youth Empowerment Scheme Monthly Stipend/Starter Packs/Post Graduation Mentoring and Monitoring Training in Aqua Culture and Enterprise Development Capacity Building for Local Contractors Business Development for Entrepreneurs Health and education support

The lessons learned

Focus on the objective Community Development is not a public relations activity Carry stakeholders along, even if they are slowing down the project initially. Perseverance - no quick wins or results Lead times of projects are long Ensure stakeholders understanding for continued commitment. Do not cluster projects Rather separate them into stand alone sub-projects to deliver tangible milestones Executive Management support is critical for success

The biggest project ever in Yemen

Yemen LNG is currently constructing a LNG and a 320-kilometer pipeline from the gas fields Project was authorized by the Government and shareholders in August 2005 Investment of US $ 3.7 billion The LNG plant construction is involving some 4 000 people and another 1 000 along the pipeline Yemen LNG has two major contractors Total is leading the work Production expected in 2009

Two year on the job training

On-job training abroad aims to build the technical workforce in time for the start up and operation of the LNG Over 200 trainees from every governorate of Yemen are being trained for the technical and non-technical skills required for employment 18 trainees have been sent to in Egypt and 66 to Indonesia The trainees are exposed to hands-on experience before they participate in the commissioning and start-up of the LNG plant in Balhaf

A giant project dont match PNGs capabilities

Papua New Guinea is hoping for its first LNG project to bring gas to world markets ExxonMobil and Oil Search are finalizing plans Government has legislation in place to support local content and training of locals Hurdles are extremely high for local firms A giant project does not match the small industrial base Developers will be required to open a liaison procurement office in the country to provide local firms fair access Get access to information Present their capabilities

Papua New Guinea 6 million people, 600 islands, 950 languages and cultures

Small can also be beautiful

Technology and project size is often a major hurdle for local suppliers But local firms in Papua New Guinea may have capabilities 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 smaller tasks

The ambitions in Timor-Leste

Petroleum will be the dominant revenue stream in our nations economy for the foreseeable future But we look to it for more than a source of funds. The sector should be a much broader and dynamic contributor to the national economy. Contributing through capital investment, and employment generation.. It will be seen in personnel training and education, It will be seen in infrastructure development It will be an agent of change for the enhancement and development of TimorLestes society as a whole.

Prime Minister Mari Alkatiri gave an optimistic perspective in September 2005

The Timor-Leste content policy

Identification of strategic areas for short and long term development Establishment of Timor-Leste Content Body Management of Timor-Leste Content

Timor-Leste definition of local content Means work carried out to stimulate the economy of Timor-Leste by implementing sustainable development projects related to the petroleum sector and preferential purchases of Timorese goods and services Current policy is capacity building focused Realizing that direct economic involvement will be small min the coming few years

Contactors is required to assist

ConocoPhillips is operator for the field that supports Timor-Lestes economy Its contract with the main contractor Clough AMEC JV has several specific local content obligations Implement a sub-contractor development program Provide local suppliers with the opportunity and ability to clearly understand the requirements Commit to a realistic program of practical local infrastructure development and sourcing from Timor-Leste

The Bayu-Undan field was discovered in 1995. Production from the first phase began in February 2004 It is the money earner for Timor-Leste

Training commitments were in the bid

The Clough AMEC JV anticipate that by 2010 the oil and gas industry in the Timor Sea will require a significant number of trained personnel. The company said in its tender that it was prepared to invest in a national employee pipeline to train local people to meet future requirements Sharing of the investment costs among the private and public sectors would be part of the plan A training program has been initiated but only a handful had been trained by the end 2007 Many have to be trained outside the country at sites which is certified for training people for the oil sector

The local capacity is limited

Timor-Leste has a very low levels of support capability for the oil and gas sector Low skills base, Poor port facilities and critical physical infrastructure Lack of basic storage facilities, and engineering, fabrication and manufacturing services. Caltech is a Timorese-owned company and a major engineering contractor in TimorLeste. Revenues are some US$500,000 per annum Less than 50 employees Caltech is Clough AMEC JV satellite office in Timor-Leste.

Contracts can contain constraints

ConocoPhillips priority is reliability and quality assurance That is more important than promoting sustainable development in Timor-Leste The contractor also has to do cost benefit analysis of sustainable development initiatives Both of these decision-making criteria are practical constraints for the Clough AMEC JV to enhance its local economic and social development.

Frustrated by lack of progress

"It's quite clear the Timorese government is frustrated by the lack of infrastructure and training the multinationals are providing while they are reaping billions from Timorese resources," said one of the leading trade union executives after the meetings "Training and jobs are important for the Timor's future peace and stability, he added New legislation may be introduced to back up the governments ambitions

Several international unions recently met in Dili to celebrate the local unions first 5 years

Funding small firms a challenge everywhere

High financing costs can put local entrepreneurs at a comparative disadvantage. Small size of capital (USD 1 million or less) Limited experience in oil field services No or limited borrowing track record T he corporate structure is sometimes confusing International banks are unfamiliar with local firms All this makes it difficult for indigenous oil service providers to provide terms compatible with their international competitors

A local content fund in Nigeria

Nigerian Content Suppliers Fund is being set up with global and local financial institutions participating The fund provides local companies with a lifeline to enable expansion and growth necessary to compete for work in the industry Tailored specifically to the needs of Nigerian Oil & Gas service providers More than 50 local companies with contracts-in-hand have applied for the Fund in an ongoing process.

Local content development what will it take?

Willy H Olsen
Advisor to INTSOK, Norwegian Oil and Gas Foundation Member of the Governing Board, Revenue Watch Institute Cambodia March 2008

Your objective

Where is it possible to domesticate?

Global competition Knowledge & Capital Intensive

Operators Design & Engineering Equipment manufacturing Maintenance Materials & Components Construction
Local competition Job creation potential

Labour intensive

The goal: Deliver on time and budget

The goal is to complete the project to optimal cost, specified quality and within agreed date Most project leaders will prefer an optimum number of contracts to enable them to
Control of interfaces Secure/control cost Secure/control schedule

Minimise changes to scope of work

No harm to people, equipment or the environment

Important to set HSE goals at start of a project Make sure everybody associated with the project understands and buys into the goals Oil companies are now scrutinizing potential contractors corporate and HSE culture as closely as they do their technological prowess

Project strategy must integrate local content

Contract planning Define contract strategy
Prequalification & contractor selection

Tendering & Award

Post award meeting

Close out

Review Analyze local Market contractor capabilities performance

Develop Local Content plan for category

Develop capability Define Scope for strategies opportunities

A pro-active approach is required to ensure Local Content is an inherent part of the business and contracting strategy

And dont only look at the short term

Project development

Operations

Lasting 3-5 years

Lasting 15-40 years

What is your ambition?

The oil companies will be looking for local support for the jobs that require less skilled personnel Moving towards the core will require technology transfer and ability to absorb the technology Getting towards the core is a 15-20 years process

Technologically simpler jobs Technologically advanced jobs Technology core Organizationally advanced jobs Organizationally simpler jobs

Final remarks

Designing a policy to enhance local content

Focus should be on reducing barriers to entry in the industry Stimulate a creative and demanding environment for business development Improve local skills and capabilities Protection should only be temporary and must be transparent!

Dont expect to find simple answers

There is no simple answer to how implement a policy to enhance industrial development with basis in the petroleum activities Policy makers should be aware of the trade-offs and the pitfalls they may entail when developing a policy to enhance local content Local content may be worth doing even if it entails higher cost but must make business sense Local content merely for the sake of local content wastes scarce development resources