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Opinions of Wednesday, 13 October 2010

Columnist: Asamoah, Joe

Uptake of Local Content in the Oil and Gas Industry

In contemporary times, local content has assumed enhanced relevance, and more countries are enacting laws to make it obligatory for all stakeholders of specified industries. One may ask; what is local content, and why has it become such a hot issue in the natural resource industry in general and particularly in the oil and gas sector? Local content regarded as the development of local skills, technology transfer, and utilisation of local manpower and local manufacturing. For a more useful definition, one could say that local content is building a skillful labour force including the development of a base for competitive supply. It has become an issue of heightened importance due to the fact that in this day and age, every country would like its citizens to capture the commanding heights of its economy with a view to assisting it to keep its wealth within its borders, as well as providing jobs to the growing population. This is accomplished through capacity building, creating small and medium enterprises as well as offering products and services domestically. It could be argued that in the Third World, local enterprises are the drivers of economic activity and development. While the technology gap between developing and developing countries is widening, the spread of local technologies in developing countries is being fast-tracked simultaneously. Additionally, technological improvement undergirds the rise in incomes, particularly in developing countries, and has assisted the reduction in poverty levels from 29% in 1990 to 18% in 2004.
Fundamentals of Local Content
It has been trendy for governments of rentier economies to look beyond revenues that accrue to them from the economic rent. The objective is towards maximization of the national value creation by means of the oil and gas value chain through job-creation, adding value, technology transfer and the acquisition and application of knowledge. The rudiments for boosting local content are rule of law, skilled workforce, and investment-friendly atmosphere. On the other hand, there are forces of opposition to government efforts to put enabling environment in place. These forces are the split between national and commercial interests, delays, health, safety and environmental challenges, and corruption.

Local Content Practices

The principle of outsourcing has progressively been applied by petroleum companies; and it is fascinating to note that oil companies spend up to 80% of their investments on products and costs that are supplied from without. Therefore, indirect employment in the oil and gas sector accounts for a huge proportion of total employment and value-addition. Taking into account the fact that opportunities for building local content may vary along the value-chain, the market for maintenance, modification and operation (MMO) is often undervalued. Thus, only clearly defined methods for identifying and quantifying local content will tease out its major components - value-addition and growth potential. In light of this, employment as well as direct and indirect value-addition must be identified and accounted for separately.

Multiplier Effect

Local goods and services procurement is very important, as it establishes a multiplier for local economic development through contribution to employment, skills strengthening, supplier and local enterprise development. Whereas some countries have a multiplier effect of investment in the oil and gas sector of about 3.0, that of Norway is 2.5. It is noteworthy that a lot of countries find it difficult to attain a multiplier of 1. The multiplier of Kazakhstan is 0.45 as at 2003, in spite of being industrialized. Norway is mentioned for being a classic case of a country where local content in the oil and gas industry has been implemented with marked success. In Africa, countries like Ghana and Uganda that have lately found oil in commercial quantities are in various stages of crafting local content bills. Further, Norway is providing assistance to several developing countries with the indirect development of local content through an initiative called Oil for Development (OfD). The OfD initiative is aimed at providing assistance to developing countries, on the basis of their request. This initiative is to improve the bid to administer petroleum resources in a manner that creates economic growth; while encouraging the welfare of the whole population in an environmentally sustainable way. The pertinent question is whether enough is being done by the powers that be to put the economies of sub-Saharan countries in the hands of skilled professionals!

Dr Joe Asamoah, a consultant in the Oil and Gas Industry, Environment, Energy and the CDM can be reached at