LOCAL CONTENT IN THE OIL AND GAS INDUSTRY OF NIGERIA CHALLENGES PROSPECT AND THE WAY FORWARD
CHAPTER ONE
INTRODUCTION
1.1 BACKGROUND TO THE STUDY
Despite the richness of natural oil resources, Nigeria is ranked the 20th poorest country in the world. Much of the
country’s poverty and underdevelopment can be contributed to the misguidance in governance, mismanagement of
resources, various political issues and lack of infrastructures (Adams et al., 2008). The country’s level of GDP per
capita was, a few years back, below the level at independence 40 years ago, and income inequality was widening
(Boscheck, 2007). The oil and gas industry is, however, a major contributor to the Nigerian economy. It accounts for
about 90% of the federal government’s annual revenue (Nwosu et al., 2006). The industry is, however, dominated by
foreign interests and major activities like exploration, drilling, production, well intervention and service provision
remain primarily controlled and managed by foreign multi-national companies, and only minor contracts have been
awarded to local contractors (ibid). In order to increase local industry’s participation in the oil and gas industry of
Nigeria, local content requirements (LCR) have been made legally mandatory, which implies that foreign companies
involved in exploring and exploiting the resources in Nigeria, are forced to include indigenous companies. With a few
exceptions, the foreign companies are large multinational enterprises (MNEs). For example, 95% of Nigeria’s oil and gas production is generated by only five companies; Shell, Exxon, Chevron, Total and Agip (Frynas and Paulo, 2007).
Historically, the involvement by foreign companies in developing countries has been motivated by a desire to exploit
natural resources and abundant labor pools (Hansen et al., 2009).
The need for resource-rich Nigeria to assume control of the exploration, exploitation and production activities in the oil
and gas sector and to harness the potentials of this most strategic industry in order to generate more value-added,
seems to be receiving much desired attention from all the stakeholders. This need is equally expressed in Nigeria’s
desire to domicile a substantial amount of the average $18 billion per annum exploration and production spending
and stem the tide of capital flight which, over the years, has made Nigeria a junior partner in her joint venture
arrangements with the International Oil Companies (IOCs). For a country with over four decades’ experience in oil
and gas exploration and production activities and proven recoverable reserves of about 37 billion barrels, her inability
to use the resource wealth as a means for national development and poverty reduction has perhaps been the
greatest challenge facing successive administrations. These challenges have their expression in how Nigeria can
derive maximum benefits from oil and gas operations through optimal use of local competences and resources as
practiced in Indonesia, Brazil, Norway and Venezuela, for example. Although these countries started oil exploration
and production activities after Nigeria they have largely recorded remarkable success in their efforts to grow the local
content in this strategic industry. The question is: why has Nigeria been unable to surmount her own challenges?
The Nigerian Oil and Gas Development Law 2010 defines local content as “the quantum of composite value added to
or created in Nigeria through utilization of Nigerian resources and services in the petroleum industry resulting in the
development of indigenous capability without compromising quality, health, safety and environmental standards”. It is
framed within the context of growth of Nigerian entrepreneurship and the domestication of assets to fully realize
Nigeria’s strategic developmental goals. The scheme, which has the potential to create over 30,000 jobs in the next 5
years, is geared to increasing the domestic share of the $18 billion annual spending on oil and gas from 45% to 70%,
in addition to enhancing the multiplier effects on the economy, through refining and petrochemicals. The local content
policy action started in 1971 through the establishment of the Nigerian National Oil Corporation, (NOC). NOC was
established as a vehicle for the promotion of Nigeria’s indigenization policy in the petroleum sector. It later became
Nigerian National Petroleum Corporation (NNPC) in 1977 through NOC’s merger with the petroleum ministry. NNPC
flagged off the actual local content initiative through acquisition of interests in the operations of the IOCs. These
interests grew to about 70%, with the responsibility of controlling all acreages and other activities. Although conscious
efforts were made in the past through Regulation 26 of the 1969 Petroleum Act, enforcement of local content policy,
the springboard for sustainable economic transformation of Nigeria, was mere paper work. For an industry that
contributes 80% of Nigerian government revenues and 95% of its foreign exchange this is entirely unacceptable to
the Nigerian government hence the clamor for change.
LOCAL CONTENT IN THE OIL AND GAS INDUSTRY OF NIGERIA CHALLENGES PROSPECT AND THE WAY FORWARD