LOCAL CONTENT IN THE OIL AND GAS INDUSTRY OF NIGERIA, CHALLENGES: PROSPECT AND THE WAY FORWARD

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 its abundant natural oil resources, Nigeria ranks 20th among the world’s poorest countries. Much of a country’s poverty and underdevelopment can result from misgovernment, poor management of resources, various political problems, and lack of infrastructure (Adams et al., 2008). A few years ago, the country’s GDP per capita was below pre-independence levels 40 years ago, and income inequality was widening (Boscheck, 2007). However, the oil and gas industry contributes significantly to the Nigerian economy. It accounts for approximately 90% of annual federal revenue (Nwosu et al., 2006). However, the industry is dominated by foreign interests and key activities such as exploration, drilling, production, well intervention and service provision continue to be controlled and controlled primarily by foreign multinationals and local contractors have been awarded only small contracts (ibid.) Local Content Requirements (LCR) are required by law to increase local industry involvement in the Nigerian oil and gas industry . This means that foreign companies involved in the exploration and development of Nigeria’s resources are forced to get involved with local companies. Foreign companies are, with a few exceptions, large multinational companies (MNEs). For example, 95% of Nigeria’s oil and gas production is produced by just five companies. Shell, Exxon, Chevron, Total, and Agip (Frynas and Paulo, 2007). Historically, the involvement of foreign firms in developing countries has been motivated by a desire to take advantage of natural resources and abundant labor (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. Question is:
Why has Nigeria failed to meet her own challenges?

The Nigerian Oil and Gas Development Act 2010 defines local content as “the amount of complex value added or created in Nigeria through the development of resources and services in the Nigerian oil industry, which includes quality, health, and the Set in the context of growing entrepreneurship and asset domestication in Nigeria, the program has the potential to create more than 30,000 jobs over the next five years, in order to fully realize its strategic development goals. We have a vision and a goal: to increase the domestic share of the $18 billion annual oil and gas spending from 45% to 70%, in addition to increasing the economic multiplier effect through refineries and petrochemicals.

1.2     STATEMENT OF THE PROBLEM

Nigeria’s rising profile in oil and gas production has been fairly rapid and stable, quickly becoming a formidable force within OPEC. Oil exploration, which began onshore, has greatly improved the country’s production capacity to about 2.3 million barrels per day and increased proven reserves to about 37 billion barrels. But despite Nigeria’s growing prominence and wealth, the country remains one of the poorest and most technologically backwards in the world. This is basically because vaunted wealth does not lead to better welfare. One of the reasons for this is that more than 90% of annual industrial spending escapes the domestic economy as capital flights. Despite the ever growing number of local oil service companies the latter’s annual gross earnings still account for less than 5 percent of the sector’s aggregate annual contracting budget.

1.3     OBJECTIVE OF THE STUDY

The main objective of this study is to find out the challenges, prospect and way forward of local content in the oil and gas industry in Nigeria; specifically the study intends to:


· Find out the challenges faced by the local content in the oil and gas industry in Nigeria

· To anticipate the prospect of the local content in the oil and gas industry in Nigeria

· To proffer a way out to the problems highlighted.

1.4     RESEARCH QUESTIONS

The following research questions was formulated to guide the study to arrive at a valid and reliable conclusion.

· What are the challenges faced by the local content in the oil and gas industry in Nigeria

· What is the prospect of the local content in the oil and gas industry in Nigeria

· What is the way out to the problems highlighted?

1.5     SIGNIFICANCE OF THE STUDY

The study will expose the stakeholders involve in oil and gas policy making, the government at various levels, and the society at large to what local content in oil and gas means, will also expose them to the challenges face by the oil and gas industry in Nigeria, the prospect of the industry and the way out to the problems. The conclusions drawn in this study will also serve as a guide for Nigerian policy makers to formulate sensible policies to move the industry forward. Finally, this study will serve as a guide for other researchers who initiate the same research in the near future.

1.6     SCOPE OF THE STUDY

This research paper covers the Nigerian oil and gas industry, and the industry issues and prospects are studied in detail in this study.

1.7     RESEARCH METHODOLOGY

This study basically focuses on local content in the Nigerian oil and gas industry. Therefore, this study uses secondary sources, which he is one of the traditional methods of gathering information. A significant proportion of the secondary sources used are from published and unpublished works, including the following materials:
Archives, newspapers, debates, conference materials, magazines,