A Perspective on Local Content in the Oil and Gas Industry

Local Content has become very topical, particularly in poor countries where the discovery of rich deposits of natural resources and the inevitable association of First World entities with the exploitation of those resources gives rise to discourse regarding how smaller businesses and potential local investors in the resource-yielding countries can benefit, directly, through the provision of goods and services necessary for the effective execution of the recovery and exploitation processes.

 In order to formalize the process, countries have enacted laws to make it mandatory for all stakeholders of specified industries. In the instance of Guyana the issue of Local Content has arisen out of the country’s significant oil discoveries, beginning with the first May 2015 disclosure.

 In the Guyana context local content speaks to the development of local skills and service capabilities including the use of local manufacturing in support of the oil and gas recovery process. Put differently, Local Content is about the creation of a skilled work force and the building of “a competitive supplier base.” This may be realized through the creation of small and medium-sized enterprises that have the capacity to offer goods and services of a particular quality, locally, which goods and services would otherwise have to be imported.

Fundamentals of Local Content

The prerequisites for enhancing Local Content are the rule of law, a skilled workforce, and an investment-friendly atmosphere. However, there are opposing forces to government efforts to create the enabling environment. These forces are the divide between national and commercial interests, delays and corruption.

Local Content Practices

The principle of outsourcing has increasingly been applied by oil & gas companies; and it is interesting to note that oil companies expend up to 80 percent of their investments on products and costs that are supplied from without. Thus, indirect employment in the sector accounts for a large proportion of total employment and value-addition. Considering 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 a succinct definition of the methods for the identification and quantification of local content will delineate properly its key components—value-addition and growth capability. In view of this, employment as well as direct and indirect value-addition must be identified and accounted for separately.

Local Content: Levelling the playing field

The procurement of local goods and services establishes a multiplier for local economic development through contribution to employment, skills strengthening, supplier and local enterprise development. In Africa, countries like Ghana and Uganda where oil has been found in commercial quantities, Local Content legislation has been crafted. Norway is among those countries that have assisted developing countries with the indirect development of Local Content through an initiative called Oil for Development (OfD). This initiative seeks to enhance efforts to administer petroleum resources in a way that creates economic growth and attempts to address the welfare of the whole population in an environmentally sustainable way.

 A World Bank 2016 paper titled Local Content in Oil, Gas and Mining sets out its perspective pointing out that what Local Content seeks to do is to “leverage the extractive value chain to generate sustained and inclusive growth through economic diversification and employment opportunities” in a manner that can reduce dependence on external aid. Its success, the Bank says, “depends on early engagement and collaboration among government, extractive industry companies, and communities.”

The Bank points out that while foreign capital in mineral and petroleum producing countries has historically driven investment and employment” its most valuable contribution to long-term sustainable and inclusive growth comes from “the ability of the extractive industries to generate further benefits to the domestic economy beyond the direct contribution of its value-added, through productive linkages with other sectors…………” In other words, Local Content.  

Host governments’ acknowledgement of the importance of Local Content, the World Bank says, is, these days, reflected “through a wide array of policy instruments……… oil, gas and mining companies now rate Local Content among the most significant expectations in the communities in which they operate. “

The World Bank says, however, that while Local Content Policies (LCPs) have the potential to stimulate broad-based economic development, which is necessary to alleviate poverty, achieve prosperity and ensure sustainable economic and social outcomes, their use has achieved mixed results. The Bank says that “the use of specialized inputs and the technological complexity of the petroleum sector often limit the possibility of developing links into the local economy. An economy that is very limited can hardly be expected to quickly supply services. A fast-growing extractive sector coupled with too ambitious Local Content targets may exacerbate supply bottlenecks arising from increased aggregate final demand. This would ultimately affect employment and output trends in other sectors of the economy, and create distortions and inefficiencies. Furthermore, the size and location of extractive projects also affect the type of potential links, and the speed at which they can efficiently develop.”

 It is important to understand the trade-offs and pitfalls that the development of LCPs may entail. Since LCPs are part of a broader category of policy interventions aiming to strengthen the productive structure of a particular economy, their success largely depends on their interaction and coherence with broader economic development policies and related implementation tools. It is therefore possible that, for example, the success of regulatory interventions to increase local employment in the oil and gas sector may require an improvement in the quality of education, changes in labour mobility, improvement in infrastructure, and so on, while policies leveraging economic diversification through the extractive industry may require stable macroeconomic policies that attract foreign investment, provide more leverage in trade agreements, and improve the financial market. The sustainability of a newly created domestic manufacturing sector may require a level of demand that goes beyond the domestic market thus requiring trade agreements, the development of resource corridors and regional integration.

 This article draws on current material available on Local Content including a World Bank Paper on the subject.

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