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Africa's local content policies are opening up key sectors for private equity investors.

Evening traffic jam in Accra, Ghana

perspectives on dynamic africa

Local Content Creates Opportunity

By Kingdom Zephyr Africa Management

Local content is becoming a hot topic in Africa as governments look to replicate the success of countries such as Brazil and Norway by fueling domestic economic growth and creating local employment. Local content policies are creating investment opportunities within Africa's emerging indigenous upstream and oil services sectors for private equity investors. Countries need to adopt a collaborative approach towards working with the international oil majors if they are to gain access to the latest technology and facilitate skills transfer within the workforce.

Historically, relationships between African governments and the integrated oil majors have been strained by a seeming inability to align their vested interests. Inept or corrupt legislators have laid the blame on foreign oil companies, alleging the siphoning off of oil profits. The oil companies in turn cite the lack of world-class skills and services as the reason for limited local procurement of equipment and services. Regardless of who is to blame, proceeds of oil-export revenues have largely failed to trickle down to the benefit of local communities or for reinvestment in much needed infrastructure. Many oil-exporting countries in Africa still need to import refined products from the West to satisfy local demand.

The promotion of local content

Today, the game is changing. As African markets develop, the governments of resource-rich countries are increasingly looking to diversify their economies with a focus on sustained development, placing greater emphasis on social equity and environmental protection. International oil companies are under increasing pressure to replace their hydrocarbon reserves, and the reserves are becoming harder to find and more expensive to extract. It is estimated that, over the next two decades, 90% of new oil and gas development projects will be in the developing world, and many of these will be in Africa1.

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To secure their future growth, oil companies need access to frontier markets with significant energy reserves in exchange for contributing to the growth of wider domestic economies. As a result, the promotion of local content, whereby foreign companies must source a significant percentage of labor, goods and services from the host country, is gathering pace. Norway has built a technologically advanced offshore services industry on the back of local content, and Petrobras has the policy at the heart of its investment program in Brazil. Foreign companies in the bidding for Africa's new generation of infrastructure projects, from the expansion of the mining industries in Tanzania and Zambia to the construction of new power plants in South Africa, ignore local content at their peril.

of the long delayed Petroleum Industry Bill whose principal aims include restructuring NNPC, increasing royalties paid by foreign oil companies operating in Nigeria, and encouraging local companies to play a larger role in the country's oil and gas industry. Turning NNPC into a financially strong, commercially driven entity, similar to Petrobras, would stimulate Nigeria's domestic oil industry. One of the main roadblocks to stimulating Nigeria's oil industry is the ability of indigenous companies to enhance skills capacity and quality standards. To enable the companies to supply products and services that meet international standards, they invariably need access to skilled workers and credit. Historically, there has been a transfer of local talent via the multinationals operating in Nigeria, which has led to technical skill shortages among the local working population. Many of the international oil companies now provide scholarships for students, to both Nigerian and overseas universities, to promote skills transfer.

Local content and the oil and gas sector

Local content is not new to Africa's oil and gas sector. As early as 2003, the Angolan government introduced legislation requiring that the procurement of oil-related goods and services be solely from Angolan companies. The following year, Equatorial Guinea passed an investment law that imposed a minimum 35% domestic shareholding on the local subsidiaries of international oil companies2. Recent large-scale oil discoveries in Ghana and Uganda are again bringing indigenous capacity issues to the forefront. Ghana's draft Local Content Bill, for example, sets a goal of 90% domestic participation by 2020, which, however laudable, is seen as unrealistic by some observers in view of the limited manufacturing infrastructure in the country. The development of the oil industry in Nigeria has been marred by a history of corrupt military regimes, the socio-economic problems of the Niger Delta and a plague of capital flight. It is estimated that Nigeria needs to spend approximately US $20 billion per year in order to sustain growth in the oil and gas sector, but less than US $2 billion is currently retained in the national economy. To date, the Nigerian oil industry has lost more than US $300 billion to capital flight3. It is hoped that the implementation of equitable local content policies will bring tangible economic benefits to Nigeria. Last year, Goodluck Jonathan's government introduced the Local Content Act with the goal of boosting the overall indigenous contribution to the sector from its current rate of 40% to 70%. In the upstream, local operators currently account for only 3% of Nigeria's 2.4 million barrels per day of crude oil production. This is expected to increase to more than 15% over the next three years, as stakes in marginal fields, previously owned by joint ventures between the Nigerian National Petroleum Corporation (NNPC) and the multinational oil companies, are farmed out to domestic companies4. The Act requires operators to ensure that more Nigerians are employed in key sub-sectors of the industry to enhance indigenous human capital development and technology transfer.

Increasing access to private equity and creating opportunities for investors

Pension fund reforms and the establishment of a Nigerian sovereign wealth fund are increasing access to private equity and venture capital finance for local companies. This, coupled with the opportunities presented by the new legal framework, mean that the future looks bright for Nigerian oil and gas companies. A new breed of indigenous company, capable of competing both at home and internationally, is emerging. These companies include Afren (upstream), Dorman Long Engineering (fabrication), Oando (integrated oil and gas) and Seawolf Oilfield Services (offshore drilling contractor). As one of the last unexplored oil provinces, Africa can utilize its reserve base as a platform upon which to build a thriving independent sector. There are already more than 100 African independent oil exploration and production companies from more than 30 countries. The emergence of an indigenous oil industry in Africa is creating opportunities for growth equity investors to participate in a sector that is often the domain of sovereign states or multinationals, due to the heavy expenditure required for exploration and development. These opportunities will allow investors to partner with established industry leaders to facilitate projects that will not only bring a return on investment, but lead to sustainable prosperity for Africa's local businesses and its people.

Footnotes 1 2 3 This Is Africa, "A new chapter for African oil"

by Adam Robert Green, 31 March 2010

Deloitte International Tax Highlights 2011: Equatorial Guinea Allafrica.com, "Nigeria: Oil Industry Loses U.S.$300 Billion to Capital Flights"

by Mohammed Shosanya, 31 August 2011

The challenge for Nigeria

The challenge for Nigeria is to create systems to feed the internal energy market, integrating the whole value chain, from oil and gas exploration, downstream product processing and distribution to power generation, and, in the process, create local employment opportunities. A key milestone in this process will be the passing

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This Day Live, "Crude Oil: Nigerian Indigenous Operators Target 400,000bpd"

by Ejiofor Alike, 24 May 2011

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