CHAPTER ONE
1.0 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.
1.2 STATEMEMT
OF THE PROBLEM
Nigeria’s
rising profile in oil and gas production was rather fast and steady such that
she soon became a formidable force within OPEC. Oil exploration, which started
onshore has tremendously improved the nation’s daily production capacity to
about 2.3 million barrels per day, and raised her proven reserves to about 37
billion barrels. However, despite Nigeria’s ever-growing profile and wealth,
the country remains one of the poorest, and technologically backward, nations
in the world. This is basically because the much-taunted wealth has not
translated into improved welfare. One reason for this is that over 90 percent
of the yearly industry expenditures escape the domestic economy as capital
flight. 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. Also the conclusion made in this research will serve as a guide to
the policy makers in Nigeria to formulate a reasonable policy that will take
the industry forward. And finally this research will serve as a guide to other
researcher who will embark on the same research in the nearest future.
1.6 SCOPE
OF THE STUDY
This
research work covers the oil and gas industry in Nigeria, the problems and the
prospects of the industry will be deeply investigated on in this research.
1.7 RESEARCH
METHODOLOGY
This
study is basically on the local content in the oil and gas industry of Nigeria.
The study therefore adopts one of the traditional methods of gathering
information, i.e. the secondary sources. A sizeable percentage of secondary
sources that is used came from published and unpublished works which include
materials extracted from: Archives, Newspapers, discussions, Conference papers,
Magazines, Internets, Books, and Articles in journals e.t.c.