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Oil reserves matter, so do manpower and technology

September 22, 2009

There is no better time to be a graduate engineer in Nigeria, asserts Fabian Ajogwu, managing partner Kenna & Associates, a Lagos-based law firm. His reasons aren’t far-fetched. “Local content in Nigerian oil and gas is generating high demand for good engineers in field and engineering designs, fabrications, etc.”

Mr Ajogwu made this comment last month during an informal gathering at Victoria Island. The event, a monthly get-together on entrepreneurship and leadership, is organised by the some young professionals living there.The power sector, telecommunications and ICT were also areas Ajogwu pointed out as opportunities for engineers. Alas, the reality: the ongoing ASUU strike, the state of Nigeria’s universities and the quality of graduates, casts a dim light over this prospect. Yet this pessimism, however factual, can be addressed.

The Natural Resource Charter, designed by some academics and professionals, seeks “to assist the governments and societies of countries rich in non-renewable resources to manage those resources in a way that generates economic growth, promotes the welfare of the population in general and is environmentally sustainable.” (Paul Collier, professor of economics at Oxford and author of The Bottom Billion contributed to the charter).

The fifth of twelve precepts considers local capacity development —through part-ownership of oil companies or as controllers, of oil licenses or oil mining leases— as one way of “allowing for profits to flow back into the local economy and for business skills to be developed”.

Key to achieving this is as much participation along the entire value chain (upstream, midstream and downstream) through the usage of local goods, services, people, businesses and financing. Greater local participation, to a large extent, is the intention of Nigeria’s Petroleum Industry Bill (PIB). Even before the bill was presented this year, a mandatory 10 percent equity for local companies was conceived during the bid round for oil wells in 2005. This process, by oil-rich countries, of promoting local content or indigenous companies in the oil industry isn’t entirely new.

Nigeria’s PIB is even more ambitious. One of its fundamental objectives is to “promote the involvement of indigenous companies and manpower and the use of locally produced goods and services in all areas of the petroleum industry in accordance with existing laws and policies.”

The PIB limits government ownership in indigenous oil companies with aggregate production of not more than 50,000 barrels per day (bpd) of oil or its gas equivalent. If passed, oil prospecting licenses and oil mining leases, held before or after the Act is made law, will be affected; that is, such companies will have to make provision for new local content stipulations.

In general terms, the local content aspect of the PIB envisages that not less than 95 percent of managerial, professional and supervisory of petroleum companies operating in the country will be Nigerians. It also specifies that 60 percent of the board of directors of oil companies should be comprised of Nigerians.

Also the bill stipulates that the number of Nigerians in any grade shall not be less than 60 percent of the total. In addition, the bill requires that “all skilled, semi-skilled and unskilled workers, or any other corresponding grades designated by the lessee are citizens of Nigeria.” Furthermore, there are provisions for the recruitment, training and scholarship schemes for Nigerians working in oil companies. Still, there are challenges.

Despite the fact that the world’s concentration of “conventional oil”—the cheapest, best and biggest oil reserves, are in the hands of National Oil Companies (NOCs)—oil companies that are wholly or partly owned by government. Thus there are questions: Are NOCs and indigenous oil companies, relative to oil majors (Shell, Chevron, Mobil, Total, Agip) capital-rich enough? Do they have the skilled personnel and technology?

Multinational oil companies have the edge. Their staying power include resilience (they rebounded from nationalisations in the 1970s), they are capital-rich, remain the natural lodestone for top talent in the business and indisputably lay claim to cutting-edge technology.

Technology is what they have centred their survival on. It is an area they largely have an advantage over the NOCs. Also, technologies, to explore and exploit “unconventional oil” are being developed. One other area is gas. A capital and technology-intensive business, drilling for it in remote areas and transporting it requires compressing and cooling it as liquefied natural gas (LNG), and marketing to end-users is no mean feat.

Even more, technology to drill for gas in urban areas has been developed.  For instance, in the US, engineers have come up with a way of drilling horizontally through hard shale. A lucrative discovery of gas has been made under the Dallas-Fort Worth airport in Texas. Without the requisite technology and capital, to explore and exploit oil wells, ownership of vast reserves will remain a necessary but insufficient advantage. Plus the fact that NOCs are notoriously inefficient. The rules of engagement will have to change.

The sixth precept of the Natural Resource Charter provides some ideas on how to tackle this. Clear objectives, responsibilities, professional management, transparency and competition are antidotes against inefficiency. This presumes that NOCs aren’t charged with regulatory functions.

For instance, making NOCs truly operate as a commercial and separate legal entity subject to public oversight and control like any publicly quoted company will curb poor performance. Genuine competition will spur NOCs to attract talent and invest in research and technology.

Otherwise, preferential treatment will cultivate inefficiency and complacency associated with monopolies. In short, “Competition acts as a discipline on the efficiency of the national company and provides a useful yardstick in measuring its performance.” If not, oil majors, coupled with their stockpile of capital, technology and pool of talent, may well become drillers of last resort.

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