First foothold: What oil and gas startups need to doFebruary 6, 2015
The CEO of Bell Oil & Gas, Kayode Thomas, discusses how the implementation of Nigeria’s 2010 Local Content Act has benefited local industry and how oil and gas startups can learn from more experienced companies. Local services company Bell Oil & Gas, incorporated in 2002, is supplying flowlines and subsea pipes to the Egina offshore project operated by Total.
Nigeria’s Local Content Act of 2010 has revamped the business climate for entrepreneurs entering the country’s oil and gas industry. Prior to the act’s inception, the operating environment for local companies was far more turbulent and uncertain. There were no policies or regulations backing local participation in the sector and helping Nigerian entrepreneurs gain a foothold and build capacity. It was a free-for-all, and as a result local companies were left to fend for themselves.
The implementation of the law has been the first real legal and regulatory impetus to reject sub-standard involvement of local companies in the value chain. On the back of this, there has been a wave of Nigerian entrepreneurs who have entered various levels of the hydrocarbon industry’s value chain and have changed the makeup of the competitive landscape.
A NEW DAWN: For entrepreneurs that are driven by a passion for capacity building, the Nigerian oil and gas market is a far more conducive business environment than it was before. Since 2010, Bell Oil & Gas has more than doubled its activity from the first eight years of its existence.
Aided by local content regulations, the company now works with international clients and partners. Helping entrepreneurs and new Nigerian companies get their foot in the door and gain experience is precisely the purpose of local content laws. With domestic operators taking over assets and establishing themselves, there is a growing number of clients and thus plenty of opportunity for newly formed local services companies to rapidly step up their activity. Many of the plays in the hands of domestic operators are onshore, which leads to lower capital and technological barriers for a number of services and products.
NUMBERS GAME: Significant challenges still remain for local entrepreneurs, most notably on the financing front. Every sector of the oil and gas industry is capital-intensive. It is difficult for companies to gain access to the required capital at interest rates below 10 percent. For an entrepreneur looking for base funding, these high interest rates are untenable without a guarantee, which is hard to come by without some form of capacity already in place.
PICK AND CHOOSE: Intellectual property and innovation remain a weak point for Nigerian hydrocarbons companies that are growing. The country cannot yet compete in petroleum innovation and technology at an international level.
Entrepreneurs must overcome these difficulties by first recognising that they cannot compete on their own. Recruiting international technical and operational partners at the outset is critical for skills transfer and building knowledge about the oil and gas business. This requires patience and an understanding that you cannot take the lead in an industry until you truly have proven that you can by developing sufficient expertise and technical capacity.
Furthermore, Nigerian entrepreneurs entering the oil and gas industry must decide which sector they want to compete in, and what value they want to bring to the market. Many of these startups are spreading themselves across a variety of services sectors, which will make it hard for them to offer a clear, cohesive value proposition to potential clients and partners.
The first question that these business leaders should be able to answer is this: Why would tried and tested companies want to partner and work with us? The answer to this question does not involve the size and scope of ones company, as these potential partners are always larger and thus are not looking for size or track record. Many are mandated to have a local partner in order to adhere to local content regulation. The most sought after criteria that these companies look for in a start-up Nigerian partner, regardless of the segment of the industry, is a combination of professionalism, credibility, trust and reliability.
SPRINGBOARD FOR GROWTH: Integrity and professionalism are the key drivers for local startups looking to grow in the hydrocarbons industry. Nowhere is this seen more clearly than in the tendering process through the Nigerian Petroleum Exchange. When tenders are released, there are often as many as 150 companies listed, but only 20 or 30 of those companies are usually serious contenders. This really frustrates the tendering process.
If companies have zero experience in piping for instance, they should first go learn from leaders in the industry, then return and start bidding. The prerequisites to participation in the bidding process need to be looked at. This should not act as a way to close doors to new entrants, as they should be encouraged to come into the industry. However the process should be changed so as to require entrants to have certain base qualifications.