Industry malpractice: The downside of local content in Nigeria

Nigeria

The managing director of Atlantic Marine & Oilfield Services, Humphrey Okposo, discusses the effects the 2010 Local Content Act has had on the diving sector in Nigeria. He mentions in which areas the legislation is lacking and what hurdles it has presented for local companies that have proven their ability and capacity in the market. He also alludes to the importance of local capacity building over local participation.

While the purpose of the Local Content Act is to promote the indigenisation of Nigeria’s oil and gas industry, implementation of local content has provided a medium through which companies are taking advantage of the policies and flooding the market despite not possessing the qualifications or capabilities needed to perform the jobs they claim to offer.

The emphasis on local content has led to growth in local participation, but not necessarily participation with substance. Local content policy directives need to be reoriented towards incentivising genuine capacity building, which can lay the foundation for future unassisted and organic growth of the local sector.

MISALIGNMENT: The subsea diving sector exhibits this misalignment and is a microcosm of industry-wide malpractice. For offshore construction projects or engineering, procurement and construction contracts, companies such as Italy’s Saipem or South Korea’s Hyundai Heavy Industries are awarded as the primary contractors.

These companies generally do not have their own certified divers and equipment for the job, and so they submit a call for tender to subcontract the diving services required for the project to companies such as Atlantic Marine & Oilfield Services. With offshore projects for rig setups or pipeline construction, hiring a qualified company with certified divers is fundamental to the successful completion of these underwater works.

At the end of 2014, only a few Nigerian companies had full certification and capability to perform diving works, professionally. Conversely, dozens of domestic companies in the market advertise these services and participate in calls for tender.

STRETCH THE SUPPLY CHAIN: It has become common practice for contracts to be awarded to local companies that do not have capacity to perform the job. These companies then turn around and subcontract that contract to a company that does have the capacity, thus adding an extra intermediary and driving up the aggregate costs of the supply chain.

Most of the time, because these jobs are given to the lowest bidders, international oil companies receive a good deal. The local diving companies who end up doing the job accept a lower profit margin, as the initial contracted company maintains a set profit margin for themselves.

This creates challenges for the companies doing the job. With a lower margin, companies have to find a way to balance the books, invest in maintaining equipment, ensure that the compressors continue to run, keep an ample supply of divers on the payroll, and determine whether to take a loss on the figures and get the job done. In the long run, we take the hit financially for the imperfections in the system.

A HISTORY OF STRIFE: Just as with the rest of the hydrocarbons industry, 20 years ago diving was dominated by international companies, specifically the British. Diving was seen as being strictly a foreign enterprise.

For those Nigerian companies that entered this segment prior to the implementation of the local content act, the road has not been easy. The biggest challenge has been in creating and cultivating diving expertise locally. The deficit in the number of skilled and certified divers was beyond imaginable – overcoming this required investment, time, and patience on behalf of these companies. The second challenge was image related. In the 1990s and early 2000s, local content could not guarantee you a contract as a local player. You were awarded the job on the basis of competency, capacity, and professionalism.

The landscape in 2015 has changed. Any Nigerian who carries a briefcase and flashes a card that says he is Nigerian, even if he does not have the professional capacity, can still be given the job.

That is what the local content law is perpetuating in Nigeria at the moment. Meanwhile, a handful of companies have built their businesses without this crutch and are demonstrating that Nigerian companies can compete head on with international players. To a certain extent, the success that these companies had in shaping the outside perception of the value of Nigerian companies has been washed away in favour of mediocrity.

TOP DOWN IMPROVEMENTS: All diving contracts that come from international oil companies or lead contractors are supposed to be bid on through the Nigerian Petroleum Exchange. Nevertheless, some of them somehow slip through the cracks, which perpetuate the issue of shell companies being awarded contracts.

Still, the situation is improving. Since 2013, international oil companies are performing technical audits on contractor’s actual infrastructure and capacity. For the inspection process, international oil companies look at your equipment, your previous audits, your product and loss statements, your certifications, and more or less tag your equipment to make sure it belongs to you.

Knowing who exactly the legitimate players are has brought some sanity to the business. As the technical evaluations and audits become more robust and more integrated into the pre-screening and screening of bidding companies, the standard of services coming from Nigerian companies will improve and the supply chain will be shortened.

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