Outline of Presentation

1. LOCAL CONTENT IN THE HYDROCARBON SECTOR: LESSONS OF EXPERIENCEPROF. JOHN C. ANYANWU*LEAD RESEARCH ECONOMISTDEVELOPMENT RESEARCH DEPARTMENTAFRICAN DEVELOPMENT BANKTEMPORARY RELOCATION AGENCYBP 323, 1002 TUNIS, TUNISIAE-Mail:J.ANYANWU@AFDB.ORGMOZAMBIQUE COAL AND GAS SEMINAR, MAPUTO, MOZAMBIQUE, 27-28 FEBRUARY , 2013* The views expressed here are those of the authors and in no way reflect those of the AfDBand its Executive Directors.

2. Outline of Presentation • INTRODUCTION • WHY LOCAL CONTENT POLICY? • KEY ELEMENTS OF LOCAL CONTENT INITIATIVE • COUNTRY EXPERIENCES, WITH SPECIAL EMPHASIS ON NIGERIA • KEY CHALLENGES • THE WAY FORWARD FOR MOZAMBIQUE: CRITICAL SUCCESS FACTORS

3. INTRODUCTION

4. INTRODUCTION - Hydrocarbon in Africa: Blessing or Curse? • Mozambique, like many African countries, is blessed with huge natural resources, including: • (1) COAL • (2) NATURAL GAS • (3) BEACH SAND TITANIUM MINERALS AND ZIRCON • (4) TANTALITE • (5) PRECIOUS AND SEMIPRECIOUS STONES, RARE EARTHS • (6) GOLD, PLATINUM GROUP METALS (PGM) & BASE METALS • (7) NEPHELINIC SYENITES AND BAUXITE • (8 DIMENSION AND ORNAMENTAL STONE

5. INTRODUCTION - Hydrocarbon in Africa: Blessing or Curse? • Are major coal, oil and gas discoveries a blessing or curse? • Norway’s case demonstrates the huge benefits of oil and gas finds. • To some extent, Botswana’s case shows important blessings from mineral resources wealth. • However, other African countries’ experiences show how a curse natural resources wealth can be. • There is huge advantage to have mature institutions in place before hydrocarbon finds. • But Mozambique and other countries discovering hydrocarbons have to build progress “from scratch”.

6. Local content Expand supply capacity More equipment availability >50% (> min. 15% target) Increased flexibility New suppliers Lower prices Strengthen Mozambican economy Create jobs and income Reinforce internal market INTRODUCTION - Hydrocarbon in Africa: Blessing or Curse? …..however, local content can benefit Mozambique Source: Adapted from Olsen (2010)

7. INTRODUCTION: What is Local Content? • Generally, local content (LC) is the added value brought to a host nation (and regional and local areas in that country) through the activities of the coal, oil, gas or extractive industry. This may be measured (by project, affiliate, and/or country aggregate) and undertaken through: • Workforce development: employment of local workforce; and training of local workforce. • Investments in supplier development: developing supplies and services locally; and procuring supplies and services locally. • Some see LC in the hydrocarbon sector as local ownership, control and financing by citizens of a nation, in the sector that promotes and enables the optimal use of in‐country human resources, materials and services.

8. INTRODUCTION: What is Local Content? • It is value addition leading to sustainable development and culminating also in job creation, economic growth, environmental protection and long-term gains. • →Thus, developing local economies, stimulating local industrial development, increasing local capability, building a local skilled workforce and creating a competitive supplier have become the minimum requirements for doing business with host countries and national oil companies in the hydrocarbon sector.

9. INTRODUCTION: Local content has become a global drive Many countries , including Mozambique, are now seeking to create more in value through local content ↑ Source: Lunde (2013)

10. WHY LOCAL CONTENT POLICY?

11. Why Local Content Policy? • The objectives of local content policy are: • Rapid transformation of the hydrocarbon sector for inclusive development and integration of hydrocarbon exploration, production and distribution activities. • Accelerate growth of indigenous involvement in the hydrocarbon sector. • Create opportunities for individual citizens to invest in upstream, midstream and downstream hydrocarbon development. • Enhance the development of national technical and commercial hydrocarbon skills. • Promote development and poverty reduction by: • Providing jobs and opportunities for local businesses; • Facilitating technology transfer; and • Building local knowledge and skills that are critical for development.

12. Why Local Content Policy? (Contd.) • The objectives of local content policy are to: • Facilitate increased use of competitive national goods and services • Expand the commercial co-operation between national and foreign companies • Strengthen/enhance the sophistication of national financial markets by floating shares in upstream and midstream companies • To avoid the natural resource curse • Transformation and visibility of local businesses into world class companies, which can then export their newly acquired competencies • Significant conservation of foreign exchange reserves • Development of linkage industries which will support the hydrocarbon sector e.g. steel sector

13. Why Local Content Policy? (Contd.):What should the policy try to achieve? • In summary, LC policy should aim at the retention of more benefits in-country by: • Maximizing the value-added and job creation through the use of local expertise, goods and services, businesses and financing; • Developing local capabilities through education, skills and expertise development; • Transferring technology and know-how and an active research and development portfolio; and • Increasing international competitiveness of domestic businesses • Immediate positive impact on GDP and economic growth • Creation/stimulation of other industries on the supply chain of the hydrocarbon industry e.g. insurance, transport/telecoms, supply of labor, catering, medical, etc

14. KEY ELEMENTS OF LOCAL CONTENT INITIATIVE

15. The Key Elements in the National Local Content Program Source: Adapted Lunde (2013)

16. The Key Elements in the National Local Content Program Business and Employment Opportunities (direct and indirect services) Source: Adapted from Karuhanga (2011)

17. The Key Elements in the National Local Content Program Key Areas where it is “easy” to make an impact Source: Adapted from Olsen (2010)

18. The Key Elements in the National Local Content Program Good Business Environment is Essential Source: Adapted from Nore & Olsen (2008)

19. COUNTRY EXPERIENCES, WITH SPECIAL EMPHASIS ON NIGERIA

20. THE NIGERIAN CASE • From the Nigerian local content act perspective, local content is the quantum of composite value added to or created in the economy through the utilisation of local human and material resources and services in the exploration, development, exploitation, transportation and sale of Nigerian crude oil and gas resources. • Strategies for value addition include: • Capacity Building • Capacity enhancement • Competency Development • Technology and knowledge transfer

21. THE NIGERIAN CASE - Key Thrust of ACT • A. ORGANIZATION AND IMPLEMENTATION FRAMEWORK • Creates & Integrates NCDMB into planning and contracting process to ensure Nigerian Content counts. • Empowers Honorable Minister to Make regulations; Board to Issue procedure Guides. • Mandates utilization of electronic platform to cover upstream, midstream, downstream, independents etc. • Requires increased stakeholder engagements in the NCCF to create linkages to other sectors including professional services.  • B. INDIGENOUS AND COMMUNITY PARTICIPATION • Requires increased participation by indigenes and defines Indigenous company. • Creates opportunity for integrating oil producing communities into mainstreams industry activity. • Mandates enlightenment and awareness programs.

22. THE NIGERIAN CASE - Key Thrust of ACT • C. DEVELOPMENT AND UTILIZATION OF LOCAL CAPACITY • Promotes Education, Employment, Training, Research and Development. • Requires multinationals to domicile proportion of assets in Nigeria- • Promotes Indigenous Ownership of Equipment. • Mandates local capacity development.- Gap analysis; design and implement interventions. • Provides dedicated NC Development Fund for capacity building. • D. NC TARGETS, COMPLIANCE MONITORING AND ENFORCEMENT • Sets steep targets for specific work items to be executed in Nigeria. • Empowers Hon Minister to grant waiver under specific conditions. • Provides for Monitoring, measurement and tracking compliance. • Stipulates Penalty for non-compliance.

23. THE NIGERIAN CASE – Prelim Results

24. THE NIGERIAN CASE – Prelim Results • The implementation of the local content initiative has, in nearly 3 years, ensured: • The spending of about $4 billion in-country out of the annual $20 billion spending; • Stimulated over $2 billion investment in new and upgraded facilities; • Created 30,000 direct and indirect jobs (in engineering, fabrication, exploration and production, marine transportation and logistics sectors); • Increased the level of participation of Nigerians in oil and gas contracts to 87% of total industry contracts; • Direct investments of more than US $500 million by equipment manufacturers; • The inauguration of the vessel, the Akpevweoghene, Africa’s largest offshore pipe-laying barge, owned by an indigenous company, FENOG Nigeria Limited in May 2012. • Seawolf Oil Services Ltd, a Nigerian offshore drilling company, won a contract with ExxonMobil Corporation for the supply of a rig valued at N22 billion ($140 million).

25. THE NIGERIAN CASE – Prelim Results • The implementation of the local content initiative has, in nearly 3 years, ensured: • Attracted Foreign Direct Investments (FDI) worth over $500million; • In December 2012, four Nigerian indigenous companies – Laser Engineering and Consultancy Nigeria Ltd; Ankorpointe Nig. Ltd., Integrated Data Services Ltd, (a subsidiary of the Nigerian National Petroleum Corporation (NNPC)) and Nubian Nig. Ltd – clinched the Shell Petroleum Development Company of Nigeria Limited (SPDC)’s Maturation Studies Services (MSS) contracts, in an initiative to help indigenous firms build their capacity in this key aspect of the oil and gas industry. • The Lagos Deep Offshore Logistics (LADOL), located in the Apapa port axis in Lagos. Has so far invested over $100 million in transforming the swampland of Apapa port axis into a world-class, one-stop base for deep offshore logistics: • Created more than 1,000 skilled jobs and prevented the leakage of more than $60 million of foreign capital. LADOL has contributed to making Nigeria the West African hub for rig and vessel repair with more than $500,000 of new revenues and business. Repairing rigs in Nigeria has helped the country to benefit from technological transfer through training of manpower.

26. THE NIGERIAN CASE – Prelim Results • The implementation of the local content initiative has, in nearly 3 years, ensured • There has been an increase in the involvement of Nigerian oil services firms in the construction of facilities in the oil and gas industry. Stress Corrosion Cracking (SCC) Ltd., a Nigerian-owned pipe mill in Abuja, received a multi-million dollar contract from Shell Petroleum Development Co. (SPDC) to supply pipes for SPDC’s major pipeline projects; • Shell companies have also sponsored the training and professional certification of several Nigerians, including 12 engineers in FEED and detailed engineering at the Shell FEED office in Port Harcourt. They will increase in-country capacity in this field. • The Nigerian National Petroleum Corporation (NNPC) had achieved over 40% in the area of encouraging local participation in the oil and gas industry. • The participation of Nigerian Companies in the oil and gas business, especially the upstream segment has substantially increased from a meager 10% before the enactment of the law to more than 30% even in the deep offshore as recently demonstrated in the recently commissioned Usan Deep Offshore Field development.

27. THE NIGERIAN CASE – Prelim Results • The implementation of the local content initiative has, in nearly 3 years, ensured: • The Petroleum Technology Development Fund (PTDF) early this month (February 2013) in Abuja presented certificates to 15 drilling engineers (including five staff of the Nigerian Petroleum Development Company (NPDC)) trained at the French Institute of Petroleum (IFP), in France to boost the local content policy. • The program evolved due to the intention of the Fund to fill identified gaps and ensure adequate capacity building in the area of oil and gas drilling/production operations. • Shell companies in Nigeria also received the award for “Most Local Content Friendly International Oil Company” at the 10th anniversary and awards ceremony of the Nigerian Chamber of Shipping held in Lagos.

28. THE NIGERIAN CASE – Prelim Results • Challenges, however, remain: • Insufficient skilled labor to support the growth of the oil and gas industry; • Quality of delivery and poor patronage of Made-in-Nigeria products. • Local businesses servicing the oil and gas industry lack solid capital base and have to source funds from commercial banks at high interest rates; • This is being addressed through the Nigerian Content Development Fund, which grew from zero in 2010 to US$150 million at the end of 2012. It has got a guarantee and tenure adjustment elements to reduce interest amounts paid. 30% would be direct intervention fund and would be used for direct capacity building by the NCDMB as well as for skill development. • Delays to contract awards or disappointment of local companies that fail to win contracts. • But overall the Nigerian oil and gas industry isn`t the same again in that local companies are participating more than ever before in the industry and the participation is bound to increase in the years ahead if the current implementation momentum is maintained.

29. THE BRAZILIAN EXPERIENCE • Local Content Requirement • ■Definition: minimum percentage of equipment and services contracted by the operator that must be supplied by local companies • ■ Average 70% in the production development phase • ■ Component of the bid for acquisition of E&P Blocks • ■Certification of each item by inspection companies (guidelines set forth by Federal Government – MME) • ■Subject to severe penalties • Local Content Rationale • ■ Boost local oil & gas equipment and services industry • ■ Incentivize local technology development • ■ Substantially increase employment and income

30. THE BRAZILIAN EXPERIENCE • Nationalization Policy of Petrobras • Controls about 75% of all operating licences • About 2,000 companies registered in the supply chain for the offshore petroleum industry. • Oil companies to comply with ‘Local Content Certification’ as prerequisite for contract award. • In the mid 1990s, local participation at ‘exploration’ and ‘development’ phase were 5% and 15% respectively. Currently it stands at 80% minimum for both. • Through LCD, Brazil has developed a globally renowned competence in deep-water exploration. • The country’s oil and gas linkages to the local economy are being optimized while utilization of existing national infrastructure has improved. • The LCD has resulted in the participation of 2,300 local small and micro companies, a major drive to massive industrialization.

31. THE BRAZILIAN EXPERIENCE Source: Adapted from Filho (2009) & LLX (2012)

32. NORWAY’S CASE SALIENT FEATURES OF THE NORWEGIAN APPROACH • Coherence – local content part of overall policy • Local content policies aimed at… • Increasing value added (not deter investments) • Balancing industry and government needs • Building on existing capabilities • Encouraging JVs with international players

33. NORWAY’S CASE • National steering of the direction and pace of petroleum operations. • • Good governance (Govt. Petroleum Administration). • • Constructive competition among the oil companies. • • Variety among the licensees to master challenges and enhance efficiency. • • Direct participation by national companies alongside IOCs. • • Encouraging the local content in deliveries to petroleum operations. • • Maintaining balance between national and international oil companies. • • Co-operation between the authorities and the oil companies. • • Focus on high oil recovery. • • Focus on Health, Safety and Environmental protection. • • Technical innovation to cope with petroleum operations in rough seas. • Through LCD, Norway, a major oil producer and gas exporter to Europe, has built an advanced tech­nological oil and gas service indus­try.

34. LC Comparative Performance: From Isolated Initiatives to Excellence Source: Adapted from Lunde (2013)

35. Lessons Learned from Country Experiences

36. KEY CHALLENGES

37. Challenges of Local Content Development (Contd.) The oil and gas industry is highly capital-intensive with limited direct employment opportunities. A significant proportion of the goods and services demanded by the industry are highly technological and specialized in nature, and are typically supplied by competitive international markets. • In addition, the complex and hazardous nature of the industry demands the highest level of performance in terms of quality, technical integrity, and health safety and environmental standards (EHS). • Inadequate quality of local educational systems, arcane regulatory environments, poor access to finance, and deficient local infrastructure.

38. Challenges of Local Content Development (Contd.) • Limited local content capability-Local entrepreneurs are not competitive in price/quality/technical competence • Access to capital equipment • Reluctance by investors to assist local content companies • Perception that local content participation is based on commissions, not as a value-adding activity • Financing Challenges • Limited local funding capacity • Short tenors relative to requirements • High cost of local borrowing • Limited access to international financing

39. Challenges to Successful Implementation of a Local Content Policy The hydrocarbon industry is a volatile business  Cyclical industry  Volatile prices & volumes  Long investment lead time  Capital intensive  High variable costs →Difficult to plan for the future

40. Challenges to Successful Implementation of a Local Content Policy – In Mozambique Therefore, local firms in Mozambique must jump high hurdles *Domestic capture of expenditure will depend on – Available skills, often limited – Lack of technological capabilities – Management systems and HSE standards – Access and affordability of finance • Most local firms lack experience, financial track record and the quality systems required • High minimum capital requirements – a challenge • Breaking into the global supply chain is difficult • Believe that their greatest deficiencies are technical • International companies have identified business and management practices as the main challenge

41. Challenges to Successful Implementation of a Local Content Policy The hydrocarbon companies and governments have different priorities Source: Adapted from Olsen (2010)

42. Challenges to Successful Implementation of a Local Content Policy Summary of principal challenges: A problem tree analysis Source: Adapted from IPIECA (2011)

43. THE WAY FORWARD FOR MOZAMBIQUE: CRITICAL SUCCESS FACTORS

44. Critical Success Criteria • Stable democracy • Predictable legal system • Transparent and accountable government/decisions • Competitive coal and gas prices • Liberalized national currency • Skilled and capable workforce • Strategic location • Openness and liberalized international trade • Strategic partnerships and alliances • Fiscal discipline and a balanced fiscal regime • Mechanism for monitoring measurable impacts in terms of skills acquisition, local capacity development, technology transfer, job creation, training, infrastructure development, support for SMEs and entrepreneurs, FDI inflows, local R&D, and welfare of host communities.

45. Critical Success Criteria Source: Adapted from Lunde (2013) Local Participation Should be Planned Early

46. Critical Success Criteria Create an enabling environment Source: Adapted from Olsen (2010)

47. Critical Success Criteria Adopt a strategic approach: Successful countries follow a long-term strategy to make their firms and economy more competitive Source: Adapted from Olsen (2010)

48. Critical Success Criteria All Stakeholders that must play their parts Source: Adapted from Olsen (2010)

49. Critical Success Criteria: Examples of how local participation can be harnessed • Brazil - Petrobras maintained an active involvement in the industry from its formation and acquired technology in deep water drilling through international expertise. • Malaysia - Formed partnerships with international oil companies; Local industry gained best practice, management skills and cutting edge technologies used by oil companies. • Norway - openness towards international companies combined with a strong focus on national value creation. Technology agreements were signed to fund R&D and existing capabilities and competitive strengths were leveraged.

50. Critical Success Factors for Mozambican Local Content • Active engagement of Government to create an enabling environment for the implementation of local content activities • There must be standards set and minimum qualification criteria for local content entities to ensure the highest levels of professionalism • Financial markets, both local and international must provide significant support to indigenous entities • Rewards/Concessions to oil majors for compliance/support of local content initiatives e.g. tax concessions/award of oil blocs • There must be a concerted effort towards the transfer of knowledge and enhancement of technical abilities of local content entities • Government can assist to build capacity by intervention projects e.g. Infrastructure upgrading, resource training, information management and financing • Government must identify and address gaps in human resources, facilities & infrastructure, materials & manufacture, and institutions & systems.