A Review of the Nigerian Energy Industry

Achieving local content without breaking the bank

*Welders at work.

Sola Adekunle

25 July 2017, Sweetcrude, Lagos —
Local content has always been regarded as a reason for cost escalation in the Oil Industry. This belief stems from the fact that many International Companies are not equipped with the strategy to achieve local content from the front end and try to adapt local content requirements to fit their standard mode of execution. This typically creates bottlenecks that lead to schedule overrun with additional costs to manage quality requirements.

However, local content is great in the long run not only for the country but also for the International Companies and there have been instances where applying local content has saved quite some money. An example is a company that chose to design a workshop in Nigeria and the engineering consultant designed to European standards. This meant additional requirements to cater for European climate (winter) were included in the design. Sounds basic but this is what happens. Things like ice loading and insulation found their way through until a Nigerian company pointed them out. Direct savings achieved on building cost!
To turn local content from a burden into an advantage requires a shift in mindset. First the company must be prepared to stay the course, local content is a marathon, not a “Bolt”. It needs a different kind of company “diet” and a different kind of “coach”.

The key attributes a company needs are Foresight, Positivity and Flexibility. Foresight helps you identify and plan to achieve the target early, Positivity keeps you going in the low times when things seem difficult, it keeps you focused on the end game and the coming rewards, and Flexibility enables you to manoeuvre through the myriad of challenges that may spring up. It enables quick response to emerging issues and is a sure track to success.
Earlier I stated that a company needs three (3) key attributes to achieve local content; Foresight, Positivity and Flexibility. Let’s take a quick look at Foresight in this context.

With Foresight, you can identify and plan to achieve your local content objectives ahead of time. This sounds easy but the evidence shows otherwise. The proof is in the number of International Companies that fail to proceed beyond the Technical stages of juicy contracts just because they failed to meet the minimum local content requirements. Getting simple requirements like documentation, the definition of metrics, agreements and alliances wrong can be a fatal flaw to the regulator.
Having foresight means starting the race before everyone else. Imagine a Formula One driver who is a lap ahead at the beginning of the race that is the advantage being “local content-ready” gives. If you know there are upcoming opportunities in places with bullish local content requirements you need to start preparing before the tenders are issued. It’s already too late after that you will likely submit a watery package and look insincere.

You can start by understanding how the local content requirements apply to the scope you wish to capture, identifying your company’s strengths and weaknesses, conducting a gap analysis of the key players in the field and developing an engagement strategy to close those gaps. These enable you to start de-risking early thereby reducing your risk factor and ultimately, your costs. A company that could have invested USD1 Million in processing a critical raw material locally chose to import the finished product instead. A failure in the supply chain subsequently threatened to shut down operations and led to a significant increase in cost and loss of customer trust.
While most companies look to the Management for direction, Foresight is not limited to the CEO and his top men/women. A typical CEO is busy ensuring that shareholders are happy today and will remain happy tomorrow. This guarantees a great bonus and is worth the energy invested. So, it is understandable when Management is not the best champions of investing in being “local content-ready”. However, every good Management recognises that sustainability comes from growth and looks to the rest of the team for the coal face insight that will help decision making. Every member of the team has a part to play.

To prepare a tender for a major project package costs the Contractor over USD1 Million. Why risk not passing the technical stage or not having enough local content information to submit a competitive quote?
You may recall, I stated that a company needs three (3) key attributes to achieve local content; Foresight, Positivity and Flexibility. In Part two I delved into how Foresight is the first game changer. I have received some questions about how an International Company can justify investment in being “local content-ready” when there is no firm contract on the table. It’s a valid point and takes us into the next attribute, Positivity.

Positivity is about staying focused on the end game which can be difficult when there is no concrete opportunity to anchor efforts on. It can be difficult justifying the required resources, cost, and time to decision makers and this is a problem faced by every Front-End Project Manager. I will approach this from an opportunity management perspective. What is the probability that a massive opportunity is in the offing? Major projects have a gestation period of two (2) years or more. That gives you enough time to evaluate the probability and identify your patch. Because you have an idea of the size of the project, it becomes easy to also estimate the potential size of your pie. Every company has its internal investment criteria and once the opportunity scales these hurdles, there is a genuine reason to initiate the discussions about being local content-ready.

If foresight is identifying the need to have a lemonade stand in future, positivity is turning every lemon into lemonade. Some typical challenges you may encounter are infrastructure deficits, knowledge gaps, a limited number of potential alliance partners and unclear local content directives. By being positive and keeping your eyes on the ball, these can be used to your advantage.

The impact of Infrastructure deficit will not be limited to your company and gives you an opportunity to fill a gap that can create a new revenue stream by servicing other companies and industries. An example is a company that realises there is a power supply gap at a potential fabrication location. Instead of turning away or building the cost of a new power plant into the project, the company can plan a power plant that will also supply other industries around them. The “Embedded Power” policy in Nigeria allows you to sell excess power to the distribution companies who in turn sell to premium customers. Money in the bank.

The knowledge gap is one of the identified reasons for local content regulation and should not be a surprise. What may surprise you is the number of local companies who are actively looking for ways of closing that knowledge gap because it adds value to their existing businesses by enabling them to expand their services. Remember that you will be shopping for alliance partners who will be companies that are already in the identified line of business. Helping them close their knowledge gap not only puts you in a great position, it also gathers you ambassadors that you will need at the right time. A simple way is to implement a “Knowledge Exchange” programme early.
There may be a limited number of local players that fit your partnership requirements and it might be tough identifying them. The good news is that they are also looking for you. By spreading your net early, you can catch the best fish before your competitors arrive and start scrambling over the same patch. It also gives you time to conduct a gap analysis and start working together to close those gaps.

Another positive outcome is that you would integrate your best practices into their way of working so when the time comes for execution you save time and money.
Interpretation of some local content directives is usually a challenge. Is it 100 tonnes and 80,000 man-hours or 100 tonnes or 80,000 man-hours? Being conservative and going worst case will cost more money while wrong assumptions will lead to non-compliance. Spotting such ambiguities early enables proactive engagement that will swing the pendulum in your favour. Not only will you have a clear path to follow thereby reducing your risk factor, you will also be demonstrating your seriousness and sincerity to key stakeholders.

There are other challenges you will encounter, you will need the experience to overcome them. By starting early, you avoid the rush and catch the best fish at a fraction of the price. What’s stopping you? Your likes, shares and comments are most appreciated and welcome. Thanks

Earlier, I stated that a company needs three (3) key attributes to achieve local content; Foresight, Positivity and Flexibility. In Part two I delved into how Foresight is the first game changer. Part three showed how Positivity is the fuel that keeps the local content vision chugging over those slippery mountains you will surely encounter along the way. I have received some feedback around how some requirements are too onerous, unrealistic or downright impossible to achieve. These are undisputed facts in some cases and takes us to how flexible thinking can be your greatest tool in achieving local content without breaking the bank.

Let’s start with why Governments implement local content laws. It’s not because they don’t like foreign companies operating in their countries. Established foreign companies typically pay staff better, are not easily distracted by local politics, have a wealth of experience and fast track knowledge transfer. But how much economic impact do they have during project implementation if all the finished products and services are imported?

The underlying reason for local content regulation is to create as much of a multiplier effect as possible from a single project. Call it getting as much “bang for your buck” as possible.

To understand the multiplier effect better in simple terms, we need to examine the Spending elements due to a project. I will put them in three (3) buckets; Direct Spend, Indirect Spend and Induced Spend.

Direct Spend can be defined as the actual cost of the project to the Customer or Investor. Think of funding a wedding; it’s the cost of the Event Planner plus all his or her deliverables. It is typically a budgeted sum that is approved at Final Investment Decision (FID). It is a sum of all the contracts awarded and the overheads associated with delivering the project.

Indirect Spend can be considered as the money spent by the Main Contractors on their Sub-Contractors and subsequently cascaded down the supply chain. The caterer has to purchase the raw food to cook right?

Finally, Induced Spend is what happens after payday for Main contractors and Sub-Contractors. They impact other non-associated local businesses when they go shopping, build houses, start new businesses and generally, everyone is better off than when they started.

Governments introduce local content regulations to get as much Direct and Indirect Spend as possible into the local economy because this goes straight into Induced Spend which has a much larger impact. It leads to employment, builds infrastructure, capacity and economic empowerment.

By understanding the spending factors and considering them in your local content strategy, you can develop a win-win plan that helps the government achieve its aim while ensuring that you don’t fall short of meeting requirements. Regulators may seem scary but are usually reasonable when faced with logical arguments.
So how does Flexibility play such an important role? Let’s use a Subsea Umbilical as an example. The Nigerian Oil and Gas Industry Development Act stipulates that the local content level for Subsea Umbilical fabrication and construction shall be 60% of tonnage. A major component of a steel tube umbilical is high-grade steel which is currently not manufactured in Nigeria, so this sounds like mission impossible from the onset, especially if you have not applied Foresight.

Based on the cost outlay for establishing an Umbilical manufacturing plant, such a venture can only be attractive if there are enough projects to feed the business. This is unfortunately not the case in Nigeria so it’s a tall order. Reels and Termination Heads can be fabricated locally and that is a step in the right direction. Another flexible option will be to hike your local content levels in other requirements to try and make up for the shortfall. For example, the Act also stipulates the following under Project Management/Consulting:
• Quality Assurance QA/QC Consultancy 45% Man-Hour
• Safety, Health and Environment Consultancy 45% Man-Hour
• Risk Analysis Consultancy 45%
• Man-Hour Personnel/Training System Consultancy 45% Man-Hour
• Legal Consultancy 50%
• Translation and Manual Writing Consultancy 45% Man-Hour
• Welding and Jointing Consultancy 45% Man-Hour
• Warranty Surveyors 45% Man-Hour
• Third Party Evaluation/Verification Consultancy 50% Spend
• Meteorological Consultancy 55% Spend
• Marine Consultancy 50% Spend
• Subsea Consultancy 45% Spend

This list is not exhaustive. The local experience in these areas indicates that they can be hiked to 100% in most cases with minimal risk. Doing this may not meet the all Regulator’s requirements but it’s better than nothing and it speaks directly to the end game which is the multiplier effect.
In conclusion, local content can be a showstopper or significant cost escalator if not well approached but the show will go on, you just may not be a player. So, why don’t you try starting early, keeping a smile on your face, and adopting a win-win attitude? Ball’s in your court.

Sola Adekunle is a Principal Consultant at Cranium Engineering LTD, a newly established Engineering Consulting Company. He is a Certified Project Management Professional (PMP), a U.K Chartered Engineer (C.Eng.), with a B.Sc. in Mechanical Engineering (University of Ibadan), M.Sc. in Offshore Technology (Cranfield University) and a Certificate in Disruptive Strategy from Harvard Business School. Sola worked in Shell for about 15years until April this year when he left to seek more challenging opportunities, one of which was to set up Cranium Engineering.

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