June 21 2010
On April 22 2010 the acting president of Nigeria signed the Oil and Gas Industry Content Development Act 2010 into law. The new act entrenches the evolving initiative to increase - and, in certain cases, to make exclusive - Nigerian participation and the use of Nigerian resources in the oil and gas industry.
To the extent that they are not already compliant, industry participants will have to rethink their structures and approach to doing business in the sector to ensure that all arrangements, contracts and memoranda of understanding relating to operations and transactions entered into after the commencement of the act conform to its requirements in order to ensure their continued viability, and the participants' eligibility and competitiveness within the sector.
The act defines 'Nigerian content' to mean:
"the quantum of composite value added to, or created in, the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the Nigerian oil and gas industry."
The act prescribes target compliance requirements which, at first glance, require the procurement of Nigerian goods and services in seemingly absolute or very broad terms.
However, the act appears to recognize that in specific circumstances, the implementation of its requirements for Nigerian content may have to be balanced by practical consideration of the extent to which available Nigerian resources and capacity can adequately meet the oil and gas industry's requirements.
The act requires as follows:
Notwithstanding the above, Section 11 expressly states that the minimum Nigerian content in any project to be executed in the Nigerian oil and gas industry after commencement of the act must be consistent with the levels set out in the schedule to the act. The schedule prescribes these minimum levels in varying units measured in terms of:
This list is not exhaustive. Section 41(1) of the act empowers the minister of petroleum to make regulations for the purpose of setting out targets to ensure the full utilization and steady growth of indigenous companies engaged in certain upstream activities, as well as the provisions of other support services for the Nigerian oil and gas industry. Where there is inadequate capacity to any of the targets listed in the schedule, the minister may authorize the continued importation of the item; however, such approval shall not exceed three years from the commencement of the act.
The recently established Nigerian Content Monitoring Board (NCMB), which is responsible for implementing the act, has the power to set appropriate minimum content levels for any excluded services pending inclusion in the act through legislative amendment. The minister of petroleum and the NCMB, subject to the approval of the minister, are required to review the schedule at least every two years for onward transmission to the National Assembly.
Perhaps the greatest challenge for industry participants is the fact that the act does not consistently lend itself to clear or conclusive interpretation. It is not always immediately clear which participants are required to comply with specific requirements or what the exact extent or scope of certain obligations imposed on them is. As it is recent, the act has not been subjected to judicial consideration or interpretation, and the NCMB, which has responsibility for implementing it, has only just been established. The minister of petroleum, who is empowered to make regulations for the purpose of carrying out or giving effect to the act, has not yet issued any such regulations. For example, while the NCMB is expressly conferred with discretion to decide the extent to which it may be impracticable to require participants to rely on only Nigerian financial institutions for financial services, such discretion is not absolute and the NCMB"s clarification of any ambiguities or inconsistencies remains subject to judicial and ultimately legislative clarification.
While some provisions of the act impose obligations on all industry participants, others apply only to specific participants (eg, operators, alliance partners, partners, contractors and subcontractors). The act defines only 'operator', 'partner' and 'Nigerian company' in its interpretation section, and does not define other terms such as 'project promoter', 'alliance partner', 'contractors', 'subcontractors', 'Nigerian indigenous company', 'Nigerian independent operator', 'Nigerian financial institutions' and 'Nigerian indigenous service companies', which are used liberally throughout the act. Even where such terms have been defined, the definitions are insufficiently specific.
Early versions of the bill which preceded the act attempted to make explicit the attributes of different entities and service providers based on explicitly stated considerations such as the extent of Nigerian equity and management participation. However, the final language of the act does not clearly distinguish the attributes relevant to the participants to which its provisions apply. For instance, an 'operator' is defined to include any Nigerian, foreign or international oil and gas company operating in the Nigerian oil and gas industry under "any petroleum arrangement". 'Petroleum arrangement' is not defined and could arguably include any industry participant, as well as the specifically named state-owned Nigeria National Petroleum Company, its subsidiaries and joint venture partners. This kind of ambiguity creates uncertainty regarding the participants to which various provisions of the act are intended to apply.
First consideration and exclusive consideration
The act entrenches the principle of first consideration, which must be given to Nigerian operators in the award of oil blocs, licences and contracts. In addition, in bids for contracts and services, exclusive consideration should be given to 'Nigerian indigenous service companies' (an undefined term) that demonstrate ownership of equipment, Nigerian personnel and the capacity to execute such work, in relation to bids for contracts and services contained in the schedule relating to land and swamp operating areas of the Nigerian oil and gas industry. Adverts, pre-qualification criteria, bid documents and proposed bidders and service provider lists for projects, contracts, subcontracts and purchase orders in excess of $1 million are subject to prior review and approval from the NCMB. Every operator must submit a Nigerian content plan to the NCMB, which must indicate how, in its evaluation of bids for goods and services required for each project, it will assess and give first consideration to:
Bid processes to give full and fair opportunity to Nigerian indigenous contractors and companies
Operators are required to demonstrate that the bid processes for acquiring goods and services will give full and fair opportunity to Nigerian indigenous contractors and companies. The act requires all operators and project promoters to consider Nigerian content when evaluating any bid; where bids are within 1% of each other at commercial stage, the bid containing the highest level of Nigerian content shall be selected provided that it is at least 5% higher than its closest competitor. Operators are under no obligation to award contracts to the lowest bidder as the act provides that the award of a contract must not be based solely on the principle of the lowest bidder. Furthermore, where a Nigerian indigenous company has the capacity to execute such work, the company shall not be disqualified exclusively on the basis that it is not the lowest financial bidder, provided that the value of its bid does not exceed the lowest bid price by 10%.
'Nigerianization' of labour and management
Nigerian individuals must also be given first consideration for employment and training in any project executed by any operator or project promoter. Operators and companies operating in the petroleum sector are required to employ only Nigerians in junior or intermediate roles, or any other corresponding grades designated by such companies. All contracts exceeding $100 million must include a labour clause mandating use of a minimum percentage of Nigerian labour in such specific roles as may be stipulated by the NCMB.
The act introduces an obligation that operators submit to the NCMB a four-year succession plan for all positions not held by Nigerians. For each of its operations, an operator or project promoter may retain a maximum of 5% of management positions as may be approved by the board as expatriate positions to take care of investor interests.
Ownership of equipment by Nigerian subsidiaries of foreign participants
International and multinational companies working through their Nigerian subsidiaries within the sector are required to demonstrate that a minimum of 50% of the equipment deployed by them for the execution of work is owned by their Nigerian subsidiaries. The language of the section suggests ownership rather than rental of equipment, but the act does not specify exactly how ownership is quantified or valued.
Mandatory retention of 10% of revenue in country
Operators, contractors and subcontractors must retain 10% of total revenue accruing from Nigerian operations in a Nigerian bank account.
Mandatory contribution of 1% of contract value to Nigerian Content Development Fund
Operators must deduct 1% of the value of every contract awarded for upstream operations at source and pay it to the Nigerian Content Development Fund established by the act.
Banking and financial services
Operators, contractors and other entities in the Nigerian oil and gas industry that require financial services must retain only the services of a Nigerian financial institution or organization, except where the NCMB is satisfied that it is impracticable to do so. Whether these provisions apply to prohibit, for instance, the growing crop of predominantly foreign-owned banks and financial institutions from providing financial services to Nigerian oil and gas industry participants without the approval of the NCMB is not immediately clear, although the minimum requirements for financial services set out in the schedule to the act suggest that even service providers such as these may still be able to provide such services to oil and gas industry participants if the minimum capacity for Nigerian content prescribed by the schedule has been exhausted.
The prior written approval of the insurance industry regulator, the National Insurance Commission, which is charged with ensuring that Nigerian local capacity is exhausted, is required before any insurance risk can be placed offshore. In addition, as a general principle legal and financial services are required to be sourced locally.
All operators, contractors and other entities engaged in any operation, business or transaction in the Nigerian oil and gas industry must retain the legal services of only a Nigerian legal practitioner or a firm of Nigerian legal practitioners whose office is located within Nigeria. However, the schedule provides that the minimum Nigerian content compliance requirement for legal consultancy services is "50% contracts", although the act does not explain what this means.
Mandatory in-country welding and fabrication
All contractors and entities engaged in the Nigerian oil and gas industry shall carry out any required fabrication and welding activities in Nigeria.
Mandatory registration with professional bodies
Operators, companies and professional employees engaged in providing engineering or other professional services must be registered with the relevant professional bodies in Nigeria.
Reporting and access obligations
When awarded, contracts must require that partners, contractors and subcontractors report Nigerian content information directly to the operator and to the NCMB as and when required, as well as giving the NCMB or its agents access to the records of such participants for assessment and verification purposes.
The act applies to all oil and gas arrangements, agreements, contracts or memoranda of understanding relating to any operation or transaction in the Nigerian oil and gas industry subsequent to its commencement. The implications for non-compliance are significant in terms of the resulting impact on the timing, structuring and viability of projects, contracts, transactions, structures and operational approach to doing business successfully in the Nigerian oil and gas industry. Notably, non-compliance with the provisions of the act is an offence for which the relevant participant will be liable, on conviction, for a fine of 5% of the project sum for each project in respect of which the offence is committed, or for the cancellation of the project.
Participants will need to seek specific legal and operational advice and, where necessary, to confirm with the NCMB and the minister the exact implications of the act for their particular projects, contracts, transactions and operations. Participants may need to restructure their organizations and approach to doing business in the Nigerian oil and gas industry to achieve compliance and to maximize eligibility under the act. To the extent that the NCMB is not empowered to provide conclusive answers to the questions raised by the act, it is hoped that the regulations made by the minister will flesh out the act's provisions. Given the significance of the act for Nigerian oil and gas industry participants, it remains to be seen whether such regulations, when passed, will provide clarification and certainty to aid compliance with and implementation of the act.
For further information on this topic please contact Folake Elias Adebowale, Anietie Inyang or Nnewuoghor Ogboi at Udo-Udoma & Belo-Osagie by telephone (+234 1 263 4831), fax (+234 1 263 4541) or email (email@example.com, firstname.lastname@example.org or email@example.com). The Udo-Udoma & Belo-Osagie website can be accessed at www.uubo.org.
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Folake Elias Adebowale