local content development in newfoundland and byron sparkes

Local Content Development in Newfoundland and Labrador

Byron SparkesSenior Policy Advisor

Newfoundland and Labrador Oil and Gas Industries Association. (NOIA)

Noia

• Newfoundland and Labrador Oil & Gas Industries Association, is Canada’slargest offshore petroleum association with more than 600 membersthroughout Canada and around the world.

• Noia’s mission is to promote development of the area’s hydrocarbonresources and encourage and ensure Canadian companies have theopportunity to participate in the supply chain. Our member companiesemploy over 10,000 Canadians in support of our offshore industry.

• We have been the leading voice in Newfoundland and Labrador for 40years on issues that can have an impact on our mission and the responsibleand safe exploration, development and production of our globallysignificant offshore petroleum resources.

What is Local Content?

• Local content in a workforce or supply chain is the subject of different interpretations and there are many different metrics for defining and reporting on local content:• In some usages equated with locally owned, sometimes used simply to

describe any business that maintains a permanent operational office within a given area.

• Local content also has been defined in terms of the value contributed to the economy through purchase of local goods and services (in monetary terms)

• Often equated with the level of equity ownership local citizens hold and this has led to the emergence of numerous definitions for a local company.

• The C‐NLOPB uses the same definition of Canadian content developed by the Canadian General Standards Board (CGSB), and is based on the principle of value added to an economy.

Why Local Content?

• Procurement, both large and small scale, related to the exploration, development and production of hydrocarbon resources, can be a means to strategically develop a competitive and sustainable industry

• Procurement practices, contracting strategies, vendor pre‐qualification, technical standards, tender evaluation criteria, contract conditions and supplier development programs can all be creatively formulated and implemented to help build competitiveness.

• Local Content should be a means NOT an end.

The Challenge

• Decisions on regulatory frameworks and project‐specific agreements have not universally lead to the creation of a competitive domestic industry.

• No simple answer to how implement a policy to enhance industrial development and need be aware of the trade‐offs and the pitfalls they may entail when developing a policy to enhance local content

• Local content may be worth doing even if it entails higher cost – but must make business sense

“While policy‐makers are understandably eager to derive greater value‐addedbenefits from the extraction of natural resources, formulating a regulatoryframework for local content that will lead to the creation of internationallycompetitive domestic industries can be a fiendishly complex task. “

‐ Joe Leahy, Bureau Chief, Financial Times

Local Content Maturity Levels

The most successful countries have achieved a national content level of 40% – 80%. Brazil, Malaysia, United Kingdom, NorwayMany are struggling to reach 25%‐30% Nigeria, Angola, Trinidad and Tobago, Saudi ArabiaCanada and NL (Operations) 75%/55%

Source: Presentation to Council of Saudi Chambers

Local Content: Canada and NL - Context

1970s• The objective of the Canadian Federal Government was to ensure the

expansion and development of the vast oil and gas resources in Alberta

• No active policies to maximize benefits to Canadians

• Administration of petroleum activities by COGLA

• Petro‐Canada est. in 1974 to have more direct involvement and control (Canadian petroleum self‐sufficiency)

• NL government started (1977) to establish how it wanted resources to be developed including local ‘benefits’.

• Establishment of NL Petroleum Directorate (1979)

Local Content: Canada and NL Context and Evolution

1980s• Atlantic Accord agreement (1985) on joint management of the offshore oil

and gas resources of Newfoundland and was implemented through mutual and parallel legislation introduced by both governments into the Parliament of Canada and the Legislature of Newfoundland

• To ensure that the offshore area was managed in a manner which would promote economic growth and development in order to optimize benefits accruing to Newfoundland in particular and to Canada as a whole.

• C‐NLOPB established as single‐point regulator for the Accord

• NL government began sector specific trade missions to North Sea (Norway/UK/Netherlands)

• Delegations to exhibitions in Norway, Scotland and Houston

• Encouraging joint ventures and strategic alliances

The Atlantic Accord ‐ Economic Growth and Development Provisions (Section 45)

• To provide for the employment of Canadians and, in particular, members of the provincial labour force and for providing manufacturers, consultants, contractors and service companies in Newfoundland and other parts of Canada with a full and fair opportunity to participate in the supply of goods and services used in that work or activity.

• To ensure that first consideration is given to services provided from within Newfoundland, and to goods manufactured in Newfoundland, where such goods and services are competitive in terms of fair market price, quality, and delivery.

• Plans for the use of goods and services (Benefits Plan) reviewed by the Board in consultation with both governments. The decision on employment and procurement plans approval rests with the board subject to the power of joint ministerial direction.


1980s• Hibernia Project Statement of Principles by the partners and the Federal and

Provincial Governments was signed on July 18, 1988.

• Established an agreement‐in‐principle on the fiscal and the financial terms applying to the Hibernia project

• Specified certain undertakings on the part of the Hibernia partners concerning construction of the topside facilities and the execution of design work for the project.


1990s• The provisions of the Statement of Principles (Hibernia) were included in a

Binding Agreement signed in September, 1990 (Hibernia Framework Agreement)

2000s • Benefits Agreements – Both non‐prescriptive (best efforts to cause work to

take place in NL, all that can be done in NL will be done) and prescriptive (Hebron GBS and topsides). Work normally expressed in hours (engineering, construction) or for specific work scopes. (living Quarters, drilling support module, mechanical outfitting)

Hibernia Project• Negotiated Benefits Agreement/Plan• Specific Work Commitments• Government Financial Assistance• Lower Royalties• Technology Transfer • Engineering agreement • Infrastructure development • $300 million Fund (75:25) Federal/Provincial to build up a core of

infrastructure and expertise• Bull Arm (NL $95 million of $468 million) • Cow Head ($41.3 million)• Petroleum Technology Training Program ($22.6 million)• Offshore Technology Training Program OTTOP ($5 million)• Centers of Excellence (eg. CERR, Simulator, etc)• Offshore Technology Transfer Fund (OTTF) ‐ $11M

Local Content: Past Approaches

Terra Nova Project• Negotiated Benefits Agreement• No Specific Work Commitments• No Government Financial Assistance• Reliance on Best Efforts Clauses and Principles• Emphasis on Royalties

White Rose (initial project) • No formal negotiated Benefits Agreement• Targets were a condition of approval of Development Plan Application • Hours of work for topsides fabrication • No Government Financial Assistance• Reliance on Benefits Principles and Philosophy in Benefits Plan to CNLOPB • Generic Royalty Regime

Hebron Project• Negotiated Benefits Agreement• Specific work Commitments • Equity • Generic Royalty Regime + Super Royalty

Local Content: Past Approaches

Hibernia• HIBERNIA INDUSTRIAL BENEFITS STRATEGY

To position the province to: • increase work content from Hibernia and other future projects• eventually pursue offshore work internationally, by establishing:

• Industrial Infrastructure• Industrial/Business Capability• Management Expertise• Labour skills

Local Content: Hibernia Strategy

Hibernia• Benefits Commitments – NL

• Development of the GBS Construction Site at Bull Arm• Construction of the GBS at Bull Arm• Mating, Hook‐up and Commissioning of the GBS and Topsides in

Newfoundland (at Bull Arm)• Full and Fair Opportunity for Canada, with first consideration for

Newfoundland, for the supply of goods & services, and employment & training (Atlantic Accord Acts)

• Fabrication, Assembly and Outfitting in Newfoundland:• Wellhead Module• Helideck• Air Control Modul• Main & Auxiliary Lifeboat stations

• Design Engineering in Newfoundland • 100% design engineering of the Topsides Accommodations

Module• Helideck, Flare Boom, and the Subsea flowlines• 50% Design Engineering of the GBS

Local Content: Commitments

Local Content: Commitments

Hibernia• Benefits Commitments Canada

• Fabrication, Assembly and Outfitting in Canada• Two Drilling Derricks• Mechanical Outfitting (Decks and Pre‐assemblies)• Drillers Offices and Pipe Rack Module (with best efforts for

Newfoundland)• Best Efforts for one of the other four super modules in Canada,

on internationally competitive basis

• Other Commitments/Targets• 55% to 60% of project pre‐production expenditures (total of

$5.2 billion) in Canada• 66% of project pre‐production employment to Canadians• 80% to 95% of project management and engineering design in

Canada

Local Content: Outcomes

HiberniaHIBERNIA BENEFITS ACHIEVED• Captive Work

• Bull Arm Site Development• GBS Construction• Mating, Towout, Installation• GBS Management• Topsides assembly and hookup

• Incremental• Wellhead Module Fabrication• Topsides Mounted Structures (FB, Helideck, LB Stations)• Topsides Site Development (Bull Arm)• Drilling Modules (Best Efforts Canada)• OTTF Engineering

Employment in Province 41.6 M hours (66% of Project)Expenditures in Province $ 2.7 B (47% of Project)

LCP Jurisdictional Comparisons Policy Type

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Past Today Assertive, Encouraging, Neutral E A A A E A A E N N A N E Sourcing Policies

Mandated blanket minimum procurement targets – intentionally exceeds price competitiveness of domestic supplier industry to drive inward investment

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Domestic Only Tender Lists – bench marked against capability but not internationally competitive on price quality and delivery

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Full fair and reasonable access to procurement opportunities for domestic suppliers

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Mandated foreign/domestic consortia or subcontractor alliances

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Minimum participation of domestic subcontractors/suppliers in contracts awarded to foreign suppliers

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Minimum national ownership of suppliers awarded contracts

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Preference to domestic suppliers as long as performance, quality and delivery are competitive with international performance and prices

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Nominal Price advantage to domestic suppliers √ √ √ Reduced prequalification criteria for domestic suppliers

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Application of weightings that reward a bidders proposal on local content

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Contract award veto by government authorities √ Obligations for growing competitiveness of local suppliers

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Discrimination between foreign and nationally owned registered companies

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LCP Jurisdictional Comparisons Policy Type

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Past Today Assertive, Encouraging, Neutral E A A A E A A E N N A N E Employment Policies Targets for employment of nationals √ √ √ Imposition of penalties for non-compliance with local content targets

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Knowledge and Technology Transfer Policies Fostering the generation and transfer of knowledge and technology

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Licensing System Local content requirements or consideration in E&P licensing system (including production rights)

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Imposition of penalties for non-compliance with local content targets

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NOCs NOC as a development platform for local content √ √ √ √ Other Fiscal incentives to promote local content (tax reductions and subsidized financing)

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Sector organizations to examine industrial policies and industry performance with programs to address issues /challenges

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Noia’s Framework for Local Content and a Competitive Local Supply In NL

• Initiate a process for industry‐wide collaboration focussed on increased participation, technology transfer, technology development and mechanisms to achieve results. This will:

• Provide better definition and clarity on objectives and purpose for local capture and participation

• Reduce risk and uncertainty for both the operator and supply communities.

• Help position local businesses to increase their participation in local projects thereby acquiring the technological competence to effectively compete both here and internationally.


Vision and StrategyGovernment and industry to come together to develop a long‐term visionand a strategy for the further development of a competitive andcompetent local supply and service community.

Recommendation:The creation of an Industry Council to formulate the vision and strategy,and an Industry Development Agency for implementation, monitoring andfeedback.


Industry Council • Pivotal role in shaping the future of the industry. • Adopt global best practices on collaborative governance• Support objective, well‐informed policy making across government • Representation from across the industry and government

Industry Development Agency • Responsible for driving the strategy, goals and objectives as determined

by the Industry Council (an instrument of the council) • Be involved and influential in day‐to‐day and long‐term challenges and

play a vital role in shaping the future of the industry.


Expertise and Skills Importance of knowledge generation and transfer, technology development, dissemination and innovation for the formation of a competitive supply chains able to meet the industry’s growing needs.Recommendations: • Capture work (through agreements) that contributes to the

development of appropriate skills and expertise for long‐term industry development objectives.

• Technology transfer agreements that target technology areas for long‐term resource development.

• Ensuring R&D expenditure plans are made with input from local businesses and organizations and are appropriately invested in targeted IP

• Local participation in targeted areas of project engineering and construction management.

• Local participation and knowledge transfer in project work


Supplier Development Procurement and evaluation policies can strengthen and support local supplier developmentRecommendation: • The development of appropriate procurement rules specifically

addressing openness, transparency• Appropriate and early input from the local supplier community in

decision making on contracting plans. • Early engagement and access to operator and prime contractor(s)on

procurement and contracting plans including bid packaging and local participation strategies.

• Formal assessment of local participation in all contract awards. • Plans for technology transfer included in any and all awards to major

international contractors. • Tender evaluation criteria and weightings in contract awards to support

and drive local participation. • Bid package bundling that accommodates local capability.


Atlantic Accord New guidelines and industry‐wide procurement standardsRecommendation: • Full and fair opportunity and first consideration provisions in the

Atlantic Accord are fully addressed in guidelines and include industry‐wide procurement standards supporting the provisions.

• Appropriate guidelines, measurement metrics and monitoring processes to measure improvement (or slippage) as the local supply community continues to evolve and mature.

• Guidelines for the preparation of bid specifications and packages and execution strategies (not unfairly prevent or disadvantage locally placed contractors and suppliers)

• Programs, policies and/or procedures to enable local suppliers to participate in the proponent’s national and international activities

• Transfer of technology and “know‐how” to Newfoundland and Labrador suppliers and contractors include plans with clearly defined objectives

Challenges for Continued LC Development

• Absence of a clear vision and objectives by policy makers in NL

• Lack of over‐arching industrial strategy related to petroleum development and production in NL

• Continued low oil price and reduced supplier margins

• Recent integration and consolidation among service providers globally


Global Market – Subsea and Engineering

• Consolidation in the subsea market ‐ offshore installation contractors, who own deepwater installation vessels, expanding their capabilities by acquiring engineering capability and equipment vendors, to create an integrated offering.

• Technip/FMC • Technip acquisition of several engineering companies • GE Subsea through acquisitions of Vetco Grey and Wellstream• JV between Saipem, (Installation, URF), Chiyoda (SPS) and Xodus

(Concept and FEED)

• Previously dominant engineering contractors such as Brown and RootKvaerner, Fluor, Amec Foster Wheeler and Worley Parsons have moved to EPC or EPCM activities


Global Market – Facilities and Support

• Large (VLCC) newbuild FPSOs typically contracted to Korean shipyards who tend to execute projects using internal resources.

• Chinese and Korean Shipyards also doing topsides (sometimes to smaller nearby yards)

• Trend for small and mid‐sized FPSOs up to 100,000 bopd toward total EPC contracts for the entire vessel, including hull, turret, topsides and hook‐up, often procured on a lease basis.

• Operations support, supply base and marine services contractors increasingly bundle services impacting the ability of small contractors to bid

Questions?

local content development in newfoundland and byron sparkes

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