Jessica Kyeyune

4th Annual

East Africa Oil & Gas Summit 2015

Introduction

Home to 6 of the 10 fastest Growing world Economies

New Oil & Gas

Frontiers

16 Oil Exporting Countries

Africa’s Oil & gas Industry is on the spotlight

Despite the image of enormous wealth and opportunities, oil rich countries grew less rapidly than oil poor countries

Though helped to raise standards of living, the bounty of the proceeds from hydrocarbons goes to a minority of the country’s population

Growth failure associated with democratic collapse, corruption and civil war have led to rich countries with poor people

Oil is not a guarantee for economic success

Natural resource wealth occur independent of factors of production & economic processes

Take place without major linkages to other industrial sectors Do not need participation of domestic labor force Non-renewable and will eventually run out

These factors produce an array of political and economic

processes that produce adverse effects on the economy. These adverse effects include……………

What makes natural resource wealth different

Economic and Political Instability People are out of work are more susceptible to violence Supports Insurgents Steal & Sell; Extortion; Political Alliances Increases Separatism Massive revenues, little disbursement of wealth Under-represented locals bear brunt of costs

Volatility of earnings, timing of payments, expenditure Mexico, Nigeria, Venezuela have used future oil revenues as collateral for construction of infrastructure, drowning them into debt

Living off your capital If revenues are consumed, a country’s total capital declines

Spending pressures Politicians to hold onto power, population want to see visible welfare benefit

Insufficient investment in education Counties forget to build skilled workforce to work in other sectors

Weak unaccountable states Availability of large financial asset increases opportunity for thefts

Grievance in producing region Locals aggravated if they see wealth leaving their region

Cambodia, Angola, Doba in Chard and Niger Delta in Nigeria

Oil Bunkering

Other causes of the resource Curse

Local Content is defined as added value brought to a host

nation through:

Workforce development:

Employment and training local workforce

Supplier development:

Procuring supplies and services locally and Developing local

supplier capacity

Can Local Content Strategies Avert the Curse?

Purpose:

Increase national wealth thru Economic growth and more employment of locals

“Value creation in the country” Norway, UK, Brazil &Nigerian policy

Other countries look at Ownership

Expenditure in the local economy

Employment of local workforce

Local content is a means – not a goal

Why Develop Local Content Strategies?

Oil & Gas Specialist Goods and Services

Non-Specialist Goods and Services

$ Local Content Opportunities

Understanding Oil & Gas Cycle & Local Content

POLICY

OBJECTIVES

THE NATIONAL OIL

AND GAS POLICY (2008)

1 Efficient

Licensing

2

Establishment &

Management of

Resource

3

Efficient

Production

4

Valuable

Utilization of

Resource

5

Promotion of

Transport &

Storage

6

Collection of

right revenue

7

National

Participation

8

Development

of National

Expertise

9

Environment

Conservation

10

Stakeholder

Relationships

Policies required to enhance local participation

To enact:

State Participation in Petroleum activities

Provision of goods and services by local entrepreneurs

Training and employment of locals

Technology transfer

2

Legal requirements for local content

High Government commitment

International oil companies to be supportive

Policies and contracts that allow service companies to invest in the country

High focus on developing human capacity

What will it take to reach a satisfactory level?

There is no “Ideal model” to export to other countries

The most successful countries have 40% – 80%

Brazil, Malaysia, United Kingdom, Norway

Many are struggling to reach 25%-30%

• Nigeria, Angola, Trinidad and Tobago, Saudi Arabia, Libya

Identify competitive edge

2

What level to aim for in the LC Strategy?

Source: SBC analysisNote: Industries within quadrants are not evaluated relatively to each other

Feasibility

Cement

manufacturing

Bulky

construction

materials

Construction

steel

manufacturing

Site safety

and security

Facility

Management

Civil construction

services

Generic waste

management

Hazardous waste

management

Transportation &

Logistics (Goods)

Fuel

wholesale

Manpower

agency

Technical

consultancy

Food

supply

Catering

Light equipment

manufacturing

Domestic Airline

Services

Road

construction

Transportation

(People)

Work safety

products

High

Low

Complex Easy

Production

operation services

Furniture

manufacturing

Vendor and

representation

services

Mechanical

construction

services

GMS Light iron/steel

products Oil/Water

pipe

installation

Pipe

steel

Petrochemical

(refinery)

Fertilizer

Machinery and

heavy equipment

manufacturing

Drilling

services

Drilling

supplies

Oilfield

Services

Oilfield equipment

manufacturing

Drilling

Equipment

Oilfield

chemicals

Cement

additives

O&G specific

emergency

services

Engineering

consultancy

Benefits

Blue area

industries

will be

addressed

through

steps on

education

Identify Industries with high local content potential

What it takes to maximize local participation

Understand the strengths and weaknesses of local enterprises to ensure policy responsiveness

Promote programs to upgrade and train local companies to meet the stringent QHSE requirements

Create institutions that focus on R&D and Set up long-term plans to support and finance R&D.

Provide tangible benefits for oil and gas companies to hire and train young graduates - eg. tax rebates, royalty changes

Access to low cost finance

16

Shell placed 70% of all contracts with Nigerian owned

firms until 2002-2003

Value creation in the country was only some 5 - 15%

Sourced work outside Nigeria, acted as middlemen

for profit

Over ambitious Local Content Strategies may hurt

economies.

• Ghana 90% in 10 years, IOCs divesting-Nigeria, Brazil Revisiting

Local ownership is no guarantee for value addition

Cost of Finance Technical Standards

EHS Standards

Availability of Plant, Equipment

& Materials

Oil Industry Experience

Capital Investment

Skills

Regulatory Environment

Infrastructure

Challenges to develop Local Content

Universities and

Technical

Institutions Petroleum Industry

E&P

Refining

Transportation

Distribution

Governmental

Agencies

Supply Chain of

Goods and

Services

Financial

Institutions

Environmental Protection

Health and safety assurance

Social and economic

development

Technological innovation

Key objective: Promote Sustainable Development

Linkages to Maximize Oil & Gas Benefit

LC Strategies have succeeded in many countries

Brazil – Petrobras:

Active involvement in the industry from its formation

Acquired deep water drilling technology thru international expertise

Malaysia :

Formed partnerships with international oil companies

Local industry gained best practice & management skills

Cutting edge technologies used by oil companies

Norway :

Openness towards international companies

A strong focus on national value creation

Technology agreements to fund R&D

Existing capabilities & competitive strengths were leveraged

20

High expectations can lead to negative consequences:

A disappointed, and therefore a disengaged public

An indebted government that has borrowed

against possible incoming revenues

Increase of rent seeking; and

General mistrust within the society.

These consequences need to be managed accordingly.

Managing Expectations

2

Examples of expectations

Provide accurate information and knowledge to the public so that they can understand the challenges of the industry

Communicate and address the consequences of overly optimism.

Government to promote its own transparency and adopt the Extractive Industry Transparency Initiative (EITI)

Pay attention to lessons learned from other resource-rich countries, both successes and failures, could play an important role in managing expectations.

Ways to manage Expectations

NC strategy to address O&G negative effects

Build institutions for managing resources

Direct benefits of oil revenues to citizens

Involve principal stakeholders in developing plans

Strong civil society to monitor development

24

Direct Effect

• Value of oil and gas production

IOCs & GOV

Indirect Effect

• Purchase of materials, services and supplies locally

• Private Sector

Induced Effect

• Spending by employees of both oil Companies and suppliers

• Private Sector & Government

Oil and

Gas Sector

Government

gets revenue

from oil and

taxes from Oil

Companies,

Suppliers

And

Employees

And reinvests

the proceeds to

develop the

Country’s

Economy

NC Strategy to maximize revenue received

Conclusion

Successful local content strategies can Maximize Benefit when:

Focus is put on diversification rather than resource windfall

Ensure the revenue generated, is reinvested wisely and holistically

Stimulate other sectors in the Economy

Create more jobs to reduce unemployment

26

Thank You