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Implications of new Oil and Gas Industry Content Development Act June 21 2010 Introduction Compliance targets and minimum requirements General challenges Key provisions Non-compliance Comment Introduction On April 22 2010 the acting president of Nigeria signed the Oil and Gas Industry ContentDevelopment 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 inthe 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, contractsand memoranda of understanding relating to operations and transactions entered into after thecommencement of the act conform to its requirements in order to ensure their continuedviability, 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 systematicdevelopment of capacity and capabilities through the deliberate utilization of Nigerian human,material resources and services in the Nigerian oil and gas industry. Compliance targets and minimum requirements The act prescribes target compliance requirements which, at first glance, require the procurementof Nigerian goods and services in seemingly absolute or very broad terms.However, the act appears to recognize that in specific circumstances, the implementation of itsrequirements for Nigerian content may have to be balanced by practical consideration of theextent to which available Nigerian resources and capacity can adequately meet the oil and gasindustry's requirements.The act requires as follows: y F irst consideration must be given to Nigerian operators when awarding oil blocs, licencesand contracts. y E xclusive consideration must be given to certain Nigerian indigenous servicecompanies in all bids for contracts and services. y Nigerian companies and institutions must be used exclusively or predominantly. Notwithstanding the above, Section 11 expressly states that the minimum Nigerian content inany project to be executed in the Nigerian oil and gas industry after commencement of the actmust be consistent with the levels set out in the schedule to the act. The schedule prescribes theseminimum levels in varying units measured in terms of: y the minimum Nigerian labour input; y the kind of service provided; y the length, volume, weight or tonnage of the product; and y the use of or expenditure on specified services, project items and products.This list is not exhaustive. Section 41(1) of the act empowers the minister of petroleum to makeregulations for the purpose of setting out targets to ensure the full utilization and steady growthof 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 capacityto any of the targets listed in the schedule, the minister may authorize the continued importationof the item; however, such approval shall not exceed three years from the commencement of theact.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 excludedservices pending inclusion in the act through legislative amendment. The minister of petroleumand the NCMB, subject to the approval of the minister, are required to review the schedule atleast every two years for onward transmission to the National Assembly. General challenges Perhaps the greatest challenge for industry participants is the fact that the act does notconsistently 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 tomake regulations for the purpose of carrying out or giving effect to the act, has not yet issued anysuch regulations. F or example, while the NCMB is expressly conferred with discretion to decidethe extent to which it may be impracticable to require participants to rely on only Nigerianfinancial institutions for financial services, such discretion is not absolute and the NCMB sclarification of any ambiguities or inconsistencies remains subject to judicial and ultimatelylegislative clarification.While some provisions of the act impose obligations on all industry participants, others applyonly to specific participants (eg, operators, alliance partners, partners, contractors andsubcontractors). 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 independentoperator', 'Nigerian financial institutions' and 'Nigerian indigenous service companies', which areused liberally throughout the act. E ven where such terms have been defined, the definitions areinsufficiently specific. E arly 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 theextent of Nigerian equity and management participation. However, the final language of the actdoes not clearly distinguish the attributes relevant to the participants to which its provisionsapply. F or instance, an 'operator' is defined to include any Nigerian, foreign or international oiland gas company operating in the Nigerian oil and gas industry under any petroleumarrangement . '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 regardingthe participants to which various provisions of the act are intended to apply. Key provisions First consideration and exclusive consideration The act entrenches the principle of first consideration, which must be given to Nigerian operatorsin 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' (anundefined term) that demonstrate ownership of equipment, Nigerian personnel and the capacityto execute such work, in relation to bids for contracts and services contained in the schedulerelating 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 reviewand approval from the NCMB. E very 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: y services provided in Nigeria; y goods manufactured in Nigeria; y Nigerians for training and employment in the work programme for which the plan wassubmitted; and y any project executed by any operator or project promoter in the Nigerian oil and gasindustry. B id 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 serviceswill give full and fair opportunity to Nigerian indigenous contractors and companies. The actrequires 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 highestlevel 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. F urthermore, where a Nigerian indigenous company has the capacity to execute suchwork, the company shall not be disqualified exclusively on the basis that it is not the lowestfinancial 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 anyother corresponding grades designated by such companies. All contracts exceeding $100 millionmust include a labour clause mandating use of a minimum percentage of Nigerian labour in suchspecific roles as may be stipulated by the NCMB.The act introduces an obligation that operators submit to the NCMB a four-year succession planfor all positions not held by Nigerians. F or 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 asexpatriate 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 thesector are required to demonstrate that a minimum of 50% of the equipment deployed by themfor the execution of work is owned by their Nigerian subsidiaries. The language of the sectionsuggests ownership rather than rental of equipment, but the act does not specify exactly howownership 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 atsource and pay it to the Nigerian Content Development F und established by the act. B anking and financial services Operators, contractors and other entities in the Nigerian oil and gas industry that require financialservices must retain only the services of a Nigerian financial institution or organization, exceptwhere 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 financialinstitutions from providing financial services to Nigerian oil and gas industry participantswithout the approval of the NCMB is not immediately clear, although the minimum requirementsfor financial services set out in the schedule to the act suggest that even service providers such asthese may still be able to provide such services to oil and gas industry participants if theminimum capacity for Nigerian content prescribed by the schedule has been exhausted.
