8 Ways to Maximise Local Content in the Extractive Industry – A Snapshot

Local Content initiatives vary depending on whether the company in question is an International Oil Company (IOC), a National Oil Company (NOC) or an International Contractors/Service Company. More so, this variance is further expanded by regional peculiarities, national priorities and company-specific business objectives. In the last ten years or more, Local Content has been principally driven by compliance requirements and target specifications imposed by national governments.

Organizations who attempt to go ‘beyond compliance’ within local content remits, have the tendency to be leaders in this field. Demonstrating ‘best practice’ in local content therefore, whether for reputational, social or economic reasons, can be somewhat ambiguous because what is best practice in a situation might not be necessarily relevant in another. This is so if specific initiatives or mechanisms are considered. Best practice therefore is shown firstly, in senior management commitment to a high level strategic objective of adding value locally coupled by the design of local content strategies or models to achieve these objective.

Having worked as a local content and capacity building adviser to global organizations in the extractive and non-extractive industry and advised government, academia and industry, this is what I believe are the 8 broad categories through which local content and local content development can be achieved in the extractive industry especially in developing economies. However, the phased choices, the mix and match models and implementation plans of elements of these broad categories towards maximum benefit to all stake-holders, is what differentiates a mediocre local content strategy from a brilliant one.

1. SME development mechanisms – These initiatives when deployed are a true representation of companies that go ‘beyond compliance’ because it has a more medium to long term impact structure on the local content measurement scale. These includes Enterprise Centres, Research and Development Centres, business incubation models-whether in-house or externally. Shorter term SME development initiatives now include Enterprise Exchange programmes, SME Management Secondment Programmes, Foreign Outreach Programmes to increase Foreign Direct Investment (FDIs), company-driven incentivisation schemes to encourage SME access to capital, long term contract-based bank guarantees etc. The BP Enterprise Centre in Azerbaijan is a representative ‘best practise’ model for SME development mechanisms in the extractive industry.

2. Local Content Capacity Building/Training Initiatives – Local Content Training has been substantially driven by overseas institutions at the expense of local training institutions. Newer and more sustainable models must give consideration to local delivery with international certifications and the articulation of strategic partnerships with overseas institutions. Initiatives include in-house training, contractually mandated training (1 tier contractors to train 2 tier contractors), out-sourced training as part of social performance spends, partnership oriented training, apprenticeships etc.

The Shell’s Training Programme in Nigeria is one of the leading training models driven by strategic partnerships between a Nigerian Institution and an overseas institution with Shell acting as the work-experience backdrop to the training programme– where locals graduates are fast tracked to employability status. The programme is so successful that Shell seconds its graduates to other IOCs, and international service providers.

3. Local Content Human Resource/Employee Enhancement Initiatives – This is the simplest local content strategic consideration to achieve and measure. It must be deployed in strategic working relationship with the HR function of an extractive company, which is usually one of the first established corporate departments at business entry. Initiatives include staff progression frameworks, nationalization of employees, localization of skills, expatrait quota systems, international circulation of local employees, strategic sourcing from the Diapora, staff secondment and mobility schemes, graduate development programmes, competitive reward systems, staff scholarship schemes, staff enterprise and entrepreneurship programmes etc.

Schlumberger’s strategy of staff secondment on the back of major contracts and the international circulation of local workforce is highly successful globally.

4. Smart Contractual Mechanisms – this is the most important group in terms of actualizing local content because it is the tool for appropriating local content on the back of major oil and gas spends. Initiatives in use currently includetop level mechanisms like joint ventures, strategic alliances and technology transfers or low level mechanisms like procurement and contracting strategies i.e. contract bundling or unbundling, ITT formulations, holistic prequalification processes, performance compensation systems, incentivisation schemes etc. BG Group has mastered the model of developing local content on the back of contractual frameworks globally.

5. Local Content Performance Management/Measurement Mechanisms – there are a wide variety of measurement indices but principally, the design of such metrics is dependent on local Vs national priorities.

6. Community Content/Social Performance/Philantropy Initiatives – While on one end local content is compliance driven, social performance and community content and especially philanthropy is seemingly not. However, because both ends are ultimately inter-related especially when reputational benefits are considered, it is crucial to develop initiatives that jointly articulates them. There is a huge gap in the international extractive market for these. Some initiatives currently in the extractive industry includes designing dual purpose infrastructures, social investment programmes with human rights, economic empowerment and environmental sustainability considerations, social licensing initiatives, economic/microfinance initiatives, vocation vs education etc. Currently, Shell and Exxon Mobil has one of the best Social Performance Strategies in the extractive industry as a result of many years of crises and challenges in specific host communities.

7. Local Content Support Initiatives – these are initiatives that are vital for the success of core local content strategies which in several cases are driven in partnership with other functions within a corporate set up. These include public and media relations, vendor registrations, database management, health, safety and security, ethical, legal and sustainability principles, insurance structures, due diligence, market intelligence, capability profiling, quality assurance, risk management, communications etc.

8. Local Content Strategies as a tool to meet nationalpriorities – Ultimately, every national government has identified an overarching strategic objective for its local content intentions. For Norway and Brazil, it is the development of an internationally competitive local industry, for Nigeria, it is increase in GDP first and job creation second. This ultimately affects the design of local content strategies.

In Brazil, Petrobras’ model of increasing the international competitiveness of local suppliers with high growth potential is considered ‘best practice globally’. Hence the extensive development of their manufacturing/construction industry with the development of FPSOs in country. The Nigeria National Oil Company (NNPC) has recently adopted this model but have decided to start with the establishment of fabrication yards.

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