Introduction

The Nigerian Oil and Gas Industry Content Development Act 2010 (the “Local Content Act”) governs Nigerian content matters in the Nigerian oil and gas industry (the “Industry”). The Local Content Act provides that Nigerian content must be mandatorily considered as a key element of project development in the Industry. Essentially, Nigerian content should permeate all phases and aspects of project execution in the Industry. The implementing authority saddled with the responsibility of ensuring the actualization of this objective is the Nigerian Content Development and Monitoring Board (“NDCMB”). 

Without doubt, it must be acknowledged that the NCDMB has made laudable progress in the implementation of the Local Content Act in line with its mandate of ensuring a measurable and continuous growth of Nigerian content in all oil and gas arrangements, projects, operations, activities or transactions in the Industry. This newsletter aims to highlight some practical aspects of the implementation of the Local Content Act.

Objective of the Local Content Act – Practical Viewpoint

The development of “Nigerian content” in the Industry is the key theme/objective of the Local Content Act. Nigerian content is defined as “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”. [Our emphasis.] 

Key themes from the definition of Nigerian content are “adding or creating value in the Nigerian economy”, “development of Nigerian capacity and capabilities” and “utilization of Nigerian resources and services”. These themes must always be borne in mind in analyzing or discussing the Local Content Act. To buttress the importance of the growth of Nigerian content, the submission of a Nigerian content plan demonstrating the methodology for complying with the requirements of the Local Content Act (including achieving the stated Nigerian content level) is a mandatory requirement for project development in the Industry¹. 

From a practical perspective, the objective of the Local Content Act is to trap the Industry expenditures within the Nigerian economy as a way of not only reducing massive capital flight but developing indigenous competencies and utilizing local raw materials, products and services. Through this, value will be added to or created in the Nigerian economy. 

In addition, the focus of the Local Content Act is “domestication and domiciliation of Industry operation” and not “Nigerianization” of the Industry². In practical terms, this means that a foreign entity looking to provide services in Nigeria must plan to domesticate and domiciliate its operations and the services provided through trainings, technology transfer and building indigenous capacity and capabilities. 

Implementation of the Local Content Act: Some Practical Points

We highlight below some key practical points to note in connection with the implementation of the Local Content Act:

a. Utilization of “Nigerian Company” and Joint Venture Arrangement: 

The Local Content Act contain provisions that require that first/exclusive consideration be given to Nigerian independent operators/Nigerian indigenous service companies in certain circumstances³. Although the terms “Nigerian independent operators” and “Nigerian indigenous service companies” are not defined in the Local Content Act, the Local Content Act provides a definition of “Nigerian company”. Under the Local Content Act, “Nigerian company” is defined as “a company formed and registered in Nigeria in accordance with the provision of Companies and Allied Matters Act with not less than 51% equity shares by Nigerians”.

In practice, the “Nigerian company” forms a key part of the Local Content Act. A key requirement usually set out in invitation to tenders (“ITTs”) provided for opportunities in the Industry is that the bidding entity must demonstrate that it is a Nigerian registered company with 51% (fifty-one percent) or more Nigerian shareholding. In fact, in a recent regulation enacted pursuant to the Local Content Act, the NCDMB is empowered to request for the submission of an affidavit of beneficial ownership to confirm the shareholding requirement and to also carry out independent verifications to ascertain the veracity of the content of the affidavit of beneficial ownership⁴.

Where Nigerian expertise is lacking for the required services, there is scope for Nigerian companies bidding for an opportunity to enter into a “genuine” alliance with a foreign entity evidenced by a joint venture agreement, subject to the approval of the NCDMB. A key part of any alliance with a foreign entity is that Nigerians must be given the opportunity to understudy the expatriates to ensure knowledge transfer.

b. Equipment Ownership Requirement: 

In addition to the shareholding requirement, the Local Content Act also provides for ownership of equipment utilized in the Industry. Section 41(2) of the Local Content Act provides that “international or multinational companies working through their Nigerian subsidiaries shall demonstrate that a minimum of 50% (fifty percent) of the equipment deployed for execution of work are owned by the Nigerian subsidiaries”. This is another key provision in the Local Content Act. It is worth noting that the requirement to show minimum of 50% (fifty percent) Nigerian equipment ownership is project specific (i.e., it is applicable to the particular work sought to be executed). Again, this requirement is captured in relevant ITTs issued for opportunities in the Industry. 

While compliance with the equipment ownership requirement is implemented by the NCDMB, it may not be feasible to insist on this requirement in all circumstances, particularly for capital intensive equipment. A phased plan to acquire such equipment may be implemented with the approval of the NCDMB⁵. 

c. Governing Law and Dispute Resolution:

With respect to the provision of legal services, the Local Content Act provides for the utilization of the services of Nigerian legal practitioners⁶. Given the territorial nature of legal practice, the clear inference is that pursuant to the Local Content Act, contracts for the provision of services in the Industry are mandatorily required to be governed by and construed in accordance with Nigerian law and disputes subjected to Nigerian dispute resolution mechanism. With respect to dispute resolution mechanism, we understand that the preference is for arbitration under the arbitration rules of the Arbitration and Conciliation Act, 1988.

d. Payment to the Nigerian Content Development Fund: 

Section 104 of the Local Content Act provides for the establishment of a fund known as the Nigerian Content Development Fund (the "Fund") under the management of the NCDMB. The sum of 1% (one percent) of every contract awarded to any operator, contractor, sub-contractor, alliance partner or other entity involved in any project, operations activity or transaction in the upstream sector of the Industry is required to be deducted at source and paid into the Fund (the “NCD Levy”). The proceeds of the Fund are required to be utilized for projects, programmes and activities aimed at increasing Nigerian content in the Industry.

A literal interpretation of section 104 of the Local Content Act suggests that immediately a contract is awarded in the upstream sector of the Industry, 1% (one percent) of the contract sum must be mandatorily deducted and remitted to the Fund. However, this is capable of creating hardship for operators, particularly where contracts are terminated or cancelled before the performance of the same. In such a case, operators would have remitted the 1% (one percent) contract sum for an unperformed contract. To address this issue, the common practice is that for every invoice paid by an operator, 1% (one percent) of the sum of the invoice is deducted and remitted to the Fund. This payment structure ensures that only invoiced/disbursed sums are subject to the 1% (one percent) remittance obligation.

e. The Nigerian Oil and Gas Industry Content Joint Qualification System

The Local Content Act provides for the operation of a joint qualification system for the Industry (“NOGIC JQS”) under the management of the NCDMB⁷. In managing the operations of the NOGIC JQS, the NCDMB is required to consult with stakeholders in the Industry to ensure transparency and accountability. 

This NOGIC JQS is an electronic platform utilized as a data consolidation, dissemination, and retrieval system for available capacities in the Industry. The NOGIC JQS also serves as an interactive medium between companies and the NCDMB to facilitate pre-qualification of contractors, expatriate quota management, tenders management, reports management etc. From a practical perspective, the NOGIC JQS has so far proven useful in fostering institutional collaboration and efficiency, record keeping and resource management for engaging skilled Nigerian workforce.

Future of Local Content Implementation in Nigeria

The future of local content implementation in the Industry is perhaps captured by the position taken in the Petroleum Industry Act, 2021 (“PIA”). Section 309 of the PIA places the Local Content Act on a higher pedestal than the PIA. Specifically, section 309 of the PIA provides that “subject to the Constitution of the Federal Republic of Nigeria, 1999, upon the commencement of this Act, where the provisions of any other enactment or law except the Nigeria Oil and Gas Industry Content Development Act are inconsistent with the provisions of this Act, the provisions of this Act shall prevail and the provisions of that other enactment or law shall, to the extent of that inconsistency, be void in relation to matters provided for in this Act”. [ Our emphasis.] Therefore, where there are inconsistencies or in the event of any conflict between the provisions of the PIA and the Local Content Act, the provisions of the Local Content Act will prevail.

The above provision of the PIA clearly captures the importance that the Nigerian government places on local content matters in the Industry. It can therefore be safely assumed that more laws and regulations will be introduced with the aim of fostering the development of Nigerian content in the Industry⁸. The attempts by the National Assembly to amend the Local Content Act is a clear example of this⁹. 

Conclusion

In conclusion, it must be emphasized that the Local Content Act is not intended to discourage foreign investment in the Industry. The Local Content Act is designed to ensure a value adding interaction between foreign entities and their Nigerian counterparts. As such, it is advisable for foreign entities seeking to provide services in the Industry to have a clear strategy to domesticate and domiciliate their operations and services in order to ensure compliance with the requirements of the Local Content Act and place themselves in an optimal position to benefit from available opportunities in the Industry.

1. Sections 7 and 11 of the Local Content Act.
2. See guardian.ng.
3. Section 3(1) and (2) of the Local Content Act.
4. See the Regulations for the Further Growth of Indigenous Capacity, 2021.
5. See for example, the NCDMB Rig Utilization Strategy dated 3 December 2018.
6. Section 51 of the Local Content Act.
7. Section 55 of the Local Content Act.
8. The Minister of State for Petroleum Resources recently released a suite of regulations in respect of local content matters in the Industry.
9. See: Concerns raised over proposed local content amendment.