Nigerian Oil: The progressive protectionists

Posted by Bayo Okoya - Delta Analytics Lagos


The only progress worth attaining is slow progress. This seems to be the way in Nigeria's oil sector. It is seven years since the Federal Government enacted the Nigerian Oil and Gas Industry Content Development Act of 2010 – otherwise called the Local Content Act. At the time, we knew progress would not come overnight; its appeal was more to do with populist protectionism. But in the seven years that have passed, the effect of his Act on the petroleum sectors of Nigeria has been immense.

Speaking in Lagos last month the Executive Secretary of the Nigerian Content Development and Monitoring Board (NCDMB), Simbi Wabote, was able to put this progress into numbers. Talking before the inauguration of the new national executive council of Oil and Gas Trainers Association of Nigeria (OGTAN), he stated that about $5 billion out of the $20 billion spent each year in Nigeria's oil and gas industry is retained in the country as a result of the Act. The benefits are already being seen in the performance of indigenous companies taking some oil leases and tripling the output of previous international lease-holders. 

Despite being Africa's largest oil producer, Nigeria had previously been overlooked in areas which would have made Nigeria's oil industry truly full-service. Prior to the Act coming into force, all fabrication, engineering, and production jobs, Mr Wabote said, had been done abroad. The estimated capital flight was in the region of $380 billion in 50 years and lost job opportunities was in the region of two million.

The political need for such legislation was obvious: countering the narrative that ‘nothing could be done' in-country. Exploration and extraction was done by plants and modules fully designed and built offshore, with the expertise to service the industry imported from overseas too. There was no mechanism for transfer of knowledge or capabilities, and therefore the benefits from the oil industry were limited to government revenue. The full over-spill effect of employment in industries servicing Nigerian oil was benefitting foreigners and not Nigerians.

The economic rationale for this was not so immediately obvious: on the basis of being oil-wealthy, turning to what was undeniable level of protectionism. The Local Content Act outlines that local firms should be given “first consideration” when it comes to awarding oil and gas contracts and that “exclusive consideration” should be given to Nigerian service companies when it comes to the award of service contracts.

To an economist's mind, the Act had the potential to entirely undermine the quality and competitiveness of the industry – why should contracts not go to those best able to provide the services at the greatest value? If Nigerian suppliers were not able to provide services comparable to that of international competitors, let them compete until they can.

Mr Wabote's announcement shows that protectionism does not have to be a slippery slope, but rather a short term pill to kick-start an indigenous oil services industry. Nigerians were hungry for a foothold on the industry, and it took this legislation to give it to them. It allowed Nigerian entrepreneurs to be given a change to prove themselves and the grass-shoots of a full-service Nigerian oil industry began to show.

It is why today, as Mr Wabote announced, we can be proud that 36 per cent of our marine vessels are owned by Nigerian. Before 2010, this was just three per cent. At the same period, our dry-docking facilities were non-existing. They had been left decay. Now there are four active dry docking facilities across our major port towns. And, aside from the capital improvements, the Act has resulted in many thousands of jobs.

The test of whether the legislation provides a kick-start, rather than a crutch to oil services firms is whether firms can now compete and be given “first consideration” because they have the capabilities and the track record, rather than simply because legislation places them to the front of the queue.

The second test of success is seeing what a full-service Nigerian firm – that is a full that encompasses exploration, extraction and refinements – can do compared to the bigger multi-national players. Here there are signs that this is really happening, where indigenous firms are doing things that other global players could not.

In seven years, a lot has been accomplished to retain expenditure, capital investment and jobs for Nigerians. The Government aims to increase the $5 billion retained by Nigeria of the $20 billion to $10 billion. It is no small feat and may take another seven years, but the foundations are in place for this to happen.

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