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LOCAL CONTENT AS A DEVELOPMENT LOCAL CONTENT AS A DEVELOPMENT MULTIPLIER IN THE OIL AND GAS MULTIPLIER IN THE OIL AND GAS

INDUSTRYINDUSTRY

being a paper presented bybeing a paper presented by

ADENIRAN ADEROGBAADENIRAN ADEROGBAChief Executive Chief Executive

Calag Capital (Nigeria) LimitedCalag Capital (Nigeria) Limited

atat

UNCTAD’S OIL & GAS CONFERENCEUNCTAD’S OIL & GAS CONFERENCENAIROBI, KENYA NAIROBI, KENYA

MAY 2007MAY 2007

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IntroductionIntroduction

What is Local Content?What is Local Content?

Overview of the Nigerian Oil and Gas IndustryOverview of the Nigerian Oil and Gas Industry

Challenges of Local Content PromotionChallenges of Local Content Promotion

Critical Success Factors and Multiplier effects of Local Content Critical Success Factors and Multiplier effects of Local Content DevelopmentDevelopment

Financing as a Key ChallengeFinancing as a Key Challenge

ConclusionConclusion

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Introduction-Who we areIntroduction-Who we are

Calag Capital Limited (3c) is an Investment Banking firm Calag Capital Limited (3c) is an Investment Banking firm based in Nigeria with strong emphasis on Structured Finance based in Nigeria with strong emphasis on Structured Finance

Involved in publications, including a sector survey on the Oil Involved in publications, including a sector survey on the Oil and Gas industry published in conjunction with UNCTADand Gas industry published in conjunction with UNCTAD

Have done deals such as:Have done deals such as: US$75Million Oil Services Contracts Financing Facility for indigenous US$75Million Oil Services Contracts Financing Facility for indigenous

companiescompanies US$125Million Petroleum Products Import Financing Facility for US$125Million Petroleum Products Import Financing Facility for

indigenous Oil Marketing Companiesindigenous Oil Marketing Companies US$100Million Crude Oil Sales Pre-Financing Facility for an US$100Million Crude Oil Sales Pre-Financing Facility for an

indigenous Oil Producing Companyindigenous Oil Producing Company US$100Million Oil Service Contracts Financing FacilityUS$100Million Oil Service Contracts Financing Facility

Please visit our website Please visit our website www.3ccalag.com www.3ccalag.com

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What is Local Content?What is Local Content?

In order to achieve a clear definition of local content, it is In order to achieve a clear definition of local content, it is pertinent to reflect this in the light of the Nigerian experience pertinent to reflect this in the light of the Nigerian experience and again as regards the oil and gas sector.and again as regards the oil and gas sector.

Local content simply put is the quantum of composite value Local content simply put is the quantum of composite value added to or created in the economy through the utilisation of added to or created in the economy through the utilisation of local human and material resources and services in the local human and material resources and services in the exploration, development, exploitation, transportation and sale exploration, development, exploitation, transportation and sale of Nigerian crude oil and gas resources.of Nigerian crude oil and gas resources.

(It is) (It is) VALUE ADDITIONVALUE ADDITION leading to leading to SUSTAINABLE SUSTAINABLE DEVELOPMENT DEVELOPMENT and culminating also in and culminating also in JOB CREATION, JOB CREATION, ECONOMIC GROWTH, ENVIRONMENTAL PROTECTION ECONOMIC GROWTH, ENVIRONMENTAL PROTECTION AND LONG TERM GAINS.AND LONG TERM GAINS.

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Added ValueAdded Value 3c3c

INDIAINDIA Obvious increase in earnings for value-added products (See above chart)Obvious increase in earnings for value-added products (See above chart) Produces 120 million metric tonnes of iron ore annually, and 400 million metric tonnes of steel Produces 120 million metric tonnes of iron ore annually, and 400 million metric tonnes of steel

productsproducts

Increase in Earnings for Value Added Products

0

200

400

600

800

Iron Ore Round Steel Hot Rolled

Steel

Cold Rolled

Steel

Galv anised

Steel

Colour

Coated Steel

States of Steel

Expo

rt Pr

ice P

er M

etric

Ton

nes

(US$

)

Value Addition

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Nigerian content policyNigerian content policy

NIGERIANIGERIA

Actively pursuing a local content development policyActively pursuing a local content development policy

Encouraging indigenous participation in upstream sectors of Encouraging indigenous participation in upstream sectors of the oil industrythe oil industry

Insisting on international oil companies with local content Insisting on international oil companies with local content vehicles to participatevehicles to participate

Setting local content rules for international oil majors as Setting local content rules for international oil majors as regards oil servicing contractsregards oil servicing contracts

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Overview of Nigerian Oil and Gas IndustryOverview of Nigerian Oil and Gas Industry

Oil & Gas industry is the largest extractive industry in the Oil & Gas industry is the largest extractive industry in the countycounty

Accounts for over 90% of Nigeria’s foreign currency receipts Accounts for over 90% of Nigeria’s foreign currency receipts and about 60% of GDPand about 60% of GDP

Investments in the industry have continued to outstrip other Investments in the industry have continued to outstrip other sectors and is growing e.g New LNG plants at Olokola and sectors and is growing e.g New LNG plants at Olokola and Brass, Shell Offshore (Bonga Field), ChevronTexaco Offshore Brass, Shell Offshore (Bonga Field), ChevronTexaco Offshore (Agbami Field) etc(Agbami Field) etc

Nigeria is the largest oil producer in Africa and the eleventh Nigeria is the largest oil producer in Africa and the eleventh largest in the world, averaging 2.5million bpd, proven reserves largest in the world, averaging 2.5million bpd, proven reserves of over 35billion barrels and proven gas reserves of over 187 of over 35billion barrels and proven gas reserves of over 187 trillion cubit feet (6trillion cubit feet (6thth largest in the world) largest in the world)

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Overview of Nigerian Oil and Gas Overview of Nigerian Oil and Gas Industry Cont’dIndustry Cont’d

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Oil service contracts reportedly worth cumulative US$10billion Oil service contracts reportedly worth cumulative US$10billion annually is denominated largely by multi-nationalsannually is denominated largely by multi-nationals

Federal Government is driving patronage of local oil service Federal Government is driving patronage of local oil service entities by compelling oil majors to award contracts to these entities by compelling oil majors to award contracts to these entities especially in areas where they have shown entities especially in areas where they have shown considerable levels of competenceconsiderable levels of competence

Also oil majors are mandated to transfer various marginal Also oil majors are mandated to transfer various marginal fields to indigenous oil exploration and producing companies, fields to indigenous oil exploration and producing companies, while also encouraging these companies to participate in while also encouraging these companies to participate in various oil block bidding roundsvarious oil block bidding rounds

The FG targets local content levels of 40% in 2007 and 70% by The FG targets local content levels of 40% in 2007 and 70% by 2010 Whether this is achievable is another matter entirely2010 Whether this is achievable is another matter entirely

99

MARKETERS

REFINERIES

OIL TRADERSLOCAL

OIL SERVICECOMPANIES

MULTINATIONAL

OSC

LOCAL OILPRODUCINGCOMPANIES

JV PARTNERS

FGN/NNPC

OIL & GAS INDUSTRY

Key Players in the Oil & Gas Key Players in the Oil & Gas IndustryIndustry

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Challenges of Local Content Challenges of Local Content DevelopmentDevelopment

Despite huge investments in the Oil & Gas sector, Despite huge investments in the Oil & Gas sector, there has been insufficient contribution to GDP there has been insufficient contribution to GDP growth as a direct consequence of very low local growth as a direct consequence of very low local content in the industry resulting in:content in the industry resulting in:

Little or no job creationLittle or no job creation Substantially deficient skills creationSubstantially deficient skills creation Little or no capacity buildingLittle or no capacity building Deficient national economic developmentDeficient national economic development

Current estimates are that the degree of Local Current estimates are that the degree of Local Content involved today would be in the region of Content involved today would be in the region of 10%. To address this, the government has set for the 10%. To address this, the government has set for the oil and gas sector; local content participation targets oil and gas sector; local content participation targets of 40% by the year 2007 and 70% by the year 2010 of 40% by the year 2007 and 70% by the year 2010 under an articulated Local Content Strategy.under an articulated Local Content Strategy.

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Challenges of Local Content Challenges of Local Content Development Cont’d Development Cont’d

Limited local content capability-Local entrepreneurs are not Limited local content capability-Local entrepreneurs are not competitive in price/quality/technical competencecompetitive in price/quality/technical competence

Access to capital equipmentAccess to capital equipment

Reluctance by investors to assist local content companiesReluctance by investors to assist local content companies

Perception that local content participation is based on Perception that local content participation is based on commissions, not as a value-adding activitycommissions, not as a value-adding activity

Financing ChallengesFinancing Challenges Limited local funding capacityLimited local funding capacity Short tenors relative to requirementsShort tenors relative to requirements High cost of local borrowingHigh cost of local borrowing Limited access to international financingLimited access to international financing

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Critical Success Factors Critical Success Factors

Active engagement of Government to create an enabling Active engagement of Government to create an enabling environment for the implementation of local content activitiesenvironment for the implementation of local content activities

There must be standards set and minimum qualification criteria There must be standards set and minimum qualification criteria for local content entities to ensure the highest levels of for local content entities to ensure the highest levels of professionalismprofessionalism

Financial markets, both local and international must provide Financial markets, both local and international must provide significant support to indigenous entitiessignificant support to indigenous entities

Rewards/Concessions to oil majors for compliance/support of Rewards/Concessions to oil majors for compliance/support of local content initiatives e.g tax concessions/award of oil blocslocal content initiatives e.g tax concessions/award of oil blocs

There must be a concerted effort towards the transfer of There must be a concerted effort towards the transfer of knowledge and enhancement of technical abilities of local knowledge and enhancement of technical abilities of local content entitiescontent entities

Government can assist to build capacity by intervention projects Government can assist to build capacity by intervention projects e.g Infrastructure upgrading, resource training, information e.g Infrastructure upgrading, resource training, information management and financingmanagement and financing

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Multiplier Effects of a Local Multiplier Effects of a Local Content PolicyContent Policy

Local Content participation is certainly not to pursued for its Local Content participation is certainly not to pursued for its own sake, but rather to create long lasting value and significant own sake, but rather to create long lasting value and significant spin-off effects, some of which can be highlighted below:spin-off effects, some of which can be highlighted below:

Immediate positive impact on GDP and economic growthImmediate positive impact on GDP and economic growth

Creation/stimulation of other industries on the supply chain of Creation/stimulation of other industries on the supply chain of the Oil and Gas industry e.g Insurance, Transportation, Supply the Oil and Gas industry e.g Insurance, Transportation, Supply of labour, Catering, Medical, Telecoms etcof labour, Catering, Medical, Telecoms etc

Substantial job creationSubstantial job creation

Increased technical skillIncreased technical skill

Rapid transformation of oil and gas sector, integrating oil and Rapid transformation of oil and gas sector, integrating oil and gas exploration, production and distribution activitiesgas exploration, production and distribution activities

Enhanced sophistication of local financial marketsEnhanced sophistication of local financial markets

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Multiplier Effects of a Local Multiplier Effects of a Local Content PolicyContent Policy Cont’d Cont’d

Visibility and transformation of local entities into world class Visibility and transformation of local entities into world class companies which can then export their newly acquired companies which can then export their newly acquired competenciescompetencies

Long-term economic developmentLong-term economic development

Significant conservation of foreign exchange resourcesSignificant conservation of foreign exchange resources

Development of local manufacturing base as local substitutes are Development of local manufacturing base as local substitutes are sought for imported productssought for imported products

Technology development and transfer of skillsTechnology development and transfer of skills

Capacity building in managerial competenciesCapacity building in managerial competencies

Development of linkage industries which will support the oil Development of linkage industries which will support the oil sector e.g steel sectorsector e.g steel sector

Increased local supplier activities i.e domestic suppliers of goods Increased local supplier activities i.e domestic suppliers of goods and services under a supplier development programme.and services under a supplier development programme.

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Financing as a Key Challenge-Local Financing as a Key Challenge-Local MarketsMarkets

Availability of finance is crucial as this underpins development Availability of finance is crucial as this underpins development and key challenges are: and key challenges are:

Paucity of funding capacity in local marketsPaucity of funding capacity in local markets

Funding is at the short end of the yield curve and therefore Funding is at the short end of the yield curve and therefore medium to long term funding is practically non-existentmedium to long term funding is practically non-existent

High cost of borrowing as local interest rates annualised costs High cost of borrowing as local interest rates annualised costs tend to outstrip foreign currency alternativestend to outstrip foreign currency alternatives

Resistance by oil majors (contracting parties) to meet certain Resistance by oil majors (contracting parties) to meet certain requirements which will enhance creditrequirements which will enhance credit

Lack of understanding of structured financing by local financing Lack of understanding of structured financing by local financing partiesparties

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Financing as a Key Challenge-Financing as a Key Challenge-Offshore MarketsOffshore Markets

Conditions precedent are usually time consumingConditions precedent are usually time consuming

Country risk issues to drawing facilitiesCountry risk issues to drawing facilities

Credit enhancement instrumentsCredit enhancement instruments

Costs of registration of securitiesCosts of registration of securities

JurisdictionJurisdiction

Issuing mandatesIssuing mandates

FeesFees

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Case Study: OSC US$75M Finance Case Study: OSC US$75M Finance Facility, NIGERIAFacility, NIGERIA

Funding Recourse Security Arrangements Master Services G’tee Funding Contract (Per Aval) Letter of Comfort Accepted Invoices Payment For Services Funding

Risk Participation Agreement

Loss G’tees

Debt Service; Remainder is paid Debt Thro’ Local Banks to OSC’s

Oil Service Companies Qualified Local Banks

(Borrowers)

Afrexim Bank (Lender of Record)

Credit Enhancement (International Insurers,

Afrexim)

Lenders (International Banks)

Oil Majors

(Nigerian Subsidiaries)

Escrow Account

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Case Study: ChallengesCase Study: Challenges

Getting the right structure that appealed to international Getting the right structure that appealed to international lenders and assured profitability in a market perceived as lenders and assured profitability in a market perceived as volatile and uncertainvolatile and uncertain

Multiparty structure led to undue delays most of the time and Multiparty structure led to undue delays most of the time and there was always the problem of getting all parties to move at there was always the problem of getting all parties to move at the same pacethe same pace

Security documentation took considerable amount of time due Security documentation took considerable amount of time due to the complexity of the transaction and number of participantsto the complexity of the transaction and number of participants

Getting local banks to guarantee a pool of funds whereby each Getting local banks to guarantee a pool of funds whereby each guarantor bank guarantees pro rata all the beneficiary local guarantor bank guarantees pro rata all the beneficiary local entities instead of making selective guaranteesentities instead of making selective guarantees

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ConclusionConclusion

Active engagement policy to consciously promote local Active engagement policy to consciously promote local content can bring positive results in emerging economiescontent can bring positive results in emerging economies

Governments alone cannot achieve increased local content; Governments alone cannot achieve increased local content; organisations such as UNCTAD can continue to promote organisations such as UNCTAD can continue to promote awareness of the need for indigenous participation, offer awareness of the need for indigenous participation, offer advice and hold consultation fora (such as this) as to how this advice and hold consultation fora (such as this) as to how this can be quickly achievedcan be quickly achieved

International banks should support local entities in their International banks should support local entities in their financing needs and work judiciously to create a friendly financing needs and work judiciously to create a friendly financing environment devoid of difficult financing conditionsfinancing environment devoid of difficult financing conditions

Multinational companies should be encouraged to seek the Multinational companies should be encouraged to seek the services of local entities whilst executing projects in countries services of local entities whilst executing projects in countries where such services existwhere such services exist

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Thank You for your attentionThank You for your attention

CALAG CAPITAL LIMITEDCALAG CAPITAL LIMITED

STRUCTURED FINANCE|PROJECT FINANCE|CORPORATE STRUCTURED FINANCE|PROJECT FINANCE|CORPORATE FINANCEFINANCE