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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
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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