Cablegate: Oil Industry Cautiously Embraces Nigerian

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

1. (U) SUMMARY. The GON requires oil companies to
use indigenous contractors in joint venture projects,
with a current target goal for "local content" set at
40 percent of a company's aggregate spending on a
project. Defining what constitutes local content and
enforcing the target fairly and efficiently have proven
difficult, and domestic fabrication and labor
capacities remain low. The industry wants to ensure,
as it undertakes the effort to increase indigenous
participation in contracts, that the concept of local
content is based on a contractor's ability for domestic
value-added rather than on the nationality of the
equity stakeholders alone. With restrictive
legislation and higher local content targets on the
horizon, the next several years offer an excellent
opportunity for American companies both to participate
in capacity building of Nigerian domestic firms, and to
establish manufacturing and service operations in-
country. END SUMMARY.

2. (U) The GON encourages foreign companies involved
in the oil industry to maximize Nigerian participation
in the projects they undertake. But local content
targets are not codified and are administered in
different ways by the Department of Petroleum Resources
(DPR), the Ministry of Internal Affairs and the
National Petroleum Investment and Management Services
agency (NAPIMS). Interest and confusion over targets
run high, as evidenced during the Offshore West Africa
Conference held in Abuja March 17-19. According to
Paul Heuper, Special Energy Advisor at the U.S.
Department of Commerce, who was a presenter at the
conference, the breakout session for local content
discussion was attended by over 100 people (compared to
20 at other sessions), and at one point degenerated
into a free-for-all shouting match between members of
the audience and a Shell representative leading the
discussion. Heuper told ECONOFF that there seemed to
be no common understanding of what are the current and
near-term GON goals, and no agreement as to what
constitutes local content.

--------------------------------------------- ---
--------------------------------------------- ---

3. (SBU) Companies doing business in Nigeria's
petroleum sector must obtain various business and
project permits from DPR. The Ministry of Internal
Affairs, meanwhile, limits the number of expatriates
who can enter Nigeria to fill jobs. The limits on
expatriate workers vary with the level of expertise
required and the training or experience Nigerians may
have to do the anticipated work. Furthermore, every
contract worth $500,000 or more entered into by an oil
company must be reviewed at multiple stages by NAPIMS,
which insists that 40 percent of the aggregate spending
on projects in Nigeria be on "local content." But,
multinational oil companies and oil services firms
alike complain that they have little guidance
specifying what constitutes local content on any given
project. In a recent meeting with Maureen Scurry of
the U.S. Export-Import Bank (USEXIM), Tom Hoffman,
Chevron Nigeria's General Manager for Finance and
Information Technology, lamented that too often
businesses that are essentially shell corporations
owned by at least one Nigerian are used to partner with
international firms for the purpose of technically
meeting local content requirements, but the former
contribute little by way of actual Nigerian input.

4. (SBU) NAPIMS, for example, may approve a
refurbishing contract that includes as a subcontractor
a firm owned by a Nigerian, even if that firm has
minimal facilities in Nigeria and ultimately ships the
parts to the United States or elsewhere to be retooled
and then re-imported. Hoffman said his company would
rather not use such firms because they provide no value
added to a project: they provide no inputs derived from
Nigeria and may have few Nigerian employees other than
those who own the company. According to Hoffman, such
arrangements are neither cost effective nor
sustainable. Phillip Chukwu, Group Managing Director
of NAPIMS, admitted to ECONOFF on March 16 that in many
people's minds, including Nigerians in both business
and government, such arrangements are sufficient to
meet local content requirements. Chukwu nonetheless
agreed with Hoffman that the process would be more
effective if the government established guidelines
focused on a company's domestic value added to a
project rather than the nationality of its owners.


5. (SBU) According to Chevron's Hoffman, his company
uses a value matrix to determine the local content a
contractor will provide if brought into a project.
Elements that Chevron evaluates include the number of
Nigerians the company employs and in what positions,
the nature of the supply chain that will support the
project, the extent to which raw materials to be used
in the supply chain originate in Nigeria, and the
amount of taxes the contractor pays to the Nigerian
government. Gibson Ola, Chevron Nigeria's Supply Chain
Manager, added that the company's goals regarding local
content are to increase the value added in Nigeria and
to build domestic capacity in the sector, including
training Nigerians to work in oil services.


6. (SBU) Chevron's Ola described Nigeria's local
content regulatory regime as a work in progress.
Hoffman said that in the absence of regulation, NAPIMS
uses its contracting approval process to promote local
content. According to Hoffman, projects worth $500,000
or more must be reviewed and approved by NAPIMS at
several stages. NAPIMS officials evaluate everything
from the advertisements a company will run for bid
solicitation to the details of the contracts and
subcontracts used at various phases of the project.
NAPIMS chief Phillip Chukwu described his agency's
relationship with the oil companies as advisory, but
admitted that a project will not go forward without
NAPIMS approval at each step.

7. (SBU) The NAPIMS approval process is often
burdensome, according to officials in oil companies,
oil services firms, and NAPIMS. The NAPIMS review is
cumbersome and slow, to the point that the approval
process sometimes is longer than the lifespan of the
intended contract. By the time approvals are obtained
in some instances, a new contract must be negotiated
and maneuvered through NAPIMS all over again. Hoffman
said the delays in the NAPIMS process add uncertainty
and cost to Chevron Nigeria's contracts, which in turn
hamper local content capacity building as project
managers are less willing to work with unknown or new
Nigerian firms in order to minimize the risk of further
delays. Uncertainty in NAPIMS review frustrates oil
services companies (OSC) as well. Ray Blanchard,
Manager of Cooper Cameron's operations in Nigeria, told
ECONOFF that his company never knows if its bids on
contracts will satisfy NAPIMS local content rules, even
though all but a handful of Cameron's employees are
Nigerian including managers, and the company maintains
relatively large office, workshop, and fabrication
facilities in the Delta.

8. (SBU) NAPIMS' Chukwu agreed his agency's approval
process sometimes takes longer than the timeframe of a
proposed project, and said he is trying to streamline
the review process. He said NAPIMS is considering
reducing the number of departments involved in contract
approval, and raising the contract threshold for the
agency's review to perhaps one million dollars, which
Hoffman also suggested would provide welcomed relief.


9. (SBU) A bill submitted in 2003 to codify local
content rules is scheduled for consideration in the
National Assembly in late March. In the meantime,
NAPIMS plans to increase local content goals from 40%
of aggregate spending on a project to 45% by 2006 and
70% by 2010. Chevron managers told us that the oil
industry in Nigeria is working as a group through the
Oil Producers' Trade Section (OPTS) of the Lagos
Chamber of Commerce to shape the bill, but more
important, the accepted definition of local content.
Chevron's Hoffman said that in addition to pressing the
view that Nigerian value added is more important than
equity stake, the industry will press to see that local
content requirements work to the advantage of firms
having such capability in bid qualifications.
According to Hoffman, the industry would like to see
companies contributing a greater percentage of value
added local content win contracts even if other
technical elements, such as longevity or financial
liquidity, are less developed than competitors offering
little value added.


10. (SBU) When asked why the industry is pursuing what
appears to be the more restrictive local content
requirement based on value added, Hoffman admitted that
the oil companies see the writing on the wall and know
they need to help shape the legislation if it is to be
"done right." Hoffman said there is a risk to using
shell companies to meet local content goals because
sometimes such companies have little capacity to
deliver on contracts, forcing project managers to hire
additional contractors to do the same work. These
delays, along with the delays in NAPIMS approvals, are
more costly to the foreign oil companies than are
higher contract costs associated with doing business
with firms offering more value added, even if the
latter need assistance in capacity building. Greater
local content improves the net project value if it
reduces project delays, according to Hoffman.

11. (SBU) Hoffman also said that value added local
content should be more cost effective over time. He
and Chevron's supply manager Ola said principles of
corporate responsibility also demand a commitment to
tangible local content. They also noted that future
corporate opportunities, like gas exploration, lie in
developing economies like Nigeria, and developing local
content will help access those opportunities.


12. (SBU) Hoffman identified four requirements for
development of Nigeria's local content in the oil
sector. First, capacity and capability must be built.
There are too few indigenous firms in Nigeria that can
provide the products, fabrication or services needed by
the international oil companies operating in the
country. Hoffman said business management must also be
improved so that companies like Chevron Nigeria can be
confident that subcontractors will perform as
contracted and will be sustainable and grow over time.
He said financing is a major issue, particularly with
start-ups. And finally, Hoffman stressed that
companies like his must be willing to make mid- to long-
term business commitments to indigenous firms.

13. (SBU) Hoffman admitted that his company's worldwide
procurement practices appear contradictory to the goals
outlined above, in that ChevronTexaco, as a
multinational corporation, pursues a policy of
"strategic sourcing." ChevronTexaco tries as much as
possible to do business with suppliers and service
companies that can provide products and services
worldwide, rather than to have its regional business
units enter into multiple contracts for the same item.
Chevron Nigeria's Hoffman said that 90 percent of his
company's overall spending in terms of dollar value and
employee time goes toward 10 percent of its contracts.
In other words, Hoffman said, Chevron tends to do
business with "the big boys" and large contracts.
Nonetheless, ChevronTexaco aims to leverage its
worldwide strategic sourcing by encouraging its major
suppliers to look to Nigeria as a place to establish
manufacturing, fabrication or servicing bases. In 2003
Chevron Nigeria brought 14 of its biggest suppliers to
Nigeria for site visits and discussions centered on
possible establishment of operations here, a result of
which would give Chevron reason to continue or expand
its contracts with these suppliers, all the while
meeting local content rules of one of its key markets.


14. (SBU) CONGEN and USEXIM staff discussed with
Chevron's supply chain team the opportunities for
American businesses in Nigeria in the context of the
local content requirements. ECONOFF also discussed the
same with NAPIMS Group Managing Director Phillip Chukwu
and a group of managers from DPR. It may appear that
local content rules could thwart U.S. business
opportunities by limiting access to Nigerian projects.
But it was acknowledged by both corporate and
government officials that Nigeria lacks capacity to
provide significant local content in part because in
the near to mid-term the GON and domestic firms will
lack the financial wherewithal to make significant
investments in domestic capacity.

15. (SBU) COMMENT: Chukwu admits extensive foreign
investment is needed to sustain and grow the petroleum
sector, especially Nigeria's fledgling gas industry.
Accordingly, potential exists for American firms to
take advantage of the development of local content
standards in Nigeria in several arenas, by providing
input for local fabrication, facilities and skills
training for domestic refurbishing businesses, and
technical partnerships for service contracts. Broader
ventures might include establishing a Nigerian presence
along the lines of Chevron's strategic sourcing

noted that USEXIM can help finance American training
programs in Nigeria. This seems to be a little known
or contemplated concept here. Both corporate and
government representatives agreed training needs are
great and will be ongoing in Nigeria; American
companies may want to take advantage of the opportunity
to provide such training with USG assistance. American
supply and service firms that can manage the ongoing
challenges of infrastructure, political risk, and
security in Nigeria may have a unique opportunity in
the coming years to capitalize on the inevitable march
resulting in greater local content, all the while
improving Nigeria's domestic capacity, which will
ultimately improve the country's overall economic
footing and provide opportunities for investment in
other sectors. END COMMENT.


© Scoop Media

World Headlines


Abu Akleh Shooting: Fatal Shot Came From Israeli Forces, Says OHCHR
Israeli forces were behind the fatal shooting of Al Jazeera journalist Shireen Abu Akleh in the West Bank - not indiscriminate Palestinian firing - the UN human rights office, OHCHR, alleged on Friday... More>>

Ethiopia: Conflict, Drought, Dwindling Food Support, Threatens Lives Of 20 Million

Hunger is tightening its grip on more than 20 million Ethiopians who are facing conflict in the north, drought in the south and dwindling food and nutrition support beginning next month, the UN food relief agency warned on Thursday... More>>

Euro Med Monitor: Syria Cross-border Aid Mechanism Extension Is Necessary For The Survival Of Millions

Permanent members of the UN Security Council should extend the cross-border aid to northwestern Syria, Euro-Med Human Rights Monitor said Tuesday in a statement...

UN Ocean Conference: Opens With Call For Urgent Action To Tackle Ocean Emergency
With climate change, biodiversity loss and pollution exacting a devastating toll on the world’s ocean — critical to food security, economic growth and the environment... More>>

World Vision: Deeply Concerned For Thousands Affected By Afghanistan Quake
World Vision is deeply concerned about the deteriorating humanitarian situation in Afghanistan in the wake of a powerful earthquake in the early hours of this morning... More>>

Malaysia: UN Experts Welcome Announcement To Abolish Mandatory Death Penalty

UN human rights experts* today commended an announcement made by the Malaysian government that it will abolish the country’s mandatory death penalty and encouraged Parliament to take concrete steps to pass the agreement into law... More>>