Traditional approach to local content growth no longer reaping full benefits for developing resource-rich nations, says report

DUBAI: In the last decade, the development of ‘local content’: defined in the Energy industry as the share of local suppliers and service providers in project procurement expenditure: has been driven by International Oil Companies (IOC) and involved a passive government role, according to a recent report.

To date, this model has not managed to fully achieve globally competitive local capabilities or establish thriving industries in developing hydrocarbon-rich states. This is primarily due to the fact that IOC-led initiatives come with business and risk considerations and are limited by the boundaries of each company’s resources. In parallel, in recent years, there has been a significant rise in focus by National Oil Companies (NOC) on their procurement process as an effective tool for national economic sustainability, according to Management consulting firm Booz ‘&’ Company’s recent report.

The Company has assessed that, in order to unlock the long-term development promise of local content, NOCs must adopt a truly holistic vision.

In recent years, it said, myriad NOCs have begun to view their own capacity to build local content as a means to develop a globally competitive oil and gas supply base, as well as diversify the national economy and generate sustainable job creation. In light of this, they have become more assertive about reaching local content targets and strongly proactive in implementing strategies to strengthen the national oil and gas supply chain.

According to Booz, NOCs in countries such as Saudi Arabia, Kuwait, Kazakhstan, Nigeria, Indonesia, and Trinidad ‘&’ Tobago are aiming to replicate the effective models established by Norway, the UK, Malaysia and Brazil. As a result, international contractors, suppliers, and oil field service providers alike are facing stringent conditions pertaining to local content in the form of new policies. Those impose legally-mandated targets, minimum local ownership, and preferential treatment of local suppliers, modified bases for contract awards, advance payments to local suppliers, minimum training commitments and local content reporting requirements.

The new wave of local content regulations is also very susceptible to political pressures. “The successful development of the local supply base requires a comprehensive overview of national priorities, industrial competitiveness, government revenue growth, and foreign direct investments,” said Dr. Shihab El Borai, Senior Associate with Booz ‘&’ Company. “If policymakers do not adopt a methodical strategy to local content development, procurement expenditures may likely prop up inefficient industries instead of driving economic growth.” The first dimension: the optimization of local content target setting: requires a quantitative analysis of planned project expenditure, and the assessment of domestic supplier capabilities to identify a reference baseline scenario for local content.

Targets are then defined by cost category, aggregated and bottomed-up into long-term objectives, and then prioritized and sequenced to produce year-on-year results. “This particular analysis should take into account the impact on overall costs, schedule, investor profitability, government revenues, job creation and foreign direct investment: to quantify the trade-offs associated with local content policies,” said David Branson, Executive Advisor with Booz ‘&’ Company. “Only after developing an integrated economic model can the NOC: in collaboration with government stakeholders and international partners: improve its local requirements, define reasonable ramp-up rates and curb costs.”


Leave a Reply