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Viewing cable 04LAGOS634, OIL INDUSTRY CAUTIOUSLY EMBRACES NIGERIAN

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Reference ID Created Released Classification Origin
04LAGOS634 2004-03-24 05:23 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Consulate Lagos
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 04 LAGOS 000634 
 
SIPDIS 
 
STATE PASS TO EXIM, OPIC AND TDA 
EXIM for MSCURRY 
DOC for MRIVERO 
ENERGY FOR CGAY 
 
SENSITIVE BUT UNCLASSIFIED 
 
E.O. 12958: N/A 
TAGS: EPET EINV PGOV NI
SUBJECT:  OIL  INDUSTRY  CAUTIOUSLY  EMBRACES  NIGERIAN 
LOCAL CONTENT 
 
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. 
 
--------------------------------------------- --- 
WHAT IS LOCAL CONTENT: OWNERSHIP OR VALUE-ADDED? 
--------------------------------------------- --- 
 
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. 
 
------------------------------------ 
CHEVRON'S LOCAL CONTENT VALUE MATRIX 
------------------------------------ 
 
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. 
 
---------------------------------- 
NAPIMS PROCESS SLOW AND BURDENSOME 
---------------------------------- 
 
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. 
 
----------------------------- 
LEGISLATION FOR LOCAL CONTENT 
----------------------------- 
 
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. 
 
--------------------------------- 
INDUSTRY SEES WRITING ON THE WALL 
--------------------------------- 
 
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. 
 
----------------- 
CAPACITY BUILDING 
----------------- 
 
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. 
 
-------------------------------------------- 
LEVERAGING LOCAL CONTENT FOR U.S. BUSINESSES 
-------------------------------------------- 
 
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 
concept. 
 
16. (SBU) COMMENT CONTINUED. Maureen Scurry of USEXIM 
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. 
 
HINSON-JONES