The Oil and Gas sector of the Nigerian economy has hitherto, remained the mainstay of the country’s capital value chain and the most remarkable component of our National Gross Domestic Product. Given this incontrovertible fact, it has therefore become highly imperative that the Act be revamped and its provisions brought into compliance with international industry best practices while still preserving its core objective, which is provision for the development of Nigerian Content in the Nigerian Oil and Gas Industry by encouraging participation of Nigerians.
Before the National Assembly, is a Bill to amend the Nigerian Oil and Gas Industry Content Development Act, 2010, properly short cited as the Local Content Act (the “Act”). The Act which is composed of 106 Sections is sought to be amended by the Nigerian Oil and Gas Industry Content Development (Amendment) Bill, 2020 (HB.838) (the “Bill”). The move to amend the decade-old Act sprang out of the pressing need to address certain salient issues which have been either neglected or improperly captured in the legislation. In a bid to prevent the enactment of provisions considered inconsistent with the mandate and true spirit of the Act, the Bill seeking to usher in these amendments has thus, been subjected to rigorous legal scrutiny to capture enlightened viewpoints that will allow the fulfilment of its objects before it ascends into law. This paper is focused on some provisions of the Bill we believe needs to be addressed.
The mandate of the Nigerian Oil and Gas Industry Content Development Act is primarily to provide for the development of Nigerian Content in the Nigerian Oil and Gas Industry by encouraging participation of Nigerians. Indeed, the true measure of the success of content development in Nigeria is in the amount and complexity of works and role played by Companies wholly owned and managed by Nigerians, whose focus is on developing Infrastructure and Technology in Nigeria, thereby encouraging profits to be retained and reinvested into our economy. Consequently, these Companies are building and developing capabilities towards ultimately exporting Nigerian products and services, rather than relying on importation, which is an absolute characteristic of a Nigerian Indigenous Companies.
The focus of the Act primarily is on Nigerian indigenous companies. Therefore, any amendment to the Act must be to protect and encourage an environment for exponential increase in their numbers and rapid growth in size, so as to pull along the Nigerian economy. Just as the most developed Oil and Gas countries have done, they have prioritized the interests of indigenous companies by enacting laws that will foster and encourage their participation on the sector that is driving their economy. The glass ceiling which is preventing our economic growth will go away when we prioritize indigenous companies in the dealings of the sector that corners us the most revenue annually.
The Act has fallen short of providing a comprehensive definition as to what constitute the entities regarded as “Nigerian Indigenous Companies”, rather it resorted to using terms such as “Nigerian Independent Operators” and “Indigenous Service Companies” in making reference to exclusive and first consideration to Nigerians as stipulated in the Act. Furthermore, Section 106 (interpretation Section), defines “Nigerian Companies” thus:
“A company formed and registered in Nigeria in accordance with the provision of Companies and Allied Matters Act with not less than 51 % equity shares by Nigerians”.
A cursory study of judicial pronouncements on the definition of what constitutes a Nigerian Company, will reveal that the meaning provided by the Courts over time, appears to be at a sharp variance with what the Act envisages, which apparently allows room for foreign ownership of equity shares in a company considered Nigerian. A classical case in point, is SIKIRU AGBOOLA LASISI v. REGISTRAR OF COMPANIES [I176] LPELR-SC.301/1975, where the Supreme Court laid down the correct test for determining whether a company is a Nigerian association or not, in these words:
“It is clear from the definition under Section 16(1)(c) of the Nigerian Enterprises Promotion Decree, 1972 that the correct test for determining whether a company is a Nigerian association or not is to discover the owners of its capital and other financial interests. If its capital and other financial interests are wholly and exclusively owned by Nigerian citizens, then it is a Nigerian Association. If, however, a portion of its capital or other financial interest is owned by an alien then, except as otherwise prescribed by or under the Decree, it is an alien association”. (Underlined is ours for emphasis).
The Act having defined the term Nigerian Company makes no further mention of a “Nigerian Company” at all, rather it resorted to various vague variations; “Nigerian Indigenous Operator”; “Nigerian Indigenous Service Companies”; “Nigerian Indigenous Contractors”; “Nigerian Contractors and Service or Supplier Companies”, and “Indigenous Companies” to reference sector participants contemplated under each relevant provision. Although, the Act has implicitly substituted the term “Nigerian Company” with the above-mentioned phrases, it nevertheless still intends for the word “indigenous” to remain in the Act so as to portray its very meaning and objective.
The ambiguity created by the above mentioned words has opened the provision to different constructions, with stakeholders having to rely on the comprehension of industry best practice or formally recurring to the interpretation of the Nigerian Content Development and Monitoring Board (the “Board”) in line with S. 70(1) of the Act, which permits the Board to “provide guidelines, definitions and measurement of Nigerian Content and Nigerian Content Indicator to be utilized throughout the Industry”.
The Bill attempts to cure this ambiguity by proposing to replace the terms “Nigerian Independent Operators” with “Nigerian Companies”, and “Nigerian Indigenous Service Companies” with “Nigerian Service Companies”. Regrettably, this has failed to fix the uncertainty occasioned by the Act, instead, it moved further away from the purpose the Act is designed to attain, which is the exclusive consideration and participation of Nigerians. Hence, the proposition by the Bill to erase outright, the term “Indigenous”, nullifies the true meaning and intention of the Act.
Undoubtedly, what gauges the achievement of content development in Nigeria and especially in the oil and gas industry, rests on the intricacy and aggregate of works done and the contributions made by Nigerian domestic companies concerned with the development of infrastructure, technology and building galvanized human capacity in Nigeria, thereby assuring the reflow, retention and reinvestment of profits in our economy. Accordingly, these Companies are forming and expanding the required competence geared towards the ultimate exportation and transatlantic trading of Nigerian goods and services, in place of protracted dependence on importation, which typifies the precise features of Nigerian Indigenous Companies.
A brief study of some oil producing countries shows how their Local Content Laws focus on participation of its citizens in the Oil and Gas Sector and have reflected same in their laws. We can take a cue from our sister nation, Ghana, having passed a similar Law three years after the enactment of the NOGICD Act. The Petroleum (Local Content and Local Participation) Regulation, 2013 (Ghana), passed in 2013, was enacted with the purpose of enhancing the capacity of indigenous Ghanaian companies and to promote their participation in the Oil and Gas Industry.
Regulation 49 of the country’s Petroleum (Local Content and Local Participation) Regulations, 2013, defines an “indigenous Ghanaian Company” as
“A company incorporated under the Companies Act, 1963 (Act 179) that: a) has at least 51% of its equity owned by a citizen of Ghana; and b) has Ghanaian citizens holding at least 80% of executive and senior management positions and 100% of non-managerial and other positions”.
Similarly, resource rich countries; Kuwait, Qatar, Saudi-Arabia and the United Arab Emirates (UAE) etc. also focus on local content requirements to maximize the gains of foreign participation in their Oil and Gas Sectors. The aim is to provide opportunities for local industries to participate in Oil and Gas activities. Although, several of these countries do not exactly define the term “local” in their Local Content Regulation (LCR), generally it means; nationals, and companies owned, or majorly controlled by nationals.
It is owing to this prevailing reason, that Nigerian Indigenous Companies must assume a central place within the covers of our Local Content Act. Therefore, any amendment to it must be anchored on providing and encouraging an atmosphere for a flooding increase in their numbers and rapid growth in sizes, in order to redefine the Nigerian economy.
This work recommends that the term “indigenous” be retained and consequently, the interpretation Clause of the Bill should interpret “Nigerian Indigenous Companies” to mean;
“A company with 100% equity and assets owned by Nigerian Citizens with its head office/parent company located in Nigeria”.
It is only a clearly worded and purpose-driven definition of this kind that can adequately foster the existence of a truly Nigerian Indigenous Company and guarantees an all-round local content development in our dear Oil and Gas Sector.
The Act makes provision for the establishment of a Nigerian Content Development Fund (the “Fund”) under Section 104(1), for the purposes of funding the implementation of Nigerian content development in the Nigerian Oil and Gas Industry. In other words, it is provided to ensure the absolute achievement of the goal for which the Act was enacted in the first place.
Having so established the Fund, Section 104(2) of the Act further categorically spells out the major source from which the fund will be generated and placed at 1% deductible at source, of every awarded contract to any of the listed entities who are concerned with all the goings-on in the Upstream Sector of the Nigerian Oil and Gas Industry, to be paid into the fund. This arrangement has worked perfectly well for the fund itself and provided a considerable measure of ease to all concerned parties in the undertaking of their business operations within the spheres of the industry.
Conversely, the Bill by virtue of a new Clause 105 (2) proposes a coinage of this provision, such that the major source of the fund will now be derived from the deduction of 2% at source of every contract awarded to any operator, contractor, subcontractor, alliance partner or any other entity involved in any project, operation, activity or transaction in the Upstream Sector and designated Midstream and Downstream projects operation of the Nigeria Oil and Gas Industry, which is to be paid into the fund.
Flowing from the foregoing is the overt fact that, while the initiative to extend the spectrum of application of this provision by the Bill to include “designated Midstream and Downstream projects operation” is by far a commendable one, as it will automatically open the floodgate of more income pooling into the fund and in turn, speed up the implementation of content development in the industry. However, an increase in the contributory funds from 1% to 2% of every contract awarded, is outrageous and can be regarded as double taxation on so many levels. It can be argued that the sector is indeed already significantly overburdened by a plethora of levies and fees; Education tax, Nigeria Police Trust Fund (NPTF) levy, Nigerian Capital Development Fund (NCDF) Levy, Niger Delta Development Commission (NDDC) Levy, Nigerian Export Supervision Scheme, and Offshore Safety Permit, others include Cargo & Stevedoring Dues, Waste Reception Facilities Levy, Value Added Tax among others, and the proposed minimum of 0.5 per cent of participants respective gross revenues for Research & Development (R&D) activities in Nigeria. Industry Stakeholders have expressed concern that any additional financial imposition as proposed by the Bill on the industry, will very negatively impact Nigeria’s competitiveness and affect the viability of projects and investments.
It is a bit alarming that while the Government seems to want to achieve lower costs, it is imposing multiple taxes and levies. This is without consideration for high security costs, assets fixing and environmental remediation costs, that follows asset damages. The Government is expected to support the industry to remain a viable partner for the economic development of Nigeria and not impose unnecessary burden.
In addition, an increase to 2% smacks of unaccountability, given that there are no detailed developmental returns on previous contributions to the Fund, published by either the Board or any other responsible regulatory body. It then becomes valid to recommend that contributions be retained at 1% as provided in the Act.
Unequivocally, the landmark success in the Nigerian economy over the breadth of the last decade is attributable to the enactment of the Nigerian Oil and Gas Industry Content Development Act. The proposed amendment, which is channeled along the lane of enhancing better participation of Nigerian citizens, rests on how the industry, local businesses and state institutions create the needed synergy to overcome the obstacles militating against the actualization of local content opportunities. `
Clause 105(3) of the Bill provides that;
“The Fund shall be managed by the Nigerian Content Development and Monitoring Board and employed for projects, programmes, and activities directed at increasing Nigerian Content in the Oil and Gas Industry.”
While it can be argued that the reasoning behind the above clause is progressive, however, it has merely replicated the provision of the same clause it seeks to substitute, which fails to address the evident flaw in the application of the fund.
The resources released for funding by the Board is commendable in most cases but usually are totally insignificant for some projects. Bringing into account the yearly generated revenue of the Board, which is earmarked at $360 million from commercial ventures for the year 2020 alone, it will be most ideal to allocate a percentage of the yearly generated revenue to the advancement of indigenous companies; large projects, laudable programmes, capacity building solutions, activities and services of robust advantage to indigenous companies from whose operations the source of the generated fund is derived.
Therefore, in order to realize and meet the full objectives of the Fund, for the purpose of unceasing advancement in the Sector, at least one major project considered instrumental to the exponential expansion of indigenous companies should be initiated and executed in the industry, every fiscal year. Thus, not only would it be highly profitable to set aside a minimum percentage of the total generated contribution to be spent on projects each year, but it will also prepare the fertile ground for the acceleration of these companies into the league of their counterparts with multi-national repute, the economy will be better enriched, and the multiple returns can then be directed towards stretching the boundaries of research and development in the industry and even ultimately financing the process of diversifying into and promoting other sectors in the not too long run.
Similarly, the Board should through the Fund, provide low-Interest Loans to Nigerian Indigenous Companies operating in the Upstream Sector, to enable them deliver services at competitive pace, intentionally proceed on ceaseless capacity building programs for local companies in order to both build and boost the right structures to enable them compete favorably in the Industry, ensure effective enforcement of the Act to enhance in-country value creation, retention, reinvestment, and generation of employment for Nigerians across the Industry value chain, especially at such a time when the revenue accruable to the Federal Government from other key sectors of the economy is degenerating at an alarming rate.
Suffice it then to assert that, the provision of Clause 105(3) is the key to attaining all of these promising potentials which the whole amendment process portends for the Oil and Gas industry in particular and the economy as a whole, only if it is redrafted to encapsulate the pertinent enabling words in the manner described hereafter:
“The Fund shall be managed by the Nigerian Content Monitoring & Development Board, and 50% of the total generated fund thereof shall be employed for projects, programmes and activities beneficial to Nigerian Indigenous Companies and directed at increasing Nigerian content in the Oil and Gas Industry”
The Local Content Development Fund can only serve its true purpose if applied to the right course, and the Act must state this in no uncertain terms.
The Bill cannot afford to reenact the shortcomings it is meant to eliminate. It is therefore required at this crucial moment for our Legislators to ensure that the Bill underway, is cleared of all the ambiguities, irregularities, and shortfalls replete in the subsisting principal Act. A carefully thought amendment of the Act is vital to crystalize the core intentions of the initial drafters of its letters. While this is being done, we must balance the interests of the stakeholders in the sector. An increase in the contributory funds will be burdensome on the already over taxed stakeholders.
Written by:
is with Messrs O. M. Atoyebi, SAN & Partners (OMAPLEX LAW FIRM) where she works in the Corporate and Commercial Department of the Firm. She has an in-depth understanding of the Oil & Gas and Energy Sector and has worked with various key industry stakeholders and facilitated several transactions.