Exploration for offshore oil and gas in Norway began in the mid-1960s and from the 1970s onwards ministers started implementing policy to protect the interests of communities and the economy. Local content in Norway provides a great case study that should be emulated.
As part of local content in Norway, the Norwegian service and supply industry has seen annual revenues of US$ 50 billion, with over 1,250 active companies in the ecosystem. This had created 125,000 direct employment by the supply and service companies with over 26,000 stationed offshore. Oil companies have over 27,000 employees and near 100,000 jobs are indirectly created. The Norwegian Government has made its energy industry very competitive for both local and international companies without any local content requirements. Norway is the home to one of the world’s largest sovereign wealth funds and when it comes to technological solutions in the offshore oil and gas industry, Equinor takes the lead. Norway’s local content strategy has been hailed as an example of good practice.
In Norway, you always have to be competitive and there is no favorable policy for ownership in Norway. I do not think there is a wrong policy to have joint ventures but it is important to see the joint ventures to be competitive globally because oil and gas industry is a broad industry.
Companies have to compete in their national environment and if you go much to be local, the price will increase and it will not survive in the long run.
Local Content in Norway – Strategies
To start with, the government aimed to award contracts to Norwegian bidders when they proved to be competitive in terms of price, quality, delivery time and service. The rationale behind this was to promote the establishment of local industry and this was achieved through cooperation with international oil companies.
When foreign operators started entering the Norwegian industry in the late 1970s, they were strongly encouraged to form research and development (R&D) partnerships and joint development programmes with Norwegian companies and institutions, thus engaging in local content growth.
Overseas firms’ commitment to and strategies for technology transfers were made a crucial and determining factor in the licensing process by the Ministry of Petroleum and Energy, once again putting local content programmes at the heart of investments.
Governmental policy meant that Norwegian oil and gas supply companies developed leading class, state-of-the-art technologies and, as a result, many international companies have located part of their R&D chain in the country.
The competencies and technological expertise developed as a consequence of Norway’s local content policy also strengthened its position within the international oil industry. Local supply and service providers to oil activities have proved truly competitive by global standards.
Local Content in Norway – A Historical Perspective
Nevertheless a more interesting case study which has been debated over time is the successful implementation of local content. It is a concept of promotion and development of local industry in the oil and gas industry.
Norway has never made specific legislative requirements as to the share of local content in comparison to a country like Brazil. However, the Norwegian government and authorities alike appreciates the choice of local firms if such firms were competitive in price, quality and delivery.
However in the 70s and 80s it can be argued that local firms were chosen even if they were not arguably the most cost effective”
The Norwegian industry was predominantly that of foreign investors; shell, Exxon, Phillips and BP which is a mirror of what most oil and gas industry initially looked like. Nevertheless at a much later stage there was an establishment of local oil companies like Statoil and Norsk Hydro.
Local Companies Participation
Even though concessions were awarded to foreign oil companies with exclusive rights for exploration, the local companies are tasked to be operators in production licences.
This saw a joint participation of foreign and local companies and a result there was a transfer of technological know-how.
At the time of bidding, foreign companies could present Norwegian authorities with its list of operators and the Ministry could also add to the list of operators a local company that fits with the requirements.
In addition there were agreements among the companies both local and foreign to promote research and development cooperation through Norwegian institutions of higher learning.
Nevertheless Norway never diverted its attention from international competition unlike Brazil’s local content development. In addition, most local firms are internationally competitive due to their geographic proximity.
This in effect deters protectionism of the industry but has eventually improved international standards nonetheless.
Some people argue that the success of Norway in developing a strong and robust local content strategy was due to luck. In a comparative study of the upstream petroleum industry and local industrial development, Hildegunn Kyvik Nordas, Eirik Vatne and Per Heum of the Institute for Research in Economics and Business Administration, suggested that “lucky timing” was a major factor in the accomplishments of the government. The oil companies, and the large engineering companies, were more than eager to contribute throughout the 1970s and early 1980s when the build-up of domestic capacity took place, as Norway was one of the few promising petroleum regions where they could operate. This was a point made in another paper, entitled Local Content Development, by Per Heum. “The way Norway has organised the petroleum activities, the political ambitions that have been pursued and the measures taken to implement policy, are in no way significantly different from what other countries with rich endowments of oil and natural gas have done and attempted,” he said in the report. “Nevertheless, Norway is still one of the few exceptions when it comes to really being successful in this respect.”
The country has also passed on its expertise in this area through the Norwegian Oil Development initiative, aimed at helping developing countries to exploit oil and gas as a vital resource for economic and social progress. It cooperates with countries like Angola, Cambodia, Iraq, Madagascar, Mozambique, Nicaragua, Nigeria, South Africa, Sri Lanka, Sudan, Tanzania, Timor Uganda and Vietnam, working on various challenges, including local content and industrial development.
Lessons from Local Content Successes
A cycle of booming oil and gas exploration and production activity ended in 2015. During the decade 2005–2015, pressure on local content intensified in most oil-rich countries. The time has come to examine the economic impact of both regulations and initiatives taken by private international and national oil companies to develop local economies.
Local content is a pervasive component of the oil and gas landscape. Local content regulations (LCRs) have escalated in the last 10 to 15 years among oil-rich developing economies to an extent that it has become a critical topic for the oil and gas sector. Yet, local content is neither new nor exclusive to developing economies.
Norway enforced the development of local suppliers in the early 1970s. With the Norwegian Petroleum Code, Norway insisted on localizing a large part of international operators’ R&D in the country early on.
And recently, Scotland’s prime minister inaugurated Total UK’s new E&P facilities in Aberdeen, stating: “While we realize these are challenging times for the industry and workforce, this investment and expansion from Total is a signal that the company is committed to a long-term future in Scotland.”
The commitment of oil and gas companies to the development of local economies is a global reality. Since the mid-2000s, local content regulation – as opposed to contractual incentives – has become the preferred lever in most oil-rich countries, and the intensity of legal constraints has reached a higher level.
The complexity and the bureaucracy generated by local content laws have led to mixed results. This article aims at capturing what can be learned in terms of local content success from a decade of booming oil and gas activity. Which approaches have created value locally? What have been the main pitfalls to developing local workforce and suppliers.
Leveraging direct, indirect and induced reservoirs of job creation, oil and gas companies generate a small amount of jobs compared to their suppliers.
An illustration of this situation is the Norwegian oil and gas labor force: in 2015, 28,000 people were employed by oil and gas companies, while more than 117,000 were in the oil-field services and manufacturing industries.
In the construction phases of large projects, EPCs and their suppliers generate more than 95 percent of the jobs required. In the production phase, oil and gas operators do not represent more than one-third of the jobs needed to run operations. Given this reality, imposing recruitment quotas on IOCs is necessary, but will not create more than a few thousand local jobs at best.
In addition to these unfavorable comparisons, the lead times to develop capable engineers in oil and are up to 10 years, far longer than for developing competent technicians and engineers in other sectors. Beyond the capacity of operators and oilfield suppliers to create jobs locally, the overall sector is not as labor-intensive as others can be.
Research reveals that when one job is created in the oil and gas industry in such areas as seismic studies, drilling or well services, two to four jobs are generated in indirect activities like mechanical engineering, freight services, cement manufacturing, electrical engineering, civil engineering or construction material and six to eight jobs are created in the induced industries which would include medical, hotel, IT & communication, education, banking, insurance sectors among others.
How to Build Local Capacity through Local Content
In light of these ratios, which represent tremendous opportunities to establish lasting local activity, the objective of any local content policy or private initiative should be to ensure that these ratios have materialized in the local economy.
This is what Norway and the UK did in the 1970s by creating regional clusters like Stavanger and Aberdeen, and putting the emphasis on oilfield services and manufacturing. In two decades, Norway was able to create world-scale suppliers such as Aker and Seadrill, largely oriented towards exports.
Even better, local content in Norway benefited from regulation that incentivized IOCs to place R&D centers in Norwegian clusters. A few years later, strong partnerships were established between Statoil and local suppliers, and suppliers started to develop technologies through private or semi-public collaboration.
The degree of integration between state funding, universities, and Statoil and its suppliers within dedicated clusters has been an instrumental factor of success for the country.
Another example, which is more applicable to developing economies, is Trinidad and Tobago, where an industry of topside manufacturing was developed in the late 1990s. Thanks to an initial push from the government of Trinidad and Tobago, together with BP and other private investors, the topside of the Cannonball project was fabricated locally instead of being only assembled.
The beauty of this industrial initiative was that after Cannonball, topsides for nine major offshore oil and gas capital projects were fabricated by the local company TOFCO for both local and export markets.
In the Kingdom of Saudi Arabia, the petrochemical complex of Jubail followed the same approach. From corporate social responsibility to supply procurement oil and gas companies have changed their approaches to local content. Until recently, majors and independents considered regulations a burden to projects and operations, a hidden tax to be good citizens and have the right to operate.
IOCs have a habit of putting their local development initiatives into “corporate social responsibility” (CSR) departments, for intense public relations and production of impeccable brochures on the company’s commitment to creating a better world.
Local content initiatives in such environments had limited impact and are at best superficial and at worst counterproductive, since they are placing communities under dependence of the company social infrastructures and direct financial support.
These times are changing. Many IOCs are taking local content in a more professional way, and often integrate it within contract & procurement or dedicated “local industrial strategy” entities.
Dealing With Local Content Regulation Paradox
A paradox of local content regulations is that they mostly target or blame oil and gas companies, while these companies cannot meet the high expectations of governments and local suppliers on their own for three reasons.
First, oil and gas companies are too large and rigid to make steps towards small and medium-sized local suppliers. Oil majors and large independents are full of cumbersome internal rules and global processes targeting systematic compliance with financial and legal criteria.
Contracts issued by IOCs include terms and conditions accumulated over decades of projects, specifying drastic conditions that only international suppliers can meet and from which local suppliers are de facto excluded.
For example, a typical request is that the value of a contract should not exceed 20 percent of the total asset value of a supplier. Or, proper financial accounts over the previous five years must be made available at all times by the supplier.
In the same vein, large capital projects and operations require equipment with complex specifications that are difficult to produce in developing economies. For example, oil and gas operators only accept trucks with drastic safety protections, and well cement for drilling must have specific quality – it is the same for cranes and personal protective equipment (PPE).
In many cases, especially when environment and people’s safety are at stake, these companies must respect international norms and cannot accept any tradeoffs.
However, in other cases, such as financial requirements, absence of flexibility is the result of internal policies and therefore could be more flexible.
Second, awareness of technical specifications and financial requirements is not shared early enough for local companies to invest and be ready for the early construction phase.
A lot of materials and equipment could be produced locally with good preparation. Too many times local construction equipment suppliers have invested in equipment that was refused by oil and gas operators or their EPCs because specifications had not been known in advance. These cases have led to bankruptcies, and generated scandals in local press and public frustrations.
A common view in today’s “lower for longer” oil-price environment is that local content is a thing of the past, which is a luxury concept that has no place in the low-margin and low-tax-revenue settings we operate in today.
In reality, local content continues to challenge operators and governments alike. Governments have to envision long-term views for their industrial development. In most cases, efforts are focused on how to maximize the oil rent from large oil and gas projects.
Instead, the right question is where should the government invest oil revenues to develop other lasting and more job-intensive industries? Furthermore, oil and gas companies, such as IOCs and NOCs, should share the planning of their projects and operations far enough in advance to allow local investors to prepare the ground.
A shift in mind-set is required for IOCs, as oil giants have seldom shown capacity to introduce flexibility in their procurement policies. National oil companies represent the best lever to develop local industries, provided that they do not bear alone the burden of conceiving the industrial development vision that their government should articulate.
Arthur D. Little has developed unique capabilities in assessing the socio-economic impact of large industrial capital projects and operations in upstream and downstream oil and gas, in Sub-Saharan Africa and the Middle-East, South-America, and Europe.
This approach has allowed large industrial players to prepare the ground for local content development initiatives, not only to respect regulations, but more importantly, to anchor and distribute project benefits in countries of operations in order to ensure long-lasting presence of IOCs and increased local capabilities at competitive costs for NOCs.
Role of NOCs in Local Content Development
All the examples of successful local content development results reveal the presence of a large national oil company (NOC). Brazil, Azerbaijan, Norway, Ghana, etc., each have a domestic champion.
NOCs have been leveraged to develop local suppliers and train generations of local engineers that have benefited the rest of the industry. NOCs’ agendas are to cover both operational and national development objectives. NOCs can be the execution arm of local content regulation, and also guide lawmakers to issue pragmatic regulations.
NOCs are here to last; they have the luxury of time to grow the local economy. Together with their governments, they control the planning of exploration campaigns, drilling operations, new developments and maintenance programs.
They are deeply rooted in the economic ecosystem, whose growth is as important for them as production objectives. NOCs can do much more than IOCs can in playing with preferred conditions. IOCs have rigid global approaches to contracts, procurement and technical specifications, while NOCs can be more flexible.
For example, NOCs give an advantage to local companies through favorable conditions to help them compete on an even playing field. Illustrations of such favoritism can be ring-fencing certain product types or services from international competition, support borrowing from banks, guaranteeing volumes of orders to local manufacturers, re-scoping contracts to allow local producers to qualify, or staging the quality qualification criteria for local suppliers over time.
This approach is required to allow local suppliers to have a chance to get contracts and grow, especially where limited industrial and financial capacities make local suppliers unqualifiable as per the international oil company.
In conclusion, Norwegian tax regime was a vital facilitating concept in the 70s. It saw the government take up to 85% of profit margins. Local content in Norway is an example of how local businesses can contribute to increased taxes.
But due to the drop of oil prices in the 80s, the tax regime changed by some fraction of 78%. According to a Deloitte report, the ordinary tax amounts to 27% and special tax 51%. Today Norway oil is still heavily taxed in order for the state to acquire as much profits as possible.
Norway passed the Mills and Bastable test. The former requires that a protected industry nevertheless should eventually survive international competition without the protectionism,
The latter which is a more stringent one and calls for present value of future benefits arising from policy to compensate the present cost of protectionism.
In terms of energy transition, the government of Norway is currently working on how to face out oil and gas industry.
Norwegian oil and gas industry can produce for another 50 years but due to the climate challenge, the discussions going on in Norway is that of how to reduce the oil and gas dependency in the economy and start to move forward on renewable energy.
Norway generates 98% of electricity from Hydropower and from that perspective, the country is trying to bring green electricity to the platform in the North Sea instead of using gas.
Norwegian Energy Partners (NORWEP) is a non- profit, partnership organisation founded jointly by the Norwegian Energy Industry and the Government. NORWEP’s mission is to support the partners winning contracts in international markets by promoting the capabilities of the Norwegian energy industry to clients abroad in six technology areas such as; upstream oil and gas, midstream oil and gas, offshore wind, solar energy, hydropower and energy systems.