Effective Oil and Gas Localisation

A response is increased nationalisation and to award more work to local firms. When done badly, with flat local quotas and unfocussed subsidies, the results are not sustainable and could even be damaging.

The population can develop a sense of entitlement, and also frustration if excluded, the economy is over reliant on oil and gas and never becomes competitive. Effective localisation interventions should be designed within the context of the sector’s maturity and the level at which the nation and economy is able to support rapid change.

In the oil and gas resource development stage, the government focus is on cash generation and tends to sell-off licenses, bringing in international firms to find and exploit reserves.

This adds cash, but only in the short-term. Local vendors are often subsidised, inefficient and not in core high-competence areas. The domestic economy distorts and is sensitive to oil and gas price fluctuations, local communities can become disenfranchised, unemployment remains and there can be provincial inequalities and discontent.

Once resources are developed and cash secured the focus is nationalization. NOCs respond by localising, developing domestic capabilities, awarding work to local suppliers, supporting the secondary industrial sectors and generating skilled employment opportunities for nationals.
Challenges include unrealistic targets, ineffective penalties and incentives, misaligned strategies and initiatives, a lack of national and corporate governance and coordination, scarcity in qualified and capable people and firms. Rather than moving forwards, badly managed localisation could set an economy on a backward path.

The challenge beyond localisation, is to support economic transformation. Moving energy and power needs away from a heavy reliance on oil and gas, diversifying the economy, building an internationally competitive work-force and local suppliers. Industries diversify, manufacturing and exporting, winning work globally, supported by a domestic ecosystem of financing, entrepreneurs and a small to medium sized companies.

However to do this the oil and gas sector needs support. The World Economic Forum identified three stages in which the country must support change. Putting in place basic requirements – fair institutions, infrastructure, macro-economics, health and education.

Enhance efficiency – higher education and training, market efficiency for goods and labor, financial markets, technological readiness and a decent market size. And then drive innovation and increase business sophistication.

Whilst many NOCs and their suppliers are struggling to comply with unfocussed unrealistic targets, they cannot stand still while macro-level national and industry level matters are addressed.

They need to take stock of their nationalisation and localisation efforts, within the context of sector and national maturity. This would include a thorough study of the industry value chain and industrial capability.

For example, EY recently conducted a study of the UK’s upstream oil and gas supply chain. Out of these assessments a fact-based, realistic strategy will develop that encompasses local content policy, workforce development, supplier development and funding of new start-ups.

This would include improved policy, coordination targets and efforts across industry, within primary business units and key vendors. Making sure that subsurface and surface plans, front-end- engineering-designs and procurement policy enable suppliers to invest in effective long-term localisation.

Addressing both capital projects and ongoing operations and maintenance, targeting those areas that have the greatest impact. ExxonMobil uses a Value Creation Matrix that compares services and goods with their impact on GDP value add, employment and effort/investment over time.

Using transparent systems and data that classifies and categorizes demand forecasts and matches supply for staff, services and goods, and identifies medium and long-term shortfalls for which workforce, supplier and SME plans must be developed.

Unless a considered thorough assessment is undertaken of localisation, there is a possibility, that although well intentioned, interventions are either not making the most of their investment or worse still, delaying and damaging long-term prosperity.