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Figure: Nigerian trainee welder working on a pressure vessel.

 

 

Nigerian Content Development (NCD Act):

        The Cost Impact to the Oil and Gas Industry and Benefits to the Nigerian Economy.

 

The Nigerian Content Development Act can be condensed as follows: “the quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilization of Nigerian human, material resources and services in the Nigerian oil and gas industry”.

 

The primary intent of the NCD Act is to:

 

- Maximize the utilization of Nigerian goods and services.

- Foster training and increase employment of Nigerians.

 

Two important clauses of the Act – which will have a cost (and schedule) impact of any project – are:

 

- 10% margin cost advantage in tenders submitted allowed for indigenous companies versus non- indigenous.

- Certain minimum “Nigerian content” mandated for a project’s labour, materials and equipment components.

 

Prior to the present implementation and enforcement of the Act, Nigerian companies in the Oil and Gas sector were competing head to head with other companies on an international level. For the Oil and Gas fabricators stiff completion was faced in particular from Asia (mainly Korea) and the Middle East (Dubai fabrication yards). This was not sustainable long term as Nigerian fabrication yards are most disadvantaged when playing on a level field: a mighty Korean yard flush with capital, equipment and facilities and highly skilled personnel is very capable of within a short time to substantially dominate the market; on the other hand a typical Nigerian yard faces huge capital, equipment and facilities shortfalls, and the local workforce, while (a considerable portion) often times is very willing and motivated, suffers from skills shortages.

 

Let’s take a sample case scenario – with some subjective though nonetheless quite representative narrative – which illustrates the day to day realities of the Nigerian fabricators versus an international fabricator: A Korean pipe welder will likely live and work with his family in a company provided accommodation with easy access to the yard. He will arrive at the fabrication yard and everything will be ready for him to start working. He will have a good working environment and access to the latest equipment and facilities and will have received excellent training.

 

Now lets look at the Nigerian pipe welder. It’s likely he will live in the suburbs. Maybe not very far in terms of distance, but the roads are in a dismal state of disrepair, so it takes hours to get anywhere. If it’s rainy season (and that’s half the year) when it rains the roads are flooded and traffic is an exhausting and nerve-racking affair that will tax even the most patient personality. It takes the Nigerian welder 3 hours to get to work. And possibly 2 ½ hours later to get back from work. He might easily spend over 5 hours commuting a day – or more! Also it would not be unusual for the welder, especially at the end of the month when he runs out of money to have no money for lunch, to work the entire day on an empty stomach. His work environment is mediocre at best. The equipment suffers from regular breakdowns. Power outages are common. His skills most likely are in need of much improvement. A 36” pipe is TIG welded manually. Management and supervision are poor (due to a combination of local unqualified staff in supervisory/ management positions due to factors not related to merit – for example family ties to a local influential person or expatriate staff with only personal short term interest in the project at hand). Furthermore the company is cash strapped and “running on empty” for the last 3 months (and is eagerly waiting to sign a very large new project that’s been informally been awarded to the company - but this project has been delayed by more than 9 months). So the subject case welder has received only half his salary during this time.

 

The welder unsurprisingly given all the above factors will clumsily perform a poor unacceptable weld. Radiography on the weld is performed and defects are found which means the weld has to be scraped. If there is a successive weld defect again then the pipe being welded will have to be discarded. All these results in additional delays and re-work as well tying up of resources and consequently additional indirect costs as well.

 

The list of obstacles to be surpassed by the Nigerian fabricator actually can go on almost without end. Another example is the difficult and very expensive access to financing, which in turn affects in a very real and substantial way the cost of equipment and therefore the cost of the project. Let’s suppose that the Nigerian fabricator needs to purchase a large 250 tonne crawler crane to supplement their existing equipment in support of a recently awarded project; the high cost of financing will necessarily be reflected in the cost of the project. The company could alternatively attempt to hire some of the equipment to circumvent the lack of financing. The problem is that equipment rental companies are affected likewise, and to further aggravate the problem many businesses in Nigeria operate with expectation of abnormally and extraordinarily high returns on investment (though it must also be admitted that they operate in a difficult and risky environment where creditors frequently default on payments or if they do pay they do so many months afterwards).

 

Given all these factors can Nigerian fabricators compete head to head with other overseas fabricators? Not without help, in this case the Nigerian Content Act. Prior to its implementation fabricators struggled and accumulated debts and leveraged their finances based due to optimistic forecasts and lack of options.

 

 

 

 

 

 

 

 

 

Figure: Nigerian trainee sanding weld on pressure vessel.

Nigerian Content Development NCD

The reality is that the cost per tonne of fabricated structures in Nigeria is much, much higher compared to Korea, Dubai, the UK or USA.

 

The only comparative advantage that Nigeria offers is lower wages but this advantage becomes inconsequential. The large amount of expatriate management and supervision needed (principally due to the acute local labor shortage with the necessary specialized skills and experience) is very expensive therefore greatly offsets this overall advantage of cheaper labor. Furthermore due to the shortage of qualified and experienced local labor rates for these are not particularly relatively cheap at all. For example a plain specialist with 5 years experience could have a salary (in 2011) of NGN 150k/ month ($12,000/ year), a senior project controls specialist with 10 years of relevant work experience could easily command NGN 250k/ month (about $1,600/ month or $20,000/ year). And the salary for a good Nigerian mid-level project manager could be up to NGN 500k/ month (or $40,000/ year). True, that for basic entry level and low skill positions salaries can be as low as NGN 25,000 to NGN 100,000 ($150 to $650 per month), but the value and scope of work done by these lower skilled labor segment is limited.

 

Also labor is only one cost element of the project. The bulk of materials (easily up to 90%) like steel and consumables are imported, and the cost of these is the international market price plus the “Nigerian factor” – or call it what you will. The same goes for equipment.

 

Therefore, as discussed above any comparative advantage is small and quickly offset by the myriad of other more consequential factors.

 

Which leads us again to the Nigerian Content Development Act (NCD). Put bluntly it’s the lifeline of many of the Nigerian Oil and Gas business, in particular fabricators, without which they would simply succumb to open international competition.

 

However, there’s a downside to the NCD: it effectively results in higher and very substantial project costs. Is this additional cost worth it? In my subjective opinion: yes. Oil and gas produced in Nigerian territory is consumed internally and exported profitably (though at a reduced profit of course due to a higher production cost). However the indirect benefits are many: the Nigerian labor is employed (which would otherwise would likely have few other opportunities), gains experience and expertise, and money is more widely and effectively cascaded down throughout the economy. For those that support and influence the NCD as a law and in it’s day to day workings and enforcement, the message would be to keep things in perspective and balanced: what makes sense and what doesn’t, what creates meaningful and sustainable employment what creates unnecessary cost without benefit.

 

 *Note: I understand that this article is rather subjective and as it stands lacks empirical data to support the above narrative. I will endeavor to enhance the article with hard data in the near future. Meanwhile, if you have helpful comments please feel free to send me an email (see the contacts link in the navigation bar).

 

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