Ask the country manager of any international oil company operating in the developing world about his day-to-day concerns, and the issue of ‘local content’ will almost certainly rank near the top. The term refers to the obligation – moral, contractual or legislative – to employ and train local staff and contractors, and to procure local goods and services. And some economists and governments believe it may point towards a cure for what has come to be termed ‘the oil curse’.

At the heart of local content is the idea that whereas oil, gas or mining companies have traditionally imported the equipment, materials and skills they require, by investing more deeply into the local economy and accepting some short-term sacrifices, they can make mid- to long-term gains.

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The idea was developed by the Norwegian government after the discovery of North Sea oil. In return for an opportunity to exploit its resources, the Norwegians argued that foreign companies should be obliged to impart their skills and technology. The company that is now StatoilHydro is a testament to the success of that strategy. Other early adopters include the UK and Malaysia, where, in Petronas, the government created one of the most successful and internationally aggressive national oil companies to emerge out of south-east Asia – and avoided many of the pitfalls encountered by other nations developing their resources.

Production sharing

Typically, local content requirements exist in legislation or as terms in production-sharing agreements. Trinidad & Tobago has introduced an over-reaching policy framework – not a legislative document, but an outline of aims, objectives and responsibilities for all participants in the country’s oil development, including government. In many countries there are few, or even no, requirements. In others they constitute little more than vague exhortations to give equal weight to the bids of local companies where it is competitive to do so.

The trend is to raise the bar. In Nigeria, often cited as a textbook example of how not to develop an oil economy, local content requirements are highly prescriptive – and the country is on the cusp of introducing a new directive that would go further. The National Content Development Bill, for example, includes specific requirements for training, employment of engineers and procurement from local suppliers relating to each component of the oil industry.

Brazil, Iran, Kazakhstan and Venezuela, among others, also have complex local content requirements by which they hope to increase indigenous participation in their natural resource industries.

It has yet to be conclusively proved that local content can in itself make a significant dent on the oil curse symptoms of social breakdown, wealth inequality, corruption and the pricing out of traditional economic activities through currency inflation. Certainly some of the grander claims are hard to prove. Norway never seriously confronted the danger of becoming a rentier state – and in Malaysia, local content was only ever one part of a controversial, but arguably successful, vision of national development. Nonetheless, local content is almost certainly an important part of unlinking resource development from the usual accompanying ills.

Up the value chain

For host countries, the logic runs that by insisting on greater and more intricate engagements between oil companies and local businesses and communities, the economy will move up the value chain, developing industrial capacities, which will prove to be of long-term benefit to the nation.

More complexity

For the oil companies themselves, the issue is more complicated. Almost invariably, where the use of certain supply chain and logistical procedures are entrenched in company procedure, change can be daunting and consume substantial quantities of both human and financial resources, which may simply be unavailable – at least until production has reached significant volumes.

In addition, oil companies often complain that they are faced with having to meet employment quotas which are literally impossible to meet – either because the manpower is unavailable or lacks requisite experience, or because local companies fail to meet requisite engineering or other standards, for example, corporate governance, required by the project.

On the positive side, oil and gas projects typically represent an in-country presence which typically endures for two or more decades, over which time the benefits may transpire more readily. An initial premium invested into capacity building at the outset of a project may pay off in the form of efficiencies further down the line. And building commercial relations with a range of interests is excellent hedging, for example, in the event of sudden political change, and can prove that a company’s interest in a country has greater depth and breadth than a typical rent-seeking type of relationship.

For obvious reasons, it is the big players that are responsible for the flagship projects and grand gestures. When, in November 2007, BP announced a $900m exploration and production contract in Libya, some $100m of the budget, it said, had been earmarked for capacity building.

Shell, Statoil, Chevron and many other oil companies also claim to put local content-related initiatives at the heart of their activities. This is not to say that the independent companies do not show initiative – Canadian oil company Nexen, for example, is behind a highly successful scholarship scheme in Yemen (where it is a major investor) that has earned the company a very good reputation within the country and contributes to skills development in what is one of the poorest countries in the Arab world.

Regulatory matters

Nonetheless, the issue can come between companies and governments. Governments typically say that companies routinely flout the letter and/or the spirit of local content regulations. Companies riposte with the charge that targets are vastly overambitious, or that local content becomes a vehicle for the advancement of individuals and favoured cronies, and like many private/public relationships, success is all too often held back by mutual distrust and misunderstanding.

The cure – such as it exists – is to open up channels of communication and engagement, and to understand the expectations of the other side. The pay-off, both in human and financial terms, is potentially very significant.