Maximizing Benefits From Oil and Gas Production in Developing Countries through Value Addition - Term Paper Example

Maximising Benefits From Oil and Gas Production in Developing Countries through Local Content Participation and Value Addition Introduction Requirements for local content and addition of value are gradually becoming a norm in the regulatory frameworks of many oil producing nations (Baker 2007). The aims and objectives of these frameworks are to create local employment, promote development of enterprises and or projects, and to speed the transfer of technological developments and skills. In essence, Baker (2007) believes that local content participation has become a strategic issue for many developing oil and gas producing nations posing as both an opportunity and a challenge. Throughout the document, local content will be used to refer to the added value to a host country and/or region. This is achieved mainly through: i. Development of workforce through training and employment of locals. ii. Investment in the development of suppliers via procurement and development of local supplies and services. Local content participation can be measured based on a given project, an associate of the project or based on the country as a whole. Local content can be defined as the value added to a host nation via the activities generated by gas and oil production (Wise and Shtylla 2007). Many analysts are of the view that the effort and time spent developing local content participation strategies can be of commercial and social benefits which can generate enormous economic growth as well as have a huge share in sustainable development (Petro 2010). Oil and gas companies are different and hence it is almost impossible to achieve a successful local content participation program. To achieve a successful local content participation program, a number of key factors are to be involved. They include: i. Analysing the context of the local content ii. Early considerations of when and how to intervene during the project life cycle iii. Having long-term perspectives iv. Managing transparency and flow of information effectively. A host of nations have made considerable progress in the implementation and advancement of local content participation but the issue still remains of concern. As a result, more efforts and time are necessary to realise an improvement in the local content participation practices. It is estimated that 20 years from now, 90% of hydrocarbon production will be a product of developing nations (Baker 2007). This list of developing nations that extract gas and oil have introduced the local content participation requirements into the regulatory frameworks that govern the developments of natural resources. Due to the increasing importance for the local content participation, Statoil (2008) argues that most companies view local content concept as a strategic issue with direct impacts on vital business operations, for instance, procurement and business development. In response, many developing countries are coming up with innovative tools and strategies that are directed towards meeting the requirements set by local content policies as well as contribute to sustainable development. Similarly, these efforts are believed to have the ability to aid companies enhance and protect their commercial interests (Statoil 2009). Development of a Local Content Strategy In order for a company or nation to develop a successful local content program, there is need for a clear understanding of the benefits the business will reap, having a well defined strategic plan as well as understanding the local context so as to do away with narrow solutions. To achieve local content, it is crucial that practitioners in the field of local content participation take close consideration to certain key drivers. They include business expectations, regulatory requirements and stakeholder (including internal stakeholders) expectations (World Bank 2011). Advantages of Local Content Strategic Plans i. Reduced costs of operation due to reduced employment of expatriates ii. Smooth flow of goods and services’ supplies iii. A regular renewal of operations’ license iv. Better commitment to stakeholders. Many organisations or rather oil and gas producing nations have these advantages in mind hence, Wilson and Kuszewski (2011) assert that there total focus should be on enhancing the capabilities of the local employees. To achieve this, developing nations should step up employment of locals, training the local workforce for better skills and investment in the domestic supply base via procurement and development. Drivers of a Successful Strategy in Oil and Gas Producing Companies Understanding the Local Context Having complete knowledge of the neighbourhood helps a company understand the benefits associated with local content in terms of supply-side capabilities, requirements of the demand side as well as the barriers that limit the participation of local workers and companies (World Bank 2011). Research has it that targets beyond the prevailing capacity of local production can lead to increased costs, reduced state revenue and less competition. However, a thorough analysis of the local context can result in the development of a realistic local content strategic plan. Regulatory Requirements Oil and gas companies have different sets of regulatory environments. Some regulations may be structured to impose limitations on the introduction, growth and development of new entities. All these limitations can hugely contribute the high costs of doing business. Before implementation of a strategy, a feasibility study has to be carried out. This process is influenced by the various regulatory environments for different companies hence, it is essential to understand the local context in the process of developing an effective strategy. Business/Organisational Expectations A local content has a host of advantages or rather expectations from the organisations implementing the strategy. They include: i. Contribution to the stability of the business via meeting of legislative prerequisites. ii. Meeting the expectations of the mother country regarding local social and economic benefits of the oil and gas production activities. iii. Maximisation of the opportunities for achieving higher reliability levels as well as quality via proximity of local suppliers. iv. Increased competitive differentiation in bidding negotiations among government authorities and host nations. v. Delivery of objectives of sustainable and corporate responsibility as well as maximise the impacts community investment resources has. vi. Improved access to and development of new employee resources, remodel the ageing population issue in the oil and gas extraction industry as well as shrinking the available pool of expatriate and technically able skilled resources. Case Study: Allocation of Licenses in Brazil The Agência Nacional do Petróleo, Gás Natural e Biocombustíveis (ANP) of Brazil has made the performance of a company against other local companies or criteria a major aspect in the bidding process (ANP 2009). The objective of this decision and/or strategy is to increase the competitive participation of local industries at a national level, promote the growth and development of technology as well as enhance the income generation and employment in the oil and gas industry. As a result, ANP (2009) reveals that recent biddings in Brazil have seen local content account for between 20% and 40% of the total final score in the evaluation of bids by ANP. Stakeholder Expectations Internal Engagement. In order to implement a successful strategy, broad cross-departmental work and coordination is vital (Nordas et al. 2003). Oil and gas companies face an intense and complicated activity in trying to change business processes to fit the required local content participation regulations and or requirements. Drawing up a local content strategy requires one to start by the identification of key internal company stakeholders and develop an understanding of their business objectives and plans. External Engagement. They play a crucial role in the process of local content participation by bringing valued knowledge, commitment and resources. Numerous organisations have interest in local content and as a result need assessment so as to determine whether they are useful and influential in the market (Nordas et al. 2003). A clear understanding of the local context and the drivers enables practitioners to communicate accordingly so as to help set expectations as well as explain the differences between public and corporate responsibility. Benefits of External Engagement i. Knowledge, skills and sharing of risk: helping in risk management often leads to group solutions to sophisticated problems that are associated with development of local content programs. ii. Resources: working in coordination with others can result in increased resources, extensive economies of scale and capacity as well. iii. Ownership: engaging with external stakeholders enhances a sense of responsibility or rather ownership over assets and processes. iv. Legitimacy: external stakeholder engagement gives the activities of a company a greater positive recognition. Albeit these benefits, Ruffing (2006) believes that there are a number of challenges involved with working with external stakeholders – among them the commitment and time required for the establishment of the partnerships. For a partnership to be successful, the organisations in question have to identify the common objectives and align them to the specific organisational priorities. Development of Capacity Employee Development One of the established objectives of oil and gas producing companies is employment of local staff (BP 2005). As a result, a number of companies have developed comprehensive competency development systems whose role is to ensure that all local employees can perform safely and effectively in hazardous and rather sophisticated business environments. Approaches Employment Policies – when a local company sets a transparency policy on local employment, other neighbouring communities understand that the company is committed to the available workforce and requires little or no external employees. In cases where recruitment is being used to promote the participation of certain groups – for instance women, workers from specific ethnic groups and/or geographical regions, and indigenous people - suitable policies that are clear are essential (Statoil 2008). Training and Development of Skills – an effective local content strategy usually encompasses training and development of skills so as to help local people gain the necessary competence and or minimum standards required by the local companies (Statoil 2009). Aspects of this training include; basic education, language training in cases where the language used in operations is hardly spoken by the company’s potential employees, practical experiences as well as provision of scholarships to attract young employees into the oil and gas industry. Training and Education Institutions – Many developing nations are characterised by poor education systems; deficiencies in local training and education systems pose a potential barrier and/or threat to local content participation (Heum, Quale, Karlsen, Kragha and Osahon 2003). Many oil and gas companies are investing in local training and education institutions so as to reduce the requirement to provide internal basic staff training. As an added advantage, Heum et al. (2003) affirms that this program supports an extensive development of skills locally and promotes the long term reputation of the company as a first-class corporate citizen. Case Study: Developing the Workforce of Yemen LNG (TOTAL) The Yemen LNG Total company aims at Yemenization of the company’s staff by 2015 (Warner, Alexander, Matthews and Lynch 2007). To realise this, IPIECA (2010) reports that Total developed an integrated strategy that saw the company recruit, train, motivate and retain outstanding Yemeni personnel. The country, Yemen is a developing country and thus is characterised by lack of competent local personnel suitable to work for LNG. Consequently, the company set up centers for training to offer intensive and high-profile training programs for engineers, technical specialists and supervisors. Implementation and Sustenance Infrastructure (Power, Transport Facilities and Water) These factors are crucial to the success of local content participation plans (EAP 2007). Having reliable supply of power can provide local business with direct opportunities, and can result in production of more reliable products and services due to the reduced burden business organisations face with costs of operations that result when back-up power plans are needed (WBCSD and IFC 2008). In developing countries, oil and gas companies should personally provide some critical infrastructure or come into an agreement with the host nation to share the costs of the relevant infrastructure. Furthermore, local oil and gas companies should mull over investing in crucial local infrastructure when in it is part of their commercial and/or strategic concern. According to BP (2005), oil and gas producing nations and or companies can promote this by: i. Allowance of some provision in the scope of the project to catalyze or support an investment in some local infrastructure in case there is a business interest in such an investment. ii. Provision of information detailing the future potential contracts that would validate these types of investments. iii. Facilitation of contractor and supplier partnerships so that the investment burden and risks can be evenly distributed. It is essential that oil and gas companies and contractor staffs interact in person with the local people thus increasing the formal communications within the region. As a result, every individual, company and country involved in the process benefit from having insights that are shared with greater empathy and increasing respect. References ANP (2009) Agência Nacional do Petróleo Gás Natural e Biocombustível, viewed 7 Dec 2012 . Baker III Institute (2007) The changing role of national oil companies in international energy markets, James A. Baker III Institute for Public Policy, Rice University. BP (2005) BP in Trinidad and Tobago: Sustainability Report 2005, viewed 7 Dec 2012 . EAP (2007) Maximising the contributions of local enterprises to the supply chain of oil, gas & mining projects in low income countries, Engineers Against Poverty (EAP) Briefing Note, viewed 7 Dec 2012 . Heum, P., Quale, C., Karlsen, J., Kragha, M. & Osahon, G. (2003) Enhancement of local content in the upstream oil and gas industry in Nigeria: a comprehensive and viable policy approach, Institute for Research in Economics and Business Administration (SNF) SNF Report No. 25/03. INTSOK, Bergen. IPIECA (2005) Oil and gas industry guidance on voluntary sustainability reporting: using environmental, health & safety, social and economic performance indicators. London. IPIECA (2010) Oil and gas industry guidance on voluntary sustainability reporting, London. ITC (2000) Improving SME access to public procurement: the experience of selected countries, International Trade Centre, Geneva. Nordas, H. et al. (2003) The upstream petroleum industry and local industrial development: a comparative study. SNF Report No. 2003:8, Institute for Research in Economics and Business Administration, Bergen. Petro Arctic (2010) Petro Arctic—Network of suppliers for petroleum projects in the north, viewed 7 Dec 2012 . Ruffing, L. (2006) Deepening development through business linkages, United Nations Conference on Trade and Development, New York and Geneva. Statoil (2008) Annual Report, viewed 7 Dec 2012 . Statoil (2009) Annual and Sustainability Report 2008, viewed 7 Dec 2012 . Warner, M., Alexander, K., Matthews, P. & Lynch, M. (2007) Learning from AMEC’s oil and gas asset support operations in the Asia Pacific region; with case study of the Bayu-Undan gas recycle project, Timor-Leste. ODI/EAP. WBCSD & IFC, (2008) Measuring impact framework methodology: understanding the business contribution to society, World Business Council for Sustainable Development (WBCSD) and International Finance Corporation (IFC), Geneva. Wilson, E. & Kuszewski, J. (2011) Shared value, shared responsibility: a new approach to managing contracting chains in the oil and gas sector, IIED, London. Wise, H. & Shtylla, S. (2007) The role of the extractive sector in expanding economic opportunity, corporate social responsibility, Initiative Report No. 18, the Kennedy School of Government, Harvard University, Cambridge, MA. World Bank (2011) Doing business: measuring business regulations, viewed 7 Dec 2012 . Read More