Impact of the National Content Act on Deep Water Offshore Development in Nigeria

Abstract

Abstract The key objectives of National Content Act (NCA) of 2010 in Nigeria aim to enhance operational efficiency and drive costs down in the medium to long term by encouraging indigenous participation and ownership of assets in the oil and gas industry. Its implementation in the industry is to facilitate the industrialization process by manufacturing and fabricating components and other requirements needed in the industry locally. The Act is expected to stimulate investments and create opportunities for Nigerians to participate in the oil and gas industry in Nigeria. The passage of the NCA in 2010 and the subsequent formation of the Nigerian Content Development and Monitoring Board (NCDMB) have facilitated the emergence of indigenous companies operating in both the upstream and downstream sectors of the petroleum industry. Certainly, some achievements have been made in terms of policy guidelines, usage of made-in-Nigeria pipelines, increased in-country fabrication tonnage, employment and training strategy to mention a few; yet about 90% of the industry annual budget is still spent abroad. This signifies that much more could still be achieved than accomplished thus far. This paper investigates the implications of foreign expenditure as proposed in the Petroleum Industry Bill 2012 (PIB 2012) in Nigeria. The paper also evaluates the likely impact of national content contribution to the national economy. Further, the paper examines the effects of the negotiable limit of deductible foreign expenditure on project performance using Discounted Net Cash Flow (DNCF) model framework. It is observed that as the expenditure domiciled locally increases, the contractor Internal Rate of Return (IRR) increases with a corresponding higher value added to the investment than otherwise, assuming the homogeneity of a dollar spent abroad and locally. The marginal increment to the contractor in terms of IRR or Net Present Value (NPV) is higher in comparison to the marginal effect to the mineral owner in terms of Discounted Government Take (DGT), ceteris paribus. It is, however, recommended that a range for the negotiable limit be specified to avoid an open-ended discourse. Investors are seemingly better off if they reduce foreign expenditures and purposefully engage and develop national capacity as evident.