Local content and procurement requirements in oil and gas contracts

Abstract

Determined to maximize the gains of foreign direct investment (FDI), even more so in a low oil price world, many resource-rich countries have increasingly designed laws and policies that require foreign operators to engage indigenous companies in the procurement of goods and services, offer preferential employment for nationals; and utilize local raw materials. Other competing forces at play in establishing those practices include the investors’ desire to ensure freedom to procure on the basis of cost, availability and quality, and the mutual desire for a transparent and efficient process. While local content requirements may specify the portion of total expenditures that must be comprised of locally sourced goods and services, procurement procedures are frequently not well established. This can (and has) led to a misalignment between governments and investors on the requirements of those procedures. This misalignment can manifest itself in material ways, resulting in significant risk to the investor. This lack of clarity and resulting misalignment in understanding and expectations can lead to distraction in investor- government communications, disruption in petroleum operations, and potentially costly formal dispute resolution with corrosive effects on the attractiveness of the investment and the host government to the international investment communities. The objective of this research is to analyze how local content and procurement requirements have evolved in the MENA region, based on a survey of 20 countries- Qatar, Algeria, Bahrain, Djibouti, Egypt, Iran, Iraq, Israel, Jordan, Kuwait, Lebanon, Libya, Malta, Morocco, Oman, Saudi Arabia, Syria, Tunisia, United Arab Emirates, and Yemen-and a review of the literature and evidence on local content and procurement provisions in petroleum agreements. The research will provide comparative analysis and regional survey of local content and procurement requirements in MENA countries, in order to determine prevailing market preferences, trends, best practices, risks and dispute mitigation strategies.