SNF Report No. 08/03 The upstream petroleum industry and local industrial development A comparative study by Hildegunn Kyvik Nordås Eirik Vatne Per Heum SNF-project No. 4245 Private Sector Developemt in the Nigerian Upstream Industry The project is financed by NORAD and the Ministry of Petroleum INSTITUTE FOR RESEARCH IN ECONOMICS AND BUSINESS ADMINISTRATION BERGEN, MAY 2003 © Dette eksemplar er fremstilt etter avtale med KOPINOR, Stenergate 1, 0050 Oslo. Ytterligere eksemplarfremstilling uten avtale og i strid med åndsverkloven er straffbart og kan medføre erstatningsansvar. ISBN 82-491-0263-0 ISSN 0803-4036 PREFACE This report is part of a study commissioned by the Norwegian Agency for Development Cooperation (Norad) and the Norwegian Ministry for Petroleum and Energy (NPE) under the custody of four oil-industrial related Nigerian government organizations: The Office of the Advisor to the President on Petroleum and Energy, the Department of Petroleum Resources (DPR), the Nigerian National Petroleum Corporation (NNPC) with its subsidiary, National Petroleum Investment Services (NAPIMS). INTSOK was engaged to organize the study, and appointed the Institute for Research in Economics and Business Administration (SNF) to be in charge of the research. This comparative study will together with a study on Nigerian industry by Kragha & Associates, Lagos, and a technology assessment of upstream oil and gas in Nigeria, undertaken by Rogaland Research, form the basis for SNF’s preparation of the final report from the project. The main work on this comparative study was conducted during the period August 2002-February 2003. The authors appreciate comments to drafts of the report at different stages. The discussions in a reference group have been particularly useful. This reference group was made up of the following members: Egbert Imomoh, Advisor to Shell International H. Sola Oyinlola, MD Schlumberger Nigeria Odd Godal, Statoil Kjell Miskov, Aker Kværner Tore Sandvold, Sandvold Energy Furthermore, we are extremely grateful to comments from Per Hagen, INTSOK. The authors are responsible for designing the study, and the conclusions that are drawn. Neither the reference group nor the custodians, the organizer of the study, or those who have commissioned the work are responsible for the content of this report. Bergen, May 2003 CONTENTS 1 Introduction .................................................................... 1 2 Natural resources and development............................... 3 3 The case studies ............................................................. 4 3.1 Brazil................................................................................. 12 3.1.1 Production of oil and gas........................................ 12 3.1.2 Reserves.................................................................. 12 3.1.3 Technology ............................................................. 13 3.1.4 Role of national petroleum company ..................... 14 3.1.5 Local content .......................................................... 19 3.1.6 Outline of industry structure .................................. 21 3.1.7 Present regulatory regime....................................... 21 3.1.7.1 Licensing .................................................... 22 3.1.8 Success criteria and caveats ................................... 23 3.2 Indonesia........................................................................... 23 3.2.1 Production of oil and gas........................................ 23 3.2.2 Reserves.................................................................. 24 3.2.3 Technology ............................................................. 24 3.2.4 Role of national petroleum company ..................... 25 3.2.5 Local content .......................................................... 28 3.2.6 Outline of industry structure .................................. 29 3.2.7 Regulatory regime.................................................. 30 3.2.7.1 Licensing .................................................... 30 3.2.8 Success criteria and caveats ................................... 32 3.3 Malaysia............................................................................ 33 3.3.1 Production and reserves.......................................... 33 3.3.2 Technology ............................................................. 34 3.3.3 Outline of industry structure .................................. 34 3.3.4 Role of national oil company ................................. 35 3.3.5 Regulatory regime .................................................. 38 3.3.6 Local content .......................................................... 39 3.3.7 Contribution to the Malaysian economy................ 40 3.3.8 Success factors and pitfalls .................................... 41 3.4 Mexico .............................................................................. 42 3.4.1 Production and reserves.......................................... 42 3.4.2 Technology............................................................. 43 3.4.3 Outline of industry structure .................................. 43 3.4.4 Role of national oil company ................................. 44 3.4.5 Reguatory regime ................................................... 46 3.4.6 Local content .......................................................... 47 3.4.7 Contribution to the Mexican economy................... 48 3.4.8 Success factors and pitfalls .................................... 49 3.5 Nigeria .............................................................................. 49 3.5.1 Economic development since independence.......... 49 3.5.2 Production and reserves ......................................... 52 3.5.3 Technology............................................................. 54 3.5.4 Outline of industry structure .................................. 54 3.5.5 Role of the national oil company ........................... 55 3.5.6 Regulatory regime .................................................. 56 3.5.7 Local content .......................................................... 59 3.5.8 Contribution to the Nigerian economy................... 61 3.5.9 Success factors and pitfalls .................................... 62 3.6 Norway.............................................................................. 63 3.6.1 Production and reserves.......................................... 63 3.6.2 Major players.......................................................... 63 3.6.3 Regulatory regime .................................................. 64 3.6.3.1 The licensing procedure ............................. 64 3.6.3.2 Local content requirements........................ 65 3.6.3.3 Taxation...................................................... 66 3.6.4 Local content and contribution to Norway’s economic development........................................... 67 3.6.4.1 The effectiveness of local industry in international comparison............................ 67 3.6.4.2 The contribution of oil and gas to Norway’s economic development.............. 67 3.6.5 Success factors and pitfalls .................................... 68 3.7 Summary, success factors and pitfalls drawn from the case studies ....................................................................... 69 4 Supply chains in the oil industry........................... 70 5 Local content: preconditions and contribution to development ...................................................... 73 6 Policy implications for Nigeria ............................. 76 6.1 Role of the national oil company ..................................... 76 6.2 Relation between national oil company and oil majors.................................................................... 78 6.3 Industrial policy including local content.......................... 79 REFRENCES.............................................................................. 83 SUMMERY This report analyses the prospect for generating industrial development linked to the petroleum sector in Nigeria, drawing lessons from five other oil exporting countries: Brazil, Indonesia, Malaysia, Mexico and Norway. Oil exporting countries, including Nigeria have often experienced problems related to macro-economic stability and competitiveness on the part of industries exposed to international competition. The report discusses the causes of such problems and how they might be addressed in the Nigerian context as a prerequisite for the development of a cost- effective local supply industry for the Nigerian upstream petroleum sector. Nigeria has been a significant oil producer for 40 years, and has had a policy objective and policy measures in place for the promotion of a local supply industry. Yet, local content in deliveries to the upstream sector is only estimated at about 5 percent in 2002. Therefore, there is a need for rethinking the policy framework and it is the objective of this study to contribute to the rethinking. A general observation from the comparison of the six countries is that the technological challenges facing the petroleum industry together with increased focus on environmental sustainability have induced liberalization in all cases. Liberalization appears to have been motivated by the need to access state-of-the-art technology and the need to specialize in the market segments where the local industry has obtained competitiveness. In the countries with the highest local content (Brazil, Mexico and Malaysia) the local content share appears to be on a declining