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The proposed amendments to Nigeria's Local Content Act 2010

There has been a call by industry stakeholders in Nigeria’s Oil and Gas industry, for the amendment of the Nigerian Oil and Gas Industry Content Development Act, 2010 (the “Act” or “Local Content Act”). In response to the call, a Bill for the amendment of the Act is currently being deliberated. Below are some of the notable proposed changes the new Bill seeks to modify in the Act.

1. Nigerian Company – Section 3 (1) and 3(2) of the Local Content Act- The Bill seeks to amend Section 3(1) and (2) of the Act, by deleting the words Nigerian independent operators and substituting it with Nigerian companies under section 3 (1) and replacing the words “Nigerian indigenous service companies” under Section 3(2) with the words Nigerian service companies.

Comments: This deletion widens the definition of Nigerian Companies and Nigerian service companies, which will be given first consideration under the Act, to include Nigerian registered joint venture-owned companies which have non-Nigerian partnerships.

2. Nigerian Content Plan – Section 7 of the Local Content Act – The Bill shall amend Section 7 of the Act by deleting the words demonstrating compliance and substituting it with demonstrating capacity to comply.

Comments: By the proposed amendment, operators in the Nigerian oil and gas industry, wishing to participate in bidding for a license, permit, or interest in any project, only need to submit a Nigerian Content Plan showing a capacity to comply with the Nigerian content requirements of the Local Content Act.

3. Minimum Target Level / Capacity Development Initiative for Imported Items- Section 11 of the Local Content Act – The Bill is proposing to replace Section 11 (2) and (4) of the Act with the following new sections 11 (2) and (4) (a) and (b) which reads as follows:

“(2) Where a project description is not specified in the Schedule or where target of the schedule is considered inadequate based on current capacity, the Minister may make regulations to set the minimum target level for that project or project item.

(4) Notwithstanding the provisions of subsection (1) of this section, where there is inadequate capacity to meet any of the targets in the schedule to this Act, the Board may recommend to the Minister for approval, the importation of the relevant items. Any authorization to import an item shall be subject to an approved Capacity Development Initiative (CDI) to develop the relevant capacity. The approval for such CDI shall be based on the following considerations: (a) An entity requesting for approval to import goods or services into the country (herein referred to as the Applicant) shall advertise the need for the goods and service on the Joint Qualification System for a period not less than 30 days before submitting application to the Board. (b) The advert shall at a minimum indicate the description of the goods or services required, relevant”

Comments: This proposed new section, now gives the Minister of Petroleum, the power to make regulations to set up a minimum target level for the Nigerian content required in a project, in cases where, based on the current capacity in the industry, the target level set out in the Schedule to the Act is inadequate or, where the type of project is not described in the Schedule to the Act.

Section 11 (4) also makes approval for the importation of an item from the Minister of Petroleum based on an approved Capacity Development Initiative (CDI) submitted to the Company. Furthermore, the CDI shall only be approved by the Board, where the Company submitting the CDI shows that it advertised the need for the product or service for a minimum period of 30days and above, describing in detail the type of goods, services, or product required.

This proposed amendment is a welcome development to the Act as it shall increase the utilization of Nigerian goods, products, and services in projects in the oil and gas industry and equally reduce importation.

4. Opportunity to Nigerian Companies – Section 15 of the Local Content Act – The Bill shall amend Section 15 of the Act by deleting the words Nigerian indigenous contractors and companies and substituting it with Nigerian companies.

Comments: This deletion widens the definition of Nigerian Companies, which will be given opportunities under the Act, to include Nigerian registered joint venture-owned companies which have non-Nigerian partnerships.

5. Lists of contracts to be submitted by Operators -The Bill proposes an amendment to Section 17 of the Local Content Act to include projects valued more than N100,000,000 to the list of contracts to be submitted to the board by operators for approval. It does this by amending the existing Section 17 (1) with the following new Section 17(1):

“(1) For any proposed project, contract, subcontract, and purchase order in the Nigerian oil and gas industry estimated by an operator to be more than $1,000,000 (USD) for contracts denominated in US Dollars or ₦100,000,000 for contracts denominated in Naira, the operator shall provide to the Board for approval, advertisements, pre-qualification criteria, technical bid documents, technical evaluation criteria, and the proposed bidder’s lists.”

Comments: This is a welcome development to the Act as it increases the number of contracts Nigerian Companies can bid for and be given first consideration.

6. Quarterly Procurement Report – Section 24 of the Local Content Act – The Bill seeks to amend section 24 (1) of the Act to include the words “or100,000,000 for contracts denominated in Naira “before or such other limit as the Board….

Comments: The Act currently only requires contracts valued at US$1,000,000 to be submitted to the Board by operators. This bill extends the type of projects to be submitted to the Board by operators in their quarterly procurement report to include contracts valued at N100,000,000 in the case where the contracts are denominated in Naira.

7. Expatriate Quota – Section 33 of the Local Content Act – The new Bill seeks to amend section 33 subsections (1) and (2) by replacing the present section 33 (1) and (2) with the following new section 33 (1) and (2) (a) (b) (c) (d) (e) (f) (g):

“33. (1) Notwithstanding anything to the contrary contained in any existing enactment, law, or regulation, an operator shall obtain the approval of the Board before submitting an application to the Ministry in charge of Internal Affairs or any other relevant agency of the Federal Government for expatriate quotas or work permits. (2) The application made to the Board shall include:

(a) job titles;
(b) description of responsibilities;
(c) the duration of the proposed employment in Nigeria;
(d) exceptional reason(s) why the services of an expatriate are required;
(e) the country of residence where the expatriate would be engaged from;
(f) the nationality of the expatriate
(g) any other information required by the Board for purposes of determining the merit of the application.”

Comments: This amendment makes all applications for expatriate quota to the Minister of Interior, subject to prior approval by the Board. While this amendment might be seen as an effective means of reducing the number of foreign workers working in the industry, seeking prior approval from the Board before proceeding to the Minister of Interior, only increases the number of administrative bottlenecks and delays experienced by Companies and undermines the government policy of improving the Countries ease of doing business rating.

8. 0.5% Levy on Gross Revenue of Operators – Section 38 of the Local Content Act- The Bill shall replace section 38 subsections (2) with the following new section 38 (2) (3) and (4):

“(2) The R & D Plan shall outline a revolving three to five-year plan for oil and gas-related research and development initiatives to be undertaken in Nigeria, together with a breakdown of the expected expenditures that will be made in implementing the R&D Plan;

(3) All operators shall set aside, annually and for the purpose of carrying out research and development activities in Nigeria, a minimum of 0.5% of the gross revenue received by the operator;

(4) The funds set aside under subsection (3) shall be applied as follows:

(a) fifty percent shall be allocated to Research and Development programmes in Nigerian;

(b) fifty percent shall be applied to research and development activities within the facilities of the operator established in Nigeria.

Comments: The bill has introduced a new levy of 0.5% on gross revenue received by operators which is required to be set aside for R & D programs in Nigeria. While this may be viewed as a commendable initiative by the Board, it may be perceived by some industry operators as an additional indirect tax on their profits.

9. Section 68 of the Local Content Act – The Bill seeks to insert the following new subsections (2) (3) (4) (5) and (6) in the existing section.

“(2) A person who submits a plan, returns, report or other document and knowingly makes a false statement, commits an offense and shall be liable to administrative sanctions which may include a fine of not more than five percent of the project sum, cancellation of the project or any other sanction as may be prescribed by the Board.

(3) Subject to section 69 (1), A person who submits a plan, returns, report or other documents and knowingly makes a false statement, and fails to provide satisfactory reason for the violation shall be liable to administrative sanctions including cancellation of project, withdrawal of certificates or any other sanction as may be prescribed by the Board.

(4) A person who connives with a Nigerian citizen or a Nigeria company to deceive the Board as representing a Nigerian company to achieve the local content requirement under this Act commits an offence and shall be liable to administrative sanction which may include a fine of not more than five percent of the project sum, cancellation of the project or any other sanction as may be prescribed by the Board.

(5) An operator or other connected entity which –

(a) carries out oil and gas activities without the required local content requirement;

(b) fails to submit a local content plan;

(c) fails to satisfy the content requirement of a local content plan; or

(d) fails to submit its local content performance report or annual work plan to the Board, commits an offence and is, on conviction, liable to administrative sanction which may include a fine of five percent of the value of the proceeds obtained from the oil and gas activities in respect of which the breach is committed but which shall not exceed five percent of the project sum or to the cancellation of a contract with respect to the extractive activity or any other sanction as may be prescribed by the Board.

(6) A person who is convicted of an offence under this Act for which no penalty is provided shall be liable to a fine not exceeding five percent of the project sum or to imprisonment for a term of not more than five years, or to both.”

Comments: The Bill has introduced a new class of offences for persons who submit false reports and documentation as well as for those who fail to submit a plan. The value of the fine has, however, been retained as 5% of the project sum or cancellation of the contract.

10. Disciplinary Procedure for Infractions by Operators – Section 69 of the Local Content Act – The Bill seeks to add a new subsection to Section 69. Namely subsections (1) (2) (3) (4) and (5) below:

“(1) Where an operator fails to comply with any provision of this Act, the Board shall notify the operator in writing specifying the details of the infraction.

(2) Any operator who is notified of any infraction shall within 7 days of the receipt of the notice reply in writing.

(3) If the board is satisfied with the operator’s reply, the matter shall end, however, if the Board is not satisfied with the reply, the Board shall impose any sanction specified in this Act or this regulation.

(4) Subject to section 69 (1), A person who submits a plan, returns, report, or other documents and knowingly makes a false statement, and fails to provide satisfactory reason for the violation shall be liable to administrative sanctions including cancellation of project, withdrawal of certificates or any other sanction as may be prescribed by the Board.

(5) Any Operator who fails to remit the Nigerian Content Fund within the timeframe stipulated in the Regulation by the Minister, shall be liable to administrative sanctions including:

(a) recommendation for revocation of Operating license and permits;

(b) cancellation of project, contracts, or certificates as applicable;

(c) imposition of fines;

(d) refusal to process statutory approvals;

(e) any other action as may be prescribed in the Ministerial Regulation on Nigerian Content Development Fund.”

Comments: This is a welcome development in the Act as it spells out a step-by-step disciplinary procedure for operators who infringe on the provisions of the Act, thereby preventing any misunderstanding regarding the consequences for contravening the Act.

11. Increase in 1% Levy – Section 104 of the Local Content Act – The bill seeks to change the existing section 104 to section 105 by deleting and substituting the existing section 104 (1) (2) and (3) with a new section 105 (1) (2) and (3) as follows:

“(1) A Fund to be known as the Nigerian Content Development Fund (the “Fund”) is established for purposes of funding the implementation of Nigerian content development in the Nigerian oil and gas industry.

(2) The sum of two percent of every contract awarded to any operator, contractor, subcontractor, alliance partner, or any other entity involved in any project, operation, activity, or transaction in the upstream sector and designated midstream and downstream projects operation, activity or transaction in the Nigerian oil and gas industry shall be deducted at source and paid into the Fund.

(3) The Fund shall be managed by the Nigerian Content Development and Monitoring Board and employed for projects, programs, and activities directed at increasing Nigerian content in the oil and gas industry.”

Comments: The change will increase the amount to be deducted at source and paid to the Nigerian Content Development Fund from 1% to 2% on every contract awarded to a contractor. This change might be viewed by some operators as an attempt by the Government to increase its revenue stream in an industry which is currently struggling from the effects of the move from fossil fuels to renewable energy.

Conclusion:

The proposed amendment to the Act is a welcome development as the law must evolve often enough to reflect industry best practices. Upon implementation, further engagement between the Regulator and stakeholders will more specifically bring to the fore the efficacy or otherwise of the new amendments.