Make It Local, Make It Cheap
Amy Jadesimi, Managing Director of Lagos Deep Offshore Logistics Base (LADOL), explains why local content done right always reduces costs, and how low oil and gas prices can be a boon for the oil and gas industry.
How have lower oil and gas prices impacted local content in Nigeria?
If you look at local content in real terms, an oil price crash is actually a positive for two reasons.
First, because development of local content initially requires development of infrastructure and capacity, and it is always better to develop capacity and infrastructure when the market is down and prices are lower. You see governments across the world developing infrastructure when the market is down, as it generates jobs and also because the projects are cheaper right now.
Second, real local content actually lowers costs of operations. When you hear people complain about local content adding to the cost, it is because something is wrong: Either rent-seeking is involved, or people who are trying to make it seem that they are doing local content are actually doing it from abroad. For example, in Nigeria, because of the lack of local manufacturing, things have to be imported anyway so the high costs are still there even with local companies. Real local content, with activities on the ground, does more than create jobs, it offers cost-savings for international companies.
At LADOL, for example, we are able to offer a 50 percent cost-saving to the offshore industry because we have already built the capacity, we have the equipment, the infrastructure, and the people. This is real local content, and it is cheaper.
You can always tell when it is real local content, because it always brings prices down.
Have you seen more demand for services at LADOL during the last two years?
Absolutely, and it happened very quickly. Let’s take the biggest and oldest operator in Nigeria — Shell. Shell has put out a tender for a logistics base to support its deep offshore operations, and specified in that tender that the logistics base must be located in Lagos. This is not the first time they have done this. In 2006, Shell issued a similar tender and specified the logistics base had to be in Lagos, but as the oil price crept up and up, even as people knew that the offshore support would have to come from Lagos, the oil companies would say, ‘Yes we are working it out.’ By the time the price was over $100 per barrel, the international companies weren’t even taking your phone call anymore, even though they knew they had to get Lagos. There was not enough of a fiscal or political incentive to move or even improve their business practices. Now, they know they need to move.
The oil industry tends to have entrenched interests, and those interests make it difficult to change, even when the benefits of changing are crystal clear. Definitely a drop in the oil price has forced people to look at optimal solutions, and in the case of offshore support it is has been clearly established that the cheapest, most reliable and safest place in Lagos is LADOL.
In a country like Nigeria, with the offshore activity here and in the region, we should have five, six, seven and even eight LADOLs. Nigeria needs to be gearing up, not just to increase our own local content, but we also need to gear up to become the hub for West Africa. At LADOL, we hope our development can be a positive example that will attract other investors to do the same thing, because there is still a lot of capacity.
How can the government and private corporations like LADOL cooperate to jumpstart the E&P industry?
I would say the current oil prices are not a new low. This is a correction, because prices of over $100 per barrel are ludicrous and destabilizing. It was not sustainable — companies should not have such a huge margin for operations, and it doesn’t make sense for the global economy. Of course, we don’t know where prices are going to settle, and I’m not brave enough to say, but let’s say we are looking at $50 per barrel. If we settled at $50 per barrel, you could still profitably explore and produce in all the offshore blocks in Nigeria, provided that you bring down your costs. In fact, national budgets of countries which are dependent on commodity exports, like Nigeria, should be based on a formula that includes the expected margin return on the cost of production, which we control, and not solely on international market prices, which we don’t control.
What we are seeing now is oil and gas companies bringing down their costs, and they are reconstructing their business fundamentally around local content — training Nigerians to be in leadership (and not just in a token way but in a very real way), and they are looking at their supply chain as well.
There are two reasons for this. First, as we’ve already explained, it is cheaper.
Second, real local content is sustainable. If an international company has a sustainable way of operating, then they are able to ensure the medium and long term security of their assets in a country. By ensuring local prosperity of the country they are operating in, they also drive up the international demand for commodities. It is not rocket science — these are things that everyone has known for a long time, but there was not enough of an impetus for people to make the decision and adopt new economically sustainable business practices. Now, they are ensuring they are operating in the best way possible, and that may be part of the reason we are seeing some of these changes quite quickly.
I think there is an appetite in the real Nigerian private sector to do more of these types of investments. We need to support the development of mutually beneficial relationships with IOCs by investing in real local private companies that add value.