A New Approach to Enterprise and Community Development in Africa’s Oil and Gas Sector

About a month ago, I received a phone call from the lead consultant on a team hired to advise the Ministry of Energy for a small African nation on issues regarding “local content”. “Local content” is a term at risk of falling into the abyss of development jargon. Put simply, it means the extent to which local people and companies are able to participate in the workforce and supply chains of a given industry. It is most often a focus area in sectors that require technical sophistication to exploit natural resources—namely extractive industries such as mining, oil, and gas.

The phone call from this lead consultant was one of four such contacts I received in that week alone. As the Vice President of Enterprise and Community Development atPYXERA Global, I have seen a growing interest in advisory services designed to aid local companies in entering the oil and gas supply chain in sub-Saharan Africa. This shift highlights the fact that a new day is dawning in the oil and gas industry in this part of the world. The claims in a recent Economist feature that the death knell is sounding for the integrated international oil and gas company (IOC) may be overcooked; however, there is no question that the rising relevance of national oil companies (NOC) in new markets is driving profound attention to issues of small and medium enterprise (SME) development among regulators, NOCs, and IOCs.

The Changing Role of the IOC

While it is true that IOCs such as ExxonMobil, Chevron, and Shell remain among the world’s most valuable companies, there is still no doubt that the IOC’s role in the global oil industry is changing.  Oil demand in developed countries has been falling since the mid-2000s, a result of more efficient vehicles and overall demographic changes in car ownership. Simultaneously, we are seeing a greater demand for oil from the developing world—a demand that is only expected to increase as living standards improve in developing countries.

Today, it is estimated that between 70 and 90% of oil reserves are controlled by NOCs. IOCs have to-date played a leading role in exploration, project development, and operations because NOCs lacked the technological expertise and global reach of the big multinational oil companies to produce, refine or sell their own oil.  The gap in expertise between NOCs and IOCs is closing, and perhaps more essentially, countries are recognizing the importance of establishing NOC preeminence from the outset of new exploration and project development. Increasingly, IOC’s are navigating the murkier waters of the oil industry—accessing oil that is harder to find and to extract for geological, chemical, or political reasons. More than ever, IOC’s are sharing the steering wheel with NOCs. Many would even argue that in some African settings they are just riding shotgun.

Keeping Jobs and Money In-Country

As this shift in influence continues, governments in developing countries are exerting their influence in this domain by passing local content laws. These laws aim to ensure that countries with large oil reserves retain the greatest economic benefit from their natural resources. Local content legislation seeks to maximize the opportunities available for indigenous businesses and people, keeping more jobs and money in-country. Many smaller, local firms, however, struggle to compete with larger, international firms that have always been the ones to supply the procurement needs of the oil and gas industry.

PYXERA Global has been engaging in local content development since our first supplier development project in Russia in the mid 1990’s. PYXERA Global currently has local content development programs, at varying degrees of implementation, underway in Equatorial Guinea, Gabon, Ghana, and Mozambique. In each of these interventions, PYXERA Global is implementing a program to first understand the demands of the oil industry and the ability of local companies in a given market to meet those demands in order to then design and implement a program to help local companies enhance their competitiveness for oil company tenders.

Ensuring Effective Enterprise Development

This is where it gets interesting. As NOCs assume greater control of the marketplace, the question remains—will NOCs be motivated to, and perhaps more importantly, will they be able to tackle challenges around local content development to enable local companies to participate in the oil and gas supply chain?

Early returns from countries seeking to enforce strict local content quotas suggest that NOCs and regulators often struggle to close the gaps between local SME performance and the oil and gas industry’s demands. These first movers are discovering that IOCs’ tendency to work with foreign suppliers and contractors is driven by more than a blind unwillingness to work with locals—finding qualified and competent local suppliers is more difficult than simply issuing an invitation to tender in the local language.

Winning work with oil and gas firms is not an easy matter for the Schlumbergers, Halliburtons, Fluors, and Bechtels of the world—so imagine the effort required of a 10-person start-up enterprise in an emerging market. The past reality, in which IOCs shouldered the entire burden in meeting regulatory requirements for local content, presented numerous sustainability challenges. Extractive industry sectors are notorious for their failure to expand economic growth opportunities—on a dollar-for-dollar basis, the mining and oil and gas sectors tend to have a much smaller impact on local economies than manufacturing, for example.

Furthermore, oil projects are not static—they are constantly evolving from exploration to construction to production, and ultimately to closure. Each stage brings with it contractors and service providers specifically geared to the delivery of short-term value to the “owner” of the asset—where the owner is an IOC keeping its eye on the next viable resource maintenance of opportunities for local small and medium enterprises is far from a priority. Making NOCs the custodians of oil reserves and the opportunities they bring presents a game changer for international development.

The perception that oil can be a “resource curse” for countries “lucky” enough to have discovered it is strong and lasting. While it is a major contributor to climate change, oil’s affordability means it will remain  a primary source of energy for the next century. The international development community should ensure that each additional unit of carbon dioxide emissions enabled by discoveries of oil in developing countries yields the greatest possible economic benefit—in the place most deserving of that impact. In order for Africa to realize its greatest potential, circumstances will demand that NOCs are equipped to champion local content initiatives.

The international development community should ensure that each additional unit of carbon dioxide emissions enabled by discoveries of oil in developing countries yields the greatest possible economic benefit—in the place most deserving of that impact. In order for Africa to realize its greatest potential, circumstances will demand that NOCs are equipped to champion local content initiatives.

Much remains uncertain as roles among and between IOCs and NOCs continue to evolve, but one thing is clear—a motivated and properly resourced NOC and local regulator that is involved in the effort to develop local content from the start will improve the way in which natural resource discoveries enhance local livelihoods. That IOCs and NOCs are increasingly willing to think of one another as true partners presents a critical opportunity for Africa’s future. The road will not be easy, and many conflicting interests remain unresolved, but these changes have the potential to improve the economic environment in some of the most underdeveloped parts of the world. And that’s all for the best.

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  1. […] to Harry Pastuszek, Vice President of Economic and Community Development at PYXERA Global, finding the right balance can be difficult. “The tendency of international oil companies […]

  2. John Kyazze says:

    My name is John Kyazze, I work with Uganda National Bureau of Standards (UNBS). I would like to contribute more most especially in HSSEQ