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Localisation boosts communities but may bloat company costs

Clear and fair laws, stakeholder engagement and capacity building deter cost inflation, graft and weak local economic diversification

Policy

Oil & gas

Publication date: 03 July 2024

By Nitin Koshi

AT A GLANCE

  • Firms can improve efficiency, reputation and resilience while developing local economies via in-location value creation. 

  • Technology transfer and local capacity building help avoid cost inflation, inefficiency and graft from local-content rules. 

  • Broad-based local development will depend on cooperative engagement between stakeholders.


At the end of 2023 Brazil authorities raised the minimum goods and services to be bought from local firms – during the exploration phase, from 18% to 30%, and when drilling wells in the production development stage, from 25% to 30% – for offshore areas awarded in future concession or production-sharing upstream auctions. Local-content laws can help build workforce; create jobs, commerce, revenue and state income; and fund infrastructure, public services, education, health, environment and community development but overtly ambitious rules deter investment. Just laws, stakeholder engagement and capacity building can ensure mutual benefit. 

Law-making

Rigid local-content laws can deter oil and gas activity as local contractors and suppliers can be more costly and inefficient than international peers. In July 2023 India’s government lowered the local content criteria and purchase preference advantage for hiring local firms for lump sum turnkey, and engineering, procurement and construction projects floated by oil and gas public-sector enterprises (PSEs) after cost concerns caused a PSE to scrap a gas project tender. 

Stakeholder engagement

Engagement between stakeholders – firms, governments, regulators, locals, workers, suppliers, contractors, and environment and civil-society bodies – informs local-content measures, and helps firms plan projects, tackle local concerns and maximise mutual benefit. In Guyana, where oil and gas firms must make payments to local suppliers within 45 days of receiving a correct invoice, such engagement led the government to plan a local content facilitation fund to boost supplier liquidity in the interim.

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Capacity building

In February 2024 Guyana’s government and an international oil and gas consortium operating there, commissioned a USD 13 million local facility to simulate a floating production, storage and offloading vessel to train the country’s upstream workers, in line with local content policies. Ensuring that the local workforce and suppliers are competitive helps to sustainably build a country’s economic capacity and enables oil and gas firms to improve cost effectiveness and reduce the risk of supply disruptions.

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Broad-based development

Oil and gas local content rules have spillover benefits: they can spur economic diversification, boost competitiveness and labour productivity, and can catalyse foreign investment. Uganda’s government plans to invest revenues from projects to extract and pipe oil from Lake Albert, to improve local roads, education and healthcare. Countries such as Norway and Saudi Arabia safeguard and develop their economies via sovereign wealth funds that invest domestic oil and gas proceeds in diverse assets. 

FURTHER READING