Nigeria

Final approval for the OK LNG project may be withheld by the Nigerian government on the grounds that the consortium has failed to commit to any local content targets. The plant is planned to be sited at Olokola, a boundary town between Ogun and Ondo states and will generate around $10bn a year for Nigeria from 2011.

The government's position on the issue has prompted the consortium, made up of Shell, BG Group, Chevron and NNPC, to hold off from making the Final Investment Decision and poses a serious threat to the $29bn contract.

The Nigerian government had been seeking as much fabrication as possible to be domiciled in Nigeria. In particular, ministers were keen to see the 235 km steel pipeline which would carry gas to a plant in Ondo being manufactured by an indigenous producer at Calabar. Indeed, the government had even begun submitting proposals for the 48”pipeline's construction and how this might fit into the country's evolving strategy to become a major gas hub.

Some Nigerian officials mooted more ambitious plans, arguing that the OK LNG project should be implemented in conjunction with plans for the construction of cryogenic modules – an idea which has been written off by consortium seniors as fantasy.

Senior NNPC officials have informally let it be known that both Chevron and the BG Group in particular have been reluctant to make provisions for raising the Nigerian content of the new liquefied natural gas project. Company officials reportedly dismissed plans to raise Nigerian content on several occasions. In particular there has been continuous friction over the ArcelorMittal steel plant. Chevron and BG repeatedly rejected calls to use the plant, situated in Nigeria, citing concerns over the allegedly low quality of steel - a charge robustly rejected by ArcelorMittal, which argued that the quality of steel required by NNPC was in fact below what AM had on offer.

The issue has been presented by several members of the Yar Adua administration as evidence of the government's commitment to forcing the IOCs to take local content seriously. Others are more sceptical. One employee of a consortium-member suggested that the government is playing politics with OK-LNG.

Speaking on condition of anonymity he said the Yar Adua administration was hostile towards the OK- LNG programme on account of the project's entwinement with the Obasanjo legacy, and that the issue of local content was being used as a pretext for intervention.

As the man who signed the go-ahead for OK LNG and concurrently created the Olokola Free Trade Zone (OKFTZ), the entire scheme is intimately associated with Obasanjo, and since coming into power the administration has been at pains to stamp its mark on the oil sector and make a break from Obasanjo's policies. This delay is being read by some as a manifestation of that agenda.

The news of the OK-LNG spat came as Group General Manager of the Nigerian Content Division, George Osahon, reported a doubling in Nigeria's overall local content rates. Speaking at the House of Representatives, Mr. Osahon claimed levels of indigenous Nigerian employment in the oil and gas sector had risen from 15% in 2005 to over 35% in 2007.

This rise has been attributed to two different factors. Firstly, the raft of legislation forced through under Obasanjo and the guidelines implemented by the NNPC. The grandest of these was the drive to raise manufacturing activity in Nigeria, covered by guidelines issued on October 13, 2006 and May 10, 2006. Under the rigorous guidelines of October 2006, the NNPC set targets of 100% for the domiciliation of front end engineering design (FEED), seismic and data activities, project management reams and procurement centers, pipe threading and coating and mechanical testing and inspection.

Secondly the growth in local content has been underpinned by the early stages of an expansion in local oil industrial capacity. According to the NCD, about 12 manufacturing plants have been established in-country since 2005.

The Nigerian Content Division of NNPC admits that the successes so far have been “modest” and it pinpoints a number of key challenges. In particular it cites the lack of integration between Nigerian content aspirations and project implementation, of which the OK-LNG debacle is said to be illustrative. However, there have been real and significant gains elsewhere:

1. Engineering man-hours in-country have gone up from less than 250,000 in 2005 to more than 3.5 million in 2005;
2. In-country fabrication has increased from less than 25 tons in 2005 to a high of 125,000 tons in 2007;
3. The number of engineering companies operating in-country has increased from as little as five to more than three dozen (both local and foreign) in 2007;
4. Technical relationships and mentoring as well as vendor development programs now commonplace.