DW: Local Content Key in Foreign Offshore Deals

In many of the key deepwater markets, estimated to be worth $72bn by 2018, E&P and OFS companies alike are exposed to challenging local content requirements, remarks Douglas-Westwood in their 'DW Monday'.

Local content agreements are typically are motivated by a desire to stimulate industrial development, and promote technology transfer. A typical local content agreement stipulates that E&P companies must procure a minimum percentage of equipment and services from local contractors.

Recent examples can be seen in countries such as Brazil (Petrobras new-build FPSO units to use domestically-built hulls), Angola (BP partnering with Sonangol) and Nigeria (Total utilising a 90% local work force for the AKPO FPSO).

Governments in developing countries are now trying to look beyond basic economic multiplier effects, with the aim to improve local yard infrastructures, encourage sustainable and ongoing investment, community support and training, and improve on in-country fabrication and supervision.

The typical risks associated with local content include lack of in-country cutting edge technology and a shortage of engineering skills, competitiveness compared to developed economies, government instabilities, all of which can combine to result in delays, re-work and cost overruns.

Local content requirements can cover everything from basic services and manpower to manufacture of more complex capital equipment. While the most critical items in a deepwater development, such as subsea trees, are typically manufactured in the US, Europe and APAC countries, the major vendors have built assembly facilities in order to service key markets such as Angola and Brazil.

The reality of international markets is that local content will remain a key selection criteria for oil and gas projects. For example, in the first round of bidding for Brazilian Pre-Salt, minimum local content of 37% was expected of bidders, increasing to more than 55% in the development phase, and there is little sign of a slowdown in political ambitions with many countries targeting 70%.

However, given that deepwater spending in Latin America is expected to reach $24.8bn by 2018, local content needs to be viewed as an opportunity area rather than a threat.

Source: Douglas-Westwood