With increasing interest in oil and gas investments in African countries, one pertinent question from clients and prospective investors is whether, and to what extent, government or the national oil company should exercise influence over a right holder’s procurement process. Specifically, what represents best practice with respect to governmental involvement in an investor’s acquisition of goods and services used for petroleum operations. Competing forces at play in establishing those practices include the desire by governments to maximize the local benefits from resource extraction activities, the investors’ desire to ensure freedom to procure on the basis of cost, availability and quality, and the mutual desire for a transparent and efficient process.
We have conducted regional and global surveys of the procurement requirements in over 30 jurisdictions with significant upstream oil and gas sectors. The aim of these surveys is to identify global best practices, trends, risks and mitigation strategies. We have also examined the procurement requirements and recommendations of major international financial institutions involved in financing upstream oil and gas projects, in order to identify prevailing market preferences.
The surveys found a wide variety of practices and requirements for local content and procurement in the upstream oil and gas sector across African countries. Moreover, while requirements may specify the portion of total expenditures that must be comprised of locally sourced goods and services, procurement procedures are frequently not well established. This can (and has) led to a misalignment between governments and investors on the requirements of those procedures. This misalignment can manifest itself in material ways, resulting in significant risk to the investor. These risks include disallowance of costs for recovery, recalculation of tax obligations, fines, penalties, or even allegations of corruption and/or material breach of the host government contract; all of which may trigger the loss of the petroleum contract.
This lack of clarity and resulting misalignment in understanding and expectations can lead to distraction in investor-government communications, disruption in petroleum operations, and potentially costly formal dispute resolution with corrosive effects on the attractiveness of the investment and the host government to the international investment communities.
A clearly detailed procurement process minimizes these risks, establishing concrete local goods and services requirements that are both realistic and able to adapt to the capacity of the local market’s goods and services requirements. An open and transparent process, free of governmental influence, is an absolute requirement. The procedures and recommendations developed by international organizations serve as valuable reference sources in developing a mutually acceptable procurement process; care must be taken to craft procedures that are practical and achievable in the jurisdiction.
This blog series will provide focused discussions on local content and procurement practices that are applicable to African countries.
As the series develops, topics discussed will include:
- global and regional trends in procurement practices
- best practices
- the procedures and recommendations of international organizations that can serve as valuable references
- the risks that arise in this area and the strategies for avoiding and addressing these risks.
- methods to ensure that procurement requirements are realistic, reasonable and mutually acceptable