Local Content in Petroleum Producing Economies Paper Example

Defining Local Content

The term Local Content is defined in various by various countries and organisations. For instance, according to the World Bank, Local Content is described as the share of job opportunities or the sales that are supplied locally and there is increased national participation in the supply chain.

Is your time best spent reading someone else’s essay? Get a 100% original essay FROM A CERTIFIED WRITER!

Save 25%

The Local Content Requirement (LC) represents an exclusive commitment of the foreign investors and thee companies in that need to engage their activities in another country to be in a position to get a certain stated percentage of goods and services from the local suppliers in that particular country with the main aim to build and develop the local industries, improve the technology, train local professionals; and thus enhance the tax revenues and availing jobs for the locals(Machtay,2012,pp.716-743). The measures can be applied differently regarding the country economy wants.

There has been unending discussion in most of developing petroleum-rich countries on the adoption of the Local Content Policy and the level of value addition within the oil and gas industry. The significance of the role of the policy the way in which the benefits of the country's resources on economic growth and development can be maximized and trickle down the wealth to the local citizens (Evans and Tatham, 2004, pp.232). The LC has also been an approach to promote the local indigenous oil and gas companies' engagement and active participation in the supply chain of the petroleum sector and enhance the backward linkage development and create more job opportunities for the local workforce.

The oil and gas industries have been engaging in the extraction and refinery of petroleum products since the 1800s. In the centuries it began in Central Europe and Russia (Tordo, 2013, p 126). Around the world, many of the companies tend to cooperate or even work against each other in some instances to meet their objectives and goals. Again in the recent past, most of the operating companies have provided the ways and means to extract the hydrocarbons and the profit taken to their home countries (Heum, 2008). Moreover, local content -quotas are instilled by the governments and the National Oil Companies (NOC) to enhance the local skills and organizations and checking the balances.

The local content is an ever-evolving topic for direct investment by foreign companies all over the world (Ablo, 2015, p320-401). Therefore, there is a need to create a more structured and engagement process by bringing together all the key stakeholders of the local content.

The local content is described as the shares of employment or sales in the context of the extractive sectors and is locally supplied at every stage (World Bank, 2010). the local content is also defined as the development of the local skills and knowledge, oil and gas technology transfer and the application of the local human resources and the domestic manufacturing industries thus creating a strong supplier base (Vaaland, 2012, pg.5399). The local content has increasingly become an exciting trend in most countries since every country currently needs her population to take charge of that specific county's economy and to maintain the wealth within the borders and create jobs for the citizens as well. However, these are met via capacity building, providing the services and products locally and also building on the small business enterprises locally. Many of the researchers tried to argue that in most of the developing countries, according to Bakare (2012, p.82-91) the economy is majorly boosted by the local small businesses.

World Trade Organisation Requirements and the National constraints on policymaking

Many of the resource-rich counties are members of the WTO thus are guided by specific laid down regulations in their respective domestic policy creation. Some of the trade-related Investment Measures (TRIMs) include the prohibition of the restrictions that demand industries, investors to use the services or products of domestic origin. Most of the member countries are of developing states thus achieving their local content may be constrained by a relatively weaker industrial foundation, and low skilled workforce thus may result into the mismatch between the capacity of local suppliers and the international industries' requirement. Moreover, better practices help to make informed policies and more technical pieces of machinery are outsourced from the developed countries.

Constraints to enhancing local content policy in the extractive industries

The domestic content policy may face constraints thus limiting the maximization of the system. Such constraints may include: inadequate knowledge about the background of the sector; insufficient scale to give a variety of services, thus it may be complicated for the local supplier to take part in the procurement process efficiently; financial incapacity to be able to avail the services and goods as per terms of the contract; poor management skills in the local companies to meet the international standards and incapacity to provide the products and services that meet the scale of the international and national oil and gas corporations.

Local Content in Petroleum Producing economies and Resource Curse

The economic impact of local contentment requirements (LCRs) is simply the regulations that are imposed by the governments to enhance the economic growth by the citizens engaging in the activities like domestically produce and supply the goods and services.it is argued that the LRCs can undermine a country's industrial competitiveness in the long run.

The LRCs have negatively impacted the trades, for instance, the 2008 financial crisis had initiated over 140 new local content strategies by various governments to enhance and promote local employment and industrial growth and development.

OECD METRO trade model is applied when analyzing a measurable subset of the related LRC measures showing a critical decline in the global imports in most the regions thus causing the various economies to be less competitive globally since most of the reduction in exports in sectors that are not connected by the LCR. Moreover, industries that gain from the LCR cover domestic reducing production and increasing imports thus boosting economic activity and develop the innovation chances a diverse economy.

Dutch disease and Local Content

The discovery of oil reservoirs can be with several challenges and even advantages as well. This mix of experiences may cause the Dutch Disease when huge petroleum the huge outside investment and the currency exchange rise that impact and disrupt other industrial sectors as the country's economy greatly relies on the hydrocarbons. However, to prevent the Dutch Disease, the Petrobras's contracts has to entail minimum local content that can be 95% for some specific equipment and that the parties that were interested have to search for the domestic partnership areas.

Rent seeking

In most of the countries whose economy is of massive petroleum incomes, the oil and gas tend to be very attractive. However, when then the there is an enormous flow of the skilled individuals in the sectors, thus a competition of the resource income or rent would be experienced instead of engaging in other forms of economic activities. These results into a wasteful rivalry thus referred to as Rent-seeking.

Patronage

Some of the oil-rich countries tend to suffer from dictatorship just because some of the leaders can maintain their power due to the excess money they get from the petroleum products thus there is a relative link between the duration in the political office and the wealth got from the petroleum products. For those countries whose democracy is low, the petroleum wealth tends to increase the chances of the legislative stay and power maintenance.

Local Content and Supply Chain Management

The local content is used to enhance job creation and to build on the local supply chains and be competitive internationally. Most of the local material entails mandates to the investing companies to employ and enhance the development of the local population and also to locally procure goods and services and these to be conducted via licensing arrangements, exclusive, and joint ventures.

Alternatives to Local content policy

This refers to the statements by the company to show its commitment to maximizing in the local content in its overall global operations. The compliance of supply chain management and the procurement expenditure provides a basis for a company's domestic content policy. When formulating a content policy, the company has to conduct several operation to which include: Conducting exclusive consultation internally and externally; need to comprehend how the local content is connected to economic development and the global development objectives; get to know the structure of the supply chain; to analyze and classify the procurement expenditures and understand the risk contract and find out more about the stakeholders.

Local content Corporate Social Investment

Local content is relatively a part of the social cooperate responsibility agenda and is now embraces by most of the international companies regarding the social impact compensation statement (Weyzig, 2006, p.69). Basically, the local content can be argued as the recommendable benefits in return to the local community and the economy that may are likely to be exploited by the operations of some of the international companies. Local content is on the strategies that help the resource-rich economies to prevent the resource curse and in turn create a sustainable capacity of the local population as they connect to the economic globalization.

Moreover, it is also a concern in the international construction market mostly in the tender conditions demands of including the local labor, local subcontractors and the materials and equipment as stipulated in the contract requirements (Warhurst 2001, p.53). For instance, in Ghana, the local content is focused by encouraging the local industries to get involved and enhance performance through the locals.

The local content is relatively connected to social impact compensation that states that the adoption of domestic content policies (LCPs) as a means to influence the employment and value addition to the local population.

The current approaches to achieving the potential benefits of local content

Procurements done from the local SMEs and creating jobs locally can enhance the social and economic benefits to the local communities and thus stimulate economic activities and facilitates more investments. Other benefits that are achieved include: improving the living standards of the business owners and the employees; spreading the innovation and new technology to other participants in the market and luring of investment in the social and economic infrastructure.

Currently, different governments have embraced legislation and local content policies (Babich and Moulijn, 2003, p.613). The domestic content policies are designed depending the determined target and can also be part of a strategy to critically transform the local economy the complication and uncertainties associated to the various interventions differ depending on several factors such as the number of stakeholders expected to benefit from the responses; the original state of the local economy relative to the expected results; and the relations of local content interventions with the other developmental policy interventions.

Moreover, the regulatory strategies available to make sure the local content requirements are implemented are mainly found in the local laws that highlight the local content demands that the oil and gas companies have to commit to as per terms ad the framework of the agreement. Some of the regulatory strategies are used by comp...