Local Content: Lessons Learnt AOG March 2015 Bernadette Cullinane By the Numbers The potential to harness the benefits of capital projects for economic development > 48 <20 ~40 >20 ~8 2/3 Source: IEA: World Energy Investment Outlook Factsheet. Copyright © 2015 Accenture All rights reserved. 2 Frontier Markets Performance in frontier markets has become an increasingly important differentiator for IOCs and their investors 70% National Development Needs (Human Development Index, Infrastructure Rating, Electrification Rate ) Sudan Mozambique Angola Uganda Yemen 60% Nigeria Congo, Rep. 50% 40% Pakistan India Indonesia Vietnam Gabon Chad Venezuela Bolivia Ecuador Algeria Syria Colombia Peru 30% Brazil Argentina Egypt Ukraine China Russia Iran Thailand Mexico 20% Malaysia Australia Qatar UK Norway 10% USA Netherlands Canada UAE Denmark 0% 0% 10% 20% Iraq Equatorial Guinea Turkmenistan Kazakhstan Azerbaijan Trinidad & Tobago Libya Kuwait Brunei Oman Saudi 30% 40% 50% 60% 70% 80% Resource Dependence (Oil & Gas Rents as % of GDP) Bubble size = risk weighted reserves ($ Oil & Gas reserves x political risk rating) Valued @ Dec-14 prices: $54.23 / barrel; $3.74 / ‘000 cubic feet; Greater value and low er political risk = more attractive for IOCs and larger bubble Source: UNDP HDI, WEF Infrastructure, WEO Energy Access, PRS Political Risk, EIA Oil & Gas Reserves, World Bank Oil & Gas Rents Copyright © 2015 Accenture All rights reserved. Developed markets High risk markets Frontier markets 3 Local Content Many countries have already established local content requirements NON EXHAUSTIVE Norway Denmark Russia Canada UK Azerbaijan Kazakhstan Libya Egypt Trinidad and Tobago China Nigeria Oman Mexico Malaysia Brunei Yemen Colombia Brazil Ghana Congo Uganda Indonesia Tanzania Venezuela Angola South Africa Source: Accenture Research Copyright © 2015 Accenture All rights reserved. Mozambique Australia Countries with local content requirements or actions in progress or to be implemented 4 Local Content Examples The definition and implementation of local content strategies varies Norway United Kingdom Development is driven by international R&D partnerships and the focus on knowledge transfer to local companies Implementation of discretionary licensing, audits of IOC purchases and financial assistance to domestic companies Nigeria Tanzania The Nigerian Content Development Fund is used for training and infrastructure development At least 25% state participation in production sharing agreements Brazil Oman A local content requirement of 37-55% during exploration and 55-65% during development 90% Manpower target requirements in production and operations Ghana Angola Petroleum licensing and agreement requires a 5% equity participation of a local company Angolanization policy seeks a 70% management and local contractors in operating IOC’s Source: Accenture Research and global Local Content Council Copyright © 2015 Accenture All rights reserved. 5 Evolution of Local Content Evolution and multi-faceted nature of local content Government & State Entity Relations Strong Standards (compliance, legal, HSE, transparency) Public Relations & Communications National Supplier & NOC Development National Workforce & Development Copyright © 2015 Accenture All rights reserved. Community & Social Development Financial, Economic & Industrial Development 6 Maturity levels Maturity levels differ by country yielding varying results Outcome Local Content Policy Maturity Level • Small regional gains • Small increase in employment of local labour • Small increase in local supply of goods and services by small enterprises • Expansion of the number of suppliers in the chain Basic Local Content Model Isolated initiatives for local industry • Increased local supply of goods and services by medium / large enterprises • Government incentives to develop new business in country and increase local competitiveness Emerging Local Content Model Level I Level II Level III • Isolated actions to promote local industry • Often leveraged by foreign companies • Focus on local workforce employment and local infrastructure improvement • Local content concept defined • Local content targets are set • Main supply capabilities and gaps identified • Local content regulation established • Local content initiatives sponsored by government and private companies in place Copyright © 2015 Accenture All rights reserved. • Local industry internationalization • Competitive industry encourages development of pioneer technologies Excellence in National Industrial Development Level IV • Supplier industry at worldclass Level (competitive to export goods and services) • Reduced need for maintenance of Local Content requirements • Employment generation and maximized income 7 Challenges in Capital Projects Local Content and infrastructure accounted for over half of all nontechnical issues a recent global study 100 $1bn+ projects $362bn overruns 90.5 years overruns Root cause analysis % of issues causing cost and schedule overruns by category Non-technical Technological Geophysical Talent Financial volatility Supplier availability / quality Forecasting Control / management Engineering quality Scope change FEL Local content 3% 3%2% 4% 5% 6% 6% Infrastructure 4% 3% 28% Enviro. regulation / lobby Legislation 6% 42% Political / social 11% Environmental incident 7% Ownership / rights 11% 22% 8% 12% 8% Security Corruption 11% Source: Accenture Research Copyright © 2015 Accenture All rights reserved. 8 A Framework for Local Content A broad framework for safeguarding value 1. Strategic Strategic Planning Operating Models Policies & Strategies 2. Tactical Demand & Supply Planning Internal Processes Development Programs Corporate Systems KPIs CAPEX OPEX 3. Operational Planning, Monitoring & Reporting tools Copyright © 2015 Accenture All rights reserved. 9 Australian Local Content Initiatives Examples of existing Local Content initiatives Project Opportunities: listing of projects Project Opportunities: Comprehensive with corresponding tenders online system with listing of projects and suppliers Supplier Directories: listing of suppliers’ Supplier Opportunities: Identifies over profile by geography and industry 1,100 sub-tier operations and maintenance opportunities that can be targeted by SMEs Copyright © 2015 Accenture All rights reserved. 10 Australian Local Content Outcomes Local content in Australia for new projects increased whilst local content in operating projects is close to 80% 2013 2009 New Projects 26% Australia 48% 52% Australia Other Other 74% AUD$ 16.5 Billion 2013 2009 Operating Projects 23% 20% Australia 80% Source: Department of Western Australia; Department of Commerce Local Content Report May 2011 & Local Content Report May 2014 Copyright © 2015 Accenture All rights reserved. Australia Other Other 77% AUD$ 14.1 Billion 11 Impact of the Industry Participation Framework State and company related funding created a measureable impact ROI of $1 Monetary Impact $100 200 150 100 $75 50 0 Round 1 Round 2* $50 Total value of major contracts (AUD $M) $182.5 $14.2 Labour Impact $25 400 300 200 $0 100 Round 1 Round 2* *Round 2 results are for regional contracts only. Round 1 results included all contracts. Source: Department of Western Australia; Department of Commerce Local Content Report May 2014 Copyright © 2015 Accenture All rights reserved. 0 New Staff Round 2* Round 1 16.5 292 New Apprentices 2 26 12 Local Content in Action Opportunities are increasingly prevalent as we transition to operations “The fibre optic cable will Onslow, Barrow Island, Gnoorea and Wheatstone” “The first Native Title Agreement for onshore oil production in the Kimberley” Octob er 2014 Australian EPA March 2015 The West Australian “An opportunity for EDG to expand their business and staff in Australia” June 2013 GHD Press Release “The vessels have been specifically designed to meet the FLNG facility’s unique marine services” Feb ruary 2014 Shell Press Release Copyright © 2015 Accenture All rights reserved. 13