Localisation is the key to success in overseas markets

The UK oil and gas supply chain exports about £12.3bn of goods and services per year, but only 20% of UK supply chain firms export – leaving plenty of potential for growth. Indeed, the Oil & Gas Authority’s (OGA) Vision 2035 has set an ambitious target to double the UK’s share of exports from 3.7% to 7.4% — generating an additional £150bn for the UK economy.

However, overseas markets with strict local content rules are often seen as tough to access by UK exporters, especially smaller ones. Some companies tend to avoid the detail, placing it in the ‘too difficult to think about’ box, according to Paul Yates of Efficio Consulting – the firm commissioned by the government of Saudi Arabia to develop the country’s national Local Content Programme.

Changing practices

This may now be changing, partly as a result of a redesign of many local content regimes, along with a changing approach from UK exporters. Dr Michael Warner, Director, Centre for Local Content Innovation, says that some entrepreneurial UK companies are now beginning to switch from seeing local content regulations as a barrier to entry, towards a view that if the regulations are better understood, they may afford an opportunity for market access.

Most countries seek several key elements from outside investors or suppliers, including compliance with local content rules, a local supply base and use of local labour – and, increasingly, the willingness to demonstrate a long-term commitment to the country’s development.

Securing a competitive advantage

A growing number of governments are establishing local content policies that require multinational companies to stimulate broad-based economic development through local purchasing and hiring. Local content can include the procurement of goods and services from local vendors, employment and training of national workers, development of local business institutions, improvement of local technological capabilities, and joint ventures and other types of partnerships.

More and more, UK exporters must offer local investment and opportunities for local suppliers in their bids. By offering a strong local content, there is an increasing chance of gaining a competitive advantage in the tender process, according to Dr Warner, although there can be some trade-off between market access and revenue. Companies therefore need to understand how they are going to be assessed, and factor that into their proposals.  

Local designed solutions

To establish a company as a trusted long-term partner, Mr Yates says a deep local understanding of the market in question is required: ‘Companies need to understand what the local market wants, and not just meet the basic requirements – what are the host government’s objectives, and what do I have to offer to help meet those objectives?’

Providing clear, quantifiable benefits to the local economy enhances relationships with host governments, increasing the likelihood of competitive differentiation in bidding rounds and negotiations. Providing jobs to local communities is also important in helping to establish a social licence to operate.

Operators must, of course, recognise the quality of the local content provision in any bid. But national oil companies (NOCs) should be well primed, and most international companies (IOCs) and majors are already experts at the local content process, having long recognised that it is essential to becoming a trusted partner of government and minimising political risk. ‘All IOCs now understand this, it’s not just a ‘nice to have’… local content is fast becoming the new compliance regime, with rules codified in legislation and regulation, even though not yet standardised across the industry,’ says Dr Warner. He adds that many smaller UK companies are not fully aware of the opportunities these regulatory rules offer.

Mr Yates says that Norwegian companies have the reputation of being the ‘poster-boys’ of local content strategy, having been extremely successful in accessing overseas markets.  However, he notes that this may also have been influenced by their offering, which tends to be technology driven with high-end skills and services; this may also be an avenue for UK firms.

There are other advantages to both NOCs and IOCs of having local firms partner with international suppliers, including improved supply chain resilience and lower costs and risks. ‘Building local content can take time and investment, but done well can create cheaper and quicker supply chains,’ says Dr Warner – by, for example, using lower cost labour and land. However, additional costs can result from the quality of the local industrial base and strength of regulation. And ‘if local content targets are excessive, it probably won’t work – investment costs must be passed through.’

Local ownership, or just local value?

When it comes to local content, there tends to be a division between countries favouring local ownership, and those that are primarily focused on value to the local economy. Brazil, Mexico, Pakistan and Saudi Arabia fall into the latter category, whereas in Africa, ownership 
is more important. In Angola, for example, the priority is to buy from local suppliers, but if they are not available, purchases can be from joint ventures (JV) or another form of alliance.

‘There’s no cookie-cutter approach, as all regulations are slightly different,’ says Dr Warner. For example, whether a JV is 50% locally owned or 51% locally owned very much affects the degree of control, and therefore the willingness of international suppliers to invest.

And when deciding whether to establish local facilities, longer-term prospects are key. For example, a pipeline coating company funded a bid in east Africa on the basis that it would set up local coating facilities, says Mr Yates. But it was only possible because people need pipes and wires coating for all sorts of reasons, so a viable long-term market was available once the initial contract was complete. He also notes that Tullow Oil has a strong brand around local content and social responsibility – ‘it was an important differentiator for them, and self-sustaining.’

There is a particularly strong push for local content in the Middle East, sometimes referred to as in-country value, where a number of countries are seeking to diversify reliance away from oil revenues. This is true in Saudi Arabia, where the local content policy is explicitly laid out in the government’s Vision 2030 document, released in 2016. The Saudi government believes this will help to create 450,000 jobs in the non-government sector by 2020, reducing the country’s reliance on sourcing labour from overseas, and increasing the job opportunities for a growing population of Saudis for which the public sector can no longer satisfy.

Exporters also need to be aware that new local content rules could squeeze them in established markets. For example, Saudi Arabia’s largest mining company has been told to raise local content, so those with existing contracts will need to develop local supply chains – albeit without the necessity 
of local ownership.

Think global, act local

By effectively analysing the latest approaches and underlying objectives of local content policy in countries around the world, UK oil and gas exporters can better expand access to overseas markets – ensuring long-term growth and bringing total exports closer to the OGA’s Vision 2035 target. 

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