Putting the Low in Local

I once heard a story that the people running a Nigerian refinery were so useless that they were unable to produce petrochemical products and so switched to making oil drums instead.  And this story turned out to be true.

The people in charge of Angola LNG seem to have found themselves in a similar situation, only on a far grander scale:

The Angola LNG consortium is looking to charter out its entire fleet of liquefied natural gas carriers after a recent pipeline rupture forced the new plant offline, according to a report.

One of seven vessels has already found a short-term charter, according to Reuters, which said the consortium has approached shipbrokers about the whole fleet.

It’s hard to describe how fucked up this is.  A consortium run by Chevron, who normally have a reasonably track record of project delivery, is reduced to renting out ships which it had hoped would be ferrying about LNG cargoes from one of its plants.  Presumably the company vehicle fleet is being used for taxi runs and pizza deliveries in Luanda.

The problems with the facility – engineered and constructed by the usually reliable Bechtel – are of epic proportions:

Angola’s $10 billion liquefied natural gas plant is expected to be offline for a “number of months” as repairs continue following a pipeline rupture on 10 April.

The Angola LNG consortium said it could not provide a firm restart date for the 5.2 million tonne-per-annum facility in Soyo, but Upstream understands it could be up to a year.

“A pipe connection at the plant failed, resulting in a hydrocarbon vapour release into the atmosphere,” a spokesman said in a statement.

“Further investigation continues but initial findings suggest that a number of actions will now be required.”

Yeah?  What sort of actions?

Sources with knowledge of the situation told Upstream that the plant could take up to a year to get online again, and nearly a third of the facility may need rebuilding work due to poor materials and design issues.

Jesus fuckitty-fuck!  A third of the plant needs to be rebuilt?  Glad it’s nothing serious!

People – me included – might wonder what the hell has gone wrong here.  How has Chevron and Bechtel combined to produce a fuckup of such magnitude?  And viewed in parallel with the equally fucked up Kashagan project, there are plenty of questions but not much by way of answers.  The oil companies are mumbling vague statements about “challenges” and “technical issues”, and the industry insiders are still trying to ascertain quite how bad the situation is.  I don’t think anybody has the resources, let alone will, to try to determine how things could have gotten this bad.

There are several reason why projects can go so badly wrong, mostly involving piss-poor management at one or several stages of the project leading to poor technical decisions and the unsatisfactory performance of contractors, either one of which will leave a project miles from completion with the budget blown.  Now I don’t know what has caused the problems at Angola LNG, but regardless of the exact cause there is an elephant in the oil industry living room which management dare not mention: local content.

“Local content” is the industry term for the legislation in force in many developing countries which requires an operator to hire locals in its workforce and utilise local services such as engineering and construction contractors, and local suppliers.  Most of the time quotas are imposed, and those quotas have gradually been increasing.  Brought in to ensure that local people and companies take part in the activities of an oil company thus transferring knowledge and creating markets, employment, and other benefits, the theory behind the laws is sound enough.  Even this skeptic would think something is amiss if a major project was executed in the developing world using imported labour and materials and no benefits were transferred to a local population who are in desperate need of an economic boost.  Such a situation would understandably cause resentment among the locals, some of whom would be tempted to turn to violence.  Resentment from the locals at their perceived disadvantages vis-à-vis foreign workers was the root cause of the clashes between native Kazakhs and Turkish workers in Tenghiz in 2006.

The problem is, as with so many well-intentioned initiatives in the developing world, in many cases the system has become utterly distorted and actually does the opposite of what it is supposed do, i.e. it prevents a country or region developing as much as it should.  The reasons for this are simple: most countries with local content legislation are backward, underdeveloped, and poor.  To varying degrees depending on the country, this state of affairs is brought about by corruption, greed, nepotism, and a culture of callous neglect by the ruling elites.  Quite unsurprisingly, these ruling elites apply the same characteristics to the local content legislation with the following results:

  1. Favourable positions in oil companies are awarded to those who are politically connected, who in turn employ members of their family and friends.
  2. The politically connected, often those who oversee the implementation of the local content legislation, form or obtain interests in businesses which are then put on a shortlist of approved local suppliers.  Locals within oil companies do the same thing, and award themselves contracts.
  3. Local workers or companies without connections in the company often find themselves frozen out, regardless of ability or competence.
  4. Many local employees who know that prevailing legislation requires their continued employment take full advantage to do absolutely fuck all.
  5. Many local suppliers who know that prevailing legislation guarantees contracts for goods and services have no incentive other than to deliver absolute shit, hopelessly late, and ludicrously overpriced.
  6. In order to maintain a percentage quota of locals, oil company departments are overstaffed with 20 locals doing what 3 could do quite adequately.

The knock-on effects of this situation are many, almost all of them negative, and I shall not go into each of them now.  But I will say two things.

Firstly, local content legislation usually results in direct and indirect cash transfers running into the millions of dollars from oil companies to the host country’s ruling elite, who are usually already fabulously wealthy.  I mention this simply because it is absolutely scandalous, and I will likely return to this subject in future.

Secondly, the oil companies are often forced (to a point) to accept designs, constructions, materials, and equipment from local contractors and suppliers which are inadequate, non-compliant with technical standards, and dangerously unsafe.  For this, they are charged two, three, sometimes four times what they could get it done properly for in Houston or Aberdeen.  If the oil company protests, the governmental authorities in charge of implementing local content legislation will simply tell them that it is their responsibility to “assist” the local contractors in bringing their work up to standard.  Given any corrective works are also subject to local content legislation – meaning they would likely have to use the same company that fucked the job up in the first place – the oil companies, with one eye on the projects schedule or production profile, just press on regardless with whatever has been delivered.

Yes, this happens: major western oil companies knowingly install defective equipment into defective, unsafe designs in the developing world because they are practically forced to by local content legislation.  Even more often, to the point it is routine, they do so unknowingly.  In the past decade or so, local content requirements have been ratcheted up relentlessly at the same time the developments have become more and more technically challenging.  This is only an opinion, and it is backed by no evidence whatsoever, but I have an inkling what we might be seeing here on Angola LNG and Kashagan is the predictable result of local content policies: poorly engineered and constructed facilities which reveal themselves to be dangerously unsafe when started up.

If I’m right, the oil companies have a major problem here.  Eager not to upset host governments, and desperate to gain access to their coveted reserves, oil companies have accepted increasingly unrealistic local content requirements while expressing confidence in their ability to manage them which is demonstrably misplaced.

I write this post mainly as an introduction to the issue of local content, which will likely feature in future posts.

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3 Responses to Putting the Low in Local

  1. Mike says:

    Interesting article, but you skipped over the major embarrassment of management at this and other projects. Major O&G company employees are selfish in their ambitions. They have no interest in the actual project they are involved. Their career is all that motivates them. This career depends upon impressing by what ever method possible within a short period, and then they move on to better things. So for instance, saving money is a great way to impress. So say an manager has the control over assets for instance, so he cuts procurement by 50%, he can save tens of millions of dollars and recieve a gold star. But what happens when the assets are required? What does he care, each assignment is around 2 or 3 years, its a gamble but what ever he has done to save money is unlikely to affect him as he is long gone. This selfish attitude of the career is everything is a major contributing factor to bad management. Along with the employess knowing its all a game and helping each other along. What this method of employee promotion enables is thick, stupid managers being able to play a game and advance. So eventually all the people at the top are so corrupt and thick the projects fail due to outright imcompetance. Does top mamnagement care? Well how did they achieve their career in the first place?
    Other factors, Controlling partners lack of knowledge of the process and employing imcompetance personnel which directly leads to many incidents at site.
    Also EPC dominance of the PMT allowing the EPC to build what they wanted as cheap as possible without realising that the problems would over take them before they could handover.
    The local content and rampant bribary puts the icing on the cake.

  2. Kathy D says:

    It sounds to me that local governments and oil and gas companies need to work together to resolve this matter to provide positive outcomes for both sides. Unfortunately, what I’ve found in working in the oilfield, is that greed gets in the way. Your article surely does point this out for both the oil and gas company and the local government, and Mike’s comment provides the point of view of the O&G employees.

    Another point to mention is that the O&G companies may be more than happy to pay the local communities just avoid having to deal with all the certifications and inspections that go along with drilling. There is now so much paperwork and audits needed for just one piece of equipment to be on a rig, that I can see how working with local governments could be beneficial.

    I’m not saying that this is the best solution. There must be a balance in all things, and there is no exception to this rule.