Oil Linkages

Oil and gas producers in Africa, like developing countries across the globe, face a particular problem in pursuing state-led development. The resource curse, and specifically the phenomenon of “Dutch disease,” in which an exporting industry brings in foreign capital and causes the local currency to appreciate, makes exporting other local products abroad difficult. But as long as oil remains a valuable commodity, it will remain an alluring opportunity for development.      

Economist Albert Hirschman notably argued that development can include both backward linkages (supplying the goods and services required for oil and gas extraction) and forward linkages (processing, refining and beneficiation activities). In recent years, there has been increased attention on local content policies (LCPs), which national governments have used to secure a degree of control over both forward and backward linkages otherwise left to the discretion of multinational firms. These policies increase the utilization of national human and material resources in the extractive sector, while domiciling within the country economic activity that previously went abroad. Far from more radical approaches such as nationalization, LCPs do express a kind of resource nationalism. As a form of industrial policy, they seek to increase national control of, and benefit from, extractive industries.

Thanks to the centrality of oil and gas to the global economy, LCPs in these industries offer significant potential for broadening development. Countries can design their LCPs to touch multiple aspects of the national economy, developing not only heavy industry but the skills and capacity needed for a variety of non-oil economic activities. In this respect, LCPs in the oil and gas sector eschew any dichotomy between “traditional industrial policy” and “global value chain-oriented industrial policy,” two strategies economists often distinguish from one another. Because the state’s power in oil and gas—vis-à-vis both petroleum rents and its ability to regulate the sector—enable it to support meaningful participation by local companies, LCPs bely the argument that today’s supply chains foreclose the old developmentalist goals of moving a national economy into higher value-added processes.

Historical oil producers Angola and Nigeria led the way in implementing LCPs in Africa in the early 2000s.¹ Over the next decade, newer oil and gas producers such as Ghana and Tanzania followed.² Sufficient time has now passed to evaluate what this approach has achieved. Results for Angola and Nigeria have not entirely met expectations, but their achievements are nevertheless significant.

State-led development in Angola

In Angola, the state oil company Sonangol took the lead in promoting local content. In 2003, the government of José Eduardo dos Santos passed a law that classified oil-industry procurement into three categories: the first for goods and services that foreign companies could only purchase from Angolans, the second for those purchases made by foreign companies working in association with an Angolan company, and the third (less common) category for foreign companies offering services without a joint venture .

Angola had and continues to have significant potential for industrial “petro-development.” Chinese financing, which began flowing into the country in the aftermath of the Civil War (1975–2002) and was directed at reconstruction and the development of infant industries, was especially important in these efforts.³ Often used towards large infrastructure projects, this financing had important spillover effects in the Angolan economy and led to substantial job creation.⁴

The local elite have also, more often than not, misused their country’s LCPs to benefit themselves—what I refer to as “dual nature of local content.”⁵ While many scholars have dismissed Angola’s development efforts as the result of neopatrimonialism, any discussion of its political economy must consider the country’s experience with colonialism, war, socialism, and liberalization.⁶

Nevertheless, there was significant promise for industrial development following the war, particularly in the petroleum services sector. Post-war reconstruction coincided with the global commodities boom. As new oil projects were developed in the country’s ultra-deep waters, gains were made in local content. This culminated in the Kaombo project, operated by TotalEnergies SE, the integrated French energy conglomerate. The Kaombo Floating Production, Storage, and Offloading (FPSO) vessels were completed in 2018 and 2019 respectively. 

Kaombo represents a “high water mark” of local content and in-country value added in Angolan oil and gas. The project involved a larger number of semi- and unskilled workers, mostly locals employed by domestic and foreign oil-service companies in activities such as catering, security, and cleaning. At its peak during the construction phase, the project provided direct employment to over 4,000 people. This involved 50 million person-hours of direct and indirect work across the globe, including a national peak of 14 million local person-hours of work (See Table 1).⁷ When oil prices began to drop in 2014, however, sustaining high levels of local content became more difficult. At the same time, cost-cutting set in as the sustainable energy transition picked up pace. As a result, the levels of local content achieved with Kaombo are unlikely to be seen again.

Table 1: Local Hours Worked in Major Projects by Total

Manufacturing and fabrication activities for Kaombo are still significant in laying the foundation for an expansion of heavy industry. Kaombo involved 84,000 tons of structures built by Angolan yards, including much of the sub-sea infrastructure, FPSO manifolds, and more. In order to achieve this level of local content, Total relied on nine Angolan oil-service yards that it had been involved in establishing (Table 2). These yards, located at various industrial centers, are now the backbone of the Angolan oil-service industry.

Table 2: Major Angolan Yards Supplying Kaombo

There are various obstacles to measuring the long-term impact on Angola’s industrial development of the foreign investments by Total and other international oil companies during the commodity boom. It is difficult to define and measure local content, as much of the data is considered proprietary by the foreign companies involved. Moreover, once oil prices dropped in 2014, the scope for petro-development shrank considerably. 

Angola’s potential for state-led development extended beyond the petroleum sector in the 2000s and 2010s, as the country experienced high annual growth rates in manufacturing from 2002 to 2012. Studying the country’s building-construction and beverages sectors, Christina Wolf identified significant new investment—mainly from Angolan firms—due to tax reforms and the tariff structure put in place to incentivize investment.⁸ The Angolan state also built schools, hospitals, water and sanitation infrastructure as well as large-scale, state-led housing delivery.⁹ But with the decline in world oil prices and the dual nature of local content, the long-term impact of Angola’s developmental approach remains uncertain, and it may not become apparent for years or even decades.

State-led development in Nigeria

As in Angola, Nigeria’s state oil company, NNPC, began implementing LCPs in the early 2000s. The Nigerian Oil and Gas Industry Content Development Act (NCA), legislated in 2010, shaped regulation to develop backward linkages through Nigerian content. The result has been a transformation of the industry. A new agency, the Nigerian Content Development and Monitoring Board (NCDMB) was created to increase local content. In 2017, the NCDMB set a ten-year goal of achieving a 70-percent share of local content, aiming to create 300,000 direct jobs and retain in-country $14 billion of the oil and gas industry’s estimated $20 billion annual spend by 2027. From about 5 percent in the early 2000s, local content under the NCDMB rose to an impressive 54 percent in 2022 (though it appeared to level off during 2023).

Such pronouncements should be met with some skepticism; verifiable data on Nigerian content is difficult to find. In one survey of 209 oil service firms in the Niger Delta, Adedeji, Sidique, Rahman, and Law found LCPs had “a positive and significant impact on increasing local value creation vis-à-vis increased local firms’ participation and backward linkages development.”¹⁰

Anecdotally, several indigenous oil service companies have developed since 2010 and now regularly supply goods and services that were previously only available from foreign firms. A small selection of Nigerian firms that have grown in prominence in recent years is presented in Table 3. A 2017 report from UNCTAD concluded that, “The evidence on capacity building shows that policies and institutions relation to local content in the oil sector allowed the development of a few leading domestic companies that are able to compete internationally in the African oil sector.” Through its Project 100, the NCDMB aims to nurture 100 such wholly indigenous firms through access to planning, market opportunities, data, and events.

Table 3: Selected Nigerian Oil Service Companies¹¹

As in Angola, state-led development in Nigeria goes beyond oil and gas. Under President Olusegun Obasanjo, the government launched a Backward Integration Policy (BIP) in the early 2000s with the aim of supporting local companies in sectors like cement and sugar processing that could exploit Nigeria’s limestone and sugarcane resources. Policies involved import quotas, concessions on tariffs or levies, tax exemption on certain investments, government consumption and investment, and infrastructure development.¹² Businessman Alko Dangote—Africa’s richest man—was one of the principal beneficiaries of the BIP, but beyond that, the program did help to stimulate his and others’ investment in productive capacity, rather than financial speculation.¹³

There has been some debate over whether Nigeria should be considered a developmental state that initiates industrial upgrading or a predatory state that operates solely on a neopatrimonial basis. Economist Zainab Usman has concluded that the answer must lie somewhere in the middle, wherein episodic or selective reforms can be understood as outcomes of an “intermediate” state.¹⁴ Many authors continue to regard Nigeria, particularly its ventures in oil and agriculture, through the lens of the developmental state paradigm. But while criticisms of slow progress and initiatives derailed by elite predation are valid, no developmental state fully matches the ideal type. The developmental state paradigm thus remains useful for understanding both success and failure, and in the case of Nigeria its long-term potential is undoubtedly significant.¹⁵

A structural transformation?

Though there is impressive potential for LCPs in oil and gas development, poor implementation and volatility in commodity prices have undermined progress. Angola’s attempts at state-led development faltered for a number of reasons, not least of which the ways in which the accumulation strategies of the Angolan elite resulted in the privatization in 2016 of many large agro-industrial farms financed and constructed by China.¹⁶

While Nigeria has adopted LCPs that on the whole are less precise and enforceable, the country is making progress in increasing their domestic benefit from oil and gas. In the long run, it may be better able to translate this progress into broader structural transformation—due to the size and significance of its oil production and reserves and the economy more generally. Countries can realize success with industrial policy rooted in the petroleum sectors in spite of the machinations of predatory elites. 

As with import-substitution industrialization, the long-term benefits of LCPs for structural transformation in both Angola and Nigeria may not be clear for decades. Interventions that build human skills, know-how, and industrial capacity, therefore, should not be prematurely deemed to have failed. Angola and Nigeria show that states are neither wholly developmental nor wholly predatory. State-led development remains the only approach to late industrialization that has ever succeeded in developing a productive national bourgeoisie and achieving structural transformation. Given the well-known problem of the resource curse, LCPs and the pursuit of strategies broadly understood under the rubric of “resource nationalism” are essential for the possibility of resource-based development in Africa.