How international oil and gas companies respond to local content policies in petroleum-producing developing countries: A narrative enquiry

Energy Policy 73 (2014) 471–479

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How international oil and gas companies respond to local content policies in petroleum-producing developing countries: A narrative enquiry Michael Zisuh Ngoasong n The Open University, Walton Hall, Milton Keynes MK7 6AA, United Kingdom

H I G H L I G H T S







Local content policies define the local context that shape IOCs’ business practices. Provides a narrative analysis of the business practices of IOCs in developing countries. IOCs use four narrative strategies to relate their business practices to local content policies. The business practices of IOCs can determine the effectiveness of local content policies.

art ic l e i nf o

a b s t r a c t

Article history: Received 28 February 2014 Received in revised form 5 May 2014 Accepted 28 May 2014 Available online 20 June 2014

This paper uses narrative analysis to critically examine the business practices used by five international oil and gas companies (IOCs) (Chevron, ExxonMobil, Shell, BP and Total) to respond to local content policies in petroleum-producing developing countries (Nigeria, Angola, Venezuela, Kazakhstan, Brazil, Indonesia, Yemen and Indonesia) during the period 2000–2012. The business practices include the formulation of local content strategies that are implemented through programmes and initiatives aimed at developing and using host country suppliers and workforce. Such practices and the narratives used to communicate them implicitly reflect the context in which the effectiveness of local content policies on economic development can be assessed. By comparing and contrasting the narratives across the five IOCs in relation to the wider literature, four emergent narrative strategies justifying the business practices of IOCs are identified and discussed. They include: (1) direct engagement to renegotiate local content requirements with governments, (2) legal compliance framework, (3) the business case for local content strategies, and (4) corporate social responsibility (CSR) initiatives. The conclusion considers the policy implications of these findings for local content development in petroleum-producing developing countries. & 2014 Elsevier Ltd. All rights reserved.

Keywords: Local content policy IOC business practices Petroleum-producing developing countries

1. Introduction Over the past decade, petroleum-producing developing countries have come under international scrutiny regarding institutional reforms involving the enactment of local content policies to regulate international oil and gas companies (IOCs). The policies require IOCs to give preference to the development and use of local suppliers and workers when sourcing technical inputs and human resources for petroleum production.1 The use of local content policies to stimulate

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Corresponding author. Tel.: þ 44 1908653192. E-mail addresses: [email protected], [email protected] 1 Since 2000 a number of high profile commissioned studies involving governments, international agencies, IOCs, think thanks and civil society groups http://dx.doi.org/10.1016/j.enpol.2014.05.048 0301-4215/& 2014 Elsevier Ltd. All rights reserved.

domestic manufacturing and create employment is not new; however it has become prominent in the petroleum industry in developing countries in the last decade (UNCTAD, 2007) due to ongoing measures by governments to legislate previously local content directives/guidelines (Kazzazi and Nouri, 2012). The pressure on IOCs to make a positive contribution to economic development through their operations in developing

(footnote continued) high the significance of local content policies in enhancing the linkages between the petroleum industry and socio-economic development in producing countries (e.g. CRES, 2008a,b; IPIECA, 2011; Tracy et al., 2011; Wilson and Kuszewski, 2011). Mendonça and de Oliveira (2014) illustrate how local content policies became prominent in Brazil and wider Latin America.

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countries has a long history, ranging from contributions to government revenue through fiscal regimes and legal contracts (Dongkun and Na, 2010; Auty, 2012) to ad-hoc corporate social responsibility (CSR) initiatives (Auty, 2012). Many studies suggest that this approach, despite being socially desired (Lessard and Miller, 2001) contributed to making the petroleum industry in most developing countries a ‘resource curse’, a term used to explain the failure of many petroleum-producing developing countries to achieve sustained and equitable economic development (Dieck-Assad, 2006; Auty, 2010, 2012). Where local content policy has been cited as an attractive complementary policy to address the resource curse problem, industry players express concerns about the targets being set as ambitious and a potential barrier to foreign direct investments (FDI) (UNCTAD, 2007; Bakare, 2011). One key question has received limited attention among scholars of energy policy: how do IOCs grapple with the challenges involved in complying with local content policies in petroleum-producing developing countries while remaining competitive? The above question is particularly relevant because local content policies ‘may have commercial implications for investors, operators, developers and service providers, which in turn may result into substantive public policy repercussions’ (Sigam and Garcia, 2012, p. 6). Shortage of skilled local workforce and under-developed technical infrastructure make it difficult for IOCs to sustain their operations without using expatriate staff and imported inputs (Ismail, 2010; Warner, 2011). However, by developing and using local procurement and local workforce, IOCs can achieve cost effective and sustainable operations as well as secure social license to operate (Sigam and Garcia, 2012; UNCTAD, 2007). Existing studies have focused on the role of governments in legislating previously local content directives/guidelines into laws to maximise the benefits of petroleum production (UNCTAD, 2007; Klueh et al., 2009; Kazzazi and Nouri, 2012). The evidence suggests that local content policies are shifting the emphasis from revenue maximisation through fiscal policies to an increasing focus on IOCs' contribution to wider societal development through local content policies. This paper therefore contributes to the energy policy literature by analysing the business practices used by IOCs to respond to local content policies. The proposed framework suggests that local content policies define the local contexts that shape the business practices of IOCs. Business practices are defined as the activities that IOCs undertake to deal with suppliers (Blalock and Simon, 2009; Zhou and Xu, 2012) and human resources (Bjorkman et al., 2007) in host countries which enhance their local legitimacy and competitiveness (Campbell, 2007; Reimann et al., 2012). Using this conceptual thinking the paper uses narrative analysis to examine the narratives used by IOCs to describe and justify the business practices they have adopted to respond to local content policies. Narrative analysis has been shown to be useful for analysing how public, private and civil society actors interpret, negotiate or respond to policy-related issues in the energy (SwiatkiewiczMosny and Aleksandra Wagner, 2012; Sovacool and Drupady, 2011), healthcare (Ngoasong, 2009) and agriculture (Hananel, 2010) sectors. Narratives are stories, events or language (Bruner, 1991) published by IOCs and their associates during the period 2000–2012. These narratives are compared and contrasted to construct the narrative strategies (or rational for emphasising one or more practice over another) (Ngoasong, 2009) that IOCs use to justify their local content-related business practices. Five IOCs namely, Chevron, ExxonMobil, Shell, BP and Total are used as case studies and their business practices are drawn from Nigeria, Angola, Venezuela, Kazakhstan, Brazil, Indonesia, Yemen and Indonesia. The paper argues that the role of local content in stimulating economic development of petroleum-producing countries critically depends on the business practices used by IOCs to respond to local content policies. Such practices implicitly reflect

the context in which local content policies are produced and implemented. The paper is structured as follows: Section 2 develops a framework for analysing local content policies and describes the research method used. Section 3 presents the results from the narrative analysis of the business practices of IOCs while Section 4 discusses the emergent narrative strategies. Section 5 presents conclusions and policy implications.

2. Materials and methods 2.1. The evolution of local content policies in petroleum-producing developing countries For the purpose of this paper, local content is defined as ‘the purchase or use by an enterprise of products of domestic origin or from any domestic source’ (UNCTAD, 2007, p. 2) or a regulatory requirement that ‘some specific fraction of a good be produced domestically’ (Hill, 2012, p. 219). This fraction can be expressed in physical (e.g. component parts) or in value (percentage value of a product) terms. Box 1 provides an overview of the evolution of local content policies in eight developing countries. The overview for each country reveals the historical perspective, evolving nature of the policies including some broad commonalities and differences across the eight countries. 2 The main commonality is the evolution from guidelines/directives to legislations. Apart from Yemen, all the countries now defined targets for local procurement, hiring of local workers and penalties for non-compliance, all of which undergo periodic reviews. Another commonality is that while IOCs are the main target, through added value contribution to a host country's economy, host governments have more ownership and decision-making power on the nature and extent of local participation in the petroleum industry. Notable differences include variations in the precise definitions and provisions, levels of IOC obligations, and the extent to which there are enforcement tools available to host country governments (see also Sigam and Garcia, 2012). Angola and Nigeria now have local content laws that have been validated through parliament while Venezuela has focused on increased state-ownership through nationalisation. Kazakhstan and Trinidad and Tobago are following a similar trend to Nigeria and Angola in legislating previously local content guidelines. As a country with a small petroleum industry base, Yemen does not have any legislation on local content as all existing initiatives are mutually agreed between the governments and IOCs. Exploring the business practices used by IOCs to respond to these local content requirements can enhance our understanding of the role of local content policies in ensuring that the petroleum industry produces desired economic development outcomes. 2.2. IOCs and economic development: The case for local content policies The main argument explored in this paper is that the role of local content in stimulating economic development of petroleumproducing countries critically depends on the business practices used by IOCs to respond to local content policies. The political economy of petroleum production in developing countries has always been dominated by the role of the state (or government) and those of IOCs in ensuring that the petroleum industry contributes positively to economic development. The industry accounts for the largest proportion of FDI, primary commodity 2 Klueh et al., (2009), p. 1133 provides a similarly historical overview of the development of local content policies in Norway, Denmark, Australia, Brazil, Malaysia, and Trinidad and Tobago.

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Box 1–Examples of local content development in selected developing countries. Source: (a) Wiig (2001), CRES (2008a,b), Teka (2011); (b) Nigerian Content Development and Monitoring Board (http://www.ncdmb. gov.ng/), Oyejide and Adewuyi (2011); (c) IPIECA (2011), Mendonc¸a and de Oliveira (2014); (d) Wilson and Kuszewsk (2011), Esteves et al. (2013), Hackenbruch and Pluess (2011), World Bank (2012); (e) IBP (2009); (f) Hackenbruch and Pluess (2011), Esteves et al. (2013); (g) Sigam and Garcia (2012); (h) Esteves et al. (2013). ANGOLAa 2003: The 1982 Decree 20/82 on Local Content was re-written as Decree 127/03 and at the same time Law No. 14/ 03 was passed to promote Angolan private enterprises. It had two main provisions: (1) 90% Angolanisation’ or increased use of Angolan staff including succession plan for expatriates; (2) Industrial Development—Rules on which IOCs give priority to Angolan goods/services, bid for certain tenders tied to contracts with local companies and levies for noncompliance. IOCs are required to submit a plan by which both provisions would be met and a final decision is then made by The Minister of Petroleum. IOCs are also required to submit every quarter “report of accomplishment” without which they face defined penalties or cancellation for non-compliance. NIGERIAb The 2003 Nigerian Oil and Gas Industry Content Development Bill and the 2005 Nigerian Content Policy respectively set directives on domiciliary of services; award of low-tech on-shore supply contracts to indigenous firms; and preferences for domestic sources of commodities, including target of 45% to be achieved by 2009. These directives became law with the enactment of the Nigerian Content Act in April 2010 and the Nigerian National Petroleum Corporation (NNPC) appointed as primary regulatory agency. The law stipulated that 65% of divers in energy projects must be Nigerian, and 60% of steel ropes must be made locally. It also called for partnerships between government departments and industry stakeholders to develop local strategies and ensure compliance. BRAZILc Local content was implicitly defined in the Petroleum Law of 1997 (Law 9478/97). From 2003 more explicit stringent and rigorous requirements were introduced: e.g. IOCs’ bid for E&P projects are assessed against explicit local content compliance requirements and these targets as well as the compliance requirements attached to them are increased/strengthened annually. In 2003 a National Program for the Mobilization and Development of Oil and Gas Industry (PROMINP) was established under the auspices of PETROBRAS to promote local capacity building. Resolution No. 36/ 2007 and Regulation No. 6/2007 define the criteria and procedures for implementing Local Content Certification; requiring IOCs to evidence up to 40% local participation for bids to be evaluated the country’s National Agency for Oil, Gas and Biofuels (ANP). KAZAKHSTANd 2007: Publish document formalising local content policy; 2009 – the Law of the Republic of Kazakhstan (No. 223-IV) formalised local content development and set targets for Kazakh contents in Works (60%), Services (70%), Staff (70–90% lower to senior personnel), service providers (95% local staff) and local goods (15%) to be achieved by 2012; 2010—A New Law on Subsoil and Subsoil Use sets target of 50% certified local procurement from Kazakh suppliers by 2012, mandatory joint ventures with KazMunayGas, the national oil company (51% minimum share) in all new exploration and production contracts and the powers to obtain field rights without open tender, IOCs that cannot satisfy requirements risk losing their preferential right to the extraction contract. VENEZUELAe Local content is considered to be very high in Venezuela although there are no local content laws. A 1992 degree established over 20% local participation requirement. This was followed by a succession of ad-hoc local contentrelated legislations emphasising ‘national interest’ and ‘social development’ of the country in all E&P project. Since 2001

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legislations advocate for 100% state-owned enterprises (e.g. PDSVA) where possible or various Joint Ventures with IOCs in which PDSVA has at least with more than 50% stake. Licenses stipulate obligations/guidelines for local participation and contribution to Local Content Fund. INDONESIAf 2007: The Law on Limited Liability Companies (2007) obliged IOCs to demonstrate budgeted Environmental and Social Responsibility (ESR) (Article 74) and to submit a report of evidence of successful implementation (Article 66); 2009—BPMIGAS (national regulator) under the Ministry of Industry’s “Technical Guidance of Usage of Local Production” Regulation 49 set minimum target of 35% domestic content in IOC operations and substantial fines for noncompliance; 2011—Regulation of Regents Number 48/2011 on petroleum local content in the district of Bojonegoro (Article 7, Chapter III, obliged IOCs to partner with local enterprises/entrepreneurs so as to empower local content development by giving preferences to advanced local enterprises/entrepreneurs to host projects). TRINIDAD AND TOBAGOg 2004: Publication of Local Content Strategy for the Energy Sector. It includes ownership, control, decision making and preferential access to financing by citizens of Trinidad and Tobago. It has three pillars each of which emphasised development of capabilities across the entire petroleum industry value chain: (i) local capability development, (ii) education and training and (iii) diversification and new business creation. The Permanent Local Content Committee was created to implement the strategy. The Government is to establish a database on the status of projects and opportunities for local suppliers, in order to assist operators to find local suppliers and vice versa. YEMENh Legislative requirements of the nature that exist in the seven countries above are comparatively rare. The government has introduced some form of mandated community engagement, but no targets specified. Whatever local content (or Yemenisation) element is found in IOC activities are based on consultations between the government and IOCs in a country that lacks a local content law. Without a legal framework, local content in the Yemeni context lacks definition beyond a desire for ownership.

exports and fiscal revenues; yet economic growth and development outcomes are relatively worsening, a phenomenon called resource curse (Auty, 2010, 2012). Without well thought-out policy interventions, this inverse relationship leads to stagnation of nonpetroleum sectors of the economy (or Dutch Disease), declining manufacturing exports (or increasing manufacturing imports), poor governance (Ettenborough et al., 2003; Dieck-Assad, 2006; Ismail, 2010), economic inequality and intra-state violent conflicts (Bannon and Collier, 2003). Historically, the petroleum industry was regulated by petroleum laws (production sharing and joint operating contracts) and fiscal regimes that favoured a techno-economic paradigm (Lessard and Miller, 2001). This was justified on the exceptionally capitalintensive production function of petroleum extraction and the fact that technology for petroleum production could traditionally be provided only by western IOCs, who placed shareholder maximisation beyond contributions to host developing country's economic development (Lessard and Miller, 2001; Dongkun and Na, 2010). IOCs were expected, rather than required, to undertake adhoc CSR initiatives that we endorsed by governments (e.g. ad-hoc provision of subsidies and social investments in regions where petroleum production activities are located) (Frynas, 2005; Gulbrandsen and Moe, 2005; Eweje, 2007; Auty, 2012). However, this approach fuelled public anger over the presence IOCs in developing countries: it favoured the adoption of western technology, use of foreign suppliers and expatriate workers by IOCs (Auty, 2012; Lessard and Miller, 2001), and providing governments

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with high rents that are misappropriated instead of being used to create domestic employment (Dongkun and Na, 2010; Auty, 2012; Click and Weiner, 2010). IOCs were also accused of running their business operations in ways that did not help developing countries deal with the resource curse problem (Frynas, 2005; Eweje, 2007). By legislating on local content, developing countries bind IOCs to a commitment to develop the host country's local economy as equally as the commitment profit maximise. Existing research suggests that local content regulations tend to benefit local firms by limiting foreign competition (UNCTAD, 2007; Wilson and Kuszewsk, 2011; Tracy et al., 2011; Hill, 2012). Local content policy places restrictions on imports thereby raising the prices of imported components and ensuring that locally manufactured components can be accessed by consumers at lower final prices. In the case of the petroleum industry, consumers are IOCs while producers are local firms (suppliers and contractors). Local content can therefore help to address the resource curse by stimulating domestic manufacturing thereby increasing domestic employment and income growth in host countries. However, the existence of local content policies does not necessarily guarantee such outcomes. The business practices used by IOCs to deal with the opportunities (e.g. low-costs labour and component parts) and challenges (e.g. shortage of skilled labour and poorly developed manufacturing base) associated with local content policies also determines the effectiveness of local content policies in helping host countries deal with the resource curse problem. 2.3. Local content policies as local context that shape IOCs business practices Empirical evidence from the international business literature suggest that how multinational companies in the natural resource industry respond to a host country's local requirements determines what difference they make to economic development (Liu, 2011; Henisz et al., 2013). The business practices of IOCs in the context of local content include actions taking to increase sourcing of local supplies (Blalock and Simon, 2009), dealing with local supplier opportunism (Liu et al., 2011; Zhou and Xu, 2012) and developing global human resources strategies (Bjorkman et al., 2007; Egels-Zanden, 2014) that can be adapted and implemented to enhance local legitimacy (Reimann et al., 2012) in specific host developing country. The success of such practices also depend on the formulation of clear business policy choices relating to financing, organisational forms and implementation (Chow et al., 2012). Murtha and Lenway (1994) suggest that the success of multinational corporations in a host country depends on well design strategies and practices to ensure effective responses to major changes in the country's institutional policies. Given the above reasoning, the business practices used by IOCs to respond to local content policies can be understood in terms of two inter-related areas, namely, technology capacity development and human capacity development, both of which come into play to

MOC Business Practices

Sourcing Practices

Technology Capacity Development

Human Resources Practices Human Capacity Development

Effects on economic development Fig. 1. Argument about the business practices of IOCs due to local content policies.

shape IOCs’ wider contribution to economic development (Fig. 1). In terms of technology capacity development IOCs are under pressure to source equipment from local suppliers (where possible) and/or support the upgrading of local manufacturing capacity to a point where they can serve as preferred suppliers. In terms of human capacity development IOCs are required to give preference to host-country nationals when recruiting and/or to develop their capacities/capabilities to work in IOCs’ local operations. The interplay of technology and human capacity development increases the productive capacity of the economy (jobs and income) and can contribute to efforts aimed at deal with the resource curse problem by enhancing economic development (Klueh et al., 2009; Warner, 2011; Kazzazi and Nouri, 2012). 2.4. Research method To investigate the business practices used by IOCs to respond to local content policies I use narrative analysis as my analytical tool. Narrative analysis entails content and context analysis of secondary data (Ngoasong, 2009) to identify the forms and functions of narratives and (re)constructing connections between events, and between events and their contexts (Zilber, 2007). Narratives are ‘stories, excuses, myths, reasons for doing and not doing’ (Bruner, 1991, p. 5). In the case of quantitative studies, narrative analysis has been found to provide a ‘less than accurate identification of boundaries’ (Suzuki, 1980, p. 65). I therefore adopt a qualitative approach. This approach has been chosen because it has the capacity to explain the business practices of firms responding to changes in the external environment (Zilber, 2007; Ngoasong, 2009). The policy literature (Hananel, 2010, Sovacool and Drupady, 2011; Swiatkiewicz-Mosny and Aleksandra Wagner, 2012; Ngoasong, 2009) also suggest that narrative analysis can be used to explain how various stakeholders use specific practices to respond to policy issues in a given context. The choice of five western IOCs, namely Chevron, ExxonMobil, Shell, BP and Total as case studies reflects their presence across the developing world and the need to capture more broadly, the business practices associated with local content policies. Illustrative examples are drawn from a range of developing countries taking into account three criteria: (1) countries that have and those that are yet to developed local content policies in the last decade and in which at least one of the five IOCs has an established presence, (2) countries with a long history of petroleum production (e.g. Nigeria, Angola and Venezuela) and those that are relatively new to the petroleum industry (e.g. Kazakhstan and Yemen) (UNCTAD, 2007), (3) variations in levels of economic development in terms of advanced (Brazil) and secondary (e.g. Indonesia and Nigeria) emerging market economies and less developed economies (e.g. Angola, Venezuela, Trinidad and Tobago, Yemen and Indonesia) (Cavusgil et al., 2013). This combination allows for a broad discussion about nature and rational of the business practices used by IOCs to respond to local content policies across the developing world. Secondary data was collected from two sources for the period 2000–2012: (1) the annual reports, newsletters, press releases and company presentations published on the websites of IOCs; (2) local content-related policy documents, technical reports and country studies commissioned by national governments, international agencies and independent consultancy organisations.3 From these 3 The main databases consulted include UN agencies (United Nations Development Programme, United Nations Conference on Trade and Development, International Monetary Fund, World Bank) and independent institutes (International Petroleum Industry Environmental Conservation Association, Revenue Watch Institute, Menas Associates), national petroleum company (or the equivalent) websites of the eight countries studied.

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two sources, links to reports disseminated on the websites of civil society organizations, media and academic/research institutions were studied to double-check and better clarify the reliability and consistency of data collected from IOCs’ websites/documents. Due to the large number of websites and volume of information, it was important to select and organise the relevant data that better captures the narratives. One central unit of analyses in a narrative that can form the basis of narrative analysis is the theme, ‘a single assertion about some subject’ (Suzuki, 1980, p. 65). I used local content as the main theme as it is impossible for IOCs to describe the business practices they undertake to comply with local content policies without mentioning local content. I typed a combination of local content and each of the eight countries in the search area of the websites/databases. Only those documents that mentioned both local content and the specified country were selected for analysis. An objective and systematic reading of the contents of the documents was carried out to identify how IOCs describe specific business practices (e.g. in terms of sourcing and human resources practices) and how they relate these to local content policy requirements. The description of such events and/or activities generate specific narratives (Suzuki, 1980; Zilber, 2007) that can be used to paint a picture of IOCs’ ‘narratives or story lines (as) an elemental part’ of their experiences (Sovacool and Drupady, 2011, p. 7245) with local content policies. By comparing and contrasting the narratives across all five IOCs and corresponding petroleumproducing developing countries, a common pattern emerged on the perspective of IOCs in using a set of business practices to respond to local content policies. For example top management in all five IOCs view local content as a key element of corporate strategy as seen in the publication of local content strategy documents, the creation of designated company web pages on local content activities and labelling numerous country-specific initiatives in terms of their commitment to local content development.

3. Results A narrative analysis of the business practices of five IOCs reveal that IOCs’ corporate strategies in petroleum-producing developing countries are defined along the lines of conducting business in a way that contributes to ‘physical, social and economic development’.4 Their annual reports describe how such a strategy is in recognition of their commitment to local content requirements. The most common pattern in the business practices of all five IOCs is the development of a local content strategy document with dedicated websites. The local content strategy documents of each IOC list a number of interrelated thematic pillars (Table 1). While the choice of words differs for each IOC, they all reflect the subthemes of human capacity development and technology capacity development along the lines discussed earlier in Section 2. The thematic pillars underpin the local content strategies of the IOCs and are reflected in the narratives they use to document their human resources and sourcing practices. These practices take the form of specific initiatives, programmes and activities developed and implemented by each IOC in specific developing countries. Similarly, interrelated narratives are used by all the IOCs to document how these initiatives and activities enable the IOC to comply with local content requirements. As discussed in the following paragraphs narratives implicitly reflect how specific business practices are developed and implemented as a response to local content policies. 4 BP in Angola: Sustainability Report 2010 〈http://www.bp.com/content/dam/ bp/pdf/sustainability/country-reports/Angola_sustainability_report_2010.pdf〉 (accessed: 13/12/2013).

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Table 1 Thematic pillars of local content strategies of IOCs. . Source: Narrative analysis to identify themes on each IOC's local content strategy documents/websites. IOCs

Pillars of local content strategy

ExxonMobil Workforce development, strategic community investments, supplier development Shell Capacity development, development of local manufacturing, training and support Chevron Preferential selection, capacity development, empower local competencies, R&D BP Development of competitive local suppliers, staff capacity development, local economic development, stakeholder engagement/recognition Total Sustainably enhance local skills, build industrial capacity, stakeholder expectations

In relation to technology capacity development, IOCs have defined mechanism for sourcing inputs locally. To select qualified local suppliers/contractors, Shell developed a template with Guidelines for Commercial Project Processes.5 This document outlines Shell's key company principles regarding the allocation of contracts and bidding processes and asks all firms (both local and foreign) providing high value contracts to include a Local Content Plan. ExxonMobil has championed the Joint Qualification System, a database to track the capabilities and competencies of pre-registered local firms in Nigeria (Mbat et al., 2013). Similar practices have also been adopted by the other seven IOCs in developing countries with the aim of ensuring transparency in selecting local suppliers while enhancing supplier development, quality control and cost-efficiency. Where local firms lack such quality standards, foreign suppliers are not necessarily seen as the immediate alternative. The IOCs have documented a number of initiatives they have directly funded to upgrade the capacity of local suppliers to their desired standards. Financing the upgrading of the technical capacity of local manufacturing is a key component of technology capacity development. BP's Cannonball Project in 2002 in Trinidad and Tobago (BPTT) directed at local supply chain development6 is one example. This included direct funding and technical assistance, training and mentoring through its local subsidiary BPTT leading to a replacement of established US-based suppliers with local firms, and consequently skilled local engineers, designers and fabricators. This initiative is documented as part of BP's contribution to local content development in terms of building a competitive local engineering and fabrication capacities, creating employment for nationals and providing cost-effective solutions to future BP projects. In addition to direct funding, IOCs also partner with established local banks to facilitate access to funding, enabling local suppliers to upgrade their capacity to provide the quality inputs needed by IOCs. The Contractors Support Funding Scheme, a Global Memorandum of Understanding (GMoUs) between Shell and five major banks in Nigeria7 is a good example. Under this scheme each bank pledged $1 billion to the scheme to provide low-interest loans to

5 Shell in Nigeria: NIGERIAN CONTENT 〈http://s01.static-shell.com/content/ dam/shell-new/local/country/nga/downloads/pdf/2013bnotes/nigerian-content. pdf〉 (accessed: 20/12/2013). 6 BP in Trinidad and Tobago: Sustainability Report 2005.〈http://www.bp.com/ liveassets/bp_internet/trinidad_and_tobago/STAGING/home_assets/sustainability_re port_2005.pdf〉 (accessed: 20/12/2013); IPIECA (2011) Local content strategy: A guidance document for the oil and gas industry. Social Responsibility. 〈http://www. engineersagainstpoverty.org/documentdownload.axd?documentresourceid=28〉 (accessed: 17/12/2013). 7 Shell in Nigeria: NIGERIAN CONTENT 〈http://s01.static-shell.com/content/ dam/shell-new/local/country/nga/downloads/pdf/2013bnotes/nigerian-content. pdf〉 (accessed: 20/12/2013).

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MOC Business Practices Sourcing Practices: Contracts with local suppliers; Funding & technical

Human Resources Practices: Recruitment plan for new local employees; Replace expatriate with local staff (succession plans, certified training & CPD), Funding to local training institutions and scholarships for nationals; Apprenticeship programmes

capacity to to bid for contracts; Funding & technical support in non-petroleum sectors

Technology Capacity Development

Human Capacity Development Economic Growth: Organizational learning; Technology transfer & skills acquisition; Capital formation; new business creations

Fig. 2. Business practices used by IOCs to respond to local content policies.

local suppliers. Local suppliers who apply for the loans contractually agree to use the funding to develop inputs that are to be used by Shell's subsidiary in Nigeria. The involvement of local banks is also evident in Total's and Chevron's microfinance programmes that provide funding and technical assistance to local firms in all the eight countries studied. In terms of workforce development IOCs report initiatives they have implemented to ensure that host-country citizens acquire the technical and managerial skills to work in the petroleum industry, where a lack of such skills precludes direct recruitment. One initiative documented in Total reports as a contribution to local development is an LNG project established in Yemen in 2005 with a target to achieve 90% Yemenization of staff by 2015.8 A training centre was established to train local people to be technical specialists, engineers and supervisors, including intensive English language courses and practical training abroad. A succession plan has been established for replacing expatriates with locals who complete the training (e.g. competitive remuneration package to encourage them to return home). Along a similar line, Chevron's Local Business Development (LBD) certificate in Indonesia provides training to small business and cooperatives, thereby qualifying them to bid for contracts as certified suppliers (Garrigo, 2011). Chevron justifies its University Partnership Scheme in Angola, Indonesia and Nigeria in terms of training of high quality and low cost local employees as well as capacity building that involves local institutions such as universities in training and employing local people.9 Based on the above analysis, Fig. 2 provides a summary of the business practices of IOCs in relation to the theoretical framework developed in Section 2.3. In addition to the petroleum industryspecific initiatives above, there is a proliferation of ad-hoc microfinance and other capacity building initiatives that all the IOCs studied provide to local entrepreneurs in agriculture, catering, and medical and community services, social infrastructure programme (e.g. healthcare) justified in terms of IOCs’ contribution to promoting new business creations, employment and improve the health of local people. These initiatives are documented within the context of the local content strategy of IOCs.

4. Discussion This section discusses the local content strategy of IOCs further by comparing and contrasting the business practices of the five 8 Total in 2005, 〈http://www.nioclibrary.ir/free-e-resources/Total%20Annual% 20Reports/Total%20in%202005.pdf〉 (accessed: 13/12/2014). 9 Chevron 2012 CSR Report 〈http://www.chevron.com/documents/pdf/corpor ateresponsibility/chevron_cr_report_2012.pdf〉 (accessed: 20/12/2013).

IOCs to the wider literature on local content in petroleumproducing developing countries. Four emergent narrative strategies (narrative techniques used by firms) (Zilber, 2007; Ngoasong, 2009) emerged about the rationale behind the local content strategies and operational practices discussed in Section 3: (1) direct engagement to renegotiate local content requirements with government authors, (2) legal compliance, (3) the business case for pursuing local content strategies and (4) corporate social responsibility (CSR) initiatives.

4.1. Negotiating local content legislation between IOCs and governments The first narrative strategy of IOCs is concerted consultations with government agencies to ensure that successive legislations lead to favourable compliance requirements. In Nigeria, Shell provided direct technical advice to government authorities to help develop the Nigerian Content Bill, while all operating IOCs are represented in the national committee that meets monthly to review progress with local content development (CRES, 2008a,b). In Kazakhstan, consultation between Karachaganak Petroleum Operating (KPO), a consortium consisting of five IOCs (BG Group, Eni, ChevronTexaco and LUKOIL) and the Kazakh government was crucial in developing the Content Increase Programme, which later informed the Kazakh Content Law (Wilson and Kuszewski, 2011). From this context, the local content strategies of IOCs emerged from the need to adopt a consultative and proactive approach to incorporating local content provisions in their corporate strategies. For the countries that have legislated local content policies the initial reaction from IOCs has been to criticise the ‘strict requirements’, ‘ambitious’ and ‘unrealistic’ requirements. Many point to host-country challenges (e.g. shortage of skilled workers and qualified local suppliers) to defend their use of expatriate labour and foreign suppliers (Bakare, 2011). Others point to unclear but strict enforcement mechanisms as a barrier to their continued investments in the petroleum industry (Bakare, 2011). As a result, IOCs’ always attempt to lobby for a relaxation of the requirements. In 2004, Kazakhstan Petroleum Association, an industry lobbyist sent a letter signed by 47 foreign oil companies to the President of Kazakhstan criticising the ‘burdensome’ local content requirements, which they claimed is against the country's constitution and represented a barrier to petroleum-related foreign direct investments (Ritchie, 2004). However as Box 1 suggests, such lobbying have not succeeded to reverse legislation. IOCs then began to take a more consultative approach to engaging with key stakeholders on local content development.

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4.2. Legal compliance with local content targets The second narrative strategy used by IOCs is to articulate quantitative evidence of compliance with local content targets to gain legitimacy to operate from both policy makers and wider civil society (e.g. ad-hoc figures of local staff and local suppliers and funding for local content programmes). Brazil uses ‘Cartilha de Conteúdo Local’, a tool for measuring contractual local content and this provides IOCs with a clear framework on which to provide quantifiable evidence (IPIECA, 2011). In the case of the other seven countries no such tool exists. Each of the five IOCs has adopted a range of proactive measures to address local compliance. The most notable measures are (1) hiring independent external auditors (e.g. KPMG and Ernst and Young) and local NGOs to conduct independent verification and audits of local content projects; (2) developing Global Memorandum of Understanding (GMoUs) with host governments and local community groups to ensure consensus on the extent to which the business practices of IOCs comply with local content requirements. From the above context the local content strategies of IOCs can be seen as a local content compliance framework. The narrative strategy of articulating evidence of compliance enable IOCs to deal with regulatory challenges such as poor reporting system, transparency and accountability mechanism in developing countries ((UNCTAD, 2007; Wilson and Kuszewski, 2011). Despite these challenges, IOCs are required to give preference (or reasonable preference) to local suppliers/contractors, to take reasonable measures and steps to maintain records that allow effective monitoring. At the same time IOCs have to deal with ad-hoc requests for evidence from government authorities. In Nigeria, IOCs that sourced offshore insurance from foreign countries where asked to provide evidence that such insurance could not be sourced locally or risk having them rejected by the government.10 Bids by IOCs for production contracts and operational licences have been rejected in Brazil while the assets of IOCs have been nationalised in Venezuela, all for failing to comply with local content legislation (UNCTAD, 2007; Click and Weiner, 2010).

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due to “above-ground” or non-technical risk (e.g. stakeholder resistance), compared to technical risk. Based on this finding they suggest that IOCs can respond to non-technical risks through local content development activities such as investments in community development. 4.4. Incorporating CSR initiatives as part of local content strategy The fourth narrative strategy used by IOCs is to incorporate their previously corporate social responsibility (CSR) initiatives that involve community participation and capacity building as part of their local content strategy. Total's project in Yemen is documented both as an initiative under its local content strategy and as a CSR initiative (widely cited in Total's CSR reports), a best practice in a country that has no local content legislation. Such a strategy enables IOCs to respond to pressures from international and local civil society groups who continually highlight the negative impact of IOCs and calling for more comprehensive local content development packages (Esteves et al., 2013). Many ‘community activists’ have also been pushing for more ‘stringent’ requirements to be set by governments, more action by IOCs to comply and more transparency in the reporting (Eweje, 2007; Salawu, 2010). Similar activism against IOCs comes from local private commercial firms. For example, the Association of Oil & Gas Contractors of Kazakhstan actively engages governments and IOCs to protect ‘the interests of local contractors … (and advocates for) better regulation and greater transparency by the government’ (Kjærnet et al., 2008, p. 105). In recognition of such activism, all the five IOCs studied now devote a section in their CSR reports where they describe their CSR initiatives in terms of (additional) measures to comply with local content requirements. The same initiatives are also documented as part of IOCs local content strategies. For example, financial contribution to University Scholarship Award Schemes are reported to government authorities as part of compliance with local content requirements and at the same time communicated in CSR reports as wider contributions of IOCs to empower indigenes from communities were petroleum production activities are located to develop skills to work in industry.

4.3. Adopting a business case for local content strategy 5. Conclusions and policy implications The third narrative strategy of IOCs is the adoption of a business case for their respective local content strategy. This requires IOCs to approach local content legislations as an opportunity rather than a threat, to maximizing shareholders’ returns and achieving operational efficiency. The business case for adherence has led IOCs to accept that with a well thought-out local content strategy, the use of local labour and local suppliers in host developing countries represent a more cost-effective option to expatriates and foreign suppliers respectively. Apart from the direct cost of imports and relocation costs for expatriates, there are non-technical risks such as stakeholder resistance which delay project completion (Bakare, 2011; UNCTAD, 2007). To maximise the benefits of this, IOCs rely on a layer of Engineering, Procurement and Construction (EPC) firms such as Jacobs or Halliburton to embed their sourcing activities locally and help deliver local valueadded (Urge-Vorsatz et al., 2007). From this context, the local content strategies of IOCs can be seen as ‘enlightened investment in risk insurance’ from ‘real and reputational costs of protests, work stoppages, boycotts, and regulatory backlash’ (Wise and Shtylla, 2007, p. 11). Hackenbruch and Pluess (2011) found that most delays in petroleum projects are 10 More information and other related guidelines and procedures are available on the Nigerian Content Development and Monitoring Board (NCDMB) website: 〈http://www.ncdmb.gov.ng/index.php/publcation-archive〉.

This paper uses narrative analysis to examine the local content strategies of five international oil and gas companies (IOCs) to understand the business practices that IOCs use to respond to local content policies in petroleum-producing developing countries. It contributes to the energy policy literature by focusing on the perspective of IOCs in local content development. Much of the business practices of IOCs narrated in this paper are scantly represented in energy policy research, which has so far focused on how government engages with key stakeholders in setting and implementing local content policies (Klueh et al., 2009). All the five IOCs studied use similar narrative strategies to determine and justify what type of business practice to undertake and how such practices enable them to respond to specific local content requirements. For example, rather than source supplies based on quality and distance (Liu et al., 2011) IOCs now base their decisions on local content compliant standards. The narrative strategies of IOCs provide opportunities for engaging key stakeholders and securing legitimacy to operate in the petroleum industry in developing countries. Another contribution of this paper is the proposed framework (Figs. 1 and 2) exploring the business practices of IOCs, which can also be used to discuss the role of IOCs in local economic development through local content in other developing countries and for other types of IOC case studies. The business practices of IOCs include a number of initiatives to build capacity and skills

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across the industry value chain, developing and/or sourcing labour and technical inputs locally, providing community investments in non-petroleum sectors all of which create employment, income and economic growth. Such indicators have the potential to address the resource curse (Auty, 2012) as well as reduce the risks of doing business in petroleum-producing developing countries (Click and Weiner, 2010). However, it remains debatable whether the business practices of IOCs are consistent with what actually makes a difference in terms of economic development. This is because such practices may be aimed at securing stakeholder support, legitimise local operations and increase financial returns (Henisz et al., 2013) rather than producing measurable contributions to economic development at local, regional and national levels (e.g. Teka, 2011; Oyejide and Adewuyi, 2011; Warner, 2011). All the five IOCs studied rely on large Engineering, Procurement and Construction (EPC) firms that are neither deeply embedded in host developing countries nor have the incentive to deliver local value to deliver their local content programmes and activities. From this context, it can be argued that the business practices of IOCs may not be as embedded in petroleum-producing developing countries as their narratives seem to suggest thereby reducing their development impacts (even if they comply with local content requirements). On the basis of the above discussion two specific recommendations are offered. The first relates to consistent documentation. Each of the five IOCs use own system and own independent auditors, a practice that leads to ad-hoc reporting and ‘disaggregated information’ (Mendonça and de Oliveira, 2014, p. 283). Each government needs to create a national system, institutional repository or database (Salawu, 2010) that is accessible to all key stakeholders for reporting and assessing the business practices used by IOCs to respond to local content policies. The second recommendation is the need for measures to ensure that specific local content programmes/activities are negotiated directly between IOCs and local stakeholders (e.g. local suppliers, recruitment agencies, and community groups) rather than through large foreign Engineering, Procurement and Construction (EPC) firms. A widely cited best practice to adopt is that of Statoil in Norway (Heum, 2008). Statoil discarded the EPC layer altogether so as to be able to better contract with smaller local providers, and now is transferring this as both a success story and best practice in many petroleum-producing developing countries. The narrative analysis approach used in this paper reveals how organisations respond to policy challenges (Zilber, 2007; Ngoasong, 2009). I use content analysis (reading and coding publicly available statements) on the largely public relations narratives of what IOCs say they are doing to respond to local content policies. This approach may be limited in that it provides a ‘less than accurate identification of boundaries’ (Suzuki, 1980, p. 65) within which the local content strategies of IOCs can be evaluated as adequate responses to the local content policies in petroleum-producing developing countries. Future research could address this through a segregated country analysis in which the formulation and implementation of local content strategies by each IOC is examined in detail on a country-by-country basis followed by comparative analyses. This will go a long way to complement the findings from this paper and further our understanding of the business practices used by firms to respond to local content policies and the impacts on economic development in host petroleum-producing developing countries.

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