Government intervention in international businesses : the rise of local content regulations in the upstream petroleum sector

(1)

Dissertations in Social Sciences and Business Studies

PUBLICATIONS OF

THE UNIVERSITY OF EASTERN FINLAND

BERRYL CLAIRE ASIAGO

GOVERNMENT INTERVENTION IN

INTERNATIONAL BUSINESSES

(2)

(3)

GOVERNMENT INTERVENTION IN INTERNATIONAL BUSINESSES

THE RISE OF LOCAL CONTENT REGULATIONS IN THE UPSTREAM PETROLEUM SECTOR

(4)

(5)

Berryl Claire Asiago

GOVERNMENT INTERVENTION IN INTERNATIONAL BUSINESSES

THE RISE OF LOCAL CONTENT REGULATIONS IN THE UPSTREAM PETROLEUM SECTOR

Publications of the University of Eastern Finland Dissertations in Social Sciences and Business Studies

No 238

University of Eastern Finland Joensuu

2020

(6)

Grano Oy Jyväskylä, 2020 Editor in-chief: Markus Mättö

Editor: Anna Karttunen

Sales: University of Eastern Finland Library ISBN: 978-952-61-3634-9 (print)

ISBN: 978-952-61-3635-6 (PDF) ISSNL: 1798-5749

ISSN: 1798-5749 ISSN: 1798-5757 (PDF)

(7)

Author’s address: UEF Law School

University of Eastern Finland JOENSUU

FINLAND

Doctoral programme: Doctoral programme in Law Supervisors: Professor Kim Talus, Ph.D.

UEF Law School

University of Eastern Finland JOENSUU

FINLAND

Professor Tina Soliman Hunter, Ph.D.

Aberdeen University Centre for Energy Law University of Aberdeen

ABERDEEN

UNITED KINGDOM Reviewers: Professor Ivar Alvik, Ph.D.

The Faculty of Law University of Oslo OSLO

NORWAY

Professor Soili Nystén-Haaral, Ph.D.

Faculty of Law University of Lapland

LAPLAND FINLAND

Opponent: Professor Ivar Alvik, Ph.D.

The Faculty of Law University of Oslo OSLO

NORWAY

(8)

(9)

Asiago, Claire Berryl

Government Intervention in International Businesses; The Rise of Local Content Regulations in the Upstream Petroleum Sector.

Joensuu: Itä-Suomen yliopisto, 2020

Publications of the University of Eastern Finland Dissertation in Social Sciences and Business Studies; 238 ISBN: 978-952-61-3634-9 (print)

ISSNL: 1798-5749 ISSN: 1798-5749

ISBN: 978-952-61-3635-6 (PDF) ISSN: 1798-5757 (PDF)

ABSTRACT

This article-based thesis addresses the legal, institutional and socio-economic issues concerning local content (LC) requirements in the upstream petroleum sector. LC requirements are regulatory tools utilised by governments to procure and promote local participation. The focus and utilisation of these regulatory frameworks among oil-producing countries has recently increased. However, their frequent and rigid application gives rise to legal and regulatory concerns that affect international businesses in the upstream petroleum sector and, consequently, result in limiting revenue flow for oil-producing countries.

Despite their limitations LC requirements have the potential to benefit oil producing governments by increasing the role of locals and local business in upstream petroleum sectors. For that, this thesis examines suitable ways in which LC requirements can be addressed and cultivated. In the light of both the potential benefits and the limitations that they involve, the examination is undertaken by exploring two specific questions and an implied one. In answering these questions, the thesis delves into regulatory theory, doctrinal and socio-legal research methodologies to evaluate the historical and contemporary legal and regulatory LC patterns in Angola, Nigeria and Norway.

First, this thesis questions whether developing LC legal frameworks in the upstream petroleum sectors is justified. This question is based on the understanding that LC legal frameworks remain critical in enhancing diverse economies that provide countries with the opportunity to achieve prosperity. Yet the rigid application of these frameworks negatively impact international foreign investments. Second, assuming that the answer to the first question is that LC regulation is justified, the thesis seeks to understand how much regulation is warranted and what form is appropriate. This question arises from the observation that several governments adopt strict control mechanisms (rules-based regulation) that unsatisfactorily align strategic policy objectives with those of international businesses. These prescriptive frameworks are ill-adapted to the sector’s needs as observed in Angola and Nigeria. In relation to this issue, this thesis asks whether it would be possible to utilise a different method of control (principles-based regulation) by considering its potential ability to meet LC policy objectives in the upstream petroleum sectors as applied in Norway.

The thesis concludes that regulatory strategies that promote local participation in the upstream petroleum sectors are essential and therefore legally justified.

However, their success is dependent on an appropriate legal framework being used.

The conclusion is that the application of principles-based regulation seems more

(10)

appropriate to the sector, since it (i) mobilises cheaper forms of social control than rules-based regulation and does not therefore, limit the potential for revenue flow.

(ii) In turn, it creates a flexible environment for both the regulator and the regulated in which to work amicably while ensuring the ultimate attainment of LC objectives.

Key words; government intervention, local content requirements, upstream petroleum sector, petroleum regulation, regulatory theory, regulatory reform, regulatory policy, principles-based regulation, rules-based regulation, Angola, Nigeria, Norway

(11)

Asiago, Claire Berryl

Hallituksen interventio kansainväliseen liiketoimintaan: paikallisen sisällön vaati- musten kasvu raakaöljyn tuotantoketjun alkupäässä.

Joensuu: Itä-Suomen yliopisto, 2020 Itä-Suomen yliopiston julkaisuja

Yhteiskuntatieteiden ja kauppatieteiden väitöskirja; 238 ISBN: 978-952-61-3634-9 (nid.)

ISSNL: 1798-5749 ISSN: 1798-5749

ISBN: 978-952-61-3635-6 (PDF) ISSN: 1798-5757 (PDF)

TIIVISTELMÄ

Tämä artikkelipohjainen tutkielma käsittelee raakaöljyn upstream-liiketoiminnan eli sen tuotantoketjun alkupään paikallisen sisällön (LC, local content) vaatimuksiin liittyviä laillisia, institutionaalisia ja sosioekonomisia ongelmia. Paikallisen sisällön vaatimukset ovat hallitusten sääntelyvälineitä, joilla pyritään tukemaan ja edistämään paikallista osallisuutta. Näiden toimintaa sääntelevien rakenteiden kohdistaminen ja hyödyntäminen on viimeaikoina kasvanut öljyntuottajamaissa. Niiden taaja ja jäykkä soveltaminen kuitenkin aiheuttaa oikeudellisia ja sääntelyyn liittyviä huolenaiheita, jotka vaikuttavat kansainväliseen liiketoimintaan raakaöljyn tuotantoketjun alkupääs- sä ja näin ollen johtavat tuotannosta saatavien tulojen vähenemiseen öljyntuotan- tomaissa.

Näistä puutteista huolimatta paikallisen sisällön vaatimukset voisivat kuitenkin hyödyttää öljyntuottajavaltioita kasvattamalla paikallisten toimijoiden ja yritysten roo- lia alkupään tuotantoketjussa. Tästä syystä väitöskirjassa tutkitaan, miten paikallisen sisällön vaatimuksia voidaan parhaiten käsitellä ja kehittää, kun otetaan huomioon sekä niiden mahdolliset edut että niihin liittyvät rajoitukset. Tätä tutkitaan pohtimal- la kahta erikseen määriteltyä sekä yhtä epäsuoraa kysymystä. Näihin kysymyksiin pyritään tässä tutkielmassa vastaamaan perehtymällä sääntelyteoriaan sekä opillisiin ja oikeussosiologisiin tutkimusmenetelmiin, joilla arvioidaan sekä historiallisia että nykyisiä paikallisen sisällön laki- ja sääntelymalleja Angolassa, Nigeriassa ja Norjassa.

Aluksi tutkielmassa pohditaan, onko paikallisen sisällön laillisten puitteiden ke- hittäminen oikeutettua raakaöljyn tuotantoketjujen alkupäässä. Tämä kysymys perus- tuu siihen käsitykseen, että paikallisen sisällön lakirakenteet ovat kriittisessä roolissa monipuolisen talouden kehittämisessä, mikä antaa maille mahdollisuuden vaurau- den kasvattamiseen. Näiden rakenteiden jäykkä soveltaminen kuitenkin vaikuttaa negatiivisesti ulkomaisiin investointeihin. Jos ensimmäisen kysymyksen kohdalla todetaan, että paikallisen sisällön sääntely on oikeutettua, pyritään tutkielmassa sel- vittämään, missä määrin sääntely on tarvittavaa ja missä muodossa se on tarkoituk- senmukaista. Tämä kysymys pohjautuu havaintoon, jonka mukaan monet hallitukset soveltavat tiukkoja hallintamekanismeja (sääntöpohjainen sääntely) , jotka eivät pysty tyydyttävästi sovittamaan yhteen strategisia poliittisia tavoitteita ja kansainvälisen liiketoiminnan tavoitteita. Angolaan ja Nigeriaan liittyvien havaintojen perusteella nämä ohjeelliset puitteet soveltuvat huonosti alan tarpeisiin. Tähän ongelmaan liittyen tutkielmassa pohditaan, olisiko mahdollista hyödyntää toisenlaista hallintamenet- telyä (periaatteisiin perustuvaa sääntelyä) arvioimalla sen mahdollisuuksia täyttää

(12)

sovelletut paikallista sisältöä koskevat poliittiset tavoitteet raakaöljyn upstream-liiketoiminnassa Norjassa.

Lopuksi todetaan, että paikallista osallisuutta edistävät sääntelystrategiat raakaöl- jyn upstream-liiketoiminnassa ovat välttämättömiä ja näin ollen lainsäädännöllisesti oikeutettuja. Niiden onnistuminen riippuu kuitenkin tarkoituksenmukaisten oikeu- dellisten puitteiden soveltamisesta. Loppupäätelmänä on, että periaatteisiin perustuva sääntely vaikuttaa olevan alalle sopivampi, sillä se (i) mobilisoi edullisempia yhteiskunnallisen hallinnan muotoja kuin sääntöpohjainen sääntely, eikä näin ollen rajoita mahdollista tuloa. Tämän seurauksena se (ii) luo joustavan ympäristön sekä sääntelijälle että sääntelyn piiriin kuuluville tahoille mahdollistaen sopuisan työym- päristön ja varmistaen samalla paikallisen sisällön tavoitteiden lopullisen saavutta- misen.

Avainsanat; hallituksen interventio, paikallisen sisällön vaatimukset, raakaöljyn tuotantoket- jun alkupää, raakaöljyn upstream-liiketoiminta, raakaöljyn sääntely, sääntelyteoria, säänte- lyuudistukset, sääntelypolitiikka, periaatteisiin perustuva sääntely, sääntöpohjainen sääntely, Angola, Nigeria, Norja

(13)

ACKNOWLEDGEMENTS

I wish to express my deepest gratitude to my supervisor, Professor Kim Talus, Director of Tulane Center for Energy Law at Tulane University and Professor of European Economic and Energy Law at UEF Law School, University of Eastern Finland (UEF), for helping transform a collection of various observations into something that looks like a doctoral thesis. I am thankful for the patience you have shown in attaining an understanding of the information presented to you. I have truly enjoyed working with you. I also wish to extend my gratitude to Professor Tina Soliman Hunter, Director of the Aberdeen University Centre for Energy Law, (AUCEL) University of Aberdeen.

I wish to thank UEF Law School at the University of Eastern Finland for providing a stimulating environment for a doctoral research. Specifically, the Centre for Climate Change, Energy and Environmental Law (CCEEL), has been noteworthy in improving my understanding of legal, institutional and theoretical knowledge. My sincere gratitude to my colleagues Dr. Moritz Wüstenberg and Dr. Kaisa Huhta of UEF Law School for their constructive comments and encouragement during the process of undertaking this thesis.

Furthermore, I also take the opportunity to thank the preliminary examiners of this thesis – Professor Ivar Alvik, Ph.D. from the Faculty of Law in University of Oslo, in Norway, and Professor Soili Nystén-Haaral, Ph.D, from the Faculty of Law, University of Lapland in Finland, for their invaluable comments and suggestions that facilitated the ultimate conclusion of this thesis.

Finally, sincere appreciation to my family: my mother, Hon. Beatrice Asiago, and my brothers (Mr. Bryan A Asiago, Dr Benjamin A Asiago, and Mr. Brodrick A Asiago), who continuously stand by me from start to finish. My loving husband Mr Joel Nervo, whose kindness and support have been unwavering through both my darkest and brightest moments, amidst all the wailing and gnashing of teeth. I feel that I have made it through thanks to his unwavering patience and his reminders that I should never doubt myself.

Thank you.

Joensuu, March 2020, Berryl Claire Asiago

(14)

(15)

LIST OF ABBREVIATIONS

BIT bilateral investment treaty

DPR Department of Petroleum Resources (Nigeria) CJEU Court of Justice of the European Union ECT Energy Charter Treaty

EEA European Economic Area E&T employment and training

EU European Union

EITI The Extractive Industry Transparency Initiative FDI foreign direct investments

GDP gross domestic product IEA International Energy Agency

ICSID International Centre for Settlement of Investments Disputes IOC international oil company

LC local content

NAFTA North America Free Trade Agreement NCDF Nigerian Content Development Fund

NCDMB Nigeria Content Development and Monitoring Board NIEO New International Economic Order

NPC Nigeria National Petroleum Company NOC National oil company

NOGCID Nigeria Oil and Gas Content Industry Development NORAD Norwegian Agency for Development and Co-operation OfD Oil for Development Norway

OML Oil Mining Lease OPL Oil Production Lease

OPEC Organization of Oil Producing Countries

OECD Organisation for Economic Co-operation and Development PAL Petroleum Activities Law – Angola

PSA/PSC production-sharing agreement/ production-sharing contract

UN United Nations

UNCTAD United Nations Conference for Trade and Development UNIDO United Nations Industrial Development Organization WTO World Trade Organization

TRIMS The Agreement on Trade-Related Investment Measures

(19)

PART I:

SETTING THE SCENE

(20)

1 INTRODUCTION

‘Conflict cannot survive without your participation.’

Wayne Dyner

1.1 BACKGROUND

This thesis examines suitable ways in which local content (LC) requirements in the upstream petroleum sectors can be addressed. It does so by highlighting the common legal defences, strategies and tools put forward by governments to secure local participation in several oil-producing countries. Instead of achieving this aim, these defences and strategies often develop into regulatory challenges for international business and ultimately for the governments of those countries. In relation to this issue, this thesis contends that there is a need to formulate suitable regulatory designs that ensure national LC objectives are met while simultaneously considering the particularities of the upstream petroleum sectors. This directed approach is essential in order to lessen or negate the adverse consequences of an intervention that may be well-intentioned but is poorly focused and, ultimately, does not achieve the desired results.

The impetus for considering this perspective stems from the assessment that in virtually all upstream petroleum sectors, governments remain eager in increasing preferential market access to domestically manufactured goods and services. These interventions aim at advancing local participation in the industry. Correspondingly, prescriptive rules have become the primary mechanism for safeguarding local participation objectives, especially in developing countries. However, the application of these rigid rules generates adverse impacts on the economic value guaranteed to international oil companies (IOCs) in these upstream petroleum sectors. LC requirements secured through rigid regulations give rise to the development of regulatory dimensions that are not only economically risky but also acquire specific legal ramifications for oil-producing states.¹ The reason for this is that these rules frequently adopt frameworks containing rigid quantitative requirements and rigorous

1 Kolstad, Ivar and Kinyondo, Abel, ‘Alternatives to Local Content Requirements in Resource-Rich Coun- tries’, Oxford Development Studies (2017), 45, p. 410, available at https://doi.org/10.1080/13600818.2016.12 62836 (last accessed on 4 June 2019); Hunter, Tina ‘Law and Policy Frameworks for Local Content in the Development of Petroleum Resources: Norwegian and Australian Perspectives on Cross-Sectoral Link- ages and Economic Diversification’, Mineral Economics (2014), 27 p. 120, available at http://link.springer.

com/article/10.1007/s13563-014-0051-y (last accessed on 30 May 2019); Asiago, Berryl Claire, ‘The Reg- ulatory Rationale for Local Content Requirements in the Petroleum Industry’, International Energy Law Review, (2018) 35, pp. 223-224; Nwapi Chilenye, ‘Defining the “Local” in Local Content Requirements in the Oil and Gas and Mining Sectors in Developing Countries’, 8 Law and Development Review (2015), pp.

189-216, available at https://www.degruyter.com/view/j/ldr.2015.8.issue-1/ldr-2015-0008/ldr-2015-0008.

xml (last accessed on 30 May 2019).

(21)

compliance procedures backed by stringent enforcement mechanisms.² These frameworks include preferential, deterrence and prohibitive measures that guide the action to be undertaken (to act or to refrain from acting in specific ways), the criteria for compliance, a set of sanctions for non-compliance and a designated administrative agency with veto powers that monitors compliance with the regulation. These rules are strictly applied even though the majority of these countries have limited access to skills, financial and technical expertise, therefore, frequently commit to specific investments frameworks to ensure that foreign-related benefits such as the transfer of technology and the continuous flow of foreign direct investments (FDI) in the upstream petroleum sector is realised. The outcome, however, is that the introduction of these rigid regulations are not only regularly overlooked, ignored or disobeyed but their introduction infringes on the trade and investment commitments entered into by governments and often hamper the creation of a positive environment that encourages competition and innovation for diverse economies.³

This is not surprising because over the years, research indicates that the use of authoritative statutes, regulations and codes to attain local participation is unsuitable and often ill-advised. Because these frameworks tend to affect international businesses, thereby limiting the projected FDI and in turn affects government revenue flow in the upstream petroleum sector. Specifically, the LC requirements imposed by high- level quantitative, deterrence and prohibitive measures to regulate the export and/or FDI mean that foreign investors must comply with unnecessary rules, which in turn constrains their freedom of action. As a consequence, depending on their technical

2 Asiago Berryl Claire, ‘Rules of Engagement: A Review of Regulatory Instruments Designed to Promote and Secure Local Content Requirements in the Oil and Gas Sector’, Resources (2017), 46, pp. 2-5, available at www.mdpi.com/2079-9276/6/3/46 (last accessed on 30 May 2019); Hunter, Tina, Legal Regulatory Framework for the Sustainable Extraction of Australian Offshore Petroleum Resources: A Critical Functional Anal- ysis (the University of Bergen 2010), pp. 89 and104 https://bora.uib.no/handle/1956/4505 (last accessed on 30 May 2019); Lila Barrera-Hernández et al., Sharing the Costs and Benefits of Energy and Resource Activity:

Legal Change and Impact on Communities (Oxford University Press 2016), pp. 1-12.

3 Nikièma, Suzy H., ‘Performance Requirements in Investment Treaties IISD Best Practices Series’, pp.

1-5, available at http://www.iisd.org/sites/default/files/publications/best-practices-performance-requirements-investment-treaties-en.pdf (last accessed on 31 May 2019); Ramdoo, Isabelle ‘E15 Initiative | Unpacking Local Content Requirements in the Extractive Sector: What Implications for the Global Trade and Investment Frameworks?’ (E15 Initiative), pp. 5-6, available at http://e15initiative.org/publications/

unpacking-local-content-requirements-in-the-extractive-sector-what-implications-for-the-global-trade- and-investment-frameworks/ (last accessed on 31 May 2019); Javorcik Beata Smarzynska and Spatar- eanu, Mariana, ‘To Share or Not to Share: Does Local Participation Matter for Spillovers from Foreign Direct Investment?’, Journal of Development Economics (2008), 85, pp. 194, 2-5, available at http://www.

sciencedirect.com/science/article/pii/S0304387806001398 (last accessed on 31 May 2019); Webb, Douglas,

‘Legal System Reform and Private Sector Development in Developing Countries’, in Robert Pritchard, Economic Development, Foreign Investment, and the Law: Issues of Private Sector Involvement, Foreign Invest- ment, and the Rule of Law in a New Era (London; Boston: Kluwer Law International: International Bar Association, 1996).

(22)

and financial capabilities, investors tend to develop ‘bottleneck’ behaviours in order to circumvent these stringent rules while still demonstrating nominal compliance.⁴

The adoption of such behaviour on the part of investors obliges governments either to revise existing legal frameworks or introduce new structures to monitor and mitigate investor behaviour; this is undertaken while simultaneously desiring the achievement of the initial regulatory objectives related to local participation.

However, the constant revision and introduction of these frameworks often results in regulatory uncertainty, ambiguity and inconsistency. Because these revisions and/

or introductions frequently focus on resolving the emerging regulatory challenges, i.e. arising bottleneck behaviour, rather than advancing or achieving the objective set out in the initial regulation. Moreover, since these regulatory revisions/introductions aim at correcting existing and arising market failures, they tend to entertain more stringent rules and drastic consequences than the earlier regulation. In turn, rather than advancing the initial regulatory objective, this practice not only weakens that objective but also leads to the development of regulatory conflicts that frequently limits the revenue inflow for investors and, ultimately, of several oil-producing countries. This is so in spite of the fact that the upstream petroleum sector is crucial for economic growth and the social development of these countries and that these oil-rich governments largely depend on petroleum revenues to enhance their economies.⁵ Despite this, and regardless of the apparent and potential legal and economic challenges relating to LC regulatory requirements, oil-producing countries renew the trajectory of utilising and regulating local contribution in the upstream petroleum sector through prescriptive rules despite the likely adverse outcome and consequences.⁶

That said, the introduction of LC requirements is strategically poised to achieve and advance certain national objectives that ultimately increase the gross domestic product (GDP) of these countries. These objectives mainly concern the potential to

4 Ovadia, Jesse Salah, ‘The Dual Nature of Local Content in Angola’s Oil and Gas Industry: Development vs. Elite Accumulation’, Journal of Contemporary African Studies (2012), 30, pp. 395-417, available at https://

www.tandfonline.com/doi/abs/10.1080/02589001.2012.701846 (last accessed on 31 May 2019); Asiago, B C.

and Wasunna, M Kapesa, ‘Are Local Content Requirements in Developing Petroleum Sectors Sustainable?

Managing Expectations While Aligning Sustainable Principles with Regulatory Policy’, Oil, Gas & Energy Law Journal (OGEL) (2018), pp. 1-19, available at https://www.ogel.org/journal-advance-publication-article.

asp?key=572 (last accessed on 24 July 2019); Tordo, Silvana, et al., Local Content Policies in the Oil and Gas Sector (World Bank Publications 2013), pp. 1-15; Larry, D., Qiu and Zhigang, Tao, ‘Export, Foreign Direct Investment, and Local Content Requirement’ Journal of Development economics (2001), vol. 66, pp. 101, avail- able at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.196.7169&rep=rep1&type=pdf

5 Raymond F. Mikesell, Foreign Investment in the Petroleum and Mineral Industries (Routledge 2011), pp.

3-15; Taverne, Bernard, Petroleum, Industry and Governments: A Study of the Involvement of Industry and Governments in the Production and Use of Petroleum (Kluwer Law International 2008), pp. 45-60; Pritchard (n 3), p. 1.

6 Acheampong Theophilus, Ashong Marcia and Victoria Crystal Svanikier, ‘An Assessment of Local-Con- tent Policies in Oil and Gas Producing Countries’, Journal of World Energy Law & Business (2016), 9, pp.

282-302, available at https://academic.oup.com/jwelb/article-abstract/9/4/282/2578768?redirectedFrom=- fulltext (last accessed on 31 May 2019); Heum Per, ‘Local Content Development: Experiences from Oil and Gas Activities in Norway’, pp. 1-21; Kazzazi Abolfazi and Nouri Behrouz, ‘A Conceptual Model for Local Content Development in Petroleum Industry’, Growing Science 2, pp. 2165-2174, available at http://

growingscience.com/beta/msl/452-a-conceptual-model-for-local-content-development-in-petroleum-in- dustry.html (last accessed on 31 May 2019); Heum Per, et al., Enhancement of Local Content in the Upstream Oil and Gas Industry in Nigeria: A Comprehensive and Viable Policy Approach (SNF 2003) SNF Working Paper No 25/03, 2003), pp. 1-9 available at https://openaccess.nhh.no/nhh-xmlui/handle/11250/164539 (last accessed on 31 May 2019).

(23)

increase national employment measures, which are often fulfilled through the use of employment quotas, together with training and capacity-building for local people.⁷ They also concern the diversification of domestic upstream petroleum sectors, which is often undertaken through the allocation of preferential quotas concerning the procurement of local goods and services and/or by the transfer of technology and technological know-how from foreign to local companies.⁸ Additional strategies may include the allocation of petroleum contracts to local companies. In a nutshell, LC requirements involve the use of local services and goods and the employment of locals in upstream petroleum operations. For that, these requirements constitute real and valid national goals in oil-producing countries.

LC requirements may be safeguarded either as regulatory objectives or regulatory tools. As regulatory objectives, LC requirements are designed to achieve certain socio- economic goals that are beneficial to the host country and locals. These objectives are usually achievable through ordinary market-based or incentive mechanisms.

For that, they are deemed impartial because they tend to utilise non-intrusive market mechanisms to promote local companies and people to participate in the upstream petroleum sectors. In response to this issue, LC objectives seek to ensure that investment in the industry, which mostly comes from foreign sources, support the national priority of achieving further economic development.⁹ This direction of travel is mainly outcome-based and often established on the basis of verifiable evidence that indicates the need for, and focus on, promoting preferential strategies and policies. Consequently, governments see a need to bring about an equilibrium that frequently entail the conclusion of joint-venture arrangements between local and

7 Asiago (n 2), pp. 5-9; Hunter (n 1), pp. 115-116; Nwapi (n 1), p. 188; Global and Conceptual Studies Branch Division for Industrial Studies, ‘Industrial Policy in the Developing Countries: An Analysis of Local Content Regulations’ (1986) UNIDO/IS. 606, pp. 2-3, available at https://open.unido.org/api/

documents/4809838/download/INDUSTRIAL%20POLICY%20IN%20THE%20DEVELOPING%20 COUNTRIES.%20AN%20ANALYSIS%20OF%20LOCAL%20CONTENT%20REGULATIONS%20(15250.

en) (last accessed on 31 May 2019); Asiago (n 2), p. 5; Segura Alonso et al., ‘Inter-Sectoral Linkages and Local Content in Extractive Industries and Beyond – The Case of São Tomé and Príncipe’, (2007), 07, IMF Working Papers 1, available at http://elibrary.imf.org/view/IMF001/08558-9781451867770/08558- 9781451867770/08558-9781451867770.xml (last accessed on 31 May 2019); Jesse Salah Ovadia, ‘Local Con- tent and Natural Resource Governance: The Cases of Angola and Nigeria’, The Extractive Industries and Society 2014, 1(2), pp. 137-146, available at http://eprint.ncl.ac.uk/file_store/production/205976/93ECC058- DE0D-4AA8-93BA-01412A533FFA.pdf (last accessed on 31 May 2019).

8 Jesse Salah Ovadia, ‘The Role of Local Content Policies in Natural Resource-Based Development’, Öster- reichische Forschungsstiftung für Internationale Entwicklung (ÖFSE)(Ed.): Rohstoffe und Entwicklung.

Südwind-Verl: Wien, (2015), pp. 37-38, available at http://www.oefse.at/fileadmin/content/Downloads/

Publikationen/Oepol/Artikel2015/Teil1_03_Ovadia.pdf (last accessed on 31 May 2019); Gary Clyde Hufbauer, Jeffrey J. Schott and Cathleen Cimino-Isaacs, Local Content Requirements: A Global Problem (Columbia University Press 2013), p. 3; Tordo et al. (n 4), p. 134.

9 James Unam Monday, ‘Local Content Policy, Human Capital Development and Sustainable Business Performance in the Nigerian Oil and Gas Industry’, Journal of Management and Sustainability, (2015), Vol.

5, No. 1 pp 75-83, available at http://www.ccsenet.org/journal/index.php/jms/article/view/42665(last accessed on 31 May 2019); Rabiu Ado, ‘Accounting, Accountability and Governance in Upstream Petroleum Contracts: The Case of Local Content Sustainability in the Nigerian Oil and Gas Sector’, p. 5, available at https://openair.rgu.ac.uk/handle/10059/1586 (last accessed on 31 May 2019); Nwapi (n 1), p. 191.

(24)

foreign companies to either acquire petroleum contracts and/or carry out petroleum operations resulting from the transfer of technology and technological know-how.¹⁰

As regulatory tools, the focus for LC requirements is to evaluate, clarify, and address arising policy related issues while simultaneously achieving certain socio-economic goals. Unlike regulatory objectives, tools bear more explicit intervention processes that governments apply to achieve specific societal outcomes usually not achievable through standard market-based or incentive mechanisms. For instance, LC regulatory tools are developed to mitigate foreign dominance that presents an exploitative and/or unbalanced market power which is not beneficial to the host country or locals. For that, they target the lessening of foreign market power to ensure that local companies and people are not precluded from participating in the upstream sectors. In the upstream petroleum sectors, governments put emphasis on the predominant nature of foreign investments and, therefore, the need for, and focus on, mitigating such foreign market power. As such, regardless of the objective, justification and/or strategy, these tools are deemed subjective because they frequently rely on attitudes, beliefs or opinions. These tools are diverse and include legislations, licenses, circulars, permits, regulations, registrations, administrative guidelines, directives and codes of practice, which collectively shape a complex regulatory architecture for society to understand, use and abide by. Presently, regulation is the most commonly utilised tool to monitor LC requirements that relate to safeguarding national interests on strategic industries,¹¹ foster local participation and development,¹² and ensure preferential market access rules for domestically manufactured goods,¹³ by promoting procurement strategies and building local capacities in upstream petroleum sectors.¹⁴

The expectation is that the implementation of these requirements either as an objective or as a tool, will result in building local capacity, achieving access to capital

10 Tina Hunter, ‘The role of regulatory frameworks and state regulation in optimising the extraction of petroleum resources: A study of Australia and Norway’, The Extractive Industries and Society, (2014), 1, pp.

48, 49, available at http://www.sciencedirect.com/science/article/pii/S2214790X14000148 (last accessed on 31 May 2019); Tina Hunter, ‘Role of the Regulatory Framework in Encouraging the Sustainable Ex- traction of Petroleum Resources in Australia and Norway’, Oil, Gas & Energy Law Journal (OGEL), (2014) 12, pp. 2-3, available at https://www.ogel.org/article.asp?key=3429 (last accessed on 31 May 2019); Asiago and Wasunna (n 4) 2; Asiago (n 2), pp. 5-9.

11 Ado (n 9) ‘Strategic Sector Argument’, p. 26; Tordo et al. (n 4), pp. 14 and 59; Hufbauer, Schott and Cimino-Isaacs (n 8), chapter 5, ‘Wind Turbines in Canada’, pp. 63-73.

12 Javorcik and Spatareanu (n 3), p. 5; E. C. Ezeani and C. Nwuke, ‘Local Content and the Marginal Fields Programme: Challenges for Indigenous Participation in the Nigerian Oil Industry’, OGEL, (2017), 15, pp.

7-10, available at https://www.ogel.org/article.asp?key=3671 (last accessed on 31 May 2019).

13 Javorcik and Spatareanu (n 3) 2; Holger Görg and David Greenaway, ‘Much Ado about Nothing?

Do Domestic Firms Really Benefit from Foreign Direct Investment?’ (2004) 19, The World Bank Research Observer Vol. 19, Issue 2, September 2004, pp. 171-197, available at https://academic.oup.com/wbro/arti- cle-abstract/19/2/171/1658636/Much-Ado-about-Nothing-Do-Domestic-Firms-Really (last accessed on 31 May 2019).

14 Javorcik and Spatareanu (n 3), pp. 5-6; Damilola Olawuyi, ‘Local Content and Procurement Require- ments in Oil and Gas Contracts: Regional Trends in the Middle East and North Africa’, Oxford Insti- tute for Energy Studies 2017, 120, pp. 12-14, available at https://www.oxfordenergy.org/publications/

local-content-procurement-requirements-oil-gas-contracts-regional-trends-middle-east-north-africa/

(last accessed on 31 May 2019); Ana Maria Esteves and Mary-Anne Barclay, ‘Enhancing the benefits of local content: integrating social and economic impact assessment into procurement strategies’, Impact Assessment and Project Appraisal, (2011), 29, pp. 205-207, available at http://dx.doi.org/10.3152/14615511 1X12959673796128 (last accessed on 31 May 2019); Michael Warner, Local Content in Procurement: Creating Local Jobs and Competitive Domestic Industries in Supply Chains (Greenleaf Publishing 2011), pp. 2-5.

(25)

for local market participants, and bringing about the transfer of new technologies for innovation.¹⁵ This opportunity has the potential to diversify markets and allow suppliers, both domestic and foreign, to competitively engage the sector for inputs and ultimately spend some of their income in the country.¹⁶ Therefore, LC requirements would increase income levels and improve skill sets that ultimately improve locals’

quality of life.¹⁷ The use of properly developed LC requirements generates the potential to promote national economic growth quotas, which bring about meaningful economic and social benefits to a nation and its populace.

In that regard, this work contends that introducing reliable LC regulations amounts to legitimate government intervention for oil-producing countries. Consequently, it is essential to accelerate regulatory efforts that legitimately promote and enhance LC in the upstream petroleum sectors. However, the obligation to identify and apply suitable regulatory frameworks in developing and monitoring these mandatory requirements remains. This follows from the observation that while LC regulations remain crucial in diversifying the markets upon which economies advance, their incorporation into national legal frameworks is, given their prescriptive nature, both an important legal development and a factor that presents a national economic risk in sectors that are pivotal to building and advancing economies.

Historically, LC requirements were primarily safeguarded under petroleum contracts and laws.¹⁸ They were generally incorporated as contract chapters or provisions presented as ‘the use of local goods and services’ or ‘the employment of locals’.¹⁹ To a greater or lesser extent such requirements usually involved imposing obligations on IOCs to provide employment, training, capacity building and transfer of technology in order to improve local knowledge.²⁰ These aspects of contracts and laws compelled IOCs to source locally, provided that the quality of the goods or services available was equal to those provided by foreign companies.²¹ However, these provisions did not, both historically and at the present time, detail specific objectives relating to the LC requirements or account for the approaches by which these objectives are to be achieved. As a result, there were no set milestones to track the fulfilment of these broad LC objectives, mainly because locals were often precluded

15 Heum et al. (n 6), pp. 23-30; Tordo et al. (n 4), p. 144; Olle Östensson, ‘Local content, supply chains, and shared infrastructure’ (WIDER Working Paper 2017) Working Paper 2017/96, pp. 1-2, available at https://

www.econstor.eu/handle/10419/163068 (last accessed on 31 May 2019); Warner (n 14), p. 6.

16 Tordo et al. (n 4), p. 14; Hufbauer, Schott and Cimino-Isaacs (n 8), p. 7; Ovadia, ‘The Role of Local Con- tent Policies in Natural Resource-Based Development’ (n 8), p. 40.

17 Esteves and Barclay (n 14), p. 211; Acheampong, Ashong and Svanikier (n 6), p. 284; Segura et al. (n 7), p. 16; Warner (n 14), p. 8; Monday (n 9), pp. 75-77; Östensson (n 15), p. 2.

18 Ernest E. Smith et al., International Petroleum Transactions, 3^rd edn. (Rocky Mountain Mineral Law Foundation 2010) p. 524; Frank C. Alexander Jr., ‘A Comparison of International Upstream Petroleum Regimes’, Annual Institute on Mineral Law (2007), 54, p. 223; William T. Onorato, ‘Legislative Frameworks Used to Foster Petroleum Development’, World Bank Policy Research Working Paper No. 1420 (Social Science Research Network 1995) SSRN Scholarly Paper ID 620531, p. 55, available at https://papers.ssrn.

com/abstract=620531 (last accessed on 3 June 2019); Carmen Otero García-Castrillón, ‘Reflections on the Law Applicable to International Oil Contracts’ Journal of World Energy Law & Business (2013), 6, 129, p 32, available at https://academic.oup.com/jwelb/article/6/2/129/978503/Reflections-on-the-law-applicable-to-international (last accessed on 3 June 2019); Asiago (n 2), pp. 5-9.

19 Smith et al. (n 18) chapter ‘Clauses Commonly Found in International Petroleum Agreements’, p. 524.

20 Taverne (n 5), p. 152.

21 Smith et al. (n 18), p. 525.

(26)

from actual petroleum activities. Consequently, countries believed that in practice these LC national objectives were never met, despite the fact that IOCs frequently enjoyed record profits from the upstream petroleum operations.

This unbalanced market and bargaining power factored into the revision of several contractual frameworks in the upstream petroleum sectors. Governments primarily sought to modify the relevant commitments concerning the need to take direct control of petroleum activities.²² This was necessary because IOCs were principally concerned with profit-making strategies and ignored local interests.²³ The evidence for this can be seen in the variations and transformations of petroleum contracts over the years.²⁴ Standard petroleum agreements have undergone a change and shifted from IOCs profit strategies as the examples of early concessions to tax and royalty system (simply known as licences) which considers government revenue maximisation strategies.

Moreover, government participation strategies are favoured by several developing countries hence the adoption of production-sharing agreements (PSAs) and risk service agreements focusing on more government revenue. Governments have argued that the basis for these contract revisions and adaptations mainly concerned the revision of IOCs’ long-term contractual obligations towards each other that frequently precluded the participation of either states or locals. Yet the activities, revenues and resources from these operations had the potential to transform the prospects of local people, companies and economies.

Unfortunately, some of these contractual revisions led to serious legal ramifications for several governments of oil-producing countries. These revisions were inequitable and onerous in character, of an arbitrary nature, violated contractual commitments and contained inconsistencies with the principles of the rule of law as concerns international investments commitments and obligations.²⁵ In turn, governments had to identify legitimate ways of exercising control – based on the rule of law – to ensure that petroleum activities and revenue promoted national objectives, including LC requirements.

Today, while host government contracts still contain LC requirements, most countries have also adopted legitimate but questionable authoritative regulatory interventions. These interventions take different forms but mainly concern prescriptive regulations that cover various issues such as industry role in enhancing local

22 Thomas W. Wälde, ‘Revision of Transnational Investment Agreements: Contractual Flexibility in Natu- ral Resources Development’, Lawyer of the Americas, (1978), 10, pp. 265-268, available at http://www.jstor.

org/stable/40175798 (last accessed on 3 June 2019).

23 Thomas W. Wälde, ‘Renegotiating Acquired Rights in the Oil and Gas Industries: Industry and Political Cycles Meet the Rule of Law’, Journal of World Energy Law & Business (2008), 1, p. 55, available at http://

jwelb.oxfordjournals.org/content/1/1/55 (last accessed on 3 June 2019); Wälde (n 22), p. 265.

24 A. Timothy Martin, ‘Model Contracts: a Survey of the Global Petroleum Industry’, Journal of Energy &

Natural Resources Law (2004), 22:3, 1, DOI: 10.1080/02646811.2004.11433373, available at http://timmartin.

ca/wp-content/uploads/2016/02/Model-Contracts-Survey-of-Global-Petroleum-Industry-Martin2004.pdf (last accessed on 3 June 2019); Kim Talus, Scott Looper and Steven Otillar, ‘Lex Petrolea and the Interna- tionalization of Petroleum Agreements: Focus on Host Government Contracts’, Journal of World Energy Law & Business (2012), 5, pp. 181-193, available at https://academic.oup.com/jwelb/article/5/3/181/1001998 (last accessed on 3 June 2019).

25 Thomas W. Wälde and George Ndi, ‘Stabilizing International Investment Commitments: International Law Versus Contract Interpretation’, Texas International Law Journal, (1996), 31, pp. 215, 231; Wälde (n 22), p. 265.

(27)

participation through procurement, training, transfer of technology and employment.²⁶ They also clearly indicate the content of the LC objectives at hand and lay down precise compliance processes.²⁷ These processes, in particular, involve sophisticated methods of measuring, enforcing and monitoring the implementation of LC requirements.²⁸

The direction in which these regulations are developing is based on the need to formulate clear and detailed rules that can be applied predictably and consistently.²⁹ This system can be characterised as a rules-based regulatory system.³⁰ It is based on the notion that the application of a rule to subjects on an equal basis, regardless of their capabilities, will result in a predictable, consistent and certain outcome. The intention behind this approach is to achieve legal certainty or regulatory precision.

The difficulty involved in this approach, however, is that achieving consistent results, in the name of legal certainty, does not necessarily amount to accuracy, fairness or justice.³¹ Nonetheless, the system described above frequently prescribes strict methods of compliance and imposes severe penalties in the event of breach. In the upstream petroleum sectors, these severe measures tend to include heavy fines, imprisonment and revocation of licences.³²

As a result, the use of LC regulations to achieve local participation in the upstream petroleum sector is still characterised by paradoxical tendencies. In this regard, despite the potential for positive effects, the tendency to lay down rigid and detailed LC requirements has given rise to negative regulatory outcomes that increase the cost of doing business in some oil countries.³³ Today, several oil-rich countries, such as Nigeria and Angola, and emerging oil countries such as Ghana, Kenya, Mozambique, Tanzania and Sierra Leone, among others, oblige foreign operators to procure locally produced goods and services. These regulatory requirements are not only attached to attaining quantitative preferential quotas in favour of local goods or services but demand the allocation of these opportunities to locals even where the price margin of the local service/good is higher than that of a foreign supplier. As a result, foreign operators are compelled to source a percentage of local goods and services if they do not exceed a 10 % price margin (advantage).

26 The Global and Conceptual Studies Branch Division for Industrial (n 7), pp. 1-8.

27 Hunter, Legal Regulatory Framework for the Sustainable Extraction of Australian Offshore Petroleum Resourc- es: A Critical Functional Analysis (n 2), p. 192; Hunter, ‘Role of the Regulatory Framework in Encouraging the Sustainable Extraction of Petroleum Resources in Australia and Norway’ (n 10), p. 12.

28 Nigerian Oil and Gas Industry Content Development Act 2010 (NOGCID) Act; Decree-Law No. 17/09;

Decree 127/03 General Regulatory Framework for Hiring of Services and Goods from National Compa- nies by Companies in the Oil Industry.

29 Colin S. Diver, ‘The Optimal Precision of Administrative Rules’, Yale Law Journal (1983), 93, pp. 66-67;

John Braithwaite, ‘Rules and Principles: A Theory of Legal Certainty’, Australian Journal of Legal Philoso- phy (2002), 27, pp. 47-49.

30 Mirko Pečarič, ‘Principles or Rules-Based Regulation in the Face of Uncertainty – Does It Really Mat- ter?’, Lex localis - Journal of Local Self-Government (2017), 15, pp. 459-478, available at http://pub.lex-localis.

info/index.php/LexLocalis/article/view/15.3.459-478%282017%29 (last accessed on 4 June 2019); Pascal Frantz and Norvald Instefjord, ‘Rules vs Principles Based Financial Regulation’ (Social Science Research Network 2014) SSRN Scholarly Paper ID 2561370, pp. 1-4, available at https://papers.ssrn.com/abstract=2561370 (last accessed on 4 June 2019).

31 Diver (n 29), p. 66; Pečarič (n 30), p. 460; Braithwaite, ‘Rules and Principles’ (n 29), p. 50.

32 NOGCID Act 2010, section 68; Decree-Law No. 17/09, Article 15.

33 Hufbauer, Schott and Cimino-Isaacs (n 8), p. 3; Qiu and Tao (n 4).

(28)

This regulatory requirement is in sharp contrast to the contractual provisions, which frequently require operators to source their goods and services locally, provided that the quality and price of the goods or services available locally is equal to those provided by foreign companies. Additionally, this regulatory obligation, however justified, does not factor in several other compounding factors, i.e. the availability of local skill sets, capital or technology and market sector realities that significantly affect the requirement to procure local services and goods especially in developing countries.

The fact is that the majority of the countries that apply prescriptive rules have a limited industrial base and inadequate financial and technological capacities, makes it difficult for them to support petroleum operations effectively. Consequently, it is unsurprising that the procurement of highly technical and capital-intensive services and goods remains the province of established international companies and not locals, regardless of what the regulations envisage.³⁴ Nonetheless, several oil-producing countries insist on strict compliance with these quantitative requirements, often without properly considering their complexity or the suitability of the regulatory mechanisms chosen alongside the special characteristics of the upstream petroleum sector. The isolation of LC requirements from internal and external factors that influence their development has resulted in complex compliance mechanisms dogged by regulatory ambiguities and inconsistencies.

On the basis of these considerations, it is possible to state with accuracy that prescriptive LC regulatory interventions may initially appear ideal and therefore give the governments involved the impression that they amount to appropriate supervisory techniques. However, on reviewing them it becomes clear that using rigid frameworks to achieve the desired outcome is not necessarily productive. The reason for this is that combining LC national objectives (that are primarily the government’s responsibility) with rigid regulatory frameworks alongside high operating costs often yields outcomes that are inconsistent with the purpose of the regulation. For instance, the requirement to achieve LC requirements coupled with rigid regulatory procedures which are attached to the additional costs involved in complying with the 10 % margin (as indicated in some of the regulatory requirements) impact the profit-making objective of operating companies. This in turn limits the size of the government’s share of the revenue, especially in respect of operations concerning production-sharing agreements (PSAs), which can only be determined following the disbursement of operational costs pursuant to profit sharing mechanisms.³⁵ It can be seen that several oil-producing countries frequently utilise the contractual framework applicable to PSAs. Ultimately the application of these authoritative requirements reduces much-needed revenue for operators and governments. Furthermore, these obligations conflict with contractual provisions, which commonly require that the product or service procured locally is similar in price and quality to that offered by foreign suppliers.

Thus, these prescriptive frameworks are usually (but not always or necessarily) negative in character and potentially worsen the problem that initially justified

34 Acheampong, Ashong and Svanikier (n 6), p. 291; Tordo et al. (n 4) p.48.

35 Taverne (n 5), p. 21; Smith et al. (n 18), p. 525.

(29)

such regulation.³⁶ Moreover, where these rigid regulations are poorly proposed, inadequately designed, sketchily administered, or inadequately enforced, a greater burden than necessary is imposed, and this lays constraints on operators’ behaviour, thereby undermining the very purpose of the regulation.³⁷ For this reason, there is a need to formulate suitable LC legal and regulatory frameworks because regulatory tools are of critical importance in evaluating, clarifying and correcting emerging policy issues relevant to a government’s national objectives.³⁸ That notwithstanding, in respect of the application of regulatory frameworks to achieve LC requirements it is necessary to consider the unique characteristics of the upstream petroleum sectors vis-à-vis the regulatory choices to be made.

This direction is essential for two reasons: it allows policymakers to take stock of existing legal frameworks in order to identify suitable supervisory techniques for the sector, and by doing so, it lessens or negates the potential adverse consequences of regulatory intervention by applying suitable elements of law that are available, without the constant need to revise existing laws or introduce new laws into the legal framework. Ultimately, making limited revisions to legal frameworks enhance the prospects of achieving the desired regulatory results while simultaneously achieving the desired goals and bolstering revenue and cash flow for governments. Moreover, based on suitable regulatory choices, policymakers will develop the ability and capacity to continuously review appropriate regulations as commonly debated in the context of regulatory theory, reform and policy.³⁹ This has the potential to limit violation of trade and investment commitments, thereby creating an environment that encourages competition and innovation for diverse economies. It is, therefore, recommended that if they are ever to achieve LC requirements, oil-producing countries need to consider more flexible, alternative forms of regulation.

1.2 THESIS PROBLEM

Countries with petroleum discoveries frequently develop a recognisable pattern, in that public and policy debates quickly turn in to the question of how to involve locals and local business (the use of local inputs), in the extraction of the resources. Thus, the routine frequently asks how to promote local participation, but rarely studies whether and to what extent LC requirements in the upstream petroleum sector

36 Hunter, ‘The role of regulatory frameworks and state regulation in optimising the extraction of petroleum Resources: A study of Australia and Norway’ (n 10), pp. 48-49; Hunter, ‘Law and Policy Frame- works for Local Content in the Development of Petroleum Resources’ (n 1), p. 123.

37 Hall, Joshua C. and Taylor, Jason E. ‘Unintended Consequences of Government Intervention’, The Cato Journal (2016), 36, pp. 1-6, available at http://go.galegroup.com/ps/i.do?id=GALE%7CA447177246&sid=- googleScholar&v=2.1&it=r&linkaccess=fulltext&issn=02733072&p=AONE&sw=w (last accessed on 4 June 2019).

38 Pera, Alberto ,‘Deregulation and Privatisation in an Economy-Wide Context’, OECD Journal: Economic Studies (1989), pp. 159-161.

39 Organisation for Economic Co-operation and Development, Organisation for Economic Co-Operation and Development, Recommendation of the Council on Regulatory Policy and Governance (OECD Publishing 2012 (OECD Publishing 2012), p. 6; Hawkins, Keith and Thomas, John N. Making Regulatory Policy (Univer- sity of Pittsburgh Press 1989) p 3; OECD Reviews of Regulatory Reform, Regulatory Policies in OECD Countries: From Interventionism to Regulatory Governance (Canongate US 2002), p. 16; Malyshev, Nick, ‘The Evolution of Regulatory Policy in OECD Countries: 30, p. 1.

(30)

should be actively promoted. As a consequence, several oil-producing countries favour the use of LC requirements often through the prism of prescriptive regulations.

The challenge with such measures is that they only address one aspect of the state/

investor relationship, which is the impact of domestic regulations on investments.

These measures frequently focus on promoting local development strategies but pay little or no attention to developing sustainable relationships associated with foreign capital, technology and capacity. Thus, the essential elements associated with foreign investments, especially FDI, that address sustainable economic strategies are frequently disregarded. Furthermore, it is observed that the application and development of LC requirements through the prism of prescriptive regulations in the upstream petroleum sector, does not increase the chances of local participation.

If anything, these rules are regularly overlooked or creatively complied with because they have the potential to infringe on the economic value guaranteed to investors.

More importantly, the majority of these developing countries have limited access to skills, financial and technical expertise to fairly compete with established foreign companies in the upstream petroleum sectors. As a consequence, the introduction of these protective requirements fosters an interdisciplinary and complex background that further isolates the specific issues relating to local development and foreign investments.

This work reviews the relevance and continuous justification for prescriptive and protective rules. More importantly, it analyses how these rules could be redesigned to promote a balanced system capable of linking all areas of investment promotion and local development, rather than segregating them. To achieve this, this thesis contends that governments must consider flexible frameworks capable of being applied to complex⁴⁰ and ever-changing environments.⁴¹ Flexible frameworks – specifically, principles-based regulation – seem appropriate for LC objectives because they have the potential to promote varied legal objectives necessary for the growth of the upstream petroleum sectors. More importantly, this proposed system of regulation was fundamental to the success of the legendary Norwegian LC model,⁴² which offers an effective regulatory mechanism that may be used as a yardstick in other jurisdictions,⁴³ as discussed in the following chapters.

LC requirements are influenced by several external and internal factors. The distinctive external issues include legal interpretation and consistency with trade

40 Black, Julia ‘Forms and Paradoxes of Principles-Based Regulation’, Capital Markets Law Journal (2008), 3, pp. 425-457, available at https://academic.oup.com/cmlj/article-abstract/3/4/425/430498/Forms-and-paradoxes-of-principles-based-regulation (last accessed on 4 June 2019).; Black Julia, Hopper Martyn and Band Christa, ‘Making a Success of Principles-Based Regulation’, Law and Financial Markets Review (2007), 1, pp. 191-206, available at http://www.tandfonline.com/doi/abs/10.1080/17521440.2007.11427879 (last accessed on 4 June 2019); Pečarič (n 30), p. 460; Braithwaite, ‘Rules and Principles’ (n 29), p. 51.

41 Pečarič (n 30), p. 461.

42 Hunter, Legal Regulatory Framework for the Sustainable Extraction of Australian Offshore Petroleum Resourc- es: A Critical Functional Analysis (n 2), p. 59; Hunter, ‘Law and Policy Frameworks for Local Content in the Development of Petroleum Resources’ (n 1), p. 118; Hunter, ‘The role of regulatory frameworks and state regulation in optimising the extraction of petroleum resources: A study of Australia and Norway’ (n 10); Heum (n 6), p. 1; Heum et al. (n 6).

43 Asiago, Berryl Claire, ‘Norwegian Local Content Model a Viable Solution?’, US-China Law Review (2017), 14, pp. 471-473.

(31)

and investment commitments,⁴⁴ fragmentation of political and social priorities,⁴⁵ historical legacies within the petroleum sector, and energy economics.⁴⁶ Internal factors involve vulnerable commodity cycles, a limited industrial base, inadequate financial, technological capacities and technological know-how. Despite these issues, governments generally view LC developments in a non-holistic and uncritical manner and often through the prism of specific and rigid regulations. This route is considered despite the comprehensive nature of regulations and the ability of LC requirements to promote a competitive and innovative environment for diverse economies.⁴⁷ Thus, despite the critical role performed by regulation in achieving national objectives, lawmakers (politicians), regulators and regulated end up contending with various individual but differing issues that entail specific aspects and effects of the regulatory setup. Consequently, this prescriptive approach does not allow for an overall appreciation of the effects and implications of these regulations or developments.

As a result, the use of regulation to foster local participation in the upstream petroleum sector has fallen out of favour, especially when associated with governments.

LC regulation is synonymous with command and control strategies that force operators to do things that they would not normally do.⁴⁸ In developing countries in particular, rules of this kind are widely enforced without much reflection on the complexities involved, given the limited technical skills, technological advancements and capital intensity that characterise the upstream petroleum sectors. Moreover, governments do not identify the need to have a stable but limited labour force with a high degree of technical skill, which far exceeds the short-run capacity of most developing countries.

This generally leads market participants (IOCs) to favour deregulation strategies, for various reasons discussed herein. Thus, the role, effects and impacts of LC regulation in several upstream petroleum sectors seems to be confronted by an incoherent government strategy. Its development focuses on responses to shifting government objectives in different policy settings with little attention being paid to existing structures that include the role of foreign participants. This further intensifies the challenges faced by the upstream petroleum sector and enhances severe government scrutiny through arguably over-prescriptive regulations. The strategic importance of the sector, based on the high revenue associated with financing essential domestic needs that would otherwise not concern other stakeholders is usually cited as the reason behind this degree of scrutiny.⁴⁹

44 Nikièma (n 3), p. 3; Ramdoo (n 3), p. 6; Rabiu Ado, ‘Local Content Policy and The WTO Rules of Trade- Related Investment Measures (TRIMS): The Pros and Cons’, Internation Journal of Business and Manage- ment Studies (2013), pp. 137-146, available at http://www.universitypublications.net/ijbms/0201/pdf/

RHS405.pdf (last accessed on 4 June 2019) .

45 Barrera-Hernández et al. (n 2), chapter ‘Community and Sharing’, p. 26; Sigam Claudine , and Garcia Leonardo, Extractive Industries: Optimizing Value Retention in Host Countries (UNCTAD Geneva 2012), pp.

9-15; Ado (n 9), p. 30.

46 Acheampong, Ashong and Svanikier (n 6), pp. 282-283; Smith et al. (n 18), p. 525; Taverne (n 5), pp.

79-109.

47 Asiago and Wasunna (n 4), p. 11.

48 Hunter, ‘The role of regulatory frameworks and state regulation in optimising the extraction of petroleum resources: A study of Australia and Norway’ (n 10); Hunter, ‘Role of the Regulatory Framework in Encour- aging the Sustainable Extraction of Petroleum Resources in Australia and Norway’ (n 10), p. 15; Hunter,

‘Law and Policy Frameworks for Local Content in the Development of Petroleum Resources’ (n 1), p. 124.

49 Taverne (n 5), pp. 79-101; Mikesell (n 5), pp. 1-20.

Government intervention in international businesses : the rise of local content regulations in the upstream petroleum sector

Dissertations in Social Sciences and Business Studies

BERRYL CLAIRE ASIAGO

GOVERNMENT INTERVENTION IN

INTERNATIONAL BUSINESSES

GOVERNMENT INTERVENTION IN INTERNATIONAL BUSINESSES

Berryl Claire Asiago

GOVERNMENT INTERVENTION IN INTERNATIONAL BUSINESSES

ABSTRACT

TIIVISTELMÄ

ACKNOWLEDGEMENTS

TABLE OF CONTENTS

LIST OF ABBREVIATIONS

PART I:

SETTING THE SCENE

1 INTRODUCTION

1.1 BACKGROUND

1.2 THESIS PROBLEM