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Manufacturing: Understanding the importance of Oil and Gas Free Zones

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In a presentation to the 2018 Oil and Gas Forum hosted at the Lagos Sheraton Hotel in October by the Institute of Oil & Gas Research and Hydrocarbon Studies, the Managing Director/CEO of the Oil and Gas Free Zones Authority, Mr Umana Okon Umana, brought into global context with local relevance, the place of the oil and gas free zones in the diversification of the Nigerian economy.

Let me start by expressing my pleasure to the Management of the Institute for the honour of asking me, not just to be part of this distinguished meeting, but to actually address it.



My hope is that at the end of the day we would have a great conference and learn something new about a sector of the economy that has given so much to the nation, and upon which we still look up to for much more, even as we work to depend less and less on hydrocarbons in their primary forms as the mainstay of the national economy. Such dependence can only be reduced through increase in value-added activities by way of secondary processing and manufacturing to domesticate the engineering support base for the Oil and Gas Industry.

Logistics support

That is why the conference theme, Oil and Gas Product Manufacturing: Prospects, Challenges and Progress, is topical and timely. The aspect I have been asked to lead the discussion on, which is the title of this address, speaks to the chief concern of my current national assignment.

The Oil and Gas Free Zones, which are supervised by the Oil and Gas Free Zones Authority (OGFZA), form a very important component of the Oil and Gas Industry. They provide the logistics support base for the sector. In doing so, they serve as manufacturing, shipping, and services supply hub to the sector, creating jobs, generating revenues for government, helping to protect the environment and promoting transfer of skills and technology. In these roles, they have served as a launch pad to economic diversification.

The Oil and Gas Free Zones have functioned as a launch pad  to the nation’s economic development, especially in attracting FDI, as shall be shown later in this presentation, partly because of the bespoke incentives that we offer to businesses that operate in the free zones. The incentives include exemption from all forms of taxation, including federal, state and local government taxes; exemption from expatriate quota policy applicable in the Customs Territory and exemption from customs duty on imports for value-added production; express processing of entry visas; the most expeditious clearance of cargoes; express processing of entry paperwork through the one-stop-shop policy and a host of other incentives. The special operating environment put in place in the Free Zones is meant to incentivize the use of the Free Zones as a manufacturing hub for economic diversification, in keeping with the global trend.

Diversification trend

Many of the world hydrocarbon-based economies are diversifying and cutting their dependence on oil and gas as revenue earners, particularly, foreign earnings, mainly because of the instability of the oil commodity market. The Kingdom of Saudi Arabia, for instance, is pursuing a vigorous national economic diversification programme to reduce its dependence on oil. The non-oil sector of the Kingdom’s economy as at 2017 accounted for 38 per cent of its GDP. The case for the United Arab Emirates, UAE, is more dramatic. Diversification of the economy of the UAE started in the 1980s, and centred on trade and the creation of shipping and logistics centres in Port Rashid and the port and free zone in Jebel Ali as well as Dubai International Airport.

From near total dependence on oil and gas as engine of growth of its economy in the 1970s, the UAE as at 2017 relied on non-hydrocarbon sources for 70 per cent of its economy, following a very successful diversification programme, through investment in infrastructure organised into free zone clusters. The UAE Ministry of Economy predicts this figure will go up to 80% of GDP by 2021.

Investment in free zones

It can bear emphasizing that much of the diversification success in the UAE is driven by its investment in free zones. The Jebel Ali Free Zone in Dubai, the economic hub of the UAE, is home to more than 5000 companies, creating many more thousands of jobs. The economy of the UAE is the most open in the world, with an Ease-of-Doing-Business rating of 21 in 2018. Nigerian Oil and Gas Free Zones are in the forefront of the implementation of the Federal Government policy on the Ease of Doing Business.

The UAE model of economic diversification along specific sectors has much to learn from. Though Nigeria pioneered specificity in free zone development with the 1996 Oil and Gas Free Zones Act number 8 which created OGFZA, unnecessary ambiguity in the law has hampered the optimal development of the Oil and Gas Free Zones in the country and denied Nigeria the full benefits derivable from optimally-operated oil and gas free zones, run according to global best practices. This is why the ongoing amendment of the OGFZA principal Act at the National Assembly is very important and deserves expeditious attention.

However, in spite of challenges, the nation’s Oil and Gas Free Zones under the administration of OGFZA have over the years made significant contributions to the national economy.

POLICY REFORMS

Policy reforms instituted by President Muhammadu Buhari’s administration, among which is the Ease of Doing Business, have created a better enabling environment for businesses to make more contributions to the national economy through the Oil and Gas Free Zones and restored confidence among foreign investors in Nigeria as an investment destination. The renewed confidence in the economy is evident in the report by the Presidential Enabling Business Environment Council (PEBEC) under the Office of the Vice President that the nation has attracted $84 billion in Foreign Direct Investments in the last 18 months.

The Oil and Gas Free Zones have without doubt been some of the key drivers of improved confidence in the economy. The Oil and Gas Free Zones Authority (OGFZA), working within the new policy environment, has instituted a regime of efficiency in the Oil and Gas Free Zones through automation and a review of procedures, leading to significant cost savings and improvements in timelines for operations. The changes in the operational environment in the free zones have seen commitments in new investments valued at more than $8 billion in the coming years.

FOREIGN DIRECT INVESTMENTS

An important new project in this regard is the Notore Industrial City located in the Onne-Ikpokri Oil and Gas Free Zone in Rivers State. Notore Industrial City, granted a Free Zone Developer Licence by OGFZA in November last year, has the potential to make Nigeria a continental hub in gas processing and petrochemicals. The new free zone is to attract $5 billion in new investments and generate 15,000 new jobs.

A number of new projects are coming up in free zone development, besides the exciting news from Notore. The most important of these is the Brass Oil and Gas City (BOG City), located on Brass Island, Bayelsa State.  The BOG City is licensed and will soon start operation. More than $3.5 billion investments are already committed to the project. BOG City is designed to evolve into a world class export-oriented and gas processing hub with the potential to generate up to 20,000 new jobs.

Even before the ongoing reforms, the Oil and Gas Free Zones had been recognized as a smart vehicle for driving the inflow of FDI. This was the reason for enacting the OGFZA Act of 1996, which created the nation’s first Oil and Gas Free Zone (OGFZ) in Onne. The premier OGFZ turned out to be a remarkable success, spawning other Oil and Gas Free Zones in different parts of the country. From inception, the pioneer OGFZ has attracted more than $20 billion in Foreign Direct Investments, and generated more than 100,000 direct and indirect jobs. The nation has also benefited from the OGFZs in the acquisition of new skills and transfer of technology.

MANUFACTURING IN NIGERIA’S OIL & GAS FREE ZONES

Among the companies contributing across the value chain—including manufacturing, skill acquisition, technology transfer and job creation—particularly in the Oil and Gas Free Zone at Onne, are the Indorama-Eleme Petrochemicals Company Limited; Tenaris Company Limited; and TechnipFMC Limited, to mention three.

Indorama-Eleme Petrochemicals produces bulk urea from gas in Eleme, Rivers State. The company’s production capacity is 3 million metric tons of bulk urea annually. It exports 70 per cent of the product through the company’s export terminal at the Oil and Gas Free Zone in Onne, while the difference is sold to the local market. Tenaris is engaged in oil pipe-making and coating while TechnipFMC makes and supports the Oil and Gas Industry with critically needed subsea equipment in fluid control, measurement systems, separation systems, Schilling robotics. TechnipFMC supports oil and gas operations in the free zones also with surface wellhead, loading systems, and multi-phase meters. Interestingly, TechnipFMC has helped the nation to save on foreign exchange by making the Christmas tree locally at its factory in Onne Oil and Gas Free Zone.

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As said earlier, these companies add value in a variety of ways. They contribute to the transfer of technologies and acquisition of skills. They also help to save foreign exchange by providing in-country what would have been imported if they did not meet those needs locally.

Operations of enterprises in the free zones are mediated by the Nigerian Content Act to make sure that sight is not lost of the imperative of local content all through the value chain. In this context, OGFZA is working closely with the Nigerian Content Development and Management Board.

The performance of the Oil and Gas Free Zones under the Buhari administration has attracted commendations locally and internationally. This year, the PEBEC Office ranked OGFZA the BEST agency of government, out of 44 MDAs, in the implementation of the policy of the Ease of Doing Business. Similarly, the FDi magazine, which is a publication of the Financial Times, named Nigeria’s pioneer Oil and Gas Free Zone in Onne as the winner of two global prizes in the FDi Global Free Zone of the Year Awards 2017. The Awards are the Global Special Award for the Oil and Industry; and the Bespoke Incentives Award.

The overall evaluation by experts and stakeholders is that the Oil and Gas Free Zones have proven to be a veritable vehicle for the attraction and retention of Foreign Direct Investments, creation of jobs, transfer of skills and technologies as well as a source of revenue generation for government.

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