The year 2020 will long be remembered as a year in which global energy markets witnessed significant upheavals due to the effects of the Corona Virus Disease 2019 (COVID-19) pandemic. Oil prices fell dramatically, commodities such as metals witnessed significant declines in demand, while prices and activity levels across the three key sectors of the energy market: production (upstream), networks (midstream), and retail (downstream) witnessed significant shocks and downturns. Furthermore, due to lockdowns and travel restrictions imposed worldwide, traditional models for sourcing goods and labor used for energy operations in global supply chains have been significantly challenged. The pandemic has forced global energy markets – i.e companies, financial institutions, trade organizations, supply chain and procurement managers, and national authorities involved in the production, distribution and sale of energy – to increasingly embrace local goods and services in order to minimize disruptions to energy services and the associated social and economic risks.
Prior to the outbreak of the COVID-19 pandemic, the push for Local Content Requirements (LCRs) – i.e. regulatory measures, contractual provisions, and policies that aim to incentivize and maximize the use of local and in-country goods, services and labour in energy operations – was already intensifying in many parts of the world, especially in resource rich developing countries in Africa, Latin America and the Middle East. Over 90 percent of resource-rich countries have at least one form of LCRs as regards their energy industries, 50 percent of which impose mandatory targets for operators to use a certain minimum threshold of human and material resources indigenous to that economy. As the world continues to grapple with the uncertainties and disruptions resulting from the COVID-19 pandemic, the adoption of LCRs are expected to escalate in scale and dimensions across global energy markets.
For example, in 2020, Qatar’s national oil company, Qatar Petroleum, commenced the implementation of its Localization Program for Services and Industries in the Energy Sector (TAWTEEN), which sets the target of localizing Qatar’s oil and gas supply chain to provide growth opportunities for indigenous small and medium enterprises. The program aims to add 15 billion Qatari Riyals of “in-country economic investment value” to the local economy. The program aims to reward suppliers and contractors who comply with the TAWTEEN programme. Furthermore, regulatory measures that aim to maximize energy citizenship, through increased local participation in decentralized energy projects are increasing in Europe, Australia, Asia, North America, and across the world.
In a post-COVID world, global energy markets will need to increasingly embrace local innovation in order to recover better and stronger, and to minimize the impacts of future disruptions and shocks. Not only do LCRs have the potential to enhance the survival and competitiveness of local industries in times of global economic uncertainty, LCRs could also stimulate the rapid development of locally made technologies, products and entrepreneurial ventures needed to advance domestic energy transition and the attainment of the United Nations Sustainable Development Goal (SDG) 7 on energy for all. For example, the rise of LCRs in Kenya and Tanzania have seen the development of Pay-As-You-Go solar initiatives that deliver electricity to energy poor homes and communities through locally made solar panels. Also, by sourcing goods and services from local industries, LCRs could minimize capital flight from the energy sector thereby unlocking the finance needed to stimulate sustainable economic recovery. LCRs could also promote other social benefits such as job creation, development of endogenous technology and infrastructure, and the redistribution of wealth and authority to address concerns of indigenous groups, women, and historically disadvantaged communities in the energy sector. For example, LCRs could be specifically tailored to address the wide gender disparity in the distribution of executive roles and benefits in energy markets across the world.
However, despite the promise and potential of LCRs, on-the-ground problems relating to the implementation of LCRs have to be carefully addressed and balanced in order to avoid policy misalignments. Practical challenges such as unrealistic LCR targets that fail to reflect prevailing local contexts; shortage of technology, capacity and material at the local level; ambiguities and misalignment between the overall policy aims of LCRs and its practical outcomes; unclear legislation and rules; and failure to balance LCRs with a country’s obligations under core international treaties on trade, investment, environment, human rights and sustainable development amongst others, may ultimately stifle the application and success of LCRs.
In order to maximise the full value of LCRs for sustainable post-COVID 19 economic recovery in global energy markets, a flexible and collaborative approach to LCR implementation will be essential. This will require designing clear, transparent and realistic LCRs, while also providing adequate institutional support, financial resources, and supplier development programmes to develop the skills and capacity of local supplier to effectively meet localization needs. Stipulating mandatory LCRs, without providing the required supportive business environment and legal frameworks that will aid suppliers to meet those requirements may be counterproductive in the long run and could ultimately weaken a country’s overall investment climate.
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