Local Content Policies in The Oil and Gas Sector PDF

W O R L D
B A N K
P U B L I C A T I O N
Local Content in the Oil and Gas

Sector: Case Studies
Silvana Tordo and Yahya Anouti
Copyright 2013
The International Bank for Reconstruction and Development/The World Bank
1818 H Street, NW
Washington, DC 20433
Telephone: 202-473-1000
Internet: www.worldbank.org
World Bank papers are published to communicate the results of the Banks work to the development
community with the least possible delay. The manuscript of this paper therefore has not been prepared in
accordance with the procedures appropriate to formally edited texts. Some sources cited in this paper may
be informal documents that are not readily available. This paper is a product of the staff of the International
Bank for Reconstruction and Development/The World Bank. The findings, interpretations, and conclusions
expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or
the governments they represent. They are entirely those of the author(s) and should not be attributed in any
manner to the World Bank, or its affiliated organizations, or to members of its board of executive directors
for the countries they represent.
The World Bank does not guarantee the accuracy of the data included in this publication and accepts no
responsibility whatsoever for any consequence of their use. The boundaries, colors, denominations, other
information shown on any map in this paper do not imply on the part of the World Bank Group any
judgment on the legal status or any territory or the endorsement of acceptance of such boundaries.
Rights and Permissions
The material in this publication is copyrighted. Copying and/or transmitting portions or all of this work
without permission may be a violation of applicable law. The International Bank for Reconstruction and
Development / The World Bank encourages dissemination of its work and will normally grant permission to
reproduce portions of the work promptly.
Queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the
Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2422; e-mail:
pubrights@worldbank.org.
Contents
Acknowledgments ............................................................................................................................................. xii
Abbreviations and Acronyms ........................................................................................................................... 13
1.
Angola ....................................................................................................................................................... 14
1.1
Structural Context ............................................................................................................................... 15
1.1.1
Economy ....................................................................................................................................... 15
1.1.2
Taxation ........................................................................................................................................ 16
1.1.3
Population and Labor Force ...................................................................................................... 16
1.1.4
Education ..................................................................................................................................... 17
1.1.5
Business Environment ................................................................................................................ 18
1.2
The Petroleum Sector .......................................................................................................................... 20
1.2.1
The Petroleum Sector in the Economy ..................................................................................... 20
1.2.2
Petroleum Geography ................................................................................................................ 22
1.2.3
Reserves, Production, and Consumption ................................................................................ 22
1.2.4
Sector Institutional Framework ................................................................................................. 23
1.2.5
Market Structure and Local Capabilities ................................................................................. 24
1.2.6
Management of Petroleum Wealth ........................................................................................... 25
1.3
Local Content Policies ........................................................................................................................ 26
1.3.1
Policy Objectives ......................................................................................................................... 26
1.3.2
Policy Tools .................................................................................................................................. 27
Angolanization of the Workforce ......................................................................................................... 27
Domestic Sourcing of Goods and Services .......................................................................................... 29
Preferential Treatment............................................................................................................................ 31
1.3.3
Legislative Channels ................................................................................................................... 31
1.3.4
Institutional Responsibilities ..................................................................................................... 32
1.3.5
Interlinks ...................................................................................................................................... 32
1.3.6
Monitoring and Measuring Tools ............................................................................................. 32
1.3.7
Policy Impact on Local Content Levels .................................................................................... 33
Angolanization ........................................................................................................................................ 33
Domestic Sourcing and Preferential Treatment .................................................................................. 35
2.
Brazil ......................................................................................................................................................... 40
2.1
2.1.1
Economy ....................................................................................................................................... 42
2.1.2
Taxation ........................................................................................................................................ 43
2.1.3
2.1.4
Education ..................................................................................................................................... 46
2.1.5
2.2
2.2.1
2.2.2
2.2.3
2.2.4
2.2.5
2.2.6
iii
2.3
2.3.1
2.3.2
Policy Tools .................................................................................................................................. 55
Regulatory Requirements ...................................................................................................................... 55
Fiscal Incentives ...................................................................................................................................... 57
Program for the Mobilization of the Oil and Gas Industry (PROMINP) ........................................ 57
2.3.3
Legislative Channels ................................................................................................................... 60
2.3.4
Institutional Responsibility for Policy Design and Monitoring of Implementation .......... 60
2.3.5
Interlinks ...................................................................................................................................... 62
2.3.6
2.3.7
3.
Indonesia .................................................................................................................................................... 69
3.1
3.1.1
Economy ....................................................................................................................................... 70
3.1.2
Taxation ........................................................................................................................................ 72
3.1.3
3.1.4
Education ..................................................................................................................................... 75
3.1.5
3.2
3.2.1
3.2.2
3.2.3
3.2.4
3.2.5
3.2.6
3.3
3.3.1
3.3.2
Policy Tools .................................................................................................................................. 84
Local Content in the Labor Force .......................................................................................................... 84
Domestic Procurement of Goods and Services ................................................................................... 85
3.3.3
Policy Channels ........................................................................................................................... 90
3.3.4
Institutional Responsibilities ..................................................................................................... 90
3.3.5
Interlinks ...................................................................................................................................... 91
3.3.6
3.3.7
4.
Kazakhstan ............................................................................................................................................... 101

4.1
Structural Context ............................................................................................................................. 102
4.1.1
Economy ..................................................................................................................................... 102
4.1.2
Taxation ...................................................................................................................................... 103
4.1.3
Population and Labor Force .................................................................................................... 104
4.1.4
Education ................................................................................................................................... 105
4.1.5
Business Environment .............................................................................................................. 106
4.2
The Petroleum Sector ........................................................................................................................ 108
4.2.1
The Petroleum Sector in the Economy ................................................................................... 108
4.2.2
Petroleum Geography and Geology ....................................................................................... 109
4.2.3
Reserves, Production, and Consumption .............................................................................. 109
iv
4.2.4
4.2.5
4.2.6
Sector Institutional Framework ............................................................................................... 111

Evolution of Local Capabilities and Market Structure ......................................................... 111
Management of Oil Wealth ...................................................................................................... 113
4.3
Local Content Policies ...................................................................................................................... 113
4.3.1
Policy Objectives ....................................................................................................................... 113
4.3.2
Policy Tools ................................................................................................................................ 115
Localization of Petroleum Workforce ................................................................................................ 115
Target Quotas for Foreign Staff Employed by Subsoil Users ...................................................... 115
Limitations on Granting of Work Permits ..................................................................................... 116
Minimum Budget Dedicated to Training of Local Workforce .................................................... 116
Domestic Sourcing of Goods, Works, and Services .......................................................................... 116
Goods, Works, and Services Procurement Rules .......................................................................... 116
Ministry of Oil and Gas KC Development Programs .................................................................. 117
KMG (National Oil Company) Local Content Development Efforts ......................................... 117
4.3.3
Legislative Channels ................................................................................................................. 119
4.3.4
Institutional Responsibility for Policy Design and Monitoring of Implementation ........ 119
4.3.5
Interlinks .................................................................................................................................... 120
4.3.6
Monitoring and Measuring Tools ........................................................................................... 120
Local Content in the Labor Force ........................................................................................................ 121
Local Content in the Procurement of Goods, Works, and Services ................................................ 121
4.3.7
Policy Impact on Local Content Levels .................................................................................. 122
5.
Malaysia .................................................................................................................................................. 131

5.1
5.1.1
Economy ..................................................................................................................................... 132
5.1.2
Taxation ...................................................................................................................................... 133
5.1.3
5.1.4
Education ................................................................................................................................... 136
5.1.5
5.2
5.2.1
5.2.2
Petroleum Geography .............................................................................................................. 140
5.2.3
5.2.4
5.2.5
Market Structure and Local Capabilities ............................................................................... 142
5.2.6
Management of Petroleum Wealth ......................................................................................... 144
5.3
5.3.1
5.3.2
Policy Tools ................................................................................................................................ 145
Building Local Capabilities in the Petroleum Sector ........................................................................ 145
Domestic Sourcing of Goods and Services ........................................................................................ 147
Incentives for the Manufacturing Sector ............................................................................................ 147
Developing a Domestic OFSE Industry ............................................................................................. 148
5.3.3
Policy Channels ......................................................................................................................... 150
5.3.4
Institutional Responsibilities ................................................................................................... 150
5.3.5
Interlinks .................................................................................................................................... 150
5.3.6
5.3.7
6.
Trinidad and Tobago................................................................................................................................ 156

6.1
6.1.1
Economy ..................................................................................................................................... 157
6.1.2
Taxation ...................................................................................................................................... 158
6.1.3
6.1.4
Education ................................................................................................................................... 160
6.1.5
6.2
6.2.1
6.2.2
Petroleum Geography .............................................................................................................. 163
6.2.3
6.2.4
6.2.5
Market Structure and Local Capabilities ............................................................................... 165
6.2.6
Management of Petroleum Wealth ......................................................................................... 166
6.3
6.3.1
6.3.2
Policy Tools ................................................................................................................................ 168
6.3.3
Legislative Channels ................................................................................................................. 170
6.3.4
Institutional Responsibilities ................................................................................................... 170
6.3.5
Interlinks .................................................................................................................................... 171
6.3.6
6.3.7
Tables
Table 1.1 Key Economic Indicators of PostCivil War Angola, 19852010 ________________________ 15
Table 1.2 Angolas Labor Force Indicators Compared to Select Countries, 2010 ___________________ 17
Table 1.3 Angolas Educational Indicators Compared to Select Countries, 2010 ___________________ 18
Table 1.4 Indicators for Doing Business in Angola, 2011_______________________________________ 19
Table 1.5 Snapshot of Angolas Oil Sector Reserves and Production (2010) _______________________ 23
Table 1.6 Angola: Company Share and Operator (in Gray), by Producing Blocks (%) ______________ 25
Table 1.7 Domestic Sourcing of Goods and Services in Angola: Objectives, Rationale, and Instruments
__________________________________________________________________________________ 26
Table 1.8 Angolanization Targets Outlined by the Decree of 1982 ______________________________ 27
Table 1.9 Angola: Annual Contributions to the Training and Development Fund _________________ 28
Table 1.10 Key Angolanization Regulatory Requirements and Fines in Case of Noncompliance ____ 29
Table 1.11 Angola: List of Goods and Services by Mode of Preferential Treatment ________________ 30
Table 1.12 Angola: Tendering Rules as per Decree No. 48/06 ___________________________________ 30
Table 1.13 Summary of Local Content Policy Tools in Angola __________________________________ 31
Table 1.14 Labor Distribution and Angolanization Rate by Occupation along the Oil Value Chain, 2002
__________________________________________________________________________________ 34
Table 1.15 Angolanization Rate in Administrative versus Technical Occupations, 2002 ____________ 35
Table 1.16 Number of Graduates from High-Skilled Programs at the INP, 19832008 _____________ 35
Table 1.17 Angola: A Selection of Sonangol Joint Ventures in Upstream Oil and Gas Services, 1984
2002 ______________________________________________________________________________ 36
Table 2.1 Key Economic Indicators of Brazil, 1980 2010_______________________________________ 42
Table 2.2 Snapshot of Taxes in Brazil (2010) _________________________________________________ 44
vi
Table 2.3 Brazils Labor Force Indicators Compared to Select Countries, 2010 ____________________ 45
Table 2.4 Brazils Educational Indicators Compared to Select Countries, 2010 ____________________ 46
Table 2.5 Indicators for Doing Business in Brazil in Comparison to OECD Average, 2012 __________ 47
Table 2.6 Snapshot of the Brazilian Petroleum Sector in 2010 __________________________________ 50
Table 2.7 Brazil: Local Content in the Bidding Process, 19992007 ______________________________ 56
Table 2.8 Brazil: Schedule of Fines in Case of Noncompliance with Local Content Requirements ____ 56
Table 2.9 Brazil: An Activity Map of PROMINPs Local Content Stakeholders ___________________ 62
Table 2.10 Brazil: PROMINPs Methodology for Calculating Local Content ______________________ 63
Table 2.11 Brazil: PROMINP Targets Versus Achieved Participation of Domestic Industry in
Investments, 200310 _______________________________________________________________ 64
Table 2.12 Brazil: Cumulative Total and Local Investment (in $ million) and Percentage Local Content,
2011 ______________________________________________________________________________ 64
Table 3.1 Key Economic Indicators for Indonesia, 19802010___________________________________ 71
Table 3.2 Indonesias Labor Force Indicators Compared to Select Countries, 2010 _________________ 74
Table 3.3 Indonesias Educational Indicators Compared to Select Countries (2010) ________________ 75
Table 3.4 Indicators for Doing Business in Indonesia Compared to OECD Average _______________ 76
Table 3.5 Snapshot of the Oil and Gas Industry in Indonesia 2011 ______________________________ 81
Table 3.6 Indonesia: Definition of Goods and Respective Procurement Strategy __________________ 86
Table 3.7 Indonesia: Procurement Requirements for Services __________________________________ 87
Table 3.8 Indonesia: Summary of Price Preferences Based on Local Content (LC) Level and Company
Status ____________________________________________________________________________ 88
Table 3.9 Indonesia: Example of Calculating a Bid Evaluation Price for the Supply of a Good ______ 88
Table 3.10 Indonesia: Activities, Criteria, and Weights for the Local Content Level Achieved _______ 89
Table 3.11 Indonesia: Calculating the Penalty Given for Unachieved Local Content, and Rank Changes
__________________________________________________________________________________ 89
Table 3.12 Indonesia: Local Content Levels for Work Tools ____________________________________ 92
Table 3.13 Indonesia: Local Content of Value of Service of Equipment Use in Implementation of
Physical Work and Other Services ____________________________________________________ 93
Table 3.14 Indonesia: APDN Distribution of Goods by Category _______________________________ 94
Table 3.15 Indonesia: Snapshot of Domestic Suppliers of Compressors and Vacuum Pumps _______ 95
Table 4.1 Key Economic Indicators of Kazakhstan, 19902010 _________________________________ 102
Table 4.2 Kazakhstans Labor Force Indicators Compared to Select Countries, 2010 ______________ 104
Table 4.3 Kazakhstans Educational Indicators Compared to Select Countries, 2010 ______________ 106
Table 4.4 Indicators for Doing Business in Kazakhstan in Comparison to OECD Average, 2012 ____ 107
Table 4.5 Tengiz and Kashagan: A Comparison _____________________________________________ 109
Table 4.6 Snapshot of the Oil and Gas Sector in Kazakhstan (2011) ____________________________ 110
Table 4.7 Kazakhstan: Quotas for Foreign Staff Employed by Subsoil Users _____________________ 115
Table 4.8 Kazakhstan: Local Content Targets and Attained Levels in 2011 ______________________ 117
Table 4.9 Kazakhstan: Breakdown of the Planned KMG Agreements by Value (million KZT) ______ 118
Table 4.10 KMGs Kazakh Content in Purchased Goods, Works, and Services: 2010 and 2011______ 119
Table 4.11 Kazakh Content in Subsoil Personnel ____________________________________________ 122
Table 4.12 Kazakh Content in Goods, Works, and Services: 201011 ___________________________ 123
Table 4.13 Kazakh Content by Product Group and Local Suppliers, 2011 _______________________ 126
Table 5.1 Key Economic Indicators for Malaysia, 19802010 __________________________________ 133
Table 5.2 Malaysia Labor Force Indicators Compared to Select Countries, 2010 __________________ 135
Table 5.3 Malaysias Educational Indicators ________________________________________________ 137
Table 5.4 Indicators for Doing Business in Malaysia _________________________________________ 138
vii
Table 5.5 Snapshot of the Oil and Gas Industry in Malaysia (2010) _____________________________ 141
Table 5.6 Companies and Universities Engaged in the Malaysian Governments Internship Program
_________________________________________________________________________________ 147
Table 5.7 Malaysia: Industry Strategy, Expected Contribution to GNI, and Jobs to be Created _____ 148
Table 5.8 Malaysia: OFSE EPPs, KPIs, and Targets for 2011 ___________________________________ 152
Table 5.9 Malaysia: OFSE-related EPP Progress over 2011, and Target for 2012 __________________ 152
Table 6.1 Key Economic Indicators for T&T, 19802010 ______________________________________ 158
Table 6.2 T&T Labor Force Indicators Compared to Select Countries, 2010 ______________________ 160
Table 6.3 T&T Educational Indicators, 2010 ________________________________________________ 160
Table 6.4 Indicators for Doing Business in T&T in Comparison to OECD Average, 2012 __________ 162
Table 6.5 Snapshot of the Oil and Gas Industry in T&T 2011 __________________________________ 164
Table 6.6 T&T: Capacities and Shareholders of LNG Plants (1999, 2002, 2003, 2006) ______________ 165
Table 6.7 T&T: Energy-Intensive Industrial Base by Company ________________________________ 166
Table 6.8 T&T: Vision 2020, Goal 1 for the Energy Sector _____________________________________ 167
Table 6.9 Total and Local Content Expenditure on Platform Fabrication in T&T _________________ 172
Figures
Figure 1.1 Angolas Exports by Commodity, 19802010 ($ billion) ............................................................ 15

Figure 1.2 Comparison of Angolas Tax Revenues and Corporate Tax Rate to Other Countries, 2009
and 2010 ..................................................................................................................................................... 16
Figure 1.3 Evolution of the Angolan Population and Labor Force over Time (in millions of people) ... 17
Figure 1.4 Governanced Indicators in Angola Compared to the OECD Average ..................................... 20
Figure 1.5 Contribution of Angolas Extractive Sector to Value-Added, 19702010 (in $ billion and as
share of GDP) ............................................................................................................................................ 20
Figure 1.6 Breakdown of Value-Added in Angola by Economic Activity, 2010 ($ billion) ...................... 21
Figure 1.7 Angola: Percentage of Oils Contribution to GDP, Oil Export Revenues ($), and Total
Government Revenues, 200210 ............................................................................................................. 21
Figure 1.8 Employment in the Angolan Oil and Oil Services Sector, 200409 ........................................... 22
Figure 1.9 Angola: Actual and Estimated Oil Production According to Field Depth, 19902020 ........... 23
Figure 1.10 Achieved Angolanization Rate versus Target, 1990 .................................................................. 33
Figure 1.11 Angola: Production ........................................................................................................................ 34
Figure 1.12 Angola: Framework and Initiatives for Approaching Domestic Sourcing Challenges ......... 36
Figure 2.1 Key Challenges for Brazilian Companies, Percentage of Respondents (total = 77) ................. 42
Figure 2.2 Brazils Exports by Commodity, 19802010 ($ billion) ................................................................ 43
Figure 2.3 Comparison of Brazils Tax Revenues and Corporate Tax Rate to Other Countries, 2009 and
2010 (%) ...................................................................................................................................................... 43
Figure 2.4 Evolution of the Brazilian Population and Labor Force over Time, 19502050 (in millions of
people) ........................................................................................................................................................ 44
Figure 2.5 Breakdown of Labor Force by Category, 2000 and 2007 (in millions of people)...................... 45
Figure 2.6 Governance Indicators in Brazil Compared to the OECD Average .......................................... 48
viii
Figure 2.7 Brazil: Breakdown of Value-added by Economic Activity, 2010 ($ billion).............................. 48

Figure 2.8 Brazil: Contribution of Mining, Manufacturing, and Utilities to Value-added, 19702010.... 49
Figure 2.9 Brazil: Geographical Distribution of Main Oil and Gas Reserves 2010 (Number in
Parentheses Indicates Percentage Onshore) .......................................................................................... 49
Figure 2.10 Brazil: Evolution of Production by Water Depth (in billion boe) ............................................. 50
Figure 2.11 Brazil: Forecasted Domestic Oil Demand and Supply, mmbpd .............................................. 51
Figure 2.12 Brazil: Evolution of Petrobas R&D Spending (to the left) in Comparison to IOCs and
NOCs (to the right), 19982008 ............................................................................................................... 53
Figure 2.13 Brazil: Forecasted Investment, 201020 ($ billion) ..................................................................... 54
Figure 2.14 Brazil: Number of Jobs to be Created in the Oil And Gas Value Chain, in Thousands ........ 55
Figure 2.15 Brazil: Progredir Program Workflow .......................................................................................... 59
Figure 2.16 Brazil: Gaps and Challenges in Domestic Supply (Red Cells Indicate Areas of
Challenges/Gaps) ...................................................................................................................................... 59
Figure 2.17 Brazil: PROMINP Strategic Subjects, Areas, and Projects ......................................................... 60
Figure 2.18 Brazil: PROMINP Governance Structure .................................................................................... 61
Figure 2.19 Brazil: Average Local Content Commitment Resulting from Bidding Rounds, 19992008 . 64
Figure 2.20 Brazil: Local Content in the Procurement of Goods (left) and Services (right) Sourced by
Petrobras, 200508 .................................................................................................................................... 65
Figure 3.1 Indonesias Exports by Commodity, 19802010 ($ billion) ......................................................... 72
Figure 3.2 Comparison of Indonesias Tax Revenues as Percentage of GDP and Corporate Tax Rate to
Other Countries, 2009 and 2010 .............................................................................................................. 72
Figure 3.3 Evolution of the Malaysian Population and Labor Force over Time, 19502050 (in millions of
people) ........................................................................................................................................................ 73
Figure 3.4 Breakdown of Indonesias Labor Force by Sector, 200008 ........................................................ 74
Figure 3.5 Governance Indicators in Indonesia Compared to OECD Average .......................................... 77
Figure 3.6 Indonesia Compared to Select Countries: Breakdown of Value-added by Economic Activity
in 2010 ($ billion) ....................................................................................................................................... 78
Figure 3.7 Indonesia: Contribution of Mining, Manufacturing and Utilities to Value-added, 19702010
..................................................................................................................................................................... 78
Figure 3.8 Oil and Gas Production and Consumption in Indonesia, 19902011 ........................................ 80
Figure 3.9 Indonesia: Evolution of Upstream Investments and Local Content Levels, 200611 .............. 93
Figure 3.10 Indonesia: Local Content Procurement of Goods and Services, 200611 ($ billion) .............. 94
Figure 3.11 Indonesia: Distribution of Companies by Local Content Value Achieved ............................. 95
Figure 3.12 Indonesia: Distribution of Local Content Value by Segment of Activities ............................. 96
Figure 3.13 Indonesia: Distribution of Companies by Category of Certificate of Business Ability ......... 96
Figure 3.14 Evolution of Indonesianization in Exploration (left) and Production (right) Activities (in
thousand workers) .................................................................................................................................... 97
ix
Figure 3.15 Number of Indonesians Engaged in Capability Development Programs, 200811............... 97

Figure 4.1 Kazakhstans Exports by Commodity, 19952010 ($ billion).................................................... 103
Figure 4.2 Comparison of Kazakhstans Corporate Tax Rate to Other Countries, 2009 and 2010 (%) .. 103
Figure 4.3 Kazakhstan: Population by Age Group from 1950 to 2050 ....................................................... 104
Figure 4.4 Kazakhstan: Breakdown of Labor Force by Sector, 200107..................................................... 105
Figure 4.5 Governance Indicators in Kazakhstan Compared to the OECD Average .............................. 106
Figure 4.6 Kazakhstan: Contribution of Mining, Manufacturing, and Utilities to Value-added, 1990
2010 ........................................................................................................................................................... 108
Figure 4.7 Kazakhstan: Breakdown of Value-added by Economic Activity in 2010 ($ billion) .............. 108
Figure 4.8 Evolution of Oil and Gas Production and Consumption in Kazakhstan, 19912011 ............ 110
Figure 4.9 Kazakhstan: Reports Filed by Subsoil Companies, 200811 ..................................................... 123
Figure 4.10 Evolution of Kazakh Content in Monetary Presentation for the Purchase of Goods, Works,
and Services, 200911 (in KZT billion) ................................................................................................. 123
Figure 4.11 Kazakh Content in Goods Purchased for Offshore Operations, 2011 ................................... 124
Figure 4.12 Kazakh Content in Goods Purchased for Onshore Operations by Depth, 2011 .................. 124
Figure 4.13 Kazakh Content in Works and Services Purchased for Offshore Operations, 2011 ............ 125
Figure 4.14 Kazakh Content in Works and Services Purchased for Onshore Operations by Depth, 2011
................................................................................................................................................................... 125
Figure 5.1 Malaysias Exports by Commodity, 19802010 ($ billion) ........................................................ 133
Figure 5.2 Malaysias Tax Revenues and Corporate Tax Rate Compared to Select Countries, 2009 and
2010 ........................................................................................................................................................... 134
Figure 5.3 Evolution of the Malaysian Population and Labor Force over Time, 19502050 (in millions of
people) ...................................................................................................................................................... 135
Figure 5.4 Malaysia: Breakdown of Labor Force by Sector, 200008 (millions) ....................................... 136
Figure 5.5 Governance Indicators in Malaysia Compared to OECD Average ......................................... 138
Figure 5.6 Malaysia and Select Countries: Breakdown of GDP by Economic Activity in 2010 ($ billion)
................................................................................................................................................................... 139
Figure 5.7 Malaysia: Contribution of Mining, Manufacturing, and Utilities to GDP, 19702010 .......... 140
Figure 5.8 Evolution of Oil and Gas Production and Consumption in Malaysia, 19912011................. 141
Figure 5.9 Malaysia: Forecasted Contribution of the Energy Sector to the 2020 Gross National Income
(RM billion) .............................................................................................................................................. 145
Figure 5.10 Malaysia: Number of Scholars Sponsored by Petronas, 19752005 ....................................... 146
Figure 5.11 Malaysia: Skills Gap in the OFSE Industry ............................................................................... 149
Figure 6.1 T&Ts Exports by Commodity, 19802010 ($ billion) ................................................................ 158
Figure 6.2 T&Ts Tax Revenues and Corporate Tax Rate Compared to Other Countries, 2009 and 2010
................................................................................................................................................................... 159
Figure 6.3 Evolution of the T&T Population and Labor Force over Time)................................................ 159
Figure 6.4 Governance Indicators in T&T Compared to the OECD Average ........................................... 161
Figure 6.5 T&T: Contribution of Mining, Manufacturing, and Utilities to Value-added, 19702010 .... 163
Figure 6.6 T&T and Select Countries: Breakdown of Value-added by Economic Activity in 2010 ($
billion) ...................................................................................................................................................... 163
Figure 6.7 T&T: Evolution of Oil and Gas Production, 19702010 (in million tons of oil equivalent) .. 164
Figure 6.8 T&T: Evolution of Petrotrin .......................................................................................................... 165
Figure 6.9 T&T: Evolution of Funds, September 2001September 2010 ($ billion) .................................. 167
Figure 6.10 T&T: Approach to Maximizing Local Content and Participation .......................................... 169
Figure 6.11 T&T: Survey of Domestic Services Companies ........................................................................ 172
xi
Acknowledgments
Local Content Policies in the Oil and Gas Sector is part of a wider research effort
aimed at gathering existing knowledge and data on local content policies, with a
view to develop guidelines for the design and monitoring of implementation of
local content policies. This paper contains detailed case studies on the local content
policies in selected countries and is intended as background document for the
paper on Local Content Policies in the Oil and Gas Sector, World Bank Studies,
2013.
The case studies were coordinated by Silvana Tordo (lead energy economist,
Sustainable Energy Department, World Bank). The main author was Yahya Anouti
(consultant).
The comments of peer reviewers Maria Vagliasindi (lead economist, Sustainable
Energy Department, World Bank), Graham Davis (professor, Division of
Economics and Business, Colorado School of Mines), Fredric Manuel Cegarra
Escolano (senior adviser, Sustainable Energy Department, World Bank) and Gary
McMahon (senior mining specialist, Sustainable Energy Department, World Bank)
are gratefully acknowledged. Helpful comments were also received from
Alexander Huurdeman, David Santley, and Kristina Svennson, all from the
Sustainable Energy Department, World Bank, and Havard Halland, from the
Poverty Reduction and Economic Management Department, World Bank. Special
thanks go to Dino Andrian (BP MIGAS) for his assistance with the preparation of
the Indonesia case study, and Fayre Makeig, who edited the paper.
xii
Abbreviations and Acronyms

ASEAN
Association of Southeast Asian Nations
CAGR
compound annual growth rate
CAs
concession agreements
E&P
exploration and production
EOR
enhanced oil recovery
FDI
foreign direct investment
GATS
General Agreement on Trade in Services
GATT
General Agreement on Tariffs and Trade
GDP
gross domestic product
GWS
goods, works, and services
HSE
health, safety, and the environment
HRW
Human Rights Watch
IMF
International Monetary Fund
IOC
international oil company
KPI
key performance indicator
LCP
local content policy
LNG
liquefied natural gas
MNC
multinational company
NAFTA
North American Free Trade Agreement
NCO
national oil company
NGO
nongovernmental organization
OECD
Organisation for Economic Co-operation and Development
OFSE
oil field services and equipment
OPEC
Organization of the Petroleum Exporting Countries
PPPs
public-private partnerships
PSA
production sharing agreement or similar contractual arrangement
R&D
research and development
SADC
Southern African Development Community
SMEs
small- and medium-sized enterprises
TRIMs
Trade-Related Investment Measures
UN
United Nations
WEF
World Economic Forum
WTO
World Trade Organization
13
1. Angola
Oil has been the lifeblood of the Angolan economy since its independence from Portugal in 1975. In 2009 the oil
sector constituted over 44 percent of Angolas gross domestic product (GDP), over 95 percent of exports value,
and around 65 percent of government revenues (World Bank 2012). Shortly after independence, the political
administration instigated local content policies (LCPs) in the countrys petroleum sector. At the end of the 27year civil war, a socioeconomic development agenda renewed these policies.
Upon the nations independence in 1975, the Popular Liberation Movement of Angola (MPLA) led the
political and economic scene. Supported by Cuba, the MPLA had a Marxist outlook with a strong presence in
Luanda and the oil-rich urban coastal areas. The MPLA president Agostinho Neto nationalized colonial
properties in Angola and introduced a centralized planning economy in the capital and the coastal areas that
were controlled by the MPLA (Oliveira 2007; Warner 1991). The nationalization agenda had a different path in
the oil sector. As a starting point, there was a smooth appropriation of the colonial oil company, Angol,
followed by the creation of the state oil company, Sonangol. The company was granted sole concessionaire
rights over petroleum resources and mandated with regulatory and operational activities (CRES 2008). Aware
that international oil companies, vital for the transfer of knowledge and for future production, would be
discouraged to invest in Angola should Sonangol follow the socialist agenda, Sonangol was allowed to partner
with international companies (Oliveira 2007). Albeit, the government introduced a local content agenda, calling
for transfer of knowledge and Angolanization of the petroleum sector workforce. Institutionally this was
mainly championed by Sonangol (Council of Ministers 1982).
Shortly after independence, the country underwent a 27-year civil war that engaged three main political
parties,1 neighboring countries, and international allies. The battles took place mostly in the underdeveloped
areas, causing the migration of the local population and the destruction of the countrys infrastructure (Cihlar
2010; Oliveira 2007). During this period, Sonangol appeared to operate in isolation, unaffected by the overall
destitute situation of the economy and its institutions (Morais 2012). By the end of the civil war the Angolan
society was shattered, the countrys human capital was lost, and the non-oil economy was almost nonexistent
(Oliveira 2007). In response to these socioeconomic conditions, the government revived the Angolanization of
the workforce and launched new policies directed toward the domestic sourcing of goods and services, which
were extended beyond the petroleum sector (National Assembly 2003).
Today Angola remains an oil economy, with Sonangol establishing itself on the international oil scene by
branching outward into many countries and ventures. The country consists of 18 provinces that are governed
by a centralized pyramid structural hierarchy. The MPLAs Jos Eduardo dos Santos, who took office in 1979,
still exerts a strong grip on the ministries under his constitutional rule (Morais 2012), and particularly on the
oil sector through the Ministry of Petroleum, and Sonangol by proxy (Cihlar 2010). In this context, LCPs are
expected to be pursued across most of the countrys sectors.
The MPLA and two other parties: (i) the National Union for the Total Independence of Angola, supported by South Africa, which
controlled the majority of inland areas that were dependent on diamond extraction and agriculture; and (ii) the National Front for
Liberation of Angola, a more ethnic-based party drawing the majority of its supporters from local tribes and ethnicities, backed by
neighbouring Zaire.
1
14
1.1 Structural Context

As previously noted, the 27-year-long civil war destroyed the countrys infrastructure and human capital
apart from the petroleum sector, the Angolan economy was left barely functioning. In its Global Competitiveness
Report 2011, the World Economic Forum (WEF) placed Angola 139th out of a total of 142 countries, dropping
one position from the previous years report. The country joins the bottom 10 of the list with 7 other SubSaharan African countries (WEF 2011). In addition, the country is ranked near the bottom of the United
Nations (UN) Human Development Index. Today, Angola suffers from several structural problems including
inequality in income distribution, a noneducated growing labor force, lack of infrastructure, high bureaucracy,
and corruption.
1.1.1 Economy
Backed by high oil prices, Angolas GDP and per capita income have been growing since the end of the civil
war. Today, the country is the second-largest economy among the Southern African Development Community
(SADC) countries. This performance is mixed with high inequality in income distribution and poverty levels.
In 2010 the countrys GINI index was 58.6, and 54.3 percent of the population lived below $1.25 per day
(UNDP 2010).
Angolas real interest rate has been always among the lowest in the world. By the end of the civil war the
government started controlling the inflation rate that reached 14.5 percent in 2010, still among the highest in
the world. The countrys currency, Kwanza, has been depreciating against the U.S. dollar. Table 1.1 provides a
brief overview of Angolas key economic indicators. The countrys overall exports have been on an increase. As
shown in Figure 1.1, the basket of exports is increasingly dominated by petroleum and mining products.
Table 1.1 Key Economic Indicators of PostCivil War Angola, 19852010
1985
GDP (constant 2000 $, billion)
GDP per capita (constant 2000 $)
1990
1995
2000
2005
2006
2007
2008
3.9
3.0
4.2
6.7
8.0
9.9
11.2
11.5
11.9
362.5
372.8
251.9
298.4
404.3
473.1
563.0
622.6
619.8
623.2
2,671.8
325.0
23.0
13.3
12.2
12.5
13.7
14.5
-84.7
-60.8
25.2
4.2
13.0
-6.0
22.8
-0.5
0.0
10.0
87.2
80.4
76.7
75.0
79.3
91.9
152.5
128.7
109.9
117.5
127.5
98.5
100.2
Real interest rate (%)

Exchange rate (LCU per $)
Trade (% of GDP)
0.0
0.0
61.1
59.8
Source: World Bank 2012.

Note: CPI = consumer price index; GDP = gross domestic product; LCU = local currency unit.
Figure 1.1 Angolas Exports by Commodity, 19802010 ($ billion)
1.9
2.2
3%
3.9
97%
1980
1985
Source: Adapted from WTO 2012b.
9%
Manufactures
13%
Fuels and
mining products
78%
2010
3.3
Inflation, CPI (%)
Agricultural
products
2009
3.6
7.8
24.1
1%
1%
3%
2%
8%
53.4
1%
100%
97%
91%
97%
99%
1990
1995
2000
2005
2010
15
100%
1.1.2 Taxation
Compared to other Sub-Saharan African countries, such as Tanzania and Uganda, Angola leads the pack in
levying the highest corporate tax. For a select group of companies, the rate is in line with that of the United
States. The tax is levied on all profits derived from Angola, [and] all the income obtained by an Angolan
company operating overseas (PKF 2011). In addition, Angola levies high taxes on the mining and petroleum
sectors. For instance, Angolas petroleum industry tax regime taxeson the income obtained from the
exercise of petroleum transactions and any other income derived from other activities of a non-commercial or
industrial naturecan reach 65.75 percent for joint ventures (PKF 2011). As shown in Figure 1.2, tax revenues
in Angola as a percentage of GDP are among the highest in the world.
Figure 1.2 Comparison of Angolas Tax Revenues and Corporate Tax Rate to Other Countries, 2009 and 2010
Tax Revenues as % of GDP, 2009
Corporate Tax Rate, 2010
Angola
43%
Norway
Angola
35%
27%
Brazil
Trinidad and Tobago
26%
Australia
30%
United Kingdom
26%
India
30%
South Africa
26%
Uganda
Netherlands
23%
Australia
22%
Malaysia
16%
Chile
16%
Brazil
13%
Canada
12%
Uganda
Indonesia
India
Kazakhstan
12%
30%
Canada
28%
Norway
28%
South Africa
16%
Russia
34%
28%
Indonesia
25%
Malaysia
25%
Netherlands
25%
Trinidad and Tobago

UK
11%
10%
8%
25%
24%
Chile
20%
Kazakhstan
20%
Russia
20%
OECD 14%
Source: based on data from CIA 2012; Deloitte 2012; World Bank 2011.
Note: For Angola and Tanzania, tax revenues reflect 2011 levels and include social contributions (such as payments for social security and
hospital insurance), grants, and net revenues from public enterprises. OECD = Organisation for Economic Co-operation and Development.
1.1.3 Population and Labor Force
Population has been growing at a double-digit pace since the 1980s, totaling 19 million in 2010. This trend is
expected to continue for the coming decade, but at a slower rate. As a result, the country is characterized by a
young populationmore than half of the labor force aged 15 to 64. By 2030 the youth share of the working-age
group is projected to increase to around 60 percent (UN 2010). Figure 1.3 presents the evolution of Angolas
population by age group and expected growth.
16
Figure 1.3 Evolution of the Angolan Population and Labor Force over Time (in millions of people)
45
70%
40
60%
Million People
35
60+
50%
50 to 59
25
40%
40 to 49
20
30%
30
30 to 39
15
10 to 19
10%
0 to 9
10
5
0
20 to 29
20%
0%
% 15 to 64
Source: Adapted from UN 2010.
While the overall unemployment rate is at 25 percent, Angolas skilled-labor market is very tight; the labor
forces mean years of education is 4.4 years, in line with that of other countries with low human development
(4.2 years). Minimum wage is $127 a month, and the average wage is $211 per month in a country whose
capital is the second-most expensive city in the world (Mercer 2012). Table 1.2 presents a snapshot of Angolas
labor market in comparison to select countries.
Table 1.2 Angolas Labor Force Indicators Compared to Select Countries, 2010
Educational attainment (% of total)
Labor force
(million)
Angola
Australia
Primary
Secondary
Mean years
of education
Tertiary
7.1
Unemployment,
total (% of total
labor force)
Minimum wage
($ per month)
4.4
127
25
11.8
27.3
38.9
33.8
12
1,597
5.2
101.6
7.2
300
8.3
19.0
13.5
40
46.5
12.1
1,903
8.8
10.4
6.6
Malaysia
12.0
18.3
56
21.1
9.5
3.7
Norway
2.6
19.9
43.5
35.8
12.6
3,609
3.6
South Africa
18.2
15.8
74.2
5.2
8.5
543
23.8
Tanzania
22.1
5.1
59
10.7
0.7
25.3
63
11.1
9.2
5.38
Uganda
13.4
4.7
4.2
United Kingdom
31.8
19.2
44.4
35.4
9.3
1,655
7.8
Brazil
Canada
Kazakhstan
Trinidad and
Tobago
Source: Based on data from World Bank Group 2012; UNDP 2010.
Note: Educational attainment data for Australia, Canada, Malaysia, South Africa, and Trinidad and Tobago are from 2008; unemployment data
for Brazil, Kazakhstan, Malaysia, South Africa, and Uganda from 2009.
Not available.
1.1.4 Education
Finding a skilled workforce is a challenge in Angola, partly due to a weak educational system that suffers from
low enrollment rates. While enrollment in primary education is relatively low, enrollment in tertiary education
17
is among the lowest in the world. In addition, the literacy rate among adults and youth is near 70 percent, and
government expenditure on education is well below the Organisation for Economic Co-operation and
Development (OECD) average of 5 percent. As per the 2011 budget, primary and preprimary education
constitutes over two-thirds of spending on education. Table 1.3 summarizes key educational indicators in
Angola in comparison to select countries.
Table 1.3 Angolas Educational Indicators Compared to Select Countries, 2010
Literacy rate (%)
Adult (15+)
Angola
Australia
Brazil
Canada
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
Trinidad and Tobago
Uganda
UK
70.1
90.3(1)
99.7
93.1
88.7(c)
73.2
98.8
73.2
Youth
(1524)
73.1
98.1(a)
99.8
98.4
77.3
99.6
87.4
School enrollment (%)

Primary
Secondary
Tertiary
85.7
97.1
94.1(b)
89.5
99.1
85.1(a)
98.0(b)
93.9
90.9
99.6(a)
11.5(a)
85.5
82.0(b)
88.2
67.9(a)
93.9
96(a)
3.7
79.9
36.1(a)
38.5
40.2(a)
74.4
2.1
4.2(a)
58.5(a)
Public expenditure
on education
(% of GDP)
3.6
5.1(a)
5.4(b)
4.8(b)
3.1(a)
5.8(a)
6.5(b)
6.0
6.2
3.8(d)
3.2(a)
5.4(b)
Source: Based on data from Gomes and Weimer 2011; UNDP 2010; World Bank 2012.
Note: (a) year 2009; (b) year 2008; (c) year 2007; and (d) year 2006 data.
The situation is exacerbated by the low quality of secondary and higher education, and the restricted entry
to vocational and specialized engineering education. Among multiple factors, absenteeism of faculty, lack of
libraries, and nonexistence of an accreditation system contribute to the weakness of university-level
educational. As stated by Gomes and Weimer (2011), universities in Angola do not adequately prepare their
studentsa situation acknowledged by Sonangol, which established its own university. The national company
education plan has still not been approved by the Ministry of Education. To close the educational gap, most
international companies operating in Angola have established internal programs and rely on partnerships and
external support, in-country and abroad, to train their local staff (Gomes and Weimer 2011).
1.1.5 Business Environment
Bureaucracy and corruption remain key issues in Angola, and the centralized bureaucratic system suffers from
low capabilities and regulations from the colonial era (Kirk 2011). In fact, it takes 68 days and up to 8
procedures across different government bodies to start a business in Angola. The World Bank has ranked
Angola as one of the most difficult countries in the world to do business in. Further indicators on doing
business in Angola in comparison to the OECD average are presented in Table 1.4.
18
Table 1.4 Indicators for Doing Business in Angola, 2011

Angola
OECD
1. Starting a business
6. Protecting Investors
Procedures (#)
Time (days)
Cost (% of income per capita)
Paid-in min capital (% income per cap)
Rank (Change in rank from 2011)
Extent of disclosure index (0-10)

Extent of director liability index (0Ease of shareholder suits index (0Investor protection strength (0-10)
8
68
118.9
25.3
167 (-3)
5
12
4.7
14.1
11
321
180.3
115 (+4)
14
152
45.7
8
48
890.5
120 (+5)
5
103
92.8
7
184
3.2
129 (+45)
5
31
4.4
3
4
2.4
0
126 (+4)
7
5
9.5
63.9
2. Dealing with Construction Permits

Procedures (number)
Time (days)
Payments (number per year)

Time (hours per year)
Profit tax (%)
Labor tax and contributions (%)
Other taxes (%)
Total tax rate (% profit)
Documents to export (#)

Time to export (days)
Cost to export (US$ per container)
Documents to import (#)
Time to import (days)
Cost to import (US$ per container)
5. Getting Credit
Strength of legal rights index (0-10)
Depth of credit information index (0-6)
Public registry coverage (% of adults)
Private bureau coverage (% of adults)
5
6
6
5.7
65 (-5)
6
5
7
6
31
282
24.6
9
19.5
53.2
149 (-4)
13
186
15.4
24
3.2
42.7
11
48
1850
8
45
2690
163 (-1)
4
10
1032
5
11
1085
1011
44.4
46
181 (0)
518
19.7
31
6.2
22
6.9
133 (+6)
1.7
9
68.2
8. Trading across borders
4. Registering Property
Procedures (number)
Time (days)
Cost (% of property value)
OECD
7. Paying Taxes
3. Getting electricity
Procedures (number)
Time (days)
Angola
9. Enforcing Contracts
Time (days)
Cost (% of claim)
Procedures (number)
10. Resolving Insolvency

Time (years)
Cost (% of estate)
Recovery rate (cents on the dollar0

Note: Ranking is out of 183 countries. OECD = Organisation for Economic Co-operation and Development.
Despite some efforts to improve the situation, corruption and weak governance remain major hurdles in
Angola (as shown in Figure 1.4). In fact, the country is perceived to have one of the highest levels of corruption
in the world (CRES 2008). In relation to domestic sourcing policies in the petroleum sector, many questions are
being raised around the conflict of interest arising from Sonangols role as operator and shareholder in oilservice companies (IEA 2006).
19
Figure 1.4 Governanced Indicators in Angola Compared to the OECD Average

Voice and
Accountability
100
80
Political
Stability/Absence
of Violence
60
Control of
Corruption
40
20
Angola 2010
Angola 2000
OECD 2010
Government
Effectiveness
Rule of Law
Regulatory
Quality
Source: Adapted from Kaufmann, Kraay, and Mastruzzi 2011.
1.2 The Petroleum Sector

1.2.1 The Petroleum Sector in the Economy
The later pre-independence days of Angola were characterized by a relatively diversified economy with strong
agricultural and manufacturing sectors. Since independence in 1975, the country gradually increased its
economic reliance on extractive industries, particularly oil and diamondswith extractive industries
contributing around 35 percent of GDP. In 2010 that share increased to over 50 percent, most of which came
from oil. Figure 1.5 presents the evolution of the extractive industry value-added and its share of GDP.
Angolas oil intensity in GDP is among the highest in the club of the resource-rich and Organization of the
Petroleum Exporting Countries (OPEC) countries Figure 1.6).
Figure 1.5 Contribution of Angolas Extractive Sector to Value-Added, 19702010 (in $ billion and as share of
GDP)
60
80%
70%
50
50%
30
40%
30%
20
20%
10
10%
0%
70
72
74
76
78
80
82
84
86
88
90
92
Contribution to GDP
94
96
98
00
02
04
06
Percentage Share
Source: UN Statistics 2010.

Note: GDP = gross domestic product.
20
08
10
Share of GDP
GDP (Bn $)
60%
40
Figure 1.6 Breakdown of Value-Added in Angola by Economic Activity, 2010 ($ billion)

85
1,296
2,066
1,637
159
304
402
377
24
17
22%
23%
2,236
22
100%
7%
25%
15%
20%
33%
38%
39%
43%
45%
5%
11%
6%
13%
8%
18%
6%
8%
9%
50%
14%
7%
2%
5%
5%
19%
19%
7%
10%
Australia
Brazil
5%
7%
8%
12%
8%
8%
4%
6%
1%
12%
6%
2%
21%
33%
6%
24%
Canada Kazakhstan Malaysia
Norway
South
Africa
Trinidad
& Tobago
27%
10%
36%
20%
8%
12%
8%
0%
13%
1%
8%
7%
8%
3%
32%
6%
16%
6%
3%
4%
30%
Angola
5%
11%
8%
14%
19%
20%
13%
11%
51%
12%
10%
9%
23%
1%
12%
14%
14%
Uganda
UK
Tanzania
Other Activities
Transport, storage and communication
Construction
Wholesale, retail trade, restaurants and hotels
Manufacturing
Agriculture, hunting, forestry, fishing
Mining, Manufacturing, Utilities
Source: Based on data from UN Statistics 2010.

Note: UK = United Kingdom.
During the past decade, Angola shifted from its dual resource dependency to a predominantly oil economy. In
fact, the diamond sectors contribution to GDP diminished from 5.7 percent in 2005 to 1.2 percent in 2008 (Teka
2011). In 2008 oil constituted over 56 percent of GDP, over 96 percent of exports value, and around 80 percent
of government revenues, as a result of upward trending prices and increased production. Oil export revenues
increased from $7.57 billion in 2002 to a peak of $67.12 billion in 2008 (Cihlar 2010). Figure 1.7 shows the
percentage of oils value-added contribution to the countrys main economic indicators.
Figure 1.7 Angola: Percentage of Oils Contribution to GDP, Oil Export Revenues ($), and Total Government
Revenues, 200210
2.0
100
Oil Price (Brent $/bbl)
1.8
90
1.6
80
1.4
70
1.2
60
1.0
50
0.8
40
0.6
30
0.4
20
0.2
10
0.0
0
2002
2003
2004
2005
2006
2007
2008
2009
2010
Export. Rev.
($ Bn)
7.57
8.76
13.24
22.37
30.72
43.07
67.12
41.85
Share in GDP
(%)
54.2
54.7
62.9
55.7
55.8
56.9
44.4
Source: Based on data from BP 2011; Morris, Kaplinsky, and Kaplan 2011.
Note: bbl = barrel; GDP = gross domestic product; mmbpd = million barrels per day.
21
$/bbl
mmbpd
Production (mmbpd)
In 2004 the oil industry employed 12,296 people directly through operators and 12,886 people indirectly
through supporting service companies. Fueled by exploration and development activities, the workforce in the
oil services sector almost tripled in 2009, increasing the total workforce over 1.5 times. As shown in Figure 1.8,
overall employment in the oil sector reached 64,677 workers in 2009, which included the 5,174 registered
expatriates working in oil services (Skills Shortages II).
Figure 1.8 Employment in the Angolan Oil and Oil Services Sector, 200409
64,808
64,677
CAGR
2004 - 2009
55,061
48,818
77%
76%
Service
Provider
31%
Operator
5%
74%
25,182
27,173
74%
51%
52%
49%
48%
26%
26%
23%
24%
2004
2005
2006
2007
2008
2009
Source: Based on data from CRES 2008.

Note: CAGR = compound annual growth rate.
1.2.2 Petroleum Geography
Angola has a 1,980-kilometer (km) coastline on the Atlantic Ocean stretching from Cabinda, a small separate
province north of the general borders of Angola, to the Namibian borders in the south. Along the coastline are
three major sedimentary basins: the northern Lower Congo Basin, the Kwanza Basin, and the southern Namibe
Basin.
The Lower Congo Basin has the largest proven reserves and the most-developed base for production,
particularly in Cabinda (CRES 2008). It is divided into onshore and offshore blocks that are in their exploration
and production phases. The Kwanza Basin was the first discovered in Angola (CRES 2008) and constituted the
majority of production before the 1990s. It is also divided into onshore and offshore blocks. The onshore blocks
have mostly matured and their production was highly affected by the civil war; the offshore blocks are in both
production and exploration phases. The third basin, Namibe, is located in the south and has identified reserves
that remain largely untested by drilling. Exploration efforts there have been discouraged after several failures
in that area.
Overall, Angolas petroleum resources extend from onshore to ultra-deep waters. To date, most
exploration efforts have primarily focused on offshore areas (CRES 2008). The offshore formation is divided
into 51 blocks, of which only 9 are currently in production. The blocks are distributed as follows: 14 in shallow
waters with depths below 500 meters; 17 in deep waters between 500 meters and 1,500 meters; and 20 ultradeep blocks below 2,500 meters.
1.2.3 Reserves, Production, and Consumption
Angola experienced significant exploration activities after the 1990s, when Sonangol opened up the countrys
deep-water areas. Proven oil reserves increased from 1.6 billion barrels in 1990 to 13.5 billion barrels by 2010.
Proven reserves in 2010 constituted 1 percent of the world reserves, positioning the country in 16th position
22
worldwide and in 3rd position among African countries, behind Nigeria (37.2 billion barrels) and Libya (46.4
billion barrels) (UN Statistics 2010). In 2007 Angola became a member of the OPEC (Cihlar 2010).
The majority of recent discoveries were made in deeper waters. The first of these discoveries was made by
French ELF in 1996 (CRES 2008). Since then, deep-water exploration efforts ramped up. Between 2004 and 2011,
subsea spending on infrastructure and equipment more than tripled, from $1.27 billion to $4 billion. In 2011
cumulative offshore EPC spending reached $21.4 billion (Rystad Energy 2010).
Angola was a small player in the oil market, with moderate and stagnant production figures, between 1970
and 2002, as the civil war hindered production from onshore fields. Additionally, prior to 1990, offshore
reserves were not discovered and did not surface on the governments agenda until 1996. Since the end of the
civil war in 2002 daily production picked up, doubling from 0.9 million barrels per day (bpd) in 2002 to over
1.8 million bpd in 2010 (BP 2011) to constitute 2.3 percent of the world production. Oil production in Angola
peaked in 2012, with future discoveries coming onstream to replace depleting reserves. Table 1.5 provides a
snapshot of the oil sector with annual productions and estimates, and Figure 1.9 shows oil production since
1990 and the estimated production until 2020 as reported by Sonagol.
Table 1.5 Snapshot of Angolas Oil Sector Reserves and Production (2010)
2010
Level
Share of
world
%
Oil proven reserves, billion boe
13.5
1.00
Oil production, mmbpd
1,851
2.32
Percentage change
Global rank
16
1 yr
%
0.0
3 yrs
%
0.0
5 yrs
%
49.4
10 yrs
%
107.7
15
3.78
-1.3
30.3
149.5
Source: Based on data from BP 2011.

Note: boe = barrel of oil equivalent; mmbpd = million barrels per day.
Figure 1.9 Angola: Actual and Estimated Oil Production According to Field Depth, 19902020
3.0
Ultra-deep Water
Deep Water
2.5
2.0
1.5
1.0
0.5
0.0
1990
1995
2000
2005
2010
2015
2020
Source:Based on data from Sonangol 2012.
Angolas oil consumption remains low; the country exports most of its oil. In 2009 the country exported 98
percent of its production, the main export markets being China and the United States.
1.2.4 Sector Institutional Framework
Although the Council of Ministers and the Ministry of Petroleum are the constitutional overarching bodies
overseeing the oil sector (Teka 2011), Sonangol retains the upper hand in decision making within this structure
(Oliveira 2007). Upon its establishment in 1976, Sonangol was granted sole concessionary rights and mandated
to manage the exploration of Angolan hydrocarbon resources. Today, the company:
o
o
o
Identifies exploration areas

Negotiates and manages production contracts
Collects, validates, monitors, and archives all petroleum activity data in Angola (CRES 2008).
23
As per the law of 2004, petroleum activities can be only carried out under a prospecting license or a
concession. Historically, Sonangol has engaged foreign companies through production sharing agreements
(PSAs). Operationally, Sonangols influence over its upstream joint ventures is translated through venturespecific operating committees. A joint-venture operating committee advises, supervises, and oversees
exploration, development, and production activities. The committee, constituting four members (two
appointed by Sonangol and two by the contractor), approves work programs and budgets. Decisions within
the committee are taken by a simple majority, and the tie-breaking vote is reserved for the Sonangol-nominated
committee chairman. Provisions for the operating committees are established in the PSAs.
Sonangol was established prior to the ministry, and its top executives are closely affiliated with the ruling
elite, providing more power and control for Sonangol (Oliveira 2007). Furthermore, some argue that Sonangol
reports directly to the president (Lwanda 2011). Nevertheless, the Ministry of Petroleum is mandated with
policy development and some regulatory activities, including:
o
o
o
o
o
Issuance of exploration permits

Formulation of sectoral policies
Approval of work plans
Regulation of production levels
Design and enforcement of the petroleum tax regime in coordination with the central bank
and the Ministry of Finance.
The mandate extended Sonangols activities to export crude oil and identify exploration areas.
Furthermore, Sonangol manages the bidding process, and negotiates for new concessions and ventures in
partnership with operators. In practice, Sonangol's participation has taken a variety of forms. In many contracts
signed to date, Sonangol holds a working interest through exploration and concession agreements (CAs); in
others, it only participates in the development of commercial discoveries in PSAs (CRES 2008).
1.2.5 Market Structure and Local Capabilities
Historically, before independence, the major oil company operating in Angola was Cabinda Gulf Oil, an
American subsidiary of Gulf Oil. When the Marxist MPLA took power in 1975, Gulf Oil closed its operations
out of fear of nationalization, and the MPLA was not able to secure the transfer of the companys technology
and knowledge acumen (Oliveira 2007). But this was not the case for another oil company operating in Angola
called Angol, a subsidiary of Sacor of Portugal. In 1975 the MPLA took over Angol, but did not nationalize it.
Instead the existing Portuguese employees were preserved (Oliveira 2007), and new cadres of Angolan2
executives were introduced. Since then, Sonangol has developed its capabilities through external training of its
personnel, reliance on consultants, and partnerships with international oil companies.
Upon its establishment, Sonangol was the sole concessionaire, regulator, and tax collector of the oil
industry. Since then, the company has relied on external consultants to complement its capacities in all its
operations (Oliveira 2007). The company received close guidance and advice from the Italian oil company, ENI.
A first wave of Sonangol-sponsored employees who received training at ENIs facilities in Milan took on
leadership positions when they returned to Angola by the end of 1970s (Sonangol 2012). A second, larger
group went to Algeria and received training from the Algerian state company, Sonatrach (Sonangol 2012),
which had the trust and confidence of the MPLA leaders (Oliveira 2007). Moreover, the former colonial
advisors and auditors of the Angolan oil sector, the U.S. consulting firm Arthur D. Little, played a role in the
shaping and development of Sonangol (Oliveira 2007), by handling Angolas negotiations with international oil
companies from 1977 (Neigus 1981).
On another front, Sonangol relied on the capabilities of international operators to carry out upstream
The key figures in Sonangols core team were well-networked MPLA party members who enjoyed the confidence of President
Neto (Oliveira 2007).
24
activities, by partnering with leading international oil companies through PSAs. Table 1.6 presents the
shareholders and operators by producing block.
With time, Sonangol began expanding its activities beyond Angola. The first subsidiary was established in
London in 1983; Sonangol Limited was responsible for direct trading of nearly 40 percent of the production
(Oliveira 2007). In 1991 the company undertook a restructuring of its growing business. A holding was created,
and the principal line of business became subsidiaries.
Overall, Sonangol has emerged from a postcolonial era and a 27-year-long civil war to drive the countrys
oil sector economy into 29 joint ventures and multiple subsidiaries (Lwanda 2011), with more than 8,000
employees across the globe in 2008 (CRES 2008). The company has ventured into drilling, fabrication,
transportation, industrial supplies and infrastructure, distribution, storage services; banking, food retail, and
catering; and civil engineering and real estate development.
Table 1.6 Angola: Company Share and Operator (in Gray), by Producing Blocks (%)
Sonangol
Block 3
Block
0
Block
2
3/05
Sonangol P&P
41.00
25.00
25.00
Total
10.00
3/85 and
3/91
6.25
50.00
Canuku
Block
14
100.00
20.00
20.00
BP
IOCs
Block
15
39.20
ENI
9.80
20.00
16.67
12.00
15.00
20.00
20.00
40.00
20.00
Sonangol Sinopec
50.00
China Sonangol
25.00
STATOIL
PETROBRAS
13.33
23.33
27.50
AJOCO
Independents
50.00
31.00
Esso
NOCs
Block
18
40.00
26.67
Chevron
Block
17
20.00
SOMOIL
9.30
POLIEDRO, S.A.
9.10
KOTOIL, S.A.
9.10
12.50
10.00
NATGAS
4.00
5.00
INA-NAFTA
4.00
5.00
GALP
9.00
SVENSKA
6.25
Source:Based on data from Sonangol 2012.

Note: IOCs = international oil companies; NOCs = national oil companies.
1.2.6 Management of Petroleum Wealth
Angolas oil wealth has not been efficiently managed to the benefit of the economy and the population at large.
The country has so far not instituted an oil fund, nor has it publicly designated a methodology for the
management of oil revenues. In fact, the management of oil revenues has been characterized as illusive, lacking
transparency, often fraudulent, and endowed with a certain degree of political motivation. High poverty levels
in addition to the countrys overall poor infrastructure are visible proof of the poor management of oil
revenues.
Over the years, several issues have been brought to the limelight by international economic and
monitoring bodies such as the International Monetary Fund (IMF) and Human Rights Watch (HRW), which
claim the unlawful appropriation of oil revenues. Issues include Sonangols unaccounted-for sums between
1996 and 2001, which totaled $10 billion, and unlawful donations by oil companies to the Fundacao Eduardo
dos Santos (Foundation of Eduardo Santos) to maintain a good relationship with the authorities (Andre 2010).
25
In addition, Sonangol did not have to publicly disclose receipts from oil companies as per Tax Law 13 of 2004
(Republic of Angola 2004), thus increasing the possibility of shadow operations to take place unnoticed.
1.3 Local Content Policies

1.3.1 Policy Objectives
The Angolan government has been following two routes to achieve its local content objectives: (i)
Angolanization of the workforce and (ii) domestic sourcing of goods and services. These are primarily
legislated through a series of official decrees. In addition, the PSA administered by Sonangol includes local
content rules and regulations that build on the governmental legislations.
Angolanization of the workforce started in 1979, with Law10/79 giving Sonangol exclusivity over the
countrys petroleum rights. The law mandated that the national oil company must employ locals and provide
them with the necessary technical-professional training, allowing it to hire foreign workers only in case of a
shortage of qualified Angolan workers. Three years later, an official decree was issued on the Angolanization
of the petroleum industry workforce. As it appears in the introduction of the decree 20/82 of 1982, the objective
was to endow the People's Republic of Angola with national personnel able to assure the functioning of the
economic key sectors (Council of Ministers 1982). This objective remained unchanged 27 years later in the law
of 2009. Angolanization of the workforce was stated as a government priority with the necessity to provide
the Republic of Angola with national workers capable of ensuring the functioning of this sector of national
economy (Council of Ministers 2009).
In 2003 a backward link was introduced to Angolas local content strategy in the oil and gas sector as well
as other sectors.3 Decree 13/03 promoted the sourcing of domestic goods and services in petroleum-related
activities. The introductory notes of the decree imply that there are two overarching objectives behind such
policies: (i) achieving socioeconomic development and (ii) fairness in the distribution of national wealth. Here,
the government argues that the first objective can be only achieved by development that is led by an Angolan
citizen. Operationally, this can be through direct economic activity or through ownership of rights to
production of goods. Achieving the second overarching objective is a consequence of such a development.
Building on that, the government offers a rationale for its intervention through LCPs: (i) to reduce
inequalities faced by domestic investors when competing against foreigners; and (ii) to encourage synergies
between these agents. An analysis of the introduction to the decree of 2003 is presented in Table 1.7.
Table 1.7 Domestic Sourcing of Goods and Services in Angola: Objectives, Rationale, and Instruments
Overarching
objective
Strategy
Rationale for state
intervention
Local content
policies and
objectives
Instruments
The economic and social development and fair distribution of well-being and quality of life in a market
economy can never be complete until that development is carried out and led predominantly by Angolan
citizens families and public and private institutions, either in terms of economic initiatives or the
ownership of the right to produce goods.
Therefore, one of the pillars of development shall be based on national free private initiative of Angolan
citizens families and institutions.
For that purpose it shall be the duty of the State, according to the principle of more favorable priority or
preferential treatment.
Contribute toward reducing inequalities in competition with foreign investors and encouraging synergies
between national and foreign private investors.
Create and offer the legal, material, and institutional conditions.
Source: Based on data from National Assembly 2003.
The decree specifically covers the following activities: crops and livestock, extraction and processing, commerce, finance, fishing,
food industry, public works, civil construction, transport, and services.
3
26
1.3.2 Policy Tools
Angolanization of the Workforce

Decree 20/82 of 1982 laid out the foundation for local content in Angolas oil and gas workforce. Policy
instruments outlined by the decree covered the recruitment, training, and career progression of the local
workforce. On recruitment, any company operating in the Angolan petroleum sector must:
o
o
o
Hire locals whenever their qualification and experience meet the requirements
Submit annual recruitment plans to be approved by the Ministry of Petroleum
Get the ministrys approval for hiring any foreigner.
In addition, Angolans and foreign workers of the same grade must enjoy equality in compensation and
benefits.4
On training, the law mandated the provision of capacity-building programs by operating companies. To
this end, companies had to develop annual training plans and get the Ministry of Petroleums approval before
implementation. In addition, companies had to contribute annually to a training fund accessed by the Ministry
of Petroleum, to the tune of 15 cents for every dollar per barrel produced. Appraisal and exploration
companies had to pay $200,000 yearly; for companies engaged in other activities, the amount was decided by
the ministries of petroleum and finance on a case-by-case basis. Funds could be used by the Ministry of
Petroleum for the provision of training programs, research activities, and purchase of books and equipment for
training purposes.
On career progression and replacement of the foreign workforce, the law set out Angolanization targets
specific to groups of job grades for the years 1985, 1987, and 1990 (outlined in Table 1.8). The targets were
reviewed in 2002 and new ones set for the year 2010.
Table 1.8 Angolanization Targets Outlined by the Decree of 1982
Example of occupations
Unskilled staff (up to grade VI)
Midlevel staff (grades VII to XI)
Upper-level staff (grades XII and XIII)
Drivers, janitors
Technicians, accountants
Managers, geologists, engineers
1985
%
1987
%
1990
%
2010
%
100
50
100
60
50
100
70
80
100
80
70
Source: Based on data from Council of Ministers 1982; MENAS, Angola 2008.
Not available.
Noncompliance with the plan of recruitment and training could result in cancellation of the contract. In
addition, the Ministry of Petroleum could impose monetary fees that were double the value of what would
have been spent to comply with the plan. In case companies could not achieve the Angolanization target, they
had to pay a monetary fine for every percentage point missed from the target. On January 1, 1980, the value of
the fine was the U.S. dollar equivalent of 3 million kwanzas. The fine was to be updated every quarter based on
the UN index of the prices of manufactured products exported by developed countries.
Driven by technological developments in the industry and new policy options for the use of human
resources, Angola launched a new system of the recruitment, integration, training, and development of
Angolan personnel and the regulation of the hiring of foreign personnel in 2009, 27 years after the initial law.
The new system reformulated aspects of the 1982 law and included a new regulatory framework.
On recruitment, the law reinforced the need to hire Angolan citizens at all job grades. Equity between local
and foreign workers was reiterated. In 2010 decree No. 13/10 gave Angolans legal protection against
Any kind of discrimination between national and foreign workers with respect to the conditions of employment (including
accommodation and other benefits) is prohibited by law, without prejudice to the right of the employer to provide compensatory
measures for foreign workers to defray the cost of their presence in a foreign country, including periodic trips to their home country
(Council of Ministers 1982).
4
27
discrimination in employment and working conditions, salary, allowances and social benefits, embodied in
perks and benefits granted by companies as an additional increment to the salary and of medical care,
medication and others (Ministry of Petroleum 2010). Foreign workers could still be admitted only upon
authorization of the Ministry of Petroleum. Albeit, getting the approval required companies to submit evidence
that no qualified Angolan was found for the vacant position.
On training and development, every operating company must conclude an annual contract with the Ministry
of Petroleum, which includes the:
o
o
o
o
Organizational structure of the company and foreseen evolution

Roles, responsibilities, and wages of personnel
Career development plans for Angolan workers
Goals to be achieved in terms of integration of the Angolan workforce (Council of Ministers
2009).
As part of the annual contract, the Ministry of Petroleum must approve a plan for training and
development, which includes:
o A definition of the knowledge and expertise to be transferred to the Angolan workforce
o A detailed manpower plan
o A career path and succession plans
o Training plans.
An additional modification to the 1982 law was the amendment of the training and development
contributions, accessed by the Ministry of Petroleum (outlined in Table 1.9). These contributions became taxdeductible5 and their spending channels were expanded to include benefits to the National Petroleum Institute
and other educational institutions, internship-related expenses, and funds committed for projects in higher and
vocational education.
Table 1.9 Angola: Annual Contributions to the Training and Development Fund
Companys scope of activities
Annual contribution
Holding a prospecting license
$100,000
Appraisal or exploration
$300,000
Production, processing, or refining
15 cents per barrel produced
Storage, transmission, distribution, and marketing of petroleum products
0.5% of annual revenues
Services
0.5% of the value of the contract
Source: Based on data from Council of Ministers 2009.
Typically, 9 of the 15 cents per barrel received from oil companies go to the Ministry of Industry and
Petroleum (MINPET), while the rest are used by operators on training their staff. Of the 9 cents, 3 cents go to
local universities (Gomes and Weimer 2011).
The new law does not mention Angolanization targets, but companies not complying with Angolanization
regulatory requirements become subject to the monetary fines outlined in Table 1.10. In addition,
noncomplying companies are banned from entering into new contracts relating to the petroleum sector in
Angola. A second offense to the regulatory requirements is punishable by three times the value of the fine.
Collected fines are equally distributed between the state budget and the Social Fund of the Ministry of
Petroleum.
For the purpose of calculating profit taxes.
28
Table 1.10 Key Angolanization Regulatory Requirements and Fines in Case of Noncompliance
Regulatory requirement
Get the approval of the Ministry of
Petroleum for hiring any foreign worker.
Offer local and foreign workers equal
rights.
Submit a list of service providers.
Conclude a training and development
contract with the Ministry of Petroleum.
Get approval from the Ministry of
Petroleum on the annual human resources
development plan.
Get authorization from the Ministry of
Petroleum for any modification on the
training and development plan.
Submit a training and development status
update report.
Contribute annually to a training and
development fund at the Ministry of
Petroleum.
Category
Training and
development
Fine in case of noncompliance

25 percent of the annual contribution to training and
development.
2.5 percent of the annual contribution to training and
development.
Immediate repatriation of workers improperly admitted.
10 percent of the annual contribution to training and
development.
Immediate repatriation of workers improperly admitted.
25 percent of the annual contribution for training and
development.
Training and
development

development.
Training and
development

development.
Training and
development

development.
Training and
development
10 percent of the annual contribution for training.
Recruitment
Recruitment
General
Source: Based on data from Council of Ministers 2009.
Finally, the decree recognizes temporary workers in the industry, and requests the Ministry of Petroleum to
create a database of these workers to facilitate their integration into future projects.
A secondary source for the Angolanization of the workforce is the PSA entered by any contractor group with
Sonangol. A specific article in the agreement refers to the above legislations and adds the following:
o
o
o
o
o
o
o
The contractor group shall train its Angolan personnel to reach the level of knowledge and
qualifications enjoyed by foreign personnel.
The training shall enable Angolan personnel to use the latest technologies, including
proprietary and patent technologies.6
The subcontractors offering services to the contractor group for more than one year shall be
required to comply with the training requirements of their personnel. The contractor group
shall be responsible for monitoring their compliance.
Recruitment, training, and integration plans for Angolan personnel shall have a span of three
years, and be submitted to Sonangol for approval by the Ministry of Petroleum.
Contracting external specialists for the delivery of training programs shall be approved by
Sonangol.
The contractor group shall incur all costs associated with training of Angolan personnel it
employs.
Training costs shall be recovered as production expenditures.
Domestic Sourcing of Goods and Services

As per the Order 127/03 of 2003, national, private (that have at least 51 percent of their capital being owned by
Angolan citizens), or state companies enjoy preferential rights over foreign companies for sourcing of goods
and services. As per the law, exclusivity to Angolan businesses is given for the sourcing of goods and services
that require limited capital and nonspecialized know-how. Activities requiring a reasonable level of capital and
limited level of specialized capabilities fall under semi-compliance preferential treatment and require joint
ventures between domestic and international companies. Other activities are open for competition. The decree
Here the terms of the PSA mention that this shall happen to the extent permitted by applicable laws and agreements, subject to
appropriate confidentiality agreements
6
29
does not outline capital and skill-level triggers for preferential treatments, but outlines the list of goods and
services under exclusivity and semi-compliance treatments (Table 1.11).
Table 1.11 Angola: List of Goods and Services by Mode of Preferential Treatment
Group I
(Nonspecialized, low CAPEX)
Pressure tests for storage tanks and oil
and/or gas pipelines
Transport of equipment, materials, or
drilling and production platforms
Supply of industrial and drinking water
Catering and foodstuffs
Supply of technical materials
General cleaning and gardening
General maintenance of equipment and
vehicles
Supply post operators and managers
(airports, ports, and service stations)
Retail sales of kerosene, gas, and lubricants
Quality inspection of products distributed
and marketed (oil products and
derivatives)
Transport of products from terminals to
supply posts
Group II
(Higher level of know-how, not necessarily specialized, moderate CAPEX)
Acquisition and/or processing of
Drilling production materials and
geographical data
equipment
Geographical or geodesic surveys
Well cleaning and maintenance work
Vertical, directional, and/or horizontal
drilling of wells
Geological control of drilling (mud logging)
Production tests
Laboratories for geological, geochemical,
and fluid analysis
Specialized consultancy services
Operation and maintenance of production
facilities, including oil and gas pipelines
Calibration of storage tanks and measuring
equipment
Construction and assembly of mechanical
and electrical structures, and production
and drilling facilities
Inspection and supervision of the loading
of petroleum or natural gas
Transport in tankers of petroleum or
natural gas
Cement and conventional (drilling) mud
products
Supply of conventional (drilling) mud
Supply of seismic materials, including
explosives
Well cementing and/or completion work

Transport of crude oil to the refinery
Electricity and instrumentation
Terminal operators and managers
Pressure tests on storage tanks and
measuring equipment
Maintenance engineering for terminals and
supply posts
Inspection of distribution and supply
facilities
Manufacture and assembly of ovens and
lighting
Manufacture and assembly of electric
generators
Assembly of selected makes of vehicle for
the oil industry
Manufacture of plastic for the petroleum
industry, as well as synthetic fibers and
rubber
Manufacture of fertilizers
Production of detergents
Source: Based on data from Ministry of Petroleum 2003.

Note: CAPEX = capital expenditure.
In addition, national private or state companies receive preferential rights if their proposal is no more than
10 percent higher than what is proposed by other companies.7 The law mandates all companies operating in
the oil sector to launch public tendering for contracting and subcontracting the provision of goods and services.
A subsequent decree in 2006, No. 48/06 on Petroleum Tenders Rules and Procedures, specified tendering rules
(outlined in Table 1.12). Here it must be noted that the state company has a strong influence over the final
contract award decision. These rules are reiterated in the terms of the PSAs entered into with Sonangol.
Table 1.12 Angola: Tendering Rules as per Decree No. 48/06
Contract value
Below $250,000
Exceeding $250,000 and below $750,000
Exceeding $750,000
o
o
o
Tendering process
Sole sourcing is allowed as long as operators inform Sonangol of the
contracts they enter into on a quarterly basis.
Operators must hold public tenders.
Sonangol must be informed of the results of the tender. Subsequently, the
state company can object to the results within 30 days
In addition to the above, operators must obtain the approval of Sonangol of
the prequalified firms invited to bid.
Source: Based on Decree No. 48/06.

Note: Direct contracting can only take place in case of technical urgency or lack of local suppliers after approval of the Ministry of Petroleum.
This provision existed in PSAs prior to the law of 2003.
30
To facilitate the engagement of local suppliers in any bidding process, the Ministry of Industry annually
publishes a list of domestic suppliers of goods used in oil activities, and the Chamber of Commerce and
Industry publishes a list of service providers contracted by oil operators (Ministry of Petroleum 2003).
Preferential Treatment
As per the law passed by the National Assembly in 2003, preferential treatment must be given to national
private companies. In the case of the petroleum sector, Sonangol is mandated to grant local companies:
o
o
o
o
Fiscal incentives including the exemption from or reduction of industrial, income, import, and
other taxes
Financial support in the form of subsidies, loans, promotional venture capital, access to
agreed private management funds, and financial guarantees
Technical support
Special rights privileges in awarding concessions.
In addition Sonangol is mandated to support the creation of professional training centers (National
Assembly 2003). Here it must be noted that the government offers exemptions from customs duties on goods8
used in petroleum operations in case the good supplied in the Angolan market cannot ensure similar quality,
timely delivery, or a price of not more than 10 percent above the cost of the imported good before customs
duties. A summary of the local content policy tools adopted in Angola is presented in Table 1.13.
Table 1.13 Summary of Local Content Policy Tools in Angola
Ministry of Petroleum to approve the recruitment of any foreign worker.
Angolanization
Recruitment
Ministry of Petroleum to approve annual recruitment plans.

Companies to offer capability-building programs, to be approved by Ministry of Petroleum
Training
Companies to contribute to a training and development fund managed by the Ministry of Petroleum.
Replacement of
foreign workforce
Companies to meet Angolanization targets by job grade set by the Ministry of Petroleum.
Exclusivity to Angolan businesses for sourcing of goods and services that require limited capital and
nonspecialized know-how.
Semi-compliance for goods and services requiring a reasonable level of capital and limited level of
specialized capabilities, requiring joint ventures between domestic and international companies.
National private or state companies receive preferential rights if their proposal is no more than 10 percent
higher than what is proposed by foreign companies
Domestic sourcing of
goods and services
Local companies, with at least 51 percent of the capital being owned by Angolan citizens, to be offered:
Fiscal incentives including the exemption from or reduction of industrial, income, import, and other taxes.
Financial support in the form of subsidies, loans, promotional venture capital, access to agreed private
management funds, and financial guarantees.
Technical support.
Special rights privileges in awarding concessions.
Source: Authors compilation.

1.3.3 Legislative Channels
In Angola LCPs are mainly legislated through:

o
o
Law 10/79 mandating Sonangol to employ and train nationals

Decree 20/82 on the Angolanization of the petroleum industry workforce
A list has been attached to the 2004 Law on the Customs Regime for the Petroleum Sector,
http://www.sonangol.co.ao/wps/wcm/connect/e1c39000455a61ebb93aff8cae8691b3/law_petroleumCustoms_en.pdf?MOD=AJPERES
andCACHEID=e1c39000455a61ebb93aff8cae8691b3.
8
31
o
o
o
o
o
Law 14/03 establishing a framework for the promotion of Angolan private enterprises in all
sectors of the economy
Decree 127/03 on domestic sourcing of goods and services in petroleum-related activities
Local content provisions in PSAs
Decree 13/10 granting protection to nationals against discriminatory hiring and remuneration
practices
Petroleum-sharing agreements that set forth specific requirements in terms of level and area
of training for Angolan workers, and extends training requirements to subcontractors
providing services to the contractor for more than one year.
1.3.4 Institutional Responsibilities
Institutional responsibilities for LCPs are mainly split between the Ministry of Petroleum and Sonangol. The
ministry is responsible for the formulation of LCPs and regulation of their Angolanization aspects, as detailed
above. Meanwhile, Sonangol:
o
o
o
Provides input to the Ministry of Petroleum on policy design. Teka (2011) argues that the
Sonangols Local Content Department is currently in the process of defining a new local
content plan in coordination with the ministry.
Negotiates PSA terms in relation to local content, led by the Negotiations Directorate of the
state company.
Manages the procurement aspects of local content through the approval of sourcing activities
and influence over the selection of sourcing companies.
Annually, the Ministry of Industry publishes a list of domestic goods suppliers, and the Chamber of
Commerce and Industry of Angola publishes a list of service providers.
1.3.5 Interlinks
LCPs in the Angolan petroleum sector are part of a national industrial plan. In fact the law of 2003 on
preferential treatment of domestic suppliers covers all sectors of economic activity in particular crops and
livestock, the extraction and processing industry, commerce, finance, fishing, food industry, public works and
civil construction, transport, and services.
As for international trade, Angola has been a member of the World Trade Organization (WTO) since 1996.
Considered as a least-developed country, Angolas grace period of seven years of domestic market
protectionism, under the Trade-related Investment Measures (TRIMs), has expired. Angolas policies on the
domestic sourcing of goods thus violate TRIMs provisions that ban measures requiring enterprises to purchase
domestic products. It must be noted that under the General Agreement on Trade in Services (GATS) Schedule,
Angola has specific commitments in the areas of banking, money lending, and money-transfer services; hotels
and restaurants; and recreational and sporting services. Angola is not a signatory to the Plurilateral WTO
Agreement on Government Procurement, and no complaints have been filed against the country (WTO 2012a).
On another front, the country had signed a trade protocol with the SADC in 2003, which calls for the
facilitation of trade among member countries through reduction of tariffs and harmonization of trade policies.
Implementation of this protocol is expected to harm Angolas non-oil exports and increase the countrys
imports, especially from South Africa. As such, Angola has been delaying the implementation of this protocol
in the hope of reviving its local industries.
1.3.6 Monitoring and Measuring Tools
Monitoring of local content regulations is done through approval processes by the Ministry of Petroleum for
Angolanization of the workforce and direct control of Sonangol for the sourcing of domestic goods and
services.
32
Regarding the recruitment of foreign workers, it was not until 2010 that a well-established monitoring system
was laid out. Under the new monitoring system, companies wishing to hire foreign workers must submit
evidence to the Ministry of Petroleum that no qualified Angolan was found for the vacant position. Support
documents include a detailed job description, public announcements on the job vacancy, and an official letter
from the Centers for Employment and Vocational Training of the Ministry of Public Administration,
Employment and Social Security stating that no Angolan citizen is available for the position (Ministry of
Petroleum 2010).
As for recruitment plans and training programs, these have to be approved on a yearly basis by the
Ministry of Petroleum. Monitoring of these plans is done through the review of an annual implementation
report submitted to the Ministry of Petroleum,9 which documents progress against the plan, the challenges
faced, and proposed solutions to overcome these challenges. Upon review, the Ministry of Petroleum informs
the operating companies in case of noncompliance, and the appropriate measures to be taken to overcome
reported challenges (Council of Ministers 2009). Usually these plans are approved by the Ministry of Petroleum
without comments. The budgets and effectiveness of training funds allocated to universities, however, are not
monitored by the Ministry of Petroleum (Gomes and Weimer 2011).
Monitoring of domestic sourcing of goods and services is carried out through the direct involvement of
Sonangol in the procurement process of any operator, as outlined earlier in Table 1.12. No evidence has been
found of a formalized system measuring local content in goods and services procured by operators.
1.3.7 Policy Impact on Local Content Levels
Angolanization
In 2002 the Advisory Council of the Ministry of Petroleum carried out a review of the Angolanization efforts
against set targets across all operators. As shown in Figure 1.10, the review revealed that the 1990 targets were
met for unskilled workers, exceeded for midlevel staff, and came short by 46 percentage points for higherskilled staff. Overall, the Angolanization rate was 77 percent. In 1999 the total number of workers increased to
10,061, and Angolanization rates remained similar to the 1990 levels. In 2002 the total number of workers
increased by around 35 percentage points from the 1999 levels. Compared with 1990, the overall
Angolanization rate increased to 88 percent (Mangueira 2004). The highest increase occurred with reference to
upper level staff, likely as a result of the increased level of investment and raising production levels (Figure
1.11).
Figure 1.10 Achieved Angolanization Rate versus Target, 1990
3,107
7%
8,099
2,427
14%
46%
+166%
+239%
+323%
1,167
93%
86%
715
1,913
20%
54%
66%
80%
1990
2002
1990
34%
2002
Mid-level staff (grades VII to XI)
Source: Based on data from Mangueira 2004.
It used to be on quarterly basis as per the decree of 1982.
33
1990
2002
Upper level staff (grades XII and XIII)
Figure 1.11 Angola: Production
2.0
mmbpd
1.5
1.0
20
20
20
20
20
20
19
19
19
19
19
19
19
19
19
0.0
19
0.5
Source: Based on data from BP 2011;.

Note: mmbpd = million barrels per day.
One problem with the above targets and measurement mechanism is that it does not consider the
Angolanization rate by occupation. Triggered by that and upcoming petroleum developments, in 2002 the
Ministry of Petroleum launched the first study in the country that looked at the labor demand across the oil
value chain by occupation. Findings from the study showed that Angolanization rates are lower in upstream
engineering occupations, and that the overall rate was 91 percent (Table 1.14).
Table 1.14 Labor Distribution and Angolanization Rate by Occupation along the Oil Value Chain, 2002
Upstream
Downstream
Total
% Angolan
15
7,105
84
2,166
87
23
564
62
119
824
83
90
684
77
Angolan
Expatriates
Angolan
Expatriates
Technical
5,373
1,147
570
Operations
1,550
273
338
Marine operations
327
214
Mechanical
563
138
Electrical/Instruments.
434
154
Welding/Piping
2,023
348
2,371
85
Construction
476
20
496
96
Engineering
695
783
86
1,570
50
Operations
71
190
59
323
40
Marine operations
85
95
11
Mechanical
62
77
11
151
48
Electrical/Instruments.
97
81
13
193
57
Engineering
171
94
265
65
Geology/Geoscience
187
111
298
63
100
145
245
41
1,631
183
2,152
91
Surveying
Finance and administration
336
Other
3,427
394
932
16
4,769
91
Total
11,126
2,507
1,924
39
15,596
84
Source:Adapted from Mangueira 2004.
A view of the Angolanization rates in upstream operations between administrative and technical
occupations by job grade, presented in Table 1.15, shows that administrative occupations achieved higher
rates.10 The rates across the various administrative occupations are consistent with the average by job grade.
10
For details on Angolanization rates by occupation, refer to Mangueira (2004).
34
Table 1.15 Angolanization Rate in Administrative versus Technical Occupations, 2002

Total
Administrative staff
Technical staff
Workforce
% Angolan
Workforce
% Angolan
Workforce
% Angolan
3,107
93
350
100
2,757
92
Midlevel staff (grades VII to XI)
8,099
86
1,404
98
6,695
83
Upper-level staff (grades XII and XIII)
2,427
54
725
64
1,702
49
13,633
82
2,479
89
11,154
80
Total
Source: Based on data from Mangueira 2004.
In 1983 the National Petroleum Institute (INP) was instituted to promote the educational and skill levels of
the national working force in the oil industry. The INP cooperated with the Norwegian RKK center for
vocational and professional training and the Stavanger Offshore Technical College (SOTS), mainly in the
training of instructors for the INP itself. It offered three training programs:
o
The Technical Training Program (high skilled) is a three-year program provided at the
secondary level with courses in technical industrial maintenance, geology and mining,
drilling, and production as well as petroleum operations.
The Professional Training Program (medium skilled) is for candidates with secondary-level
qualifications. It has additional 12-month and 18-month courses in electrical engineering,
production operations, mechanics and maintenance, refrigeration, instrumentation, English,
and information technology.
The Petroleum Engineering Program (PEP), established in 2002, is a continuing specialized
postgraduate program of mining, steel, chemistry, and civil engineering and graduates
around 20 engineers annually (Teka 2011).
Between 1990 and 2003 the INP trained 1,581 high-skilled professionals and 1,111 medium-skilled
professionals through its programs (CRES 2008); by 2008 the number of high-skilled graduates reached 1,790
(Teka 2011). Table 1.16 presents the INPs training programs and the number of Angolans who graduated
between 1983 and 2009.
Table 1.16 Number of Graduates from High-Skilled Programs at the INP, 19832008
Study program
Geology and prospection
Drilling and production
Mechanical engineering
Geology and mining
Subsea technology
Other
Total
Number of graduates
33
705
395
425
100
132
1,790
Source: Teka 2011.
Among oil companies, training and development efforts were diversified and varied according to the level
of the beneficiaries and the spending value. For instance, Chevron concentrated on students and provided
outstanding ones with scholarship grants in engineering, information technology, and health and safety
studies, whereas Total E&P concentrated its efforts on training existing staff through tailored programs and
rotations, often on projects outside Angola. ExxonMobil also provided on-the-job and off-the-job training to
existing employees, although mostly to improve soft skills. In addition, the company funded Angolans to
study in the United States (Skills Shortage II). British Petroleum (BP) developed trainings within the company
and implemented the leadership programs used in other countries to Angola, to identify and develop
leadership potential within its ranks.
Domestic Sourcing and Preferential Treatment
Driven by the preferential treatment legislated in the decree of 2003, Sonangol developed over 20 joint ventures
with international companies to supply core and noncore goods and services to the oil and gas industry. An
35
overview of a selection of these joint ventures is presented in Table 1.17. In 2003 the Ministry of Finance
commissioned KPMG to audit the activities and roles of the key stakeholders in the petroleum sector. In
relation to local content, the auditors report raised the issue of conflict of interest since Sonangol acts as a
concessionaire and contractor at the same time. No evidence was found on work being awarded to any of
Sonangols joint ventures without being the lowest in price, as demanded by the tendering process. But the
report highlighted that the possibility for Sonangol to exert pressure on operators to award contracts to a
Sonangol Joint Venture must exist. In addition, the report recommended that payments to Sonangol's joint
venture companies should be made in local currency into bank accounts in Angola. Any foreign exchange
payments made by the joint venture should be made through the Bank of Angola in the normal way,
suggesting that it was not the case at present (MENAS, Angola, 2008).
Table 1.17 Angola: A Selection of Sonangol Joint Ventures in Upstream Oil and Gas Services, 19842002
Sonangol
Company
shares
Partners (shares)
Year
Key activities
(%)
Sonamer
49
Pride International (51%)
1998 Drilling
Petromar
30
Saipem (70%)
1984 Construction of facilities
Sonamet
40
Acergy (55%) and Wapo International (5%) 1998 Fabrication
Sonadiets
Project management, technical assistance, and
30
Dietsmann (70%)
1999
professional training
Sonaid
Supply, storage, and management of tubular
30
FORAID (55%) and KITONA (15%)
2002
equipment
Angoflex
Manufacturing of umbilicals and pipelines for
30
Technip (70%)
2002
underwater production
Source: Based on data from Sonangol 2006a AfDevInfo 2008.
Foreign oil companies operating in Angola have faced a challenge in coexisting with an inexperienced
sector of domestic firms and suppliers. As a result, there is a move toward public-private partnerships (PPPs)
to define the challenges hindering the integration of LCPs in sourcing goods and services. The challenges rest
within four main categories:
o
o
o
o
Infrastructure and engineering equipment inadequacy

Insufficient financial resources to drive change
Low level of technical expertise
Lack of collaborative efforts (Sonangol 2006b)
To counter the challenges, a framework involving five subgroups led by oil companies and coordinated by
Sonangol has been launched Figure 1.12).
Figure 1.12 Angola: Framework and Initiatives for Approaching Domestic Sourcing Challenges
Ministry of Petroleum
Feeds into a government action plan
Sonangol
Coordination of Efforts
Total
ESSO
Chevron
BP
Micro-Finance
Bidding Process
Local Capacity for

SMEs
Professional
Training
Source: Adapted from Sonangol 2006b.

Note: BP = British Petroleum; SMEs = small and medium-sized enterprises.
36
In 2002 Chevron pioneered the formation of the Angola Enterprise Program (AEP) to develop local capacity of
small- and medium-sized enterprises (SMEs) and maintain a business environment that can provide reliable
and quality-driven products and services. The program, funded by the Spanish International Cooperation
Agency for Development (AECID) and Chevron, was budgeted at $4 million and implemented with the
involvement of a number of development agencies and governmental institutions. The program started in 2004
and was initially set to be finalized by 2007, but later extended until 2013. The AEP provided technical and
financial support and assistance to local companies through funding the Luanda Business Incubator, which
provided the premises and the delivering of training seminars in finance, management knowledge, human
resources skills, and technology networking. The incubator also facilitated the business networking necessary
for later operations. In 2009 the incubator graduated 6 entrepreneurs who went on to establish companies that
created 69 jobs and were expected to generate $378,000 per year (Chevron CSR Report 2009).
BP launched the Centro De Apolio Empresarial (CAE) in 2005 in partnership with Sonangol, Chevron,
Esso, Total, and CDC Development Solutions (formerly Citizens Development Corps). The CAE provided core
courses and training sessions to local SMEs in the fields of human resource management, supply-chain
management, health safety and environment, quality management, and finance. BP coordinated and financed
the program along with its partners, while CDC monitored the progress and implementation of the CAE
program. By February 2010 the CAE had trained 1,455 companies engaging 2,478 participants. In addition, the
CAE facilitated the engagement of local companies in 289 contracts with the total value of $206 million,
creating 4,194 jobs (CAE 2010).
On the other hand, Total E&P moved to promote microfinance through the creation of the Zimbo Fund11 in
2005. Total partnered with Banco Totta de Angola to create a joint guarantee fund increasing SMEs access to
capital and reducing the banks lending risks. Projects were selected by executives from Total and Banco Totta,
according to the capital and developmental return on investment by the candidate SMEs. The loan ceiling per
project was set at $20,000 and the whole program aimed to finance around 60 projects and create 100 jobs (Total
2005). The fund was estimated to have created 300 jobs via the creation of dozens of local companies including
a textile workshop, an Internet caf, and a farm cooperative (E-biz guides).
Esso, a subsidiary of ExxonMobil, concentrated its efforts on the facilitation of bidding processes and
promotion of the CAE programs. Between 2008 and 2009, its trainings encompassed 78 local suppliers of which
56 companies were provided from the CAEs database and 22 others from Essos list of suppliers. The
companies received technical assistance on accessing the electronic bidding system e-RFX (CAE 2010), which is
used by ExxonMobil worldwide to reduce time consumption and eliminate paper work in the bidding process.
The attendees came from various oil supply sectors including security and transportation, fuel and chemical
production, office furniture, information technology (IT) and telecommunications, and water supply.
11
Named after a type of shell that was once used as money.
37
References
AfDevInfo. 2008. Online Database. AfDevInfo.
Andre, G. 2010. The Management of the Angolan Oil Revenues: Are There Any Chances to Change Course of the
Resource Curse? University of Dundee.
BP (British Petroleum). 2011. BP Statistical Review 2011. London: BP.
CAE. 2010. CAE Newsletter. Luanda.
CIA (Central Intelligence Agency). 2012. The World Factbook. https://www.cia.gov/library/publications/theworld-factbook/fields/2221.html.
Cihlar, J. 2010. Policy of the IMF and WB in Angola. Implementation of the Strategic Poverty Reduction Plan and the
Influence of Foreign Powers on the Development of the Country after the End of Civil War in 2002. Czech
Republic: Brno Jotova, Department of International Relations and European Studies.
Council of Ministers. 1982. Mandatory Hiring and Training of Angolans by Foreign Companies Operating in
the Angolan Oil Industry. Official Gazette (Dirio Da Repblica) I Series No. 90, Angola.
. 2009. Rules and Procedures to Observe in Recruitment, Integration, Training and Development of
Angolan Personnel in the Oil Industry and Hiring Foreign Personnel for the Execution of Oil
Operations. Decree-Law No. 17/09 of July 26, Council of Ministers, Luanda.
CRES (Centre De Recherches Enterprises Et Societe). 2008. Skills Shortages in the Global Oil and Gas Industry, How
to Close the Gap. CRES. Geneva, Swistzerland.
Deloitte. 2012. Corporate Tax Rates 2008-2012. Deloitte Global Services Limited.
http://www.deloitte.com/assets/DcomGlobal/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/matrices/dttl_cor
porate_tax_rates_2008_2012.pdf.
E-biz guides. n.d. http://ebizguides.com/ebizpartners_see.php?id_country_sponsors=17andebizpartnersid=858.
Gomes, E., and M. Weimer. 2011. Education in Angola: Partnership Opportunities for the UK. London: Chatham
House.
IEA (International Energy Agency). 2006. Angola: Towards an Energy Strategy. Paris: IEA.
Kaufmann, D., A. Kraay, and M. Mastruzzi. 2011. The Worldwide Governance Indicators (WGI) Project.
http://info.worldbank.org/governance/wgi/index.asp.
Kirk, R. 2011. 2011 National Trade Estimate Report on Foreign Trade Barriers. Office of the United Stated Trade
Representative.
Lwanda, G. C. 2011. Oiling Economic Growth and Development: Sonangol and the Governance of Oil
Revenues in Angola. Working Paper Series No. 21, Development Bank of Southern Africa.
Mangueira, J. P. 2004. Educational policies and endogenization of human capital in developing countries. The
case of the oil industry in Angola. Universidade Tcnica De Lisboa Instituto Superior Tcnico. Portugal.
MENAS. 2008. Angola. MENAS Local Content Online.
http://www.menas.co.uk/localcontent/home.aspx?country=6Mercer. 2012. 2012 Cost of Living Rankings. Mercer.:
http://www.mercer.com/costoflivingpr#City_rankings Ministry of Interior. 2010. application of recruitment,
integration, training and Angolan personal development and the hiring of foreign personnel for the
execution of oil operations in Angola. Executive Decree No. 13/10 of February 10, Luanda.
Ministry of Petroleum. 2003. General Regulatory Framework for Hiring of Services and Goods from National
Companies by Companies in the Oil Industry. Decree No. 127/03, Ministry of Petroleum, Luanda.
38
Morais, R. M. 2012. Understanding President Dos Santos Rule and the Gaming of His Succession. Maka Angola.
Morris, M., R. Kaplinsky, and D. Kaplan. 2011. Commodities and Linkages: Industrialisation in Sub Saharan
Africa. MMCP Discussion Paper No 13, University of Cape Town and Open University.
National Assembly. 2003. Law on the Promotion of the Angolan Private Business Community. Luanda: National
Assembly.
Neigus, D. 1981. The Government Haig Calls a "Soviet Surrogate" is Signing Sweet Deals with Gulf, Boeing,
and More. Multinational Monitor:
http://www.multinationalmonitor.org/hyper/issues/1981/08/neigus.html.
Oliveira, R. S. 2007. Business Success,Angola-Style: Postcolonial Politics and the Rise and Rise of Sonangol. Oxford:
Cambridge University Press.
PKF. 2011. Angola Tax Guide 2011.
http://www.pkf.com/media/386978/pkf%20angola%20tax%20guide%202011.pdf.
Republic of Angola. 2004. National Assembly Law No. 13/04. Translated by Miranda, Correia, Amendoeira and
ASSOCIADOS. Angola.
Rystad Energy . 2010. INTSOK Annual Market Report. Oslo, Norway.
Sonangol. 2006a. Sonangol Universo. Luanda: Sonangol.
http://www.sonangol.co.ao/sonangolEP/publications/sonangolUniverso/su11.pdf.
. 2006b. Sonangols Experience on Promoting Local Content. Local Content Summit for Oil and Gas.
London.
. 2012. Sonagol Webpage. http://www.sonangol.co.ao.
Teka, Z. 2011. Backward Linkages in the Manufacturing Sector in the Oil and Gas Value Chain in Angola. Centre for
Social Science Research.
The World Bank Group. 2012. Doing Business: http://www.doingbusiness.org/.
Total. 2005. Sharing Our Energies, Corporate Social Responsibility Report . Total.
http://www.total.com/MEDIAS/MEDIAS_INFOS/1052/EN/Total-2005-CSR-en.pdf
UNDP (United Nations Development Programme). 2010. Human Development Index. UNDP.
United Nations (UN). 2010. Department of Economic and Social Affairs. Population Division, Population
Estimates, and Projections Section: http://esa.un.org/unpd/wpp/unpp/panel_indicators.htm.
UN Statistics. 2010. National Accounts Main Aggregates Database. New York: United Nations.
Warner, R. 1991. Angola : A Country Study edited by Thomas Collelo. Library of Congress , Federal Research
Division. Washington, DC: U.S. G.P.O.
World Bank. 2011. World Bank Development Indicators. Washington, DC: World Bank.
http://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS/countries/1W-TT-ZJ?display=graph.
. 2012. World Development Indicators and Global Development Finance. Washington, DC: World Bank.
WEF (World Economic Forum). 2011. The Global Competitiveness Index 2011-2012 Rankings.
http://www3.weforum.org/docs/WEF_GCR_CompetitivenessIndexRanking_2011-12.pdf.
WTO (World Trade Organization). 2012a. Angola and the WTO. World Trade Organization.
. 2012b. Statistics Database.
http://stat.wto.org/StatisticalProgram/WSDBStatProgramSeries.aspx?Language=E.
39
2. Brazil
Brazils first oil discovery dates back to 1864, six years after that of the United States. But it was not until 1939
that oil was discovered in commercial quantities. Since then, political and economic conditions have shaped the
countrys position toward the protection of the domestic petroleum value chain.
In the earlier days of the industry and during the rule of Getulio Vargas, several decrees 12 were issued
providing the state with full ownership of all existing oil and gas fields in the country and monopolizing all the
rights for exploration, transport, distribution, and trade of oil and oil-related products. Dictator Vargas was
overthrown in 1945, and General Dutra became president. During his first year in office a new constitution was
declared, which provided local and foreign oil companies established in Brazil the right to obtain oil
concessions. This fueled a major debate between the liberal and nationalist camps that carried on for years. On
one hand, the liberals, in office at the time, argued that nationalization would damage relations between Brazil
and the United States and would hinder the development of the domestic industry due to the limited
availability of domestic capital and capabilities. On the other hand, nationalists saw that oil was crucial to the
national economy and felt that the government should control all aspects of the sector. Nonetheless, the sector
remained liberalized, and the dispute was not settled until Vargas was reelected in 1953. During that year, state
control over the oil sector was reinstated (through Law number 2004) creating Petrobras, the sole
concessionaire that held monopoly rights over all upstream operations. The government was the major
shareholder in the company.13
Promotion of domestic sourcing of goods and services used by the petroleum industry started with the
establishment of Petrobras. In 1954 the local industry supplied only 5 percent of the equipment and material
consumed by Petrobras. But stimulated by the state company, a number of domestic suppliers were established
and by 1960 they supplied more than 60 percent of the material and equipment sourced by Petrobras.
Following a period of consolidation among suppliers, this share increased to 80 percent in 1979. That period
was characterized by a strong growth in Petrobras investments as well as the overall economy (Brandao 1998).
But by 1980 Petrobras had shifted its investments to offshore developments, where the domestic industry
was lacking capabilities, and the industrys share in goods consumed by Petrobras fell to 52 percent. In parallel,
the countrys economic growth started plummeting and inflation rates swelled. Two years later, import
restrictionsput in place as a result of the debt crisisenabled the domestic industry to raise its share of goods
sourced by Petrobras to 83 percent, increasing further to 91 percent by 1989 (Brandao 1998). The period that
extended to the 1990s was characterized by low investments from Petrobras, and a shrinking domestic supply
base. Overall, the domestic chain developed to meet Petrobras demands (ONIP 2010).
In the early 1990s reforms and liberalization of external trade were introduced during the rule of Fernando
Collor and his vice president, Itamar Franco, who later took office. The reform process was carried on by
subsequent presidents. During Fernando Cardosos term the Real Plan was introduced in 1995 mainly to fight
rising inflation rates, and its implementation began to place the economy on a growth path. Brazils gross
domestic product (GDP) witnessed a growth rate of 4.3 percent in year 2000, up from 0.3 percent in 1999
(World Bank 2012b). During this regime, an Oil Bill was passed in 1997 liberalizing the oil sector and
transferring all regulatory activities to an independent entity linked to the Ministry of Mines and Energy
12
13
Decrees 336 of 1937 and Decree 395 of 1938 nationalized the oil sector in Brazil.
No foreign company was allowed to own shares in Petrobras
40
(MME). The bill did not expressly include any statements on the local sourcing of goods and services used by
the petroleum industry. Instead, these were managed in piecemeal until the arrival of the Workers Party (PT)
president, Lula da Silva, to office in 2002.
Upon its foundation in 1980, the PT united an assortment of Marxists, liberation Catholic activists,
moderate intellectuals, and union and social movement leaders. Although a homogenous mixture, PT
constantly defined itself as socialist and assumed many radical stands. In 1988 the party advocated rejection of
external debt, nationalization of banks and mineral wealth, and radical land reform. In 1994 it further
committed to anti-monopolist and anti-imperialist change as part of a long-term strategy to build an alternative
to capitalism (Samuels 2004).
But as a result of failure at the 1989 and 1994 election polls and the fall of the Soviet camp, PT began a
process of revaluation looking inward at the partys objectives and way forward. During Lulas third
presidential campaign in 1998, PT changed its socialist proposals and silenced any intention to transition Brazil
to a socialist society. The clear shift, however, was only visible in the 2002 elections, when interparty polls saw
moderate candidates gaining ground over radical candidates. During these elections, Lula and PT emphasized
a respect for the countrys contracts and obligations and expressed opposition to radical and unilateral
solutions.
Although the PT dialogue toned down the socialist slogans of the 1980s, it kept its stand on developing the
working class and increasing local capacity of Brazil as a nation. These objectives were directly translated into
multiple legislations as PT rose to office. The Oil Bill of 1997; the Buy Brazilian Law of 2010, which led to the
Bigger Brazil Plan of 2011; and multiple other initiatives have been spearheaded by President Dilma Rousseff,
who herself moved from the ranks of the National Petroleum Agency (ANP) to become the Minister of Energy,
until taking over office in 2010. The subsequent sections provide in-depth analysis of local content policies
(LCPs) related to the oil and gas industry and the context surrounding them.

In its 2011 Global Competitiveness Report, the World Economic Forum (WEF) placed Brazil in 53rd position
among 142 countries, enhancing the countrys rank by five positions from 2010 and 19 positions from 2007.
Brazil comes in behind two of the BRICS14 (that is, China and South Africa), and multiple Latin American
countries such as Chile and Panama (Sala-i-Martin 2011). According to the report, Brazil enjoys a large
domestic market, high level of sophistication of business, efficient financial markets, and high rates of
innovation and technological adoption.
On the other hand, multiple structural factors hinder the progress of the country. These include poor
infrastructure, high interest rates, a complex fiscal system, and heavy bureaucracy, in addition to a shortage of
skilled labor and a weak educational system. In its 2010 competitiveness analysis of the Brazilian oil and gas
sector, the National Organization of the Petroleum Industry (ONIP) argued that raw material costs, labor costs,
and taxes make production of petroleum-related goods in Brazil more expensive than in emerging economies
such as China, Mexico, and Southeast Asia.15 On the other hand, when compared to developed economies,
Brazil suffers from lower productivity, lack of scale, and higher cost of capital, taxes, and logistics costs. The
exchange rate is also a challenge. The same study reports that structural factors are the main hurdles to the
sector competitiveness. On top of the list of challenges reported by oil and gas suppliers in Brazil (Figure 2.1)
are high taxation, lack of qualified labor, and high cost of capital (ONIP 2010). Following is a discussion of
these major constraints.
14
Brazil, Russia, India, China, and South Africa.
The study included a competitiveness analysis for establishing domestic production facilities for a selection of oil- and gas-related
equipment (that is, valves, pumps, flanges, naval boilers, heat exchangers, and naval steel plates).
15
41
Figure 2.1 Key Challenges for Brazilian Companies, Percentage of Respondents (total = 77)
High Taxation
76%
Qualified Labor
55%
High Cost of Capital
40%
Business Bureaucracy
35%
Technology Access /
29%
Credit/Assurance Access
28%
Cost of Local Raw Materials
26%
Source: Adapted from ONIP 2010.

2.1.1 Economy
Brazil GDP continues to experience an overall upward sloping trend in growth (World Bank 2012b). The
country enjoys a strong internal market that immunized it against the global recession in 2008. In 2010 the
country achieved a growth rate of 7.2 percent, three points above the worlds average. This growth is expected
to slow down over the coming five years (IMF 2012). The 2010 per capita GDP in Brazil reached $10,710,
showing a compounded real average growth rate of 2.2 percent from year 2000.
Despite the growth, Brazil has had a troubled history with inflation nearing 3,000 percent in 1990. More
recently, between 2000 and 2010, the country maintained a relatively stable inflation rate (which varied
between 3 and 7 percent), with the exception of 2003, when inflation hit 14.7 percent. Compared to other
countries, Brazil ranks 104 out of 163 countries. After a long period of depreciation and backed by high
commodity prices, the Brazilian real has been appreciating vis--vis the dollar starting in the year 2002. This
trend is expected to continue in the future, making imports relatively cheaper.
The year 1994 marked the start of a wave of foreign direct investment (FDI) in Brazil. Net FDI reached $39
billion in year 2000, though the trend reversed between 2001 and 2005. Then, post-2006, Brazil experienced
another surge in FDI inflows, though the level was still lower than that of 2000. On the external front, despite
Brazils relatively high debt-to-GDP ratio, 54.4 percent (CIA 2012), the countrys debt profile has been
improving and current account imbalances are seen as manageable. Currently, Brazil enjoys a net creditor
position, and its foreign exchange reserves more than enable the country to offset its external debt.
Since 2002 Brazil has been enjoying a trade surplus, as exports experienced a compounded annual growth
rate (CAGR) of 22 percent between 2002 and 2008. In 2010 the country overcame the slowdown of 2009, and
surpassed the 2008 exports level to reach $201.9 billion; imports experienced a similar trend, reaching $191.5
billion. This led to a trade surplus of $10.5 billion in 2010. Brazils trade is also quite diversified. In 2010, 80
percent of the imports came from 21 major partners, and less than 80 percent of exports were directed to 25
major partners (UN Comtrade 2010). Table 2.1 provides a historical view of Brazils main economic indicators
from 1980 through 2010.
Table 2.1 Key Economic Indicators of Brazil, 1980 2010
1980
1985
1990
1995
2000
2005
2006
2007
2008
2009
2010
430.4
454.2
501.8
583.6
644.7
739.6
768.9
815.7
857.9
855.1
919.5
GDP per capita (constant 2000 $) 3,536.0
3,334.0
3,353.0
3,606.0
3,696.1
3,976.6
4,090.6
4,297.8
4,478.8
4,424.8
4,716.6
Inflation, CPI (%)
226.0
2,947.7
66.0
7.0
6.9
4.2
3.6
5.7
4.9
5.0
47.7
44.9
42.1
35.8
35.9
36.8
30.4
2.3E-11
2.7E-09
3.0E-05
0.9
1.8
2.4
2.2
1.9
1.8
2.0
1.8
Trade (% of GDP)
20.4
19.3
15.2
16.0
21.7
26.6
25.8
25.2
27.1
22.3
23.3

Not available.
42
The real interest rate in Brazil has declined since the late 1990s, but is still among the highest in the world.
As shown in Table 2.1, the real interest rate reached 30.4 percent in 2010, placing Brazil in the second place after
Madagascar in the list of 28 countries reported by the World Bank (2012b). Looking at the basket of
commodities exported (Figure 2.2), petroleum-related commodities contributed to 10 percent of total exports in
2010. Upon achieving self-sufficiency in oil production, the country became a net exporter of crude oil in 2007.
Figure 2.2 Brazils Exports by Commodity, 19802010 ($ billion)
20.1
25.6
31.4
46.5
55.1
118.5
201.9
17%
20%
19%
15%
11%
8%
6%
6%
6%
9%
7%
7%
6%
4%
34%
45%
11%
2%
4%
11%
1%
19%
2%
10%
16%
28%
26%
16%
18%
10%
14%
100%
10%
10%
28%
30%
Other
Iron and steel
Chemicals
Fuels
50%
39%
34%
31%
34%
Machinery and transport equipment

Mining products
Agricultural products
1980
1985
1990
1995
2000
2005
2010
Source: Based on data from WTO 2012.

2.1.2 Taxation
The overall tax burden in Brazil is among the highest in the region and the world (Figure 2.3); the same applies
to the countrys corporate tax rate. This has led to the establishment of a large informal economy. In addition,
the tax system in Brazil is complex, characterized by a long list of federal and state taxes (Table 2.2 presents a
snapshot). This issue has been recognized by successive governments, but reform remains slow. During her
2010 electoral campaign, President Rousseff promised to lead a tax reform that would reduce the socially
regressive effects of the existing taxation system. The pledge was reiterated in her inaugural speech in January
2011.
Figure 2.3 Comparison of Brazils Tax Revenues and Corporate Tax Rate to Other Countries, 2009 and 2010 (%)
Angola
43%
Norway
Angola
35%
27%
Brazil
Trinidad and Tobago
26%
Australia
30%
United Kingdom
26%
India
30%
South Africa
26%
Uganda
Netherlands
23%
Australia
22%
Malaysia
16%
Chile
16%
Brazil
16%
Russia
13%
Canada
12%
Uganda
12%
Indonesia
India
Kazakhstan
30%
Canada
28%
Norway
28%
South Africa
28%
Malaysia
25%
Indonesia
25%
Netherlands
25%
Trinidad and Tobago

UK
11%
25%
24%
Chile
20%
Kazakhstan
20%
Russia
20%
10%
8%
34%
OECD 14%
Source: Based on data from CIA 2012; Deloitte 2012; World Bank 2011.
Note: For Angola and Tanzania tax revenues reflect 2011 levels and include social contributionssuch as payments for social security and
hospital insurancegrants, and net revenues from public enterprises. OECD = Organisation for Economic Co-operation and Development.
43
Table 2.2 Snapshot of Taxes in Brazil (2010)

Tax
Rate (%)
Corporate
15%
CSLL
9%
Interest
15%
FGTS
ICMS
IPI
8% on monthly salary
025%
26.8%28.8% on monthly salary paid by employer
and 7.6511% paid by employee
0%330%
II
0%35%
Import tax.
IR
ISS
IOF
top rate 27.5%

2%5%
0%25%
Personal income tax.

Municipal service tax.
Financial operations tax (on loans and foreign investment).
INSS
Description
The basic rate of 15% is increased by a surtax of 10% on annual
taxable profits exceeding 240,000 reals
Social contribution on net profits
The rate for interest payments on loans can increase to 25% for
residents of tax havens.
Fund for the guarantee of length of service.
State value-added tax (VAT).
Social security contribution.
Tax on industrial products. The national average is about 10%.
Source: Based on data from KPMG 2012 and Deloitte 2012.

Note: II = import tax; IPI = tax on industrial products; II = Import tax; IR = Export tax; ISS = Personal income tax; ISS = Municipal service tax;
IOF = Financial operations tax.
Not available.
Brazils population is the largest in Latin America and has been steadily growing since 1950. As shown in
Figure 2.4, the countrys labor force will peak early next decade, returning to current levels toward 2040. This is
paralleled by an exploding generation of the elderly. PT came into power after a period of growing
unemployment, which reached 12.3 percent when Lula took office in 2003. Since then, unemployment has been
trending toward historically low rates on the back of a growing economy.
Figure 2.4 Evolution of the Brazilian Population and Labor Force over Time, 19502050 (in millions of people)
250
80%
70%
Million People
200
60%
150
100
50
50-59
50%
40-49
40%
30-39
30%
20-29
20%
10-19
10%
0-9
0%
% 15 - 64
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
60+
Source: Based on data from UN 2010.
The mean years of education of the Brazilian labor force averaged at 7.2, lower than resource-rich and
developed economies averages. In terms of labor compensation, the real average labor wage has been rising,
with a sharp increase in the minimum wage (which reached $300 in 2010). While this presents a positive
development internally, it might affect the countrys competitiveness in the global arena. Table 2.3 presents a
summary of key labor-related indicators.
44
Table 2.3 Brazils Labor Force Indicators Compared to Select Countries, 2010
Labor force
(million)
Angola
Australia
Brazil
Canada
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
Trinidad and Tobago
Uganda
United Kingdom
7.1
11.8
101.6
19.0
11.8
8.8
12.0
2.6
18.2
22.1
0.7
13.4
31.8

Primary
Secondary
Tertiary
27.3
13.5
18.3
19.9
15.8
25.3
19.2
38.9
40
56
43.5
74.2
63
44.4
33.8
46.5
21.1
35.8
5.2
11.1
35.4
Mean
years of
education
Minimum
wage
($ per
month)
Unemployment,
total (% of total
labor force)
4.4
12
7.2
12.1
5.8
10.4
9.5
12.6
8.5
5.1
9.2
4.7
9.3
127
1,597
300
1,903
133
3,609
543
59
3
1,655
25.0
5.2
8.3
8.0
7.1
6.6
3.7
3.6
23.8
10.7
5.4
4.2
7.8
Source: Based on data from World Bank 2011; UNDP 2010.

Note: Educational attainment data for Australia, Canada, Malaysia, South Africa, and Trinidad and Tobago are from 2008; unemployment data
for Brazil, Kazakhstan, Malaysia, South Africa, and Uganda from 2009.
Not available.
Industry accounted for 22 percent of the total employment in 2009, in line with the Organisation for
Economic Co-operation and Development (OECD) average. Agricultures share has been on a downward
trend, accounting for a historically low 17 percent. The remaining workforce is in the growing services sector
(World Bank 2012b). Despite the increase in the absolute level, employment in the knowledge-intensive
manufacturing remains lower than in mature economies, as shown in Figure 2.5.
Figure 2.5 Breakdown of Labor Force by Category, 2000 and 2007 (in millions of people)
61.2
84.5
20.2%
20.1%
3.9%
50.6%
2.3%
2.2%
4.0%
50.6%
1.3%
1.4%
19.4%
19.6%
2000
2007
100%
2.1%
Mature economy average,

2007
(% of total employment)
Total change in
employment, 2000 - 2007
(Million jobs)
Primary Resources
4.6
Labor-intensive manufacturing
0.3
Capital-intensive manufacturing
1.0
2.2%
Knowledge-intensive manufacturing
0.6
Labor & Capital intensive services
42
11.8
Knowledge-intensive services
17
0.4
Health, education and public services
26
4.7
Source: Based on data from MGI 2012; UNIDO 2012; ILO 2012.
Note: The number of employees engaged in manufacturing activities is based on the United Nations Industrial Development Organizations
(UNIDOs) statistics, while the rest are based on International Labour Organization (ILO) data.
Overall, Brazil is characterized by rigid labor laws and well-organized unions. Strikes occur frequently in
private sector companies where the labor force is commonly demanding for an increase in its share of profits
a requirement of the Brazilian law. Currently, labor courts are responsible for concluding decisions on most
labor disputes, as opposed to being the outcome of negotiations between management and labor. The So
Paulo Federation of Industries claimed that labor reform would make it easier for companies to hire workers,
and that it could potentially integrate some 27 million workers from the informal to the formal market, and
open another 8 million job opportunities.
45
2.1.4 Education
Education in Brazil offers ample room for improvement. The countrys enrollment figures are lower than
neighboring and developed economies, especially in tertiary education. As for the quality of higher education,
out of the 183 universities, only 6 show up in the worlds list of top 500 (Academic Ranking of World
Universities 2010), most of them ranking above 200. Literacy among adults is another issueit was 90 percent
in 2008 for adults above 15 years old. This number is set to increase as literacy rate among youth is around 98
percent and multiple programs are in place to combat that (World Bank 2012a). Public expenditure on
education reached 5.7 percent of GDP in 2009, an increase from 4.5 percent in 2005. Table 2.4 shows the
educational indicators of Brazil in comparison to that of other countries.
Table 2.4 Brazils Educational Indicators Compared to Select Countries, 2010
Literacy rate (%)
Adult (15+)
Angola
Australia
Brazil
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
Trinidad and Tobago
Uganda
United Kingdom
70.1
90.3(a)
92.2(b)
99.7
93.1
88.7(c)
73.2
98.8
73.2
Youth (1524)
73.1
98.1(a)
99.5(b)
99.8
98.4
77.3
99.6
87.4

Primary
Secondary
Tertiary
85.7
97.1
94.1(b)
95.9
89.5
94.1(e)
99.1
85.1(a)
98.0(b)
93.9
90.9
99.6(a)
11.5(a)
3.7
79.9
36.1(a)
23.1
38.5
40.2(a)
74.4
2.1
40(b)
4.2(a)
58.5(a)
85.5
82.0(2)
67.3
88.2
68.7(5)
93.9
96(a)
Public expenditure on
education
(% of GDP)
3.6
5.1(a)
5.4(b)
3.5(b)
3.1(a)
5.8(a)
6.5(b)
6.0
6.2
3.8(d)
3.2(a)
5.4(b)
Source: Based on data from Gomes and Weimer 2011; UNDP 2010; World Bank 2012b MSTTE 2011.
Note: (a) year 2009; (b) year 2008; (c) year 2007; (d) year 2006; and (e) Global Competitiveness Report data.
The overall business environment in Brazil is promising, offering diversified opportunities and prospects. The
country enjoys a stable political system and a developed financial sector. The country has been undergoing
reform initiatives on tax (to change the rigid tax system), regulatory, and structural frameworks to encourage
investment in the country.
Despite the increased privatization and constitutional reform over the past decade, corruption and
bureaucracy in business and government remain overly high in Brazil and improvements need to be made,
along with reforms of the legal framework. The World Banks annual Doing Business Survey shows that
Brazil ranks toward the bottom of the list with an average of 119 days to establish a new business. In other
aspects toosuch as registration of property, dealing with construction permits, and enforcing contracts (Table
2.5)procedures are long and time consuming. This occurs despite some recent legislative efforts to ease up
tax procedures for small- and medium-sized enterprises (SMEs) through the implementation of the Super
Simples tax regime, which aims to save the time needed to file tax reports. Moreover, a recent presidential
decree in 2009 took effect prohibiting public officials from requesting new paperwork in cases where a similar
document is held by another government agency.
46
Table 2.5 Indicators for Doing Business in Brazil in Comparison to OECD Average, 2012
Brazil
OECD
Procedures (#)
Brazil
OECD
13
Time (days)
119
12
Extent of director liability index (0-10)
5.4
4.7
Ease of shareholder suits index (0-10)
0.0
14.1
Investor protection strength (0-10)
5.3
79 (-5)
120 (+5)

Procedures (number)
Time (days)
7. Paying Taxes
17
14
13
469
152
2600
186
40.2
45.7
Profit tax (%)
22.4
15.4
40.9
24
3.8
3.2
67.1
42.7
127 (+6)
Other taxes (%)
3. Getting Electricity
Procedures (number)
Time (days)

6
34
103
130.3
92.8
51 (+2)
150 (-2)
8. Trading Across Borders

13
10
2215
1032
Procedures (number)
13
Time (days)
39
31
17
11
2.3
4.4
2275
1085
121 (-5)

114 (-5)
5. Getting Credit
Time (days)
731
518
Cost (% of claim)
16.5
19.7
36.1
9.5
45
31
61.5
63.9
Procedures (number)
118 (0)
98 (-2)

Time (years)
4.0
Cost (% of estate)
12
17.9
68.2

1.7
136 (+1)
Source: The World Bank Group 2012.

Note: Ranking is out of 183 countries. OECD = Organisation for Economic Co-operation and Development.
After three decades of underinvestment, the Brazilian government put forth the Growth Acceleration
Program (Programa de acelerao do crescimento, PAC) in 2007. As per the plan the government intended to
invest 646 billion reals on infrastructure projects in transport, energy, sanitation, housing, and water. Former
president Lula da Silva, in an effort to promote close integration within the region, was active in lobbying
developed countries (in particular the United States) to seek funding and direct investments in infrastructure
projects. Frequent disputes have, however, delayed these projects (especially in the energy sector), challenged
mostly as they are by the trade-off between the need to accelerate licensing processes of new operations and to
protect environmental and social factors.
The countrys overall governance indicators show the stability of the political environment and the
improvement in the rule of law (Figure 2.6).
47
Figure 2.6 Governance Indicators in Brazil Compared to the OECD Average

Voice and
Accountability
100
Control of
Corruption
Political
Stability/Absence of
Violence
50
2000 Brazil 2000
2010 Brazil 2010

2010 OECD 2010
Government
Effectiveness
Rule of Law
Regulatory Quality

In 2010 the mining, manufacturing, and utilities sector contributed 19 percent to Brazils GDP; oil and gas
constituted half of that (Azzoni and others 2007). Recent presalt 16 discoveries are set to boost the sectors share
in the countrys GDP to 20 percent by 2020 (Panassol 2009). Figure 2.7 compares the breakdown of Brazils
GDP by activity to other countries in 2010, and Figure 2.8 shows the evolution of the contribution of mining,
manufacturing, and utilities sector to GDP over time.
Figure 2.7 Brazil: Breakdown of Value-added by Economic Activity, 2010 ($ billion)
85
1,296
2,066
1,637
883
159
304
402
377
39%
38%
24
17
22%
23%
2,236
100%
7%
14%
25%
15%
5%
33%
43%
45%
11%
5%
6%
13%
8%
20%
18%
9%
9%
8%
6%
50%
7%
2%
14%
12%
10%
5%
5%
Angola
Australia
19%
Brazil
5%
8%
12%
7%
3%
8%
8%
4%
1%
Indonesia Kazakhstan Malaysia
6%
21%
6%
Norway
South
Africa
Trinidad
& Tobago
Other Activities
Construction
Manufacturing
12%
14%
Uganda
UK
Note: UK = United Kingdom.
Deposits located under thick layers of salt at a depth of around 18,000 feet below the oceans surface.
48
1%
16
10%
24%
20%
Canada
2%
12%
12%
36%
33%
32%
8%
0%
13%
3%
6%
7%
8%
6%
1%
30%
16%
6%
11%
4%
29%
19%
19%
20%
8%
8%
51%
12%
5%
10%
13%
11%
20%
11%
Figure 2.8 Brazil: Contribution of Mining, Manufacturing, and Utilities to Value-added, 19702010
450
30%
400
GDP (Bn $)
300
20%
250
15%
200
150
10%
100
Share of GDP
25%
350
5%
50
0
0%
70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Contribution to GDP
Percentage Share

Note: GDP = gross domestic product.
Today, the industry creates around 500,000 jobs along the supply chain80,000 by Petrobras itself. With
presalt discoveries and LCPs, Brazilian authorities plan on creating 2 million jobs across the oil and gas supply
chain by 2020.
Brazil has 29 sedimentary basins spread across the north, coastal regions, and deep waters, of which onshore
reservoirs account for less than 10 percent. As shown in Figure 2.9, the state of Rio de Janeiro is endowed with
most of the countrys oil and gas reserves and is home for most major companies. Specifically, 150 kilometers
(km) north of the states capital is the port city of Maca, which is considered the capital of offshore operations
in Brazil. Presalt discoveries will draw further attention to the state. Most of the countrys inland natural gas
reserves, however, are unexploited due to limited transportation capacity.
Figure 2.9 Brazil: Geographical Distribution of Main Oil and Gas Reserves 2010 (Number in Parentheses
Indicates Percentage Onshore)
So Lus
AM
CE
RN
SE
BA
SP
North
North-east
Midwest
South-east
South
Source: Adapted from OSEC 2011.
49
Brazil is endowed with 15.1 billion barrels (bbl) of proven oil reserves, making its reserves the second largest in
South America after Venezuela (BP 2012). Recent presalt discoveries will potentially move the countrys
worldwide rank in oil reserves from 15th to 5th (Center for Global Energy Studies 2010), increasing the
countrys reserves to 114 bbl. The majority of Brazilian reservoirs are of heavy oil, characterized by an API17
gravity in the lower 20s (Marathon 2012; Rigzone 2012). Brazils proven gas reserves are 16 trillion cubic feet
(tcf) (BP 2012). Table 2.6 provides a snapshot of Brazils oil and gas landscape.
Table 2.6 Snapshot of the Brazilian Petroleum Sector in 2010
15.1
Share of
world
%
0.9
2,192.9
Oil refinery capacities, mmbpd
2,115.9
Oil consumption, mmbpd
2,652.7
Gas proven reserves, tcf
16
Gas production, bcfd
2011
Oil proved reserves, billion boe
Gas consumption, bcfd

Primary energy consumption, million toe
Global rank
Percentage change
3 yrs
5 yrs
%
%
16.9
19.2
14
1 yr
%
5.6
10 yrs
%
53.5
2.9
11
2.5
8.1
19.7
46.3
2.3
1.1
1.1
9.4
14.2
3.0
2.3
9.8
18.7
32.3
0.2
31
8.6
25.1
25.9
87.9
1.6
0.5
16.2
43.2
49.3
80.7
2.6
0.8
29
-0.3
35.0
26.3
89.4
266.9
2.2
3.5
13.9
18.3
43.4
Source: Based on data from BP Statistical Review 2011.

Note: bcfd = billion cubic feet per day; boe = barrel of oil equivalent; mmbpd = million barrels per day; tcf = trillion cubic feet; toe = tons of oil
equivalent.
In 2010 Brazil was listed as the worlds 11th-largest producer of oil and 8th-largest oil refiner (BP 2012).
The countrys oil production has experienced steady growth, with a CAGR of 7.3 percent between 1997 and
2010, reaching over 2 million barrels per day (mmbpd) (BP 2012). Production from onshore and shallow water
basins is at a plateau or decline, and most of the foreseen growth in production will be from deep-water basins
(Figure 2.10).
Figure 2.10 Brazil: Evolution of Production by Water Depth (in billion boe)
16
14
12
Deep Water (>300 meter)

Shallow Water (0-300 meter)
Onshore
10
8
6
4
2
0
60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08
Source: Based on data from Offshore Center Denmark 2009.

Note: boe = barrel of oil equivalent.
17
American Petroleum Institute.
50
In 2006 Brazil announced self-sufficiency in oil consumption, and soon after became a net exporter of oil.18
Over the coming decade, the plan is to increase production to over 5 mmbpd, directing most of the increase to
export markets. Figure 2.11 presents the forecasted domestic oil demand and supply.
Figure 2.11 Brazil: Forecasted Domestic Oil Demand and Supply, mmbpd
6
5
Historical Production
Forecasted Production
Historical Demand
Forecasted Demand
4
3
2
1
2020
2019
2018
2017
2016
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
Source: Based on data from ANP 2011b.

Note: mmbpd = million barrels per day.
For natural gas the picture is reverseddespite the growth in domestic production, Brazil relies heavily on
liquefied natural gas (LNG) imports, mainly from Bolivia. In 2010 the country imported around 45 percent of
its consumption, as it plans to boost the supply of natural gas through two new offshore LNG facilities.
Currently, over 80 percent of the domestic natural gas supply is produced from offshore fields, 60 percent
coming in the form of associated gas.
Since 1953 state-controlled Petrobras has held a monopoly over the oil and gas value chain (expect for retail
and wholesale distribution) and used to act as the regulator and operator of the sector. In 1997 the Oil Bill
liberalized the value chain, separated governance roles, and freed oil prices from state control. Among the long
list of reforms, the new bill:
Separated policy, regulatory, and operational roles

Established concession contracts for oil and gas exploration, development, and production activities
Decreased the government ownership stake in Petrobras
Granted Petrobras the right to enter into joint ventures with private companies without congressional
approval19
Obliged Petrobras to set up an independent oil and gas transportation company (Transpetro) and
mandated open access to pipelines and terminals.
Under the new governance model, the National Congress (Congresso Nacional) is the legislative body
responsible for passing new laws and amending existing ones. Since policy making resides with the executive
arm of the country led by the presidency, an intergovernmental arm, the Conselho Nacional de Politica
Energetica (CNPE), was established to advise the presidency on the formulation of national energy policies.20
Despite that, Petrobras continues to import light oil for its refineries and exports its heavy crude.
Investment plans are still to be approved by Congress.
20 The CNPE includes members from the MME and the ministries of planning and budget, finance, environment and industry, as
well as the Secretary of Strategic Affairs of the Presidency, representatives from the states and federal district, and a Brazilian citizen
specialist in the energy sector.
18
19
51
The CNPE is also responsible for defining the blocks to be included in any bidding process. In addition to
implementing the CNPEs recommendations, the MME is responsible for sectoral planning 21 and management
of government interests in state-owned companies. The minister of mining and energy is the chairman of the
CNPE and sits on the board of Petrobras.
The ANP was created to regulate the sector. Under the MME, the agency enjoys administrative autonomy
and is governed by a board of four directors that are appointed by the president upon approval of the senate
(Article 11 of the 1997 Oil Bill). The ANPs key responsibilities include contracting of oil and gas licenses,
monitoring of activities, and management of technical data. All of the ANPs regulatory decisions are made
upon public hearings22 and are published on its Web site (www.anp.org.br). Today, the ANP has over 800 civil
servants distributed across different states. Environmental licensing of offshore activities is carried out by the
Brazilian Institute of Environment and Natural Resources (IBAMA), which is a federal agency under the
Ministry of Environment.
Despite the opening of the sector more than 10 years ago, Petrobras remains predominant in all segments
of operations. The company controls approximately 97 percent of production, 96 percent of the refining
capacity, 100 percent of the transport structure, and 46 percent of refined-products distribution. Upstream, the
situation is expected to change with presalt activities. Today, the company is recognized for its deep-water
capabilities and operates in 27 countries, holding a top quartile position in petroleum reserves, production,
refining capacity, and market capitalization.
For presalt discoveries, the country recently launched a new regulatory framework composed of four bills
that were approved by the Congress in 2010 (Beaubouef 2012). The new framework includes:
Adoption of a production sharing regime. Under this contractual regime, Petrobras is the operator with a
minimum 30 percent stake with all production belonging to the federal government. Participating
companies receive a fix share of generated revenues.
Creation of a new state-run company, Petrosal, to manage exploration and production (E&P) contracts
and carry out negotiations on behalf of the government for presalt discoveries. The company will not
have any operations.
Capitalization of Petrobras through granting it 5 bbl of unlicensed presalt oil reserves in exchange for a
larger government-ownership share.
Creation of a sovereign wealth fund to manage the governments wealth from presalt discoveries
(Langevin 2010).
In line with the new reforms, the government decreased its ownership stake in Petrobras to 48 percent,
while maintaining control over the company through 54 percent of its voting shares. In 2010 Petrobras
performed the largest shares offer in history raising almost $70 billion.
Upon its creation, Petrobras relied heavily on external contractors to deliver upstream activities such as seismic
and drilling. Over the years, the company built internal capabilities through knowledge transfer from foreign
experts, training programs, and in-house research activities. Specifically on research and development (R&D),
in 1955 the company established its research center, Cenepes, which has been closely integrated within
Petrobas operations and strategic objectives. Throughout the years, the center enabled Petrobras to achieve
major breakthroughs such as:
o First offshore oil discovery in the Guaricema field in 1968
Geological mapping of the national coast in 1978
Either directly or through state-owned companies. The Companhia de Pesquisa de Recursos Minerais (CPRM) is a state-owned
company that carries out the functions of the Geological Survey of Brazil, under the auspices of the MME. Its mission is to produce
and divulge the basic geological and hydrological knowledge required for sustainable development in Brazil.
22 For regulations that might affect rights.
21
52
Setting the new world record of deep-water oil in 1999

Designing of a new concept of building floating platforms on a single column in 2005
Presalt discoveries in 2007.
Between 1998 and 2008 Petrobras increased its R&D spend by more than four times, placing the company
in third position among major international oil companies (IOCs) and national oil companies (NOCs) (Figure
2.12). Today the center has a diverse portfolio of research projects covering 15 areas linked to Petrobras
activities.
Figure 2.12 Brazil: Evolution of Petrobas R&D Spending (to the left) in Comparison to IOCs and NOCs (to the
right), 19982008
1,000
941
R&D Spend by Company in 2008

($ Mn, grey represents IOCs and blue NOCs)
900
800
Shell
R&D Spend ($ Mn)
1,266
1,122
PetroChina
700
Petrobras
600
941
Total
+401%
900
500
ExxonMobil
847
400
Chevron
835
399
803
Gazprom
300
200
BP
Sinopec
152
100
495
StatoilHydro
Eni
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
595
ConocoPhillips
395
318
209
Source: Based on data from Herold 2010.

Note: IOCs = international oil companies; NOCs = national oil companies; R&D = research and development.
Upstream, Petrobras holds over 90 percent of oil and gas production. For natural gas, a series of licensing
rounds that started in 1999 introduced competition in the upstream sector by increasing the level of foreign
participation, but Petrobras still remains the dominant player. In 2009 the company owned 92 percent of the
production of natural gas, but upcoming local private firms are expected to gain a significant share. IOCs (such
as ExxonMobil, Chevron, Shell, and Total) as well as other countries national oil companies also participate in
oil and gas exploration and production.
Transportation has been always highly regulated. As per the 1997 Oil Bill, Petrobras established an
independent oil and gas transportation company, Transpetro, which owns most of the existing pipeline assets.
The bill also mandated open access to pipelines and terminals. The country has a network of 8,000 km of oil
and a similar network for gas.
Historically, distribution has been the most competitive part of the fossil-fuels value chain in Brazil. In
2000 Petrobras market share in fuels distribution was 26 percent, with the rest split across the private sector.
Over the past few years the market has experienced a lot of acquisition activities, resulting in the increase of
Petrobras market share to 46 percent in 2009.23
It wasnt until recently that Brazil set up a fund for the management of its oil wealth. Prior to 2010 oil revenue
allocation was often characterized as region preferential, unequally distributed among governorates, and not
providing a return for future generations in terms of social and economic well-being. Oil revenues of royalties,
taxes, and dividends were allocated mostly to states, municipalities, and unions (Gobetti 2009) in the areas
23
This accounts for around 80 percent of total fuel sales in Brazil. It includes ethanol but not natural gas for transport.
53
where production occurred (Pereira, Olbertz, and Rost 2012).

Following the major presalt discoveries, the government made a leap in the management of its wealthy
and new oil resources. The Social Fund of Pre-Salt (Fundo Social do Pre Sal) was enacted by means of Law 5940
in December 2010 (Baker and McKenzie 2010) to manage the new presalt oil revenues to continuously finance
social development in the country and reduce inequalities. This was to be carried out through programs aimed
to develop the areas of education, culture, public health, science, and technology, in addition to poverty
reduction and environmental sustainability (Gobetti 2009). The fund would allocate investments across the
nation, thus reducing the concentration of investment in producing areas.
Funding is raised from signing bonuses and royalties, petroleum marketing, and the income earned from
investing those sources. Fund governance is the responsibility of two newly founded bodies. First, the
Financial Management Committee of the Social Fund (CGFFS), which acts as a portfolio manager defining risks
and allocating funds for investment. The second, a separate Advisory Board of the Social Fund (CDFS),
describes priorities and sets parameters for the CGFFS. The fund is directly subordinate to the Presidency of
the Republic, as are the two bodies.

Brazil is set to double its oil production over the coming decade, which requires massive investments across
the oil and gas value chain. By 2020 the decades cumulative demand for oil-and-gas-related goods and
services is forecast to be around $400 billion. Figure 2.13 presents the cumulative forecasted investments and
split by category.
Figure 2.13 Brazil: Forecasted Investment, 201020 ($ billion)
33.6
2%
6%
30.3
2%
6%
Vessels and supporting boats
Seismic
25.1
4%
6%
17%
22.3
4%
8%
Driller construction
14%
16%
16%
15%
18%
19%
30%
32%
29%
15%
30.1
2%
7%
16%
27%
Exploration and Evaluation
33.8
1%
7%
29%
25%
19%
Production development
24%
12%
Construction of productive units
21%
30%
2010
2012
30.5
86.1
30%
31%
30%
2014
2016
2018
2020
155.1
231.4
311.8
399.6
31%
Cumulative Investment*
Source: Based on data from ONIP 2010.

Note: (*) Includes operating costs.
Instigated by these plans, President Lula de Silva argued that the development of Brazils oil and gas
resources should be viewed through the broader lens of development, and that Petrobras should be used as a
development platform with objectives that reflect national interests. To this end, the government launched
policies to maximize the share of domestic industry participation in supplying goods and services to the oil
and gas industry (defined as local content).
Through LCPs, the government aims to develop a competitive base for local suppliers, generate income,
and create job opportunities. A review of the Brazilian government literature on local content shows limited
54
explanation of the rationale behind these aspirations and policies. Officially, the ANP states the following four
objectives:
Increase the participation of the national industry on a competitive basis

Improve national technological development
Improve the level of capabilities
Create job opportunities for nationals and achieve growth in income (ANP 2009).
Over the coming decade, the government expects the creation of over 2 million jobs in the oil and gas value
chain. As shown in Figure 2.14, this will be induced by organic growth in demand, increased participation of
the local industry, and exports.
Figure 2.14 Brazil: Number of Jobs to be Created in the Oil And Gas Value Chain, in Thousands
2,110 2,500
130 - 170
940 1,150
620 - 760
410 - 420
Actual Current
Increase in Demand
Increase in Supply
Participation
Increase in Exports
Aspired Total
Source: Adapted from ONIP 2010.

2.3.2 Policy Tools
LCPs are enabled by an integrated set of tools that includes regulations, fiscal incentives, and support
programs.
Regulatory Requirements
Local content requirements were not expressly laid out in the Oil Law of 1997 (Law number 9.478/97). The
topic was briefly mentioned under the laws main principles of the National Energy Policy (Redo 2010). To
achieve the policy objectives, the ANP made local content commitment a provision in concession contracts and
a component of the bidding process for oil and gas licenses. Accordingly, operators were asked to bid for the
total percentage of equipment and services they were committed to source locally. Commitment value is phase
specific (that is, for exploration and development). In the first four bidding rounds, no minimum requirement
was set,24 and bids were evaluated based on a formula that weighed the bidders value of cash bonus and local
content commitments. Cash bonus was given 85 percent and local content was given 3 percent for the
exploration phase and 12 percent for the development phase. The total score was over 100 points, and points
from local content commitments were calculated based on the following formula:
% of local content offered by bidder

Local Content Weight of Local Content by Phase
Maximum offered value
A maximum value for local content was set at 50 percent for exploration and 70 percent for development.
Starting from the fifth bidding round in 2003, the ANP introduced a minimum local content requirement
to the Brazilian E&P licensing process. The local content requirement is location specific (that is, it depends on
For evaluation purposes, domestic investments for a class of systems and production units count three times their value. Such
systems include subsurface lifting systems, production gathering systems, and fixed platforms. Details are available in the Tender
Protocol document of each bidding round.
24
55
whether the block is onshore, in shallow water, or in deep water) and varies between exploration and
development phases. Minimum requirements were made item and subitem specific. In addition, the bidding
evaluation formula was modified introduce a minimum local content requirement. The mandatory minimum
requirement and evaluation formula were amended in later bidding rounds. By 2017 minimum local content
requirements are expected to gradually increase to as high as 95 percent. Table 2.7 summarizes the local
content requirements and bidding evaluation process for bidding rounds one through nine.
Table 2.7 Brazil: Local Content in the Bidding Process, 19992007
Bidding Round
Year
1999
2000
2001
2002
2003
2004
2005
2006
2007
30% for class A blocks*.

Exploration
phase
None.
50% for class B blocks.

70% for class C blocks.
Minimum local
content
requirement
30% for class A blocks.

Development
phase
None.
60% for class B blocks.

70% for class C blocks.
37% for deep water and

shallow water starting at 100
million.
51% for shallow water up to
100 million.
70% for onshore blocks.
55% for deep water and
shallow water starting at 100
million.
63% for shallow water up to
100 million.
77% for onshore blocks.
Maximum value for local

content allowed
50% for exploration and 70%

for development.
85% signature bonus.
Bid evaluation weights
12% local content in

development phase.
3% local content in
exploratory phase.
Ten points over the minimum percentage.


exploratory phase.
5% local content in
exploratory phase.

development phase.

development.
30% minimum in
exploratory program.
40% minimum in exploratory

program.
Source: Based on data from ANP (http://www.anp.gov.br/brnd/round5/english/guia_julgamento.asp).

Note: (*) These classes represent an operational classification where class A are unrestricted operators, class B are restricted to shallow water
and onshore blocks, and class C are restricted to onshore and mature basins.
In case a higher local content level is achieved in the exploration phase, the incremental value achieved can
be transferred to the development phase upon approval by the ANP. In case of noncompliance, upon award of
contract, a fine is applied. The fine is based on a schedule linked to the nonrealized value of local investment
(NR).
Table 2.8 presents the schedule of fines from the seventh bidding round.
Table 2.8 Brazil: Schedule of Fines in Case of Noncompliance with Local Content Requirements
% of the Value of Unrealized Local Content (%NR)
Fine as a % of the Value of Unrealized Local Content
Below 65%
From 65% to 100%
60%
1.143 x %NR 0.14285
Source: Based on data from MENAS 2009.
In addition to these regulations, the concession contract includes provisions such as:
Include Brazilian Suppliers in the companies invited to submit proposals;

Grant access to a Portuguese or English version of the same technical specifications for all companies
invited to submit proposals, and be disposed to accept equivalent specifications in accordance with the
56
Best Practices of the Oil Industry, in such a way that does not restrict, inhibit, or impair the
participation of Brazilian suppliers;
Send to the Brazilian suppliers a Portuguese version of all the nontechnical documents and
correspondence; and
Require no technical qualifications or certifications from the Brazilian suppliers, besides those
required from foreign suppliers (ANP 2007).
It must be also noted that the concessions agreement allows the concessionaire to request the ANP to waive
local content requirements on items in case of excessively high prices, delays in delivery, or absence of
technology. As stated in the concession contract template excessively high prices for the acquisition of local
goods and services when compared to international market conditions was a condition for waiving local
content requirements (ANP 2007).
Some operators may also elect to set higher local content requirements on their suppliers. In addition,
financing institutions, such as the Brazilian National Development Bank (BNDES), impose minimum local
content requirements to offer financing facilities.
Additionally, operators must invest 1 percent of each fields gross revenues in oil-and-gas-related R&D
(Filho 2000). Up to half of this investment can be used in the operators research facilities in Brazil and the rest
has to invested in research to be carried out by local universities or research institutes accredited by the ANP,
in line with regulations published in year 2005.25 The ANPs Web page features the 57 institutions that were
accredited between 2008 and 2011, and the $5 million that was raised and invested between 1998 and 2010.
Being the dominant operator, Petrobras is responsible for over 99 percent of this amount (ANP 2011b).
Fiscal Incentives
Fiscal incentives to promote local content include tax reductions and subsidized financing. Following is a
selection of such incentives:
REPERTO. In 1999 a federal tax exemption regime (REPERTO) was launched offering tax benefits to
imports and exports of oil-and-gas-related goods, which included suspension of COFINS, II, IPI, and
PIS.26 REPERTO is scheduled to last until 2020 and its benefits apply to a family of items defined by
the Revenue and Customs Secretariat (Secretaria de Receita Federal). These include wet Christmas
trees, families of vessels, floating cranes, and remote operation submarine vehicles.27
BNDES financing. Backed by the government, the bank offers subsidized financing to local suppliers.
The Merchant Marine Fund. Launched by the government in December 2009, the over $5 billion fund is
set to finance the construction of 17 new shipyards and the expansion of 5 existing ones.
Governmental direct assistance and tax reliefs are given to qualifying R&D projects.
Despite the existence of multiple incentive packages, importers report that the regime is complex to take
advantage of, and some companies have found difficulties in benefiting from the exemptions (MENAS 2009).
Program for the Mobilization of the Oil and Gas Industry (PROMINP)
At the end of 2003 the federal government launched the multistakeholder program PROMINP to maximize
goods and services national industry content, within competitive and sustainable basis, in the implantation of
oil and gas projects in Brazil and abroad (PROMINP 2011b). The program is coordinated by the MME and
engages most industry stakeholders.
The use of funds and accreditation of institutions are governed by the ANP resolutions 33 and 34/2005 and NPA Technical
Regulations 5 and 5/2005.
26 As a reminder, contribution for the financing of the social security system (COFINS), import tax (II), tax on industrial products
(IPI), and social integration plan (PIS).
27 The list of items is available at: http://www.receita.fazenda.gov.br/legislacao/ins/2008/in8442008.htm.
25
57
PROMINP intervenes in three strategic areas: (i) qualification, (ii) industrial policies, and (iii) industry
performance. Within each, the program has specific areas where it (i) identifies gaps and (ii) structures
initiatives to close these gaps. In the first area, PROMINP launched a professional qualification plan assessing
the demand for labor by professional category and by state. Then, a training program was launched involving
71 educational institutions and comprising 953 courses targeting over 100,000 professionals across 17 states
between 2006 and 2010. In addition, and to boost the development of domestic suppliers, the program invested
$27 million in 24 projects along the oil and gas value chain for competitive import substitution.
Under the second strategic area, in 2005 the program published a manual for the assessment of local content.
This followed confusion on reporting and monitoring local content. The manual outlined and formalized the
definitions related to local content and presented a methodology for local content calculation. Within the same
strategic subject, PROMINP engineered a frame agreement in 2004 between Petrobras and a national small
business support association, Sebrae, for the inclusion of small- and medium-sized enterprises (SMEs) in the
petroleum supply chain. The agreement aimed at mapping potential business opportunities for SMEs, training
them, and fostering interaction through business rounds. The first phase of the agreement was accomplished in
2007. A total of $32 million was invested$12 million offered by Petrobras and Sebrae and $20 million funded
by partner companies. The agreement encompassed 12 states and resulted in over $113 million in transactions
between oil and gas companies and SMEs (Jenkins 2007). In 2008 the agreement was renewed for another three
years, and additional funds were raised and more states included. Between 2004 and 2010, 3,000 SMEs were
trained to become suppliers in the oil and gas value chain. The 65 business rounds organized in this period
resulted in around $2.6 billion in transactions between oil and gas companies and SMEs. The agreement was
renewed yet another time in 2011 (PROMINP 2008).
Under the third area, PROMINP carried out a national competitiveness diagnostic study. The study
forecast oil and gas operators demand for goods and services by family. Then it looked at domestic supply
capacity and identified gaps and challenges for each family of goods and services. The gaps and challenges
were grouped into eight categories combined under three areas. Subsequently, a series of technological,
infrastructure, capabilities, and financing initiatives were designed based on the competitiveness of the sector
and challenges it faced. Figure 2.16 provides a snapshot of the diagnostic and action plan proposed by the
study.
As such, multiple initiatives were launched in the areas of technology, infrastructure, and supply chain
management. On the technological front, a plan was developed defining the technology agenda and
implementation model. A fund of $80 million was raised and 38 projects launched to close technological gaps
in the manufacturing of valves, flanges and connection, boilers, and naval construction in addition to
instrumentation and measurement. On the infrastructure front, an expansion plan was outlined calling for
fostering partnerships with international companies and the mobilization of these companies especially in
sectors were domestic competiveness is limited. To date multiple joint ventures have been signed, especially in
shipyard manufacturing. On the supply chain front, PROMINP engineered the creation of the Petrobras
Supply Chain Financing Program, Progredir, offering competitive financing to suppliers contracted by
Petrobras. The program involves the six largest banks in Brazil and is managed on an online platform
(PROMINP 2011b). Figure 2.15 offers an overview of the workflow in Progredir.
58
Figure 2.15 Brazil: Progredir Program Workflow

1
3
Buyers validate
information and
Suppliers are
allowed to request a
loan
4
Banks see the loan
request and make a
proposal respecting
the deadlines
previously agreed
Suppliers select
bank and request
their buyer the
confirmation of the
banker padlock
8
After the deliver
(goods or services),
buyer liquidates its
obligations,
according to the
banker padlock
After supplier
assumes its
obligation as a
buyer, bank releases
the money
5
Buyers confirms the
supplier contract
banker padlock at
the Portal
9
Bank checks if there
is any notice of
default against the
supplier, before
releases the money
paid by the buyer
Bank releaser
resources for the
supplier, after they
liquidate their loans
and occasional
defaults
Source: Adapted from Bonesio 2011.
Figure 2.16 Brazil: Gaps and Challenges in Domestic Supply (Red Cells Indicate Areas of Challenges/Gaps)
Technology
Insufficient
Production
Capacity
Sectors
Infrastructure
Incomplete
Production
Portfolio
Technology
Low Local Content Low R&D Activity
Process
Technology
Human Resources
Basic Industrial
Technology
Engin eering
Professional
Qualification
Steel Mills
Metallurgical
Pipelines
Flanges and Connections
Boiler Works
Rods and Sucker Rod Pumps
Subsea
Pumps
Mechnical
Compressors
Gas / Diesel Engines
Turbines
Cranes and Hoists
Valves and City Gates
Generators and Electric Engines
Electrical
Substations and Transformers

Automation and Instrumentation
Services
Engineering
Construction and Assembly
7
High
13
Medium
Competitiveness
14
15
17
19
18
8
16
10
20
Sectors
2
5
3
4
Low
21
22
24
23
Low
High
Productive Capacity
Note: Size of Bubble indicates level of dependency of the oil and gas industry on these goods
(low, medium, high)
1.Telecommunication
2. Substation and transformers
3. Generators and Motors
4. Electrical Distribution Panels
5. Automation
6. Pipelines
7. Winches
8. Valves
9. Flanges and Connections
10. Boilers Works
11. Mills
12. Steam Turbines
13. Subsea - Equipment
14. Subsea - Umbilical and Flexible Pipes
15. Pumps
16. Alternative Compressors
17. Engines
18. Cranes (Onshore)
19. Engineering Services
20. Construction and Assembly
21. Instrumentation and Measurement
22. Gas Turbines
23. Centrifugal Compressors
24. Electrical Motors (large size)
Action Plan
Mobilize foreign companies
Enable technology transfer
Promote articulation between buyers and sellers
Invest in production capacity

Consolidate demand and promote technological
upgrading
Promote technological upgrading

Instigate production and commercial changes
Invest in production capacity
Technological innovation
Source: Adapted from PROMINP 2010.

Note: R&D = research and development.
59
Buyers upload the

pre-registration and
Suppliers insert their
contracts
information into the
portal
Figure 2.17 provides a summary of PROMINPs strategic subjects, areas, and key projects. 28
Figure 2.17 Brazil: PROMINP Strategic Subjects, Areas, and Projects
1
Qualification
Strategic Areas
Technological
Qualification
Industrial
Capacity
Projects
Professional
Qualification
Industrial Policy
Industry Performance
Financing
Regulation
Sustainability
Tax Policy
Foster micro and

small companies
HSE
Professional Qualification Plan
Manual for Assessment of Local

Content
Competitive import Substitution
Petrobras x Sebrae Frame Agreement
Competitiveness
Competitiveness Study Industry of Oil

and Gas market
Source: Adapted from PROMINP 2010.

Note: HSE = Health, Safety and Environment.
In Brazil, LCPs are legislated through:
The petroleum law number 9478/97, which sets out general local content principles
Minimum local content requirements that are established in the licensing round for the award of oil
and gas E&P rights; these change over time and for different types of acreage (based on relative
maturity and location)
Specific commitments that are set out in petroleum contracts
The ANP Regulation No. 6/2007 Resolution No.36/2007, which specifies the criteria and procedures for
the calculation and certification of local content
The ANP Regulation No. 8/2007 and Resolution No. 38/2007, which specifies the procedure for audit
of local content certification
The ANP Regulation No. 9/2007 and Resolution No. 39/2007, which specifies the reporting procedure
and format.
2.3.4 Institutional Responsibility for Policy Design and Monitoring of Implementation
The governance of LCPs is distributed among several entities. Policy design is led by the CNPE (National
Energy Policy Council) that establishes guidelines for LCPs, in coordination with the MME. Regulatory
activities fall under the responsibilities of the ANP and it:
Sets the minimum local content requirements

Defines criteria, accredits and audits certification entities
Accredits R&D institutions
Issues templates for local content reporting
Checks local content commitments and applies penalties in case of noncompliance
Runs training programs, funded by revenues from royalties.
Operators may elect to local content requirements that are higher than what they have committed for in
their respective bids. In addition, financing institutions (for example, the BNEDS) set minimum local content
requirements.
For certification of local content, 21 entities are featured on the ANPs Web page. These entities:
28
Details and results of projects undertaken by PROMINP are available in Portuguese at http://www.prominp.com.br.
60
Issue local content certificates, in line with the template provided by the ANP, for goods and
services, stating the percentage of local content based on the local content primer developed
by PROMINP
Issue a quarterly certification report to the ANP, detailing certification activities.
The leading certifier is the ONIP, a nongovernmental organization (NGO) engaging 2,000 companies
working in the Brazilian oil and gas value chain (Heller Redo Barroso 2010). In addition to certification of local
content, the NGO:
Proposes actions for improvement of industrial policy and the development and competitiveness of
domestic industry
Proposes joint actions and actors for the removal of bottlenecks on factors of competitiveness of the
domestic industry
Develops and disseminates sectoral knowledge and understanding of national and international
markets
Promotes interactions and contributes to the development of business in favor of domestic suppliers.
Several other NGOs and associations are engaged in similar activities.

The other major enabler of LCPs is PROMINP. The program is a multistakeholder initiative, composed at
the steering committee level of the minister of mining and energy; minister of development, industry, and
trade; president and services director of Petrobras; president of the BNDES; president of the ONIP; and the
president of the Brazilian Petroleum Institute. Reporting to the steering committee is an executive committee
and four sectoral committees (Figure 2.18).
Figure 2.18 Brazil: PROMINP Governance Structure
Steering
Committee
CEO / President ONIP

President BNDES
President Brazilian Petroleum Institute
(IBP)
Minister of Mining and Energy (MME)

Minister of Development, Industry, and Trade (MDIC)
President of Petrobras
Director of Services of Petobras
Executive
Committee
MME O&G and Renewable Fuels Secretariat

MDIC Secretariat
BNDED Director
Petrobras Director
PROMINP Engineering Executive Manager
ONIP Director
IBP Director
Associations President / Director (ABCE,
ABDIB, ABEMI, ABIMAQ, ABINEE, ABITAM,
SINAVAL e CNI)
Sectoral Committee
E&P
Maritime
Transp.
G&P and
Pipelines
Downstream
Source: Adapted from PROMINP 2011b.

Note: BNDES = Brazilian National Development Bank; E&P = exploration and production; G&P = gas and processing; ONIP = National
Organization of the Petroleum Industry; PROMINP = Program for the Mobilization of the Oil and Gas Industry.
The steering committee is mainly responsible for strategy development, approval of portfolios of projects,
and the budget and funding sources. The executive committee shall mainly:
Implement PROMINPs guidelines

Coordinate sectoral committees and appoint their coordinators
Prepare the annual budget and indicate sources of funds
Validate, prioritize, monitor, and evaluate the portfolio of projects.
Sectoral committees are responsible for the implementation of projects and management of resources
(Decree No. 4925, 2003). PROMINPs day-to-day activities are mainly funded by the government and
Petrobras. As for the projects launched by the program, these are mostly funded on a project-by-project basis.
To summarize the landscape of local content institutional responsibilities, Table 2.9 maps key local content
activities to the different stakeholders.
61
Table 2.9 Brazil: An Activity Map of PROMINPs Local Content Stakeholders

Activities
Policy
Design local content policies
Regulation
CNPE
MME
ANP
Set minimum local content

requirements
Issue templates for local content
reporting
Define criteria and accredits
certification entities
NGOs
x
x
Audit certification entities
Check local content commitments
Apply penalties in case of

incompliance
Implementation Issue local content certificates
Support
Financing Certifying
Operators Suppliers PROMINP
Institutions Entities
Voice industry concerns to

government
Identify challenges to meeting
policy objectives
Propose and lead the
implementation of local content
Offer training programs
Source: Based on data from ANP 2009, BNDS 2011, ONIP 2010, PROMINP 2011a.
Note: ANP = National Petroleum Agency; CNPE = National Energy Policy Council; MME = Ministry of Mines and Energy; NGO =
nongovernmental organization; PROMINP = Program for the Mobilization of the Oil and Gas Industry.
2.3.5 Interlinks
LCPs became a pillar of Brazils petroleum sector plan. These policies are linked to Brazils overall industrial
strategy, which is aimed at protecting the domestic industry and increasing its competitiveness. The overall
direction was put in place during the presidency of Lula da Silva and carried on by his successor, Dilma
Rousseff. From the countrys industrial policy of 2008 (the Policy for Productive Development) to the 2011 plan
of Bigger Brazil, the government has been offering fiscal incentives and support programs to domestic
industries.29
On the financing front, the BNDES has been a catalyst for Brazils industrial policies. Overall, the Bank has
been offering programs that emphasize consolidation to increase the competitiveness of Brazilian production in
the international arena. Within the scope of the Bigger Brazil industrial plan, the bank launched the Support
Program for the Development of Oil and Natural Gas Goods and Services Supply Chain (BNDES 2011). The
program aims to:
Expand the productive capacity of businesses

Support merger and acquisition activities that increase competitiveness
Fund projects aimed at expanding production capacity, modernization, and optimization of
industrial units as well as the search for technologies abroad
Support R&D activities.
29
For instance, as per the later industrial plan, the government is guided to purchase goods and services produced domestically
that cost up to 25 percent more than imported ones, as long as they meet technical requirements.
62
In Brazil the measurement of local content is based on an expenditure philosophy. Prior to the seventh bidding
round, measurement and reporting of local content was not formalized. Operators were asked to provide a
statement of origin of their sourced goods and services without providing supporting evidence (Maya 2011).
In 2005 PROMINP published a local content primer, which formalizes definitions related to local content
and details methodologies for calculating the level of local content, specific to equipment and goods,
equipment and goods for temporary use, 30 services, systems, and subsystems (Table 2.10).31
Table 2.10 Brazil: PROMINPs Methodology for Calculating Local Content
Goods, Systems, and Subsystems
X
LC 1 100
Y
Formula
Services
ILS
Value of goods directly imported by the operator or main contractor,

including import tax.
Value of imported goods purchased by the operator or main contractor
in the local market, excluding internal tax.
Total price of goods and systems excluding IPI and ICMS taxes.
X
100
Y
Total cost of local manpower
Total manpower cost
Source: Based on data from PROMINP 2005.

Note: ICMS = state VAT; ILS = local content of services; IPI = tax on industrial products.
To facilitate and standardize calculation and reporting of local content, PROMINP developed templates
specific to types of goods and services. Starting from the seventh bid round, the primer was annexed to the
concession agreements.
In 2007 the primer was made part of a series of the ANP regulations that introduced major changes related to
the fulfillment of local content clauses to be applied as of the seventh bidding round. As part of these
regulations, a certification system was put in place. The system included the setup of certification entities that
are accredited by the ANP based on predefined criteria. These entities issue local content certificates in line
with the manual and standardized templates published by PROMINP in 2005. Under the new regulations:
Local content reporting happens on a quarterly basis

Reporting is block specific for the exploration phase and area specific for the development phase
Templates are provided by the ANP and are standardized for each phase (that is, exploration and
development)
Auditing takes place at the end of the exploration phase as well as the development phase.
To date, over 5,000 local content certificates have been issued, multiple audits carried out, and notifications
of noncompliance fees issued to some operators (ANP 2011b).
As part of the bidding process, concessionaires committed themselves to local content requirements in the
exploration and development phases. Figure 2.19 presents the average local content commitment by
concessionaires achieved over the bidding rounds.
Goods and equipment used under rental, chartering, leasing, or operational / financial leasing.
A system that is an integral part of a greater system. This could be, for example, a MODULE of an oil rig, a tanker, offshore
supply, or other type of offshore vessel.
30
31
63
Figure 2.19 Brazil: Average Local Content Commitment Resulting from Bidding Rounds, 19992008
Exploration Phase
Development Phase
86%
79%
81%
74%
80%
73%
7
(2005)
8
(2006)
77%
69%
84%
79%
54%
48%
42%
40%
39%
28%
25%27%
1
(1999)
89%
86%
2
(2000)
3
(2001)
4
(2002)
5
6
(2003)
(2004)
Bid Round (Year)
9
(2007)
10
(2008)
Source: Adapted from BG 2012.
The inception of PROMINP is believed to be the driver behind the boost in the participation of the
domestic industry in investments from 57.3 percent in 2003 to 74.3 percent in 2010 (Table 2.11).
Table 2.11 Brazil: PROMINP Targets Versus Achieved Participation of Domestic Industry in Investments, 200310
2003
%
2004
%
2005
%
2006
%
2007
%
2008
%
2009
%
2010
%
Target LC Index
57.3
59.7
63.1
59.9
64.0
66.0
67.2
68.5
Achieved LC Index
57.0
62.2
70.0
74.3
75.4
75.6
75.4
74.3
Year
Source: Based on data from PROMINP 2010.

Note: LC = local content.
At a more granular level, the ANP reports the value of investment and local content achieved at the item level.
Table 2.12 presents the cumulative value of total investment, domestic portion, and percentage local content by
item. In addition to these indicators, Petrobras has reported multiple success stories.
Table 2.12 Brazil: Cumulative Total and Local Investment (in $ million) and Percentage Local Content, 2011
Total investment
509.0
88.0
1,059.0
231.1
6.5
7.8
3.7
0.1
1.0
3.7
0.0
0.5
2.4
0.0
43.4
16.3
18.7
1,991.3
Geology and geophysics

Drilling rigs
Logistics and operational support
Well drilling, completion, and assessment
Basic engineering and detailing
Management, construction, assembly, and commissioning
Electrical, control, instruments, and measurement systems
Telecom systems
Oil and gas pipelines, storage tanks
Compression units
Steam generation and injection units
Subsea equipment and control systems
Oil-processing and treatment systems
Natural gas-processing and treatment systems
Platform and ship building
HSSE
Civil works and utilities
Total
Source: Adapted from ANP 2011b.

Note: LC = local content; HSSE = health, safety, security and environment.
64
Local investment
328.8
38.2
747.5
196.4
6.1
7.0
3.6
0.1
0.8
3.0
0.0
0.3
2.0
0.0
27.6
14.6
18.4
1,394.5
Average LC %
65
43
71
85
93
90
99
99
77
82
99
63
86
100
64
90
98
70
For goods and services sourced by Petrobras, the level of domestic sourcing has been on an increase but
fluctuating (Figure 2.20).
Figure 2.20 Brazil: Local Content in the Procurement of Goods (left) and Services (right) Sourced by Petrobras,
200508
7,011
International
38,170
Domestic
International
Domestic
34,599
19%
22%
5,240
32%
18%
4,026
12%
16,767
2,886
11%
81%
78%
30%
68%
82%
8,528
31%
88%
89%
70%
69%
2005
2006
2007
2008
2005
2006
2007
2008
Source: Based on data from Rittershaussen 2010.
On the other hand, local content policy trade-offs are being directly felt by the oil and gas industry. On
multiple projects, this has led to higher costs and delays in delivery. In fact, Jos Sergio Gabrielli, former CEO
of Petrobras, mentioned that the cost of building a midrange tanker in Brazil is twice the cost of building it in
China (Leahy 2012). As for delays, Petrobras missed its production targets last year due to delays in receiving
rigs (Millard 2012). Overall, LCPs are believed to hinder Petrobras from achieving its production and financial
targets. The company did not meet its production targets for the last three years and its stocks have been
underperforming. Some analysts are watching for the new CEO of Petrobras to seek some breathing space on
local content requirements to achieve the companys growth targets (Leahy 2012).
65
References
Academic Ranking of World Universities. 2010. Academic Ranking of World Universities2010.
http://www.arwu.org/ARWUStatistics2010.jsp.
ANP (National Petroleum Agency). 2007. Concession Agreement for the Exploration, Development and Production of
Oil and Natural Gas. Rio de Janeiro: ANP.
. 2009. Local Content: Goals and Brief History. Rio de Janeiro: ANP. http://www.anp.gov.br/brasilrounds/round10/ingles/conteudo_local_Obj_e.asp.
. 2011a. Funds of the Clause in R & D Investment. Rio de Janeiro: ANP.
http://www.anp.gov.br/?pg=45446&m=&t1=&t2=&t3=&t4=&ar=&ps=&cachebust=1336631608652.
. 2011b. Local Content Framework: Challenges and Opportunities for E&P Sector. Rio de Janeiro: ANP.
Baker and McKenzie. 2010. Brazil takes off Latin America 2010: Proactive Strategies for Doing Business in Today's
Changing Landscape . Miami.
Beaubouef, B. 2012. Pre-Salt Plays Buoy Brazil's Offshore Development Plans. http://www.offshoremag.com/articles/print/volume-71/issue-7/brazil-latin-america/presalt-plays-buoy-brazils-offshoredevelopment-plans.html: Offshore Magazine.
BNDES (Brazilian National Development Bank). 2011. BNDES New Measures Reinforce the Brasil Maior Plan.
Brazil: BNDES.
http://www.bndes.gov.br/SiteBNDES/bndes/bndes_en/Institucional/Press/Noticias/2011/20110802_bra
sil_maior.html.
Bonesio, A., Pedro. 2011. Doing Business in Brazil. Petrobras. A presentation for the Brazil Texas Chamber of
Commerce. Houston, Texas.
Brandao, F. 1998. The Petrobras Monopoly and the Regulation of Oil Prices in Brazil. Oxford Institute for Energy
Studies.
Center for Global Energy Studies. 2010. Brazils Subsalt Offshore Story.
http://www.cges.co.uk/resources/articles/2010/03/26/brazil%E2%80%99s-subsalt-offshore-story.
CIA (Central Intelligence Agency). 2012. The World Factbook. Washington, DC.
https://www.cia.gov/library/publications/the-world-factbook/fields/2221.html.
Filho, I. S. 2000. Concession Agreement. Rio De Janeiro: ANP.
Gobetti, S. W. 2009. Raising and Sharing Revenue Federalism and royalties in Brazil: what does change in
presalt context? Conference on Oil and Gas in Federal Systems, World Bank, Washington, DC.
House.
Azzoni, Carlos, Jonathan Brooks, Joaquim Guilhoto, and Scott McDonald. "Who in Brazil will gain from global
trade reforms?." The World Economy 30, no. 10 (2007): 1568-1593.
Heller Redo Barroso, M. M. 2010. The Brazilian Offshore Industry Transformation. Rio de Janeiro: Heller Redo
Barroso and Associates. http://www.hrblaw.com.br/news/2010/abr/.
66
Herold, 2010. Company Profile. http://www.herold.com/research/company_coverage.main.

ILO (International Labour Organization). 2012. Total employment, by economic activity.
http://data.un.org/Data.aspx?d=LABORSTA&f=tableCode%3a2B
IMF (International Monetary Fund). 2012. World Economic Outlook Database. Washington, DC.
Jenkins, B. A. 2007. Business Linkages: Lessons, Opportunities, and Challenges. IFC, International Business Leaders
Forum, and the Kennedy School of Government, Harvard University.
Kaufmann, D., A. Kraay, and M. Mastruzzi. 2011. The Worldwide Governance Indicators (WGI) project.
KPMG. 2012. Corporate and Indirect Tax Survey 2012. KPMG International.
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/corporate-indirect-taxsurvey.pdf
Langevin, M. 2010. Brazil's Big Oil Play: How This Nation is Charting National Energy Security. Journal of
Energy Security. September 2010 Issue
http://www.ensec.org/index.php?option=com_content&view=article&id=264:brazils-big-oil-play-howthis-nation-is-charting-national-energy-security&catid=110:energysecuritycontent&Itemid=366.
Leahy, J. 2012. Local Supply Policy Tests Petrobras. Financial Times. http://www.ft.com/cms/s/0/a2f51e1260ad-11e1-84dd-00144feabdc0.html#axzz1uMRaK7z4.
Marathon 2012.
http://www.marathonpetroleum.com/content/documents/investor_center/presentations/Garyville%20
BusTour_3_25.pdf
Maya, F. 2011. Local Content and the Domestic Industry of Goods and Services. Focus Brazil.
https://www.focusbrazil.org.br/SiteUSA/industry/energy/LOCAL%20CONTENT%20ARTICLE%20%20TN%20PETROLEO%20NOV%202011.pdf.
MENAS. 2009. Local Content Online. London: MENAS.
http://www.menas.co.uk/localcontent/home.aspx?country=6&tab=law.
MGI (Mckinsey Global Institute). 2012. Trading Myths: Addressing Misconseptions about Trade, Jobs, and
Comptetitveness.
http://www.mckinsey.com/insights/mgi/research/productivity_competitiveness_and_growth/six_myt
hs_about_tradeMillard, P. 2012. Petrobras Output Target at Risk as Brazil Favors Local Business.
Bloomberg Businessweek. http://www.bloomberg.com/news/2012-03-13/petrobras-output-goal-risked-asbrazil-boosts-dependence-on-local-supplies.html
MSTTE (Ministry of Science, Technology and Tertiary Education). 2011. Policy on Tertiary Education,
Technical Vocational Education and Training and Lifelong Learning in Trinidad and Tobago that was
laid in Parliament on January 12th 2011. http://www.stte.gov.tt/.
Offshore Center Denmark. 2009. Overview of the Brazilian Oil and Gas Industry. Offshore Center Denmark.
ONIP (National Organization of the Petroleum Industry). 2010. Agenda de Competitividade da Cadeia Produtiva de
leo e Gs Offshore no Brasil. Rio de Janeiro: ONIP.
OSEC. 2011. The Brazilian Oil and Gas Sector. Swiss Business Hub Brazil, So Paulo: OSEC.
Panassol, M. D. 2009. The Challenges of the Local Content Requirements in the Oil and Gas Industry in
Brazil. In Brazil Energy and Power. Houston: PricewaterhouseCoopers.
Pereira, C. A., K. Olbertz, and M. Rost. 2012. Oil and Gas Regulation in Brazil. Justin, Periera, Oliviera and
Talamini Advogados. Brazil.
67
Presidency. 2003. Decree No. 4925. Presidency of the Republic, Civil Office of Legal Affairs, Brazil.
PROMINP (Program for the Mobilization of the Oil and Gas Industry). 2005. Compilation of Methodology,
Systematics, Standardization and Audit Procedures for Assessment of Local Content. Rio de Janeiro:
PROMINP. http://www.prominp.com.br/data/pages/8A95488830FCBB0C013123EAF5AE3397.htm.
. 2008. Supply Chain. Brazilia: PROMINP.
http://www.prominp.com.br/data/pages/8A95488830FCBB0C013123EAF84C37BF.htm.
. 2010. PROMINP:O&G Brazilian Industry Mobilization Program. Brazilia: PROMINP.
. 2011a. Local Content Content Framework Framework: Challenges and Opportunities for E&P Sector. Rio de
Janeiro: PROMINP.
. 2011b. PROMINP: O&G Brazilian Industry Mobilization Program. Houston: PROMINP.
Redo, H. 2010. Brazil Pre-Salt: Safety and Local-Content Regulations and Technology for Brazils Deepwater.
World Oil. http://www.worldoil.com/brazil-presalt-safety-regulations.html
Rigzone 2012. Petrobras Finds Light Oil Off Brazil Coast .
http://www.rigzone.com/news/article.asp?a_id=115503.
Rittershaussen, J. H. 2010. Procurement Policy and Critical Equipment Supply. Petrobras. Brazil.
Sala-i-Martin, X. 2011. The Global Competitiveness Report 20112012. Switzerland: World Economic Forum.
Samuels, D. 2004. From Socialism to Social Democracy: Party Organization and the Transformation of the
Workers Party in Brazil. Comparative Political Studies. Volume 37 No. 9, pages 999-1024
The World Bank Group. 2012. Doing Business. http://www.doingbusiness.org/.
United Nations (UN). 2010. Department of Economic and Social Affairs. Population Division, Population
Estimates, and Projections Section: http://esa.un.org/unpd/wpp/unpp/panel_indicators.htm.
UN Comtrade. 2010. The 2010 International Trade Statistics Yearbook. New York: United Nations.
http://hdr.undp.org/en/statistics/
UNIDO (United Nations Industrial Development Organization). 2012. Statistical Country Briefs.
http://www.unido.org/index.php?id=1002110
United Nations Statistics. 2010. National Accounts Main Aggregates Database. New York: United Nations.
World Bank. 2011. World Bank Development Indicators. Washington, DC: World Bank.
. 2012a. Brazil Overview. Washington, DC: World Bank.
. 2012b. World Development Indicators and Global Development Finance. Washington, DC: World Bank.
WTO (World Trade Organization). 2012. Statistics Database.
http://stat.wto.org/StatisticalProgram/WSDBStatProgramSeries.aspx?Language=E
68
3. Indonesia
Indonesias history in the petroleum sector dates back to the end of the 19th century, when the country was still
a Dutch colony. Since then, foreign oil companies have played a pivotal role in exploring, developing, and
operating the countrys resources. After a shaky sectoral history following World War II, the framework
engaging these companies has undergone a major change marked by the formation of the countrys national oil
company (NOC) in 1957, and the governments decision in 1966 to secure state interests through production
sharing agreements (PSAs).32 A few years before these major changes, mainly in the early 1950s, the local
content agenda in the oil and gas sector appeared in the Indonesianization of the petroleum sector workforce.
Since then, the local agenda has evolved over time and is undergoing several major milestones.
Toward the early 1950s, the country witnessed aggressive Indonesianization of foreign oil company
personnel. Surprisingly, this was initiated by the companies33 themselves in a move to improve their position in
tough negotiations with the government. The negotiations were taking place in a rising nationalistic/socialist
environment. Indonesianization efforts were highly successful for disciplines requiring a low to medium level
of capabilities. For higher technical positions, the foreign oil companies established training schools and
offered scholarships to send Indonesian staff abroad to leading technical schools. Indonesianization efforts at
the managerial levels were limited. By 1963 Indonesianization of the workforce was formalized in the working
contracts entered by the foreign oil companies and Pertamin, the NOC at that time (Hunter 1966).
Under the PSA, contractors have been mandated with a domestic market obligation that requires them to
sell a share of their production entitlement to the domestic market at a discounted price. This, coupled with the
overall government fuel subsidies and the NOCs aspirations, instigated the development of a well-established
forward link. As for the local content agenda related to backward links from the oil and gas sector, policies
were initiated in the late 1970s, when the government envisioned driving technology transfer in oil field
services and equipment (OFSE) from foreign companies to domestic ones by forcing partnerships between
multinationals and local firms operating in the OFSE segment. This policy was complemented by a set of
import tariffs on certain OFSE. Overall, the government aimed at reaching local content levels of 35 percent.
Failing to reach this target required production sharing (PS) contractors to receive an exemption from the
Ministry of Industry and Trade. During this period Pertamina enjoyed a monopoly in the oil and gas sector as
it was mandated with regulatory and operational powers. The adopted approach to develop a backward link
proved to induce a limited impact. By the turn of the century, the achieved local content levels were believed to
be in the range of 10 to 20 percent (Nordas, Vante, and Heum 2003).
In 2001 the oil and gas sector underwent a major restructuring process. In that year, the Indonesian
government published a new Oil and Gas Law that primarily aimed at improving the governance of the sector
and introducing competition. As per the new law, upstream regulatory roles were transferred from Pertamina
to three regulatory bodies:
Directorate General of Oil and Gas (DGOG) under the Ministry of Energy and Mineral Resources
(MEMR), acting as the policy and concession management body
BPMIGAS, upstream regulatory body
Under the PSA, production-sharing contractors incur all capital expenditures during exploration and development, to recover
them over the production phase.
33 At that time, Royal Dutch Shell, Stanvac Petroleum, and Caltex Pacific were the main companies operating in Indonesia.
32
69
BPHMIGAS, downstream regulatory body.
The restructuring process also marked a new milestone for the local content agenda that was driven by a
national need to increase domestic production, create jobs, and reduce the need for foreign exchange (MoI
2005). To this end, the law of 2001 stipulated the development of local capabilities that enable domestic
companies to compete in the national, regional, and international landscape of OFSE. To this end, the upstream
regulator was envisioned to be an engine mobilizing different economic and industrial activities. Here,
BPMIGAS was to prioritize domestic/regional human resources roles, and utilization of goods and services in
oil and gas industry (BPMIGAS 2011b). To achieve its local-content-related aspirations, the regulator
published in 2009 a set of procurement rules around the domestic sourcing of goods and services in upstream
activities. These rules were further developed and clarified in the second revision of the manual published in
2011.
Today, local content policies (LCPs) are also applied in the mining and extractive industry, government
procurement, as well as other sectors. Going forward, policy makers in Indonesia have to deal with two main
sectoral priorities: (i) meeting the growing domestic demand for natural gas in light of a shortage, and (ii)
managing the depletion of oil reserves. Despite that, LCPs are expected to remain on top of the development
agenda for the coming years, with aspirations to reach a 50 percent level (MOEMR 2009).

Indonesia, a lower-middle-income country, is the largest economy in Southeast Asia (RSM 2012). It is in the
transition phase between stage one and two on the scale of global economic development (Schwab 2011) and
has a large multiethnic population of 242.3 million. Its GDP per capita in 2011 was above Southeast Asias
average, at $3,495, for a total of $846.8 billion (World Bank 2012b). The highest contributor to the economys
GDP is manufacturing, with a 45 percent share, followed by services, with a 38 percent share. Indonesias GDP
has been on an increasing trend, with an average growth rate of 56 percent. Foreign direct investment (FDI) in
Indonesia was vital to the countrys economic development, particularly during the period of the 1970s
(Satiotomo 1999). Exports have also been on an increasing trend over the years, with fuels and mining as the
dominating export commodities with a 39 percent share.
The business environment in Indonesia is now undergoing a fast pace of reform coupled with high levels
of optimism. In fact, the country has been moving from the planned market economy toward a decentralized
economy and lately enjoys a stable political and economic outlook (World Bank 2010b). But despite the reforms
and the impressive growth rates, Indonesia is still facing challenges posed by the legacy of 32 years of
centralized authority, corruption, and weak governance of the Suharto rule. Indeed, Indonesias governance
indicators remain well below the Organisation for Economic Co-operation and Development (OECD)
standards, and corruption is still one of the key obstacles to doing business in Indonesia. This is coupled with
the low quality of infrastructure that suffers from multiple bottlenecks. The country is also struggling with
other challenges such as the low tax revenue as a percent of GDP, mounting pressure on cities driven by
increased urbanization, shortage in skilled workers, and the low quality of its educational system.
3.1.1 Economy
Indonesia gained its independence in 1945 toward the end of World War II, after more than three centuries of
Dutch colonial rule (Bey 2012). The Indonesian economy was in poor condition, and it wasnt until 1966, when
the Communist government was overthrown, that Indonesia began to follow a sound economic track. By the
end of the 1960s and similar to its northern neighbor, Indonesia began to set economic targets and develop
five-year national plans (Repelita) in an effort to achieve those targets. Driven by revenues from mineral and
petroleum resources, the country achieved considerable economic growth, attained food security from being a
rice importer to exporter, and developed abilities in manufacturing and higher technology industry (Satiotomo
1999). In fact the countrys GDP was set on an increasing trend as of the late 1960s. GDP growth has been
momentous, achieving an average of 8.1 percent from 1968 through 1978 (World Bank 2011). The only years
70
witnessing steep drops in GDP growth were 1982 (1 percent), following the decrease of oil prices, and 1998 (-13
percent), as a result of the Asian economic crisis. The economy recovered shortly after the 1998 contraction, as
the country regained growth levels in 1999 at 1 percent and a 5 percent growth rate in 2000. Over the past
decade, GDP growth rate has been steady, between 5 and 6 percent. Today, Indonesia is a member of the G-20
countries (RSM 2012).
Indonesias economy has witnessed a structural change since the 1960s, a scenario similar to its neighbors,
Malaysia and Thailand, where a shift from agricultural dependence toward service and manufacturingoriented activities was achieved. In 1970 agriculture contributed to nearly half of the countrys GDP, while in
2008 the agriculture share of GDP reached 13 percent (ILO 2010). Additionally, in the early 1990s, a
nationalistic tendency, adopted by a group of economists with close ties to President Suharto, envisioned a
shift of the economy away from traditional sectors such as agriculture and light manufacturing into
knowledge-intensive manufacturing such as light aircrafts, helicopters, ship building, and communication
satellites (Amuzegar 1999).
Indonesia was ranked sixth in terms of GDP per capita adjusted for PPP in Southeast Asia (CIA 2012).
Across the world, Indonesia ranked 154th out of 226 countries. The key contributor to Indonesias 2011 GDP of
$846.8 billion (World Bank 2012b) was manufacturing, with a 45 percent share of GDP, followed by services
with a 38 percent share. Agriculture contributed the least, with a 17 percent share of GDP in 2011 (World Bank
2011). Table 3.1 reveals additional key economic indicators for Indonesia.
Table 3.1 Key Economic Indicators for Indonesia, 19802010
1980
1985
1990
1995
2000
2005
2006
2007
2008
2009
2010
58.8
77.4
109.2
159.4
165.0
207.9
219.3
233.2
247.3
258.7
274.7
390.0
460.1
592.1
799.3
773.3
914.6
953.9
1003.4 1052.4 1089.7 1145.4
Inflation, CPI (%)
18.0
4.7
7.8
9.4
3.7
10.5
13.1
6.4
9.8
4.8
5.1
12.2
8.3
-1.7
-0.2
1.7
2.3
-3.9
5.7
4.8
627
1,111
1,843
2,249
8,422
9,705
9,159
9,141
9,699
10,390
9,090
Trade (% of GDP)
54.4
42.7
49.1
54.0
71.4
64.0
56.7
54.8
58.6
45.5
47.6
Source: World Bank 2012b.

Not available.
FDI in Indonesia was vital to the countrys economic development particularly during the period of the
1970s (Satiotomo 1999). But the strongest records of FDI inflows have been achieved in recent years. In 2011
FDI reached over $18.9 billion, an increase from 2010 of $13.8 billion and a leap from 2009 inflows of $4.9
billion (OECD 2012). FDI inflows have increased due to factors such as the lower cost of labor, tax incentives,
and reduction in bureaucratic procedures, as well as the countrys overall economic stability (DBS 2011).
The countrys exports value has increased over the years. In 2008 the value of total exports reached $147.6
billion, increasing from $65.4 billion in 2000 (OPEC 2011). Fuels and mining were the dominating export
commodities during the last decade, reaching a 39 percent share in 2010, followed by agriculture products with
a 23 percent share. On the other hand, labor-intensive industries, such as textiles, have maintained a low share
of exports reaching 3 percent between in 2010, as shown in Figure 3.1.
71
Figure 3.1 Indonesias Exports by Commodity, 19802010 ($ billion)

21.9
1%
18.6
8%
2%
22%
16%
25.7
45.4
87.0
158.1
25%
21%
18%
4%
5%
5%
7%
3%
11%
4%
6%
8%
5%
100%
1%
21%
25%
5%
6%
6%
2%
7%
5%
16%
76%
65.4
5%
18%
73%
3%
4%
3%
3%
4%
5%
23%
16%
Other
Textiles
Telecommunications equipment
12%
Clothing
Office and telecom equipment
48%
31%
29%
39%
37%
Chemicals
Fuels and mining products
1980
1985
1990
1995
2000
2005
2010
Source: Based on data from WTO 2012b.

3.1.2 Taxation
The tax system in Indonesia has three components: national taxes, regional taxes, and custom taxes. The
national taxes are enforced on income, stamps, and property and cover sales tax on luxury goods. Regional
taxes include taxes on development, motor vehicles, households, roads, and media advertising. The third
category includes custom taxes, levied on cross-border trade and on select goods such as tobacco, sugar,
alcohol, and gasoline (RSM 2012).
Compared to neighboring countries (such as Thailand, the Philippines, Australia, and Singapore),
Indonesia levies a lower corporate tax of 25 percent. In fact, corporate taxes were lowered in 1995 from 35
percent to 30 percent, to be lowered again in 2010 to the current level of 25 percent. Indonesia offers a 5 percent
corporate tax incentive, depending on the companys minimum public offering (PKF 2012). The government
also levies capital gains taxes and branch profits taxes. Capital gains taxes exclude transactions made on the
local market and on private property (PKF 2012).
In terms of tax revenue as a percentage of GDP, Indonesia ranks considerably low at 11 percent, as shown
in Figure 3.2. Corporate taxes are extended to construction and mining sites; however, goods used for the
purpose of executing mining contracts are excluded from value-added taxes.
Figure 3.2 Comparison of Indonesias Tax Revenues as Percentage of GDP and Corporate Tax Rate to Other
Countries, 2009 and 2010
Norway
27%
Brazil
Trinidad and Tobago
26%
Australia
30%
India
30%
United Kingdom
26%
South Africa
26%
Netherlands
Australia
22%
16%
Chile
16%
Brazil
16%
Russia
13%
Canada
12%
Uganda
12%
Indonesia
India
Kazakhstan
Uganda
23%
Malaysia
30%
Canada
28%
Norway
28%
South Africa
28%
Malaysia
25%
Indonesia
25%
Netherlands
25%
Trinidad and Tobago

UK
11%
25%
24%
Chile
20%
Kazakhstan
20%
Russia
20%
10%
8%
34%
OECD 14%
Source: Based on data from Deloitte 2012; World Bank 2011.
72
3.1.3
Population and Labor Force
Indonesia is a multiethnic and multilingual populous nation. The country encompasses nearly 300 ethnic
groups that speak over 700 local languages and dialects (Idris 2012) and constitute a large population of more
than 242.3 million. Population in Indonesia has been growing steadily since 1950. Historically, the majority of
the population resides in rural and agricultural areas. This, however, has been changing, with around 40
percent of the population currently residing in urban locations (ILO 2010). Urbanization in Indonesia is on the
rise and it is expected that the urban population will constitute half the nation in 2040 (around 170 million
people). This places increasing pressure on the main cities, which are already struggling with issues such as
growing illegal housing settlements, heavy congestion, and the consequential degradation of the environment
(World Bank 2012a).
The working-age population is increasing, a trend that is expected to continue over the next decades (DBS
2011). This is driven by a growing portion of the population aged 15 to 64, leading to around 2.5 million new
entrants to the workforce each year (RSM 2012). In 2010, 29 percent of the population was aged below 30 (UN
2010). This has been exacerbating the historic problem of child labor, which is expected to have a serious
impact on the countrys social fabric if no policies are enforced. Figure 3.3 illustrates the evolution of
Indonesias population by age group from 1950 to 2050.
Figure 3.3 Evolution of the Malaysian Population and Labor Force over Time, 19502050 (in millions of people)
350
80%
300
70%
60%
Million People
250
50%
200
40%
150
30%
100
20%
50
10%
0%
60+
50 to 59
40 to 49
30 to 39
20 to 29
10 to 19
0 to 9
% 15 - 64
The labor force in Indonesia is in the low-cost category, characterized by an overall shortage of skilled
workers (World Bank 2012a) and rigid labor market regulations (DBS 2011). The total number of the
Indonesian workforce has been on the rise. In 2010 the total workforce reached 117.9 million, growing from
76.8 million in 1990 (World Bank 2012b). The agricultural sector has the larger share of the working force in the
country. Although at a decreasing rate, agriculture employed 38 percent of the labor force in 2008, a decrease
from the 66 percent achieved in 1970 (ILO 2010). Other sectors such as wholesale, retail, and trade employed
16.7 percent and manufacturing employed 12.2 percent of the total workforce in 2008 (ILO 2010). The overall
unemployment rate in 2010 was higher than neighboring countries at 7.1 percent, but showed a drop from 2005
levels when unemployment was at 11.2 percent (Table 3.2).
Indonesias labor force primary education attainment is on par with that of developed countries. But in
terms of secondary and tertiary attainment, Indonesia has plenty of room for improvement. Its mean years of
education are half that of developed countries such as the United States and Australia, and Indonesias gross
enrollment as a percentage of the total for tertiary education is at 22.4 percent. This has placed Indonesia as the
73
fourth lowest in the region in terms of tertiary education attainment as well as in terms of labor compensation
per worker per year.
Table 3.2 Indonesias Labor Force Indicators Compared to Select Countries, 2010
Labor force
(million)
Mean years
of education
Minimum wage
($ per month)
Unemployment,
total (% of total
labor force)
Primary
Secondary
Tertiary
Angola
Australia
Brazil
Canada
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
Trinidad and Tobago
Uganda
7.1
11.8
101.6
19.0
11.8
8.8
12.0
2.6
18.2
22.1
0.7
13.4
27.3
13.5
18.3
19.9
15.8
25.3
38.9
40
56
43.5
74.2
63
33.8
46.5
21.1
35.8
5.2
11.1
4.4
12
7.2
12.1
5.8
10.4
9.5
12.6
8.5
5.1
9.2
4.7
127
1597
300
1903
133
3609
543
59
25.0
5.2
8.3
8.0
7.1
6.6
3.7
3.6
23.8
10.7
5.4
4.2
UK
31.8
19.2
44.4
35.4
9.3
1655
7.8
Source: Based on data from World Bank 2011; UNDP 2010.

Note: Educational attainment data for Australia, Canada, Malaysia, South Africa, and Trinidad and Tobago represent year 2008 level.
Unemployment data for Brazil, Kazakhstan, Malaysia, South Africa, and Uganda represent year 2009 levels.
Not available.
Another look at the breakdown of labor force by activity reveals that the largest share for workers is in
primary resources sectors. In 2008 workers in primary resource sectors reached 45 percent, followed by laborand capital-intensive services with 38.3 percent. As shown in figure 3.4, knowledge-intensive manufacturing
employed 0.9 percent of the labor force in 2008, which is significantly below mature economies average of 5
percent (Figure 3.4). A recent World Bank (2010b) report on skills in Indonesia suggests that the limited
availability of qualified local capabilities hinders the development of the manufacturing sector. According to
the report, 69 percent of surveyed executives in the manufacturing sector face difficulties in recruiting skilled
capabilities, and 84 percent face difficulties in filling management positions (World Bank 2010b).
Figure 3.4 Breakdown of Indonesias Labor Force by Sector, 200008
82.4
94.2
45.0%
49.9%
2.0%
2.4%
100%
1.8%
0.8%
38.3%
35.3%
1.7%
0.9%

2007
Total change in
(Million jobs)
Primary Resources
1.3
-0.4
0.4
0.1
42
7.0
17
0.2
26
3.3
0.7%
0.6%
9.1%
11.4%
2000
2008
Note: The number of employees engaged in manufacturing activities are based on the UNIDO statistics while the rest are based on the ILO.
74
3.1.4 Education
Following independence in 1957, and as a result of the economic development plans during recent decades,
Indonesia succeeded in increasing overall access to education. Since the 1970s, Indonesia was keen on
maximizing school enrollment through building schools across the country. The national targets regarding
education were to maximize primary enrollment, ensure equal school admission opportunities between
economic classes, and improve the quality of education while considering economic and societal needs (World
Bank 2004). But several challenges have slowed the governments efforts in achieving such objectives. The main
challenge rests in the quality of education. The schooling facilities are generally worn out and in low-quality
condition, especially in poorer regions of the country. Additionally, the schooling system suffers from a lowerquality teacher base with an overall skills gap between teachers and the set curriculum.
Another challenge facing education is a result of the rapid expansion experienced in the early 1970s, which
aimed to maximize enrollment levels but in fact concentrated on increasing the number of schools rather than
controlling the productivity and quality of the schools. This was coupled with relatively low government
spending on education, which ranged between 2.5 percent to 3.5 percent of GDP over the past decades. The
highest level of government spending in recent years was 3.5 percent of GDP in 2009, which was still lower
than neighboring countries such as Malaysia and Thailand (UN 2010).
In 1997 the Asian economic crisis hit Indonesia, and resulted, among other things, in raising the inflation
rates especially in food commodities (Pradhan 2001). Household expenditure as a result was affected severely
and this caused household budgets on education to be reduced, thus threatening to ruin the educational
progress (in enrollment levels) that Indonesia had made in the previous decade. Household expenditure on
education declined by nearly one-third from 1998 to 2000. The government was successful, however, in making
a quick recovery to avoid the possible threats of such a crisis by launching a scholarship program for poor
families and creating a school grant program to diminish the negative effects of the situation.
Looking at the education indicators, shown in Table 3.3, literacy rates are quite high in Indonesia, at 99.5
percent for youth aged between 15 and 24 years. Enrollment levels as mentioned above were also high at 95.9
percent, while secondary and tertiary showed lower levels, at 67.3 percent and 23.1 percent respectively. On
the quality of primary education, Indonesia ranked 55 out of 139 countries. According to the Global
Competitiveness Report, in 2011 the quality of the educational system in higher education and training revealed a
competitive advantage and was ranked at 40 points.
Table 3.3 Indonesias Educational Indicators Compared to Select Countries (2010)
Literacy rate (%)
70.1
90.3(a)
92.2(b)
99.7
93.1
88.7(c)
73.2
98.8
73.2
Youth
(1524)
73.1
98.1(a)
99.5(b)
99.8
98.4
77.3
99.6
87.4
Adult (15+)
Angola
Australia
Brazil
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
T&T
Uganda
UK

Primary
Secondary
Tertiary
Public expenditure
on education
(% of GDP)
85.7
97.1
94.1(b)
95.9
89.5
94.1(e)
99.1
85.1(a)
98.0(b)
93.9
90.9
11.5(a)
85.5
82.0(b)
67.3
88.2
68.7(5)
93.9
3.7
79.9
36.1(a)
23.1
38.5
40.2(a)
74.4
2.1
40(b)
4.2(a)
3.6
5.1(a)
5.4(b)
3.5(b)
3.1(a)
5.8(a)
6.5(b)
6.0
6.2
3.8(d)
3.2(a)
99.6(a)
96(a)
58.5(a)
5.4(b)
Source: Based on data from Gomes and Weimer 2011; UNDP 2010; World Bank 2012b; MSTTE 2011.
Note: T&T = Trinidad and Tobago; UK = United Kingdom; (a) year 2009, (b) year 2008, (c) year 2007, (d) year 2006 data.
Not available.
75
The current business environment in Indonesia can be characterized by the fast pace of reform coupled with
general high levels of optimism. The country has been moving from the planned market economy toward a
decentralized economy, and currently enjoys a stable political and economic outlook (World Bank 2010a). The
business environment has also been positively affected by the countrys fast recovery from the global economic
slowdown, together with the overall reforms and decentralization policies that improved the economic growth
and outlook. Several issues, however, remain, with the most problematic factors being government
bureaucracy and corruption (Schwab 2011), following the low quality of the countrys infrastructure.
Reforms have successfully reduced the startup time for a new business by 70 percent, from 151 days in
2006 to 45 days in 2011. Additionally, the number of procedures required was also reduced from 12 in 2006 to 8
in 2011. The time spent to get construction permits was reduced by 15 percent from 186 days in 2005 to 158
days in 2011 (World Bank 2012a). But Indonesia remains well below the OECD average, which requires only 5
procedures to start a business, taking around 12 days. Table 3.4 provides a snapshot of doing business
indicators in Indonesia.
Table 3.4 Indicators for Doing Business in Indonesia Compared to OECD Average
Indonesia
OECD
1. Starting a Business
Indonesia
OECD
Procedures (#)
10
Time (days)
45
12
17.9
4.7
46.6
14.1
46 (-2)
155(+1)
7. Paying Taxes
Procedures (number)
13
14
51
13
158
152
266
186
105.3
45.7
Profit tax (%)
23.7
15.4
71 (0)
10.6
24
0.1
3.2
34.5
42.7
Time (days)
Other taxes (%)
Procedures (number)
Time (days)
108
103
1,379.0
92.8
161 (-3)
131 (+3)

17
10
644
1032
Procedures (number)
Time (days)
22
31
27
11
10.8
4.4
660
1085
39 (-1)

99 (-3)
5. Getting Credit
Time (days)
Cost (% of claim)
31.8
9.5
63.9
Procedures (number)
570
518
122.7
19.7
40
31
156 (-2)
126 (-10)

Time (years)
5.5
Cost (% of estate)
18
13.8
68.2

1.7
146 (+3)
Source: World Bank 2012a.

Note: Ranking is out of 183 countries.
Despite the reforms and impressive growth rates, Indonesias business environment is still weighed down
by the 32 years of centralization of authority, corruption, and weak governance of the Suharto rule. In 1997 it
76
was estimated that corruption cost Indonesians 63 percent of GDP (Idris 2012). Between 1999 and 2003, several
legislative efforts were adopted to combat corruption. The Clean Government Act and the Commission for the
Eradication of Corruption (KPK) have been successful in prosecuting numerous corrupt officials in highranking positions, and have legally won all law suits in the anti-corruption courts; however, the fight for a
clean transparent economy is still ongoing, and corruption levels remain of concern (Idris 2012). In a recent
survey done by PricewaterhouseCoopers (PwC), it was revealed that the recent high-profile arrests in relation
to corruption had made a positive impact on the perception of Indonesias commitment to fighting corruption
(PwC 2012b)
Indonesias governance indicators over the past decade reveal that progress has been achieved in the countrys
political stability and its fight over corruption. Despite such progress, Indonesia remains well below the OECD
standards as shown in Figure 3.5.
Figure 3.5 Governance Indicators in Indonesia Compared to OECD Average
Voice and Accountability
100
Control of Corruption
Political Stability/Absence
of Violence
50
0
2000 Indonesia 2000

2010 Indonesia 2010
2010 OECD 2010
Rule of Law
Government Effectiveness
Regulatory Quality
As for the state of Indonesias infrastructure, it also poses obstacles to the overall countrys efficiency. The
Global Competitiveness Report of 2011 ranked the inadequate supply and quality of infrastructure as the third
problematic factor for doing business in Indonesia (Schwab 2011). With a vast area and regional differences,
the country had a poor ranking in the quality of its infrastructure. Road facilities were ranked 82 among 139
countries and ports infrastructure was ranked 96th. Electricity supply was also of concern as it was rated
worldwide in the lower quartile with 97 points out of 139. Other facets of the countrys infrastructure such as
telephone lines and air transport revealed a better standing, but remain in poor condition in relation to other
countries.

The petroleum sector has been a major pillar in the countrys economy, contributing to its development for
over a century. A key feature of this sector is the increasing role of gas, which is replacing oil as the key natural
resource in Indonesia. With declining oil outputs and increasing gas exploration and discoveries, gas is
becoming the primary major hydrocarbon resource in Indonesia.
The mining, manufacturing, and utilities sector has been a leading contributor to the countrys GDP in the
past decades. In 1970 the government began to reap the benefits of its industrial and economic plans set during
the 1960s. In fact, the mining, manufacturing, and utilities sectors contribution to GDP increased to reach 17
percent in 1970. The sector continued to contribute an increasingly higher share of GDP to reach 34 percent in
1990 and about 40 percent in 2000 (UN 2010b). In 2010 the contribution decreased to nearly 36 percent, but still
constituted the largest share among other economic activities. Figure 3.6 shows the breakdown of GDP by
77
economic activity in 2010, and Figure 3.7 shows the share of the mining, manufacturing, and utilities sector to
GDP. Within this framework, the petroleum sector plays a key role in Indonesias economy. The sector
accounts for 7 percent of the countrys GDP and contributes over 25 percent to state budget revenues (IPA
2012a), while being a main source for foreign currency. In 2011 the petroleums sector contribution to state
revenues reached $34.4 billion and oil and gas investment reached $12.8 billion (PwC 2012b).
Figure 3.6 Indonesia Compared to Select Countries: Breakdown of Value-added by Economic Activity in 2010 ($
billion)
85
1,296
2,066
1,637
883
159
304
402
377
39%
38%
24
17
22%
23%
2,236
100%
7%
14%
20%
25%
15%
33%
43%
45%
5%
11%
11%
5%
6%
13%
8%
20%
18%
20%
6%
9%
50%
14%
7%
2%
7%
12%
10%
5%
5%
Angola
Australia
19%
Brazil
3%
8%
8%
4%
1%
6%
1%
12%
8%
0%
13%
12%
6%
2%
10%
21%
36%
33%
32%
6%
24%
20%
Canada
7%
8%
3%
30%
6%
16%
6%
4%
29%
19%
12%
11%
8%
8%
8%
5%
8%
13%
11%
19%
10%
9%
51%
12%
5%
Norway
South
Africa
Trinidad
& Tobago
Other Activities
Construction
Manufacturing
12%
14%
Uganda
UK
1%
Source: Based on data from UN 2010a.
300
35%
250
30%
25%
200
20%
150
15%
100
10%
50
Share of GDP
GDP (Bn $)
Figure 3.7 Indonesia: Contribution of Mining, Manufacturing and Utilities to Value-added, 19702010
5%
0%
70
72
74
76
78
80
82
84
86
88
90
92
Contribution to GDP
94
96
98
00
02
04
06
08
10
Percentage Share
Petroleum exports fluctuated during the past years due to several domestic and macroeconomic factors. In
1990 petroleum exports contributed to 27.6 percent of total exports, after which production levels began to
decline as a result of depleting reserves and maturing basins. Indeed, the share of petroleum exports declined
to 14.8 percent of total exports in 1994 (OPEC 2011), and to 8.1 percent in 1998, following the Asian economic
crisis. Despite this declining share of exports, the countrys total earnings from petroleum exports remain
sizeable, reaching $166 billion between 1974 and 1994 (Amuzegar 1999).
In 2004 Indonesia became a net importer of oil and the country began shifting toward dependency on gas,
particularly for power generation. This shift has been demonstrated by the relative increase in the number of
78
gas wells drilled. For instance, 439 gas wells were completed in 2008a significant increase from the 2003 level
of 23 wells (OPEC 2008). Several attempts to culminate the effect of oil depletion were applied, including deepwater exploration, enhanced oil recovery incentives,34 and the offering of new exploration bids.35
This shift toward gas resources was mostly evident in exports, and less so in the local market where the
dependency on oil remained relatively high. Until 2002 oil satisfied 75 percent of the local need for energy
(Suryantoro and Manaf 2002). This dependency on oil, however, declined in 2010 to reach 58 percent,
indicating a shift to natural gas. This drove down gas exports, leading Indonesia to lose its number-one rank as
the worlds largest exporter of liquefied natural gas (LNG) and it become the worlds second-largest exporter
in 2010 (PwC 2012b). In terms of employment, the oil and gas sector employed over 300,000 Indonesian
workers (IPA 2012b).
Indonesia is an archipelago composed of a collection of islands located between the Asian continent and
Australia. The overall Indonesian territory consists of 13,700 islands and has a total land area of 1,919,317
square km (Satiotomo 1999). The islands are grouped according to their proximity to the five main island
groups. In the east there is Sumatra Island. The capital, Jakarta, is located on the central Java Island, and to its
north rests the central Kalimantanthe region of Indonesia sharing borders with Malaysias Sabah in the
north. Sulawesi is the smaller island located east of Kalimantan, and New Guinea is toward the far eastern
section bordering Papua New Guinea.
Petroleum basins are spread across the whole country and are intertwined on both onshore and offshore
locations. The main basins are:
North Sumatra Basin

Central Sumatra Basin
South Sumatra Basin
The Natuna Sea
Sunda and Asri basins
Northwest Java
Northeast Java
Barito Basin
KuteiMahakam Delta Basin
Tarakan Basin
Eastern Indonesia: Bula (Seram), Salawati, Bintuni, and East Sulawesi Basins.
The large oil basins are the North and Central Sumatra basins located north of Sumatra Island, and the
Kutei basin located in the east coast of the Kalimantan region. Basins with oil reservoirs of between 1 and 5
billion barrels are the Southern Sumatra basin, the Northern Java basins, the East and West Natuna island
basins located in the South China Sea, and the Bintuni basin in the east shore of New Guinea. The rest of the
basins contain oil deposits below 1 billion barrels, and there are around 18 basins spread across the country.
The largest in terms of deposits within the smaller category below 1 billion barrels are the Timor Sea basin in
the south east, the Ceram and Sarawati basins located east of New Guinea, and the Barito and Tarakan basins
located east of Kalimantan (Dousta and Noble 2007). Gas basins, on the other hand, are located in North,
Central, and Southern Sumatra, in addition to Southern Java, Kalimantan Sulawesi, and Northern New Guinea
(Yusgiantoro 2012). The largest in terms of reserves are the Sumatra and New Guinea gas basins. Most oil and
gas fields are located onshore and in offshore shallow waters (Nordas, Vante, and Heum 2003).
34
Removal of taxes on capital goods involved in the process.

Thirty-one offshore blocks were released for bidding in October 2009. The majority of the new releases were in
deep-water basins.
35
79
Oil and gas reserves followed different trajectories over the past decades. While oil reserves have decreased in
recent years, gas reserves continued to rise. Oil reserves have reached 4 billion barrels in 2011, enduring a slow
decline since the early 1980s when oil reserves consisted of around 11 billion barrels. On the other hand, gas
reserves increased from 0.8 trillion cubic meters (tcm) in 1980 to 2.9 tcm in 1990. Proven gas reserves dropped
heavily to 1.8 tcm in 1991 and remained below the 2 tcm level until 1996, when the upward trend regained
momentum until today's levels of 3.1 tcm (BP 2011).
Commercial oil production in Indonesia dates back to 1885; East Java was the first producing basin.
Production of oil during the first half of the 20th century was limited. Oil did not pick up until the new
government order was in place a decade after independence. Production increased significantly and an oil
boom was experienced during the 1960s, to peak in the 1970s. In 1965 oil production reached 486,000 barrels
per day (bpd) and continued increasing to reach a peak of 1.68 million barrels per day (mmbpd) in 1977 (BP
2011).
Indonesia joined the Organization of the Petroleum Exporting Countries (OPEC) in 1962 and was one of
the main producers during the 1970s. Oil production in the 1980s was also significant; however, as of 1991 it
became more difficult to produce due to maturing reserves. Production began a descending trend to reach a
break-even point toward the turn of the century. Indonesia became a net importer of oil in 2004, leading the
country to temporarily withdraw its membership from the OPEC in 2008.
Indonesias gas production did not start until 1967 and has quickly shown strong potential since 1975.
Today Indonesia is one of the worlds most important gas exporters (Thieme, Lujala, and Rd 2007). The
largest gas reserves are found in North Sumatras Arun and East Kalimantans Badak. LNG exports to the
industrial East Asian centers primarily come from these two producing areas (IPA 2009a).
The gas production scenario has shown impressive increases beginning in the late 1970s. In 1980 gas
production reached 18.5 tcm. Year by year, gas production increased and more than doubled in one decade to
reach 43.9 tcm in 1990 (BP 2011). With Indonesias steadily growing population, gas consumption has increased
but unlike oil consumption, it remains well below production levels. In 1982 gas consumption accounted for 35
percent of production, and a decade after consumption reached 41.6 percent of production. In 2010
consumption levels reached 40.3 tcm constituting nearly half of the countrys production in that year (BP 2011).
Table 3.5 provides a snapshot of the oil and gas sector and Figure 3.8 shows the progression of oil and gas
consumption in Indonesia.
Figure 3.8 Oil and Gas Production and Consumption in Indonesia, 19902011
mbpd
bcfd
1,800
1,600
1,400
1,200
1,000
4
800
3
600
400
200
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Oil Consumption (mbpd)
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Oil Production (mbpd)
Gas Consumption (mbpd)
80
Gas Production (mbpd)
Table 3.5 Snapshot of the Oil and Gas Industry in Indonesia 2011
% Change
Oil proved reserves, billion bbl

Oil refinery capacities, mmbpd
2011
% of
World
Global
rank
1 yr
3 yrs
5 yrs
10 yrs
4.0
0.2
28
-4.5
-6.1
1.3
-14.4
941.7
1.1
45
-5.6
-4.9
-3.1
-27.0
1141
1.2
22
0.2
5.2
-0.8
4.5
1,430.5
1.6
16
-1.1
8.7
12.6
20.8
104.7
1.4
14
0.0
-2.5
-1.2
16.0
7.3
2.3
44
-7.8
5.1
11.8
8.5
3.7
1.2
24
-5.9
1.5
21.1
15.4
148.2
1.2
16
-0.4
10.9
14.5
37.9

Gas proved reserves, tcf

Note: bbl = barrels; bcfd = billion cubic feet per day; boe = barrel of oil equivalent; mmbpd = million barrels per day; tcf = trillion cubic feet; toe =
tons of oil equivalent
The region of Java, where the capital Jakarta is located, and the extended Madura-Bali series of islands
have the largest population in Indonesia (around 80 percent) (OECD/IEA 2008) and certainly constitute the
largest petroleum-consuming region of the country (IPA 2009c).
Indonesias refining capabilities are distributed over nine plants, some of which are aging with very
limited output. The total refining capacity of Indonesia is estimated at 1 mmbpd (OECD/IEA 2008). The Cilacap
refinery, the largest in the country, is located in the central Java region and has a capacity of 348,000 bpd.
The governance of Indonesias petroleum sector has undergone several changes for over a century, from the
colonial period through independence and until the recent structural reforms were assumed. Overall, the
sector is characterized by strong government control over the sectors activities.
During the colonial period, petroleum-related activities in Indonesia were governed by the mining law of the
government of the Netherlands (Pertamina 2011). Toward the later part of the colonial era, the United States of
Americas interest in the oil and gas sector in Indonesia was evident and collaborations were made with
several companies. Companies such as Standard Oil of New Jersey, Standard Oil of California, Gulf Oil, and
Standard Oil of New York (today ExxonMobil) have been operating in Indonesia under joint ventures and
agreements with several Dutch companies, mainly with Royal Dutch Shell. Upon independence, the
government took over all operating Dutch enterprises in the country 36 (Pertamina 2011) and in 1957 the
Indonesian government merged the two state-owned companiesPermina for oil and gas and Pertamin for
distributionto create Pertamina. The new fully owned state company was assigned with the full spectrum of
responsibilities in exploration, production, processing, refining, transportation, and marketing of oil and gas
products. By means of the Oil and Gas Law no. 44 of 1960, and the later Law No. 8 of 1971, the NOC became
solely responsible for all petroleum activities in the country.
The governments interests in the oil and gas sector were carried out by Pertamina prior to 2001. With the
enacting of the legislative reforms after 2001, particularly with the issuing of the Oil and Gas Law No. 22, the
duties were segregated. The petroleum policy design, licensing, and regulatory functions were granted to the
DGOG of the MEMR (OECD/IEA 2008). The DGOG has thus become the sole concessionaire, responsible for
the preparation and management of petroleum contracts bidding process.
By means of Law 22, the Executive Agency for Upstream Oil and Gas Business Activities (BPMIGAS) was
created to regulate the upstream sector and act as a government body responsible for implementation of
36
The Royal Dutch Shell was the only exception, reportedly due to its wide international equity.
81
agreements. BPMIGAS effectively took over its duties after regulation 42 of 2002. BPMIGAS reports directly to
the president of the republic, but it coordinates with the MEMR and DGOG and considers their
recommendations before the semiannual reporting period. BPMIGAS recommends policies, signs contracts on
behalf of the government, and is also responsible for monitoring the work of the contracting parties
(OECD/IEA 2008).
As for downstream activities, recent government regulations have also changed the institutional
framework. In 1997 the government allowed local companies to partner with Pertamina in setting up refineries
in an effort to increase investment in the segment and to meet the ultimate goal of supplying the domestic
demand for fuel (EEPC 2002). Until 2001 Pertamina remained the regulator and distributor of fuel in the
domestic market. Law 22 created the Executive Agency for Downstream Oil and Gas Business Activities
(BPHMIGAS) to be the regulator and supervisor of all distribution and trading activities. BPHMIGAS
supervises and regulates the availability, allocation, transportation, and marketing of natural gas for domestic
and international needs. Both BPMIGAS and BPHMIGAS are state-owned enterprises whose heads are
appointed by the president.
The most common form of contractual agreements for petroleum activities with oil companies is PSAs,
which were first signed during the 1960s. In 2001 supervision over signed PSAs with international oil
companies (IOCs) was transferred from Pertamina to BPMIGAS, and was set for a 30-year ceiling (exploration
phase for 6 years), with the government share set at 80 percent of the output (Nordas, Vante, and Heum 2003).
Less common agreements can be enforced, including technical assistance contracts (TACs), and enhanced oil
recovery contracts (EORs), which are a version of PSAs. In addition, technical evaluation agreements (TEAs),
joint operating agreements (JOAs), and loan agreements (EEPC 2002) are applied.
During the colonial era, the Dutch initially carried out petroleum development. The pioneering petroleum
activities date back to the 19th century when Dutch geologists carried out exploration activities, following the
industrial revolution in Europe (Suryantoro and Manaf 2002). The Dutch involvement was also crucial in
understanding and mapping the complex geological characteristics of the Indonesian archipelago. As a result,
crude oil, among other energy and mineral resources, was discovered.
The first commercial oil field was found in the North Sumatra Basin in 1885, after 14 years of exploration.
The discoveries continued and oil was found on Java in 1888, Kalimantan in 1898, and in the South Sumatra
Basin in 1904 (Thieme, Lujala, and Rd 2007). But most of the countrys petroleum resources remained
untapped until the national development days following independence.
With independence following World War II, all oil resources and Dutch assets including oil fields and
existing refineries were returned to the Indonesian government. The state then constitutionally took ownership
and control of all natural resources including petroleum, with the objective for natural wealth to be utilized
toward the welfare of the people (IPA 2009b). Exploration activities were continuously carried on after
Indonesian independence. Government plans for developing oil and gas were enforced, and leveraged the
technological capabilities of international oil and gas companies to further explore and develop petroleum
resources in the country. As a result, the 1960s and 1970s witnessed large increases in reserves and production.
The discovered oil and gas became the catalyst for further development funding.
Upstream exploration and production (E&P) activities were dominated by the IOCs in the early periods.
Although the early days were under Dutch colonial control, joint ventures and mutual understandings with
American companies were realized during that period. As mentioned above, companies such as Standard Oil
of New Jersey, Standard Oil of California, Gulf Oil, and Standard Oil of New York have been the major players
in Indonesia. Toward the 1960s, Shell/BPM, STANVAC, and Caltex (Standard Oil and Texaco) dominated E&P
(IPA 2009b). In later periods, after the national reclaiming of Dutch assets, the American firms with PSAs with
Pertamina have dominated the scene (Nordas, Vante, and Heum 2003). It was estimated that nearly 45 percent
82
of the countrys oil was carried out under Chevrons E&P wingtriple the oil output of Pertamina (Pillai 2010).
In 2000 only 3.3 percent of oil production was attributed to Pertamina as an operator (Nordas, Vante, and
Heum 2003). Today, and with over 200 active PSAs, Indonesia enjoys a diverse base of upstream PS contractors
that include IOCs, NOCs37 from other countries, and local and international independents.
As for the downstream sector, the legal framework has played a significant role in its development. Prior
to the new oil and gas law, Pertamina had complete monopoly over the sector. The national company owned
and operated the refineries in the country, the franchising of gasoline stations, and the retail trade. In 2001 Law
22 substantially changed the role of the national oil and gas company. The law liberalized the downstream
business and the 2003 Decree no. 31 converted Pertamina from a state-owned enterprise to a limited liability
company called PT Pertamina with the majority of the shares owned by the state, and with an outlook for
privatization to occur in the near future (Nordas, Vante, and Heum 2003). PT Pertamina became an equal to
private sector commercial oil and gas companies (Twomey, Watkins, and Galuh 2004), and is similarly
required to contract with BPMIGAS.
The United States and Japan account for 60 percent of the imported oil and gas field equipment to
Indonesia. Since most of the petroleum fields are onshore and require average sophistication and technology, a
transfer of knowledge to local capabilities was evident. Indonesia was able to cater to the downstream sector
through developing oil field services and equipment. The value of oil and gas field equipment was $459 million
in 2000, estimated close to half the total market for OFS in 2000 (Nordas, Vante, and Heum 2003). Local
capabilities exported to the international market as well161 million worth of OFS equipment were exported
to Malaysia, Thailand, Brunei, and China.
By 2003 around 200 local firms were operating in the downstream sector (Nordas, Vante, and Heum 2003).
Although there are many local companies, their capability to supply for upstream activities of E&P was limited
to the large local companies (EEPC 2002). The biggest share goes, however, to the IOCs, especially U.S.-based
companies, due to the high-level technological advantage of their equipment and to the American common
industry standards adopted by Indonesia in most of its oil gas operations (EEPC 2002).
Unlike other hydrocarbon-rich countries such as Kazakhstan, Norway, or neighboring Malaysia, Indonesia has
not introduced a national oil fund to manage its oil wealth. Petroleum wealth, and particularly oil, was instead
spent toward internal development (Eifert, Gelb, and Borje Tallroth 2003). With the exception of Pertaminas
government bailout of 1974, the windfall of oil revenues in the 1960s, 1970s, and onward were for the most part
allocated to economic development programs of vital importance for the country and the people of Indonesia.
Achieving national food security and reducing poverty was the governments priority during the era
following independence. Poverty levels during the 1970s period were high, estimated at the time to be close to
40 percent of the population (more than 50 million people) (Asian Development Bank Institute 2005). As a
result, the government was keen to invest oil windfalls in improving social and economic conditions primarily
in the formation of human capital and development of the countrys poor infrastructure, especially in the lessdeveloped and remote rural areas (Amuzegar 1999). Poverty levels were successfully reduced to nearly 11
percent of the population in 1996 (Asian Development Bank Institute 2005).
In addition, the countrys abundant gas reserves were utilized to drive forward links in the country (Eifert,
Gelb, and Borje Tallroth 2003). The following Repelitas concentrated the oil windfalls on diversifying the
resource-based industries and substituting lighter industry into heavier manufacturing such as petroleum
refining, steel and aluminum processing, LNG development, fertilizers, paper, and cement (Amuzegar 1999).
The tides changed for Indonesia, as the country became a net importer of oil in 2004. The government was
often criticized in later years for its poor management of petroleum wealth and for its failure to encourage
37
CNOCC of China and INPEX of Japan.
83
investment in further exploration of oil resources. Oil prospects in offshore Natuna were left untapped
(Hertzmark 2011). Reportedly, the market lacked, among other things, the sufficient and accurate data to
motivate investments in oil exploration (Natural Gas Asia 2012).
To counter this position, and in an effort to extend the life of oil resources, Indonesia is considering
establishing a petroleum fund. The fund will be stipulated for in the new oil and gas law that is being drafted.
The petroleum fund will be set to receive approximately 5 percent of nontax state revenues from the oil and gas
sector to finance the construction of core infrastructure as well as for research and development. As a result,
the government aims to offer big investors sufficient data on oil and gas reserves (PT. Bina Media Tenggara
2012).

As stipulated by the law of 2001, the main objective behind LCPs is to develop local capabilities that enable
domestic companies to compete in the national, regional, and international landscape of OFSE. This is to be
achieved in a transparent and competitive way (DGOG 2011a). Another source reflecting objectives behind
LCPs are the vision and strategic directions of BPMIGAS. The regulators vision is to be a proactive and
trustworthy partner in optimizing the benefits of the upstream oil and gas industry for all stakeholders while
becoming one of the Nations engines in mobilizing different economic and industrial activities (BPMIGAS
2011b). To this end, a pillar of BPMIGAS strategy is to prioritize domestic/regional human resources roles,
and utilization of goods and services in oil and gas industry. More specifically, the head of BPMIGAS set the
aspired level of local content at 50 percent by stating in 2009 that half of the total budget of oil and gas projects
must be spent domestically in order to increase local content (MOEMR 2009).
3.3.2 Policy Tools
To achieve the above-mentioned objectives, BPMIGAS has launched a holistic set of policy tools based on a
detailed assessment of domestic capabilities. Next, we discuss LCPs aimed at raising the level and participation
of local upstream capabilities, increasing domestic sourcing of goods and services, and raising the contribution
of the domestic banking sector in financing procurement transactions. The following LCPs apply to upstreamrelated activities, noting that only Indonesian entities can engage in downstream activities (OSP 2011).
Local Content in the Labor Force
In 2005 BPMIGAS published a set of guidelines on the management of human resources in PSAs. The
guidelines aimed at accelerating the development of local capabilities and increasing the share of spend on
Indonesian personnel to 75 percent by 2010.38 The guidelines were extended and reviewed in 2008. Overall,
BPMIGAS deploys a set of regulations related to the recruitment, training, and career progression of the
workforce engaged in upstream activities.
All PS contractors need to get the approval of BPMIGAS on the size and structure of the operating
organization. In addition to that, the recruitment of any domestic or foreign workforce requires the approval of
the regulator. In general, foreign manpower can be recruited only in case no domestic capabilities can be
found. It is noted that BPMIGAS imposes targets for the recruitment of Indonesian workforce by skill level and
by phase of development (that is, targets differ between development phase and production phase). Under
some contracts this is done at the regional level for villages directly affected by the oil and gas operations.
Similarly, companies operating in the downstream sector must give preferences to local employment. More
specifically, recruitment shall be done in coordination with regional governments and priority must be given to
people residing in the area of operations. Concerning the salaries and benefits extended to national staff,
38
Taking into account the costs and benefits of such actions.
84
BPMIGAS imposes caps for cost-recovery purposes (PwC 2012a). Here, industry advocates are calling for
removing the caps and shifting to a market-based competitive salary setting for both expatriate and local
workers (IPA 2012b).
Under the contractual agreements, PS contractors are required to establish and deliver capability
development programs for local personnel. Among the various programs, PS contractors deploy:
Structured mentoring system that allows junior Indonesian personnel to be taught, coached, and
counseled by more senior staff39
Educational and training programs
International career development programs that include swap and technical development exchange
between the PS contractor Indonesian employees and expatriate ones in different geographies
Internationalization of Indonesian personnel (that is, recognizing that Indonesian personnel
capabilities are in line with the PS contractors global competencies)
Overseas and domestic on-the-job training (BPMIGAS 2005).
These programs are part of the annual work plan and budget-reviewing process carried out by BPMIGAS.
Incurred costs are cost recoverable. Concerning career progression, all expatriate positions should include a
succession plan that lays out the Indonesianization plan for the position. Violating any of the above
stipulations subjects the related incurred cost to be excluded from cost recovery. Concerning providers of
OFSE, PS contractors are encouraged to offer training programs about the operating procedures of the PS
contractors, procurement regulations, as well as health, safety, and environmental issues (BPMIGAS 2011c).
Domestic Procurement of Goods and Services
In 2009 BPMIGAS launched a new set of procurement guidelines reflecting a holistic approach to achieving
local content objectives. The guidelines were reviewed and extended in 2011. Under the procurement
guidelines, PS contractors must give priority to domestic sourcing of goods and services such that they use,
maximize or empower domestic products that meet criteria of quantity, quality, handover time and price
(MoI 2011). The left-hand side of the policy statement is translated into specific actions in three categories of
domestically produced goods40:
Mandatory goods. Primary goods for exploration and production where there exists at least one
domestic manufacturer who enjoys a minimum local content plus Company Benefit Weight (BMP)41
level of 40 percent.
Maximized goods. Primary goods that have been produced domestically where there exists at least one
domestic manufacturer who enjoys a minimum local content level of 25 percent and no domestic
manufacturer with a local content plus BMP of 40 percent. Additionally, this category includes
supporting goods where there exists at least one domestic manufacturer who enjoys a minimum local
content level of 25 percent.
Empowered goods. Goods where there exists at least one domestic manufacturer who enjoys a minimum
local content level of 5 percent and no domestic manufacturer with a local content of 25 percent.
The list of goods by category as well as details on domestic suppliers (names and addresses of the
producers, specification, standard, capacity, value of local content) are provided annually in the Buku
Apresiasi Produksi Dalam Negeri (APDN) book published by MIGAS (MoI, 2011).42
The procurement of mandatory goods is carried out via a limited bidding process where all domestic
manufacturers with a minimum local content of 15 percent are invited. To optimize the procurement of
Every expatriate should act as a mentor.
A domestic company is one with at least 50 percent of its shares being owned by an Indonesian citizen, the state, or a regional
government.
41 Discussed below.
42 Information can be found on http://www.migas.esdm.go.id/apdn/.
39
40
85
mandatory goods across all upstream operations, BPMIGAS may elect to carry out the procurement process on
behalf of PS contractors43 through a joint contract strategy. For maximized goods with contract value greater
than $100,000, procurement is done by inviting all domestic manufacturers with a minimum local content level
of 10 percent. This is done via a limited bidding process for primary goods and a public one for supporting
goods. For empowered goods with a contract value above $100,000, procurement is done by engaging all
domestic manufacturers with a minimum local content level of 5 percent. Like maximized goods, this is done
via a limited bidding process for primary goods and a public one for supporting goods. A summary of the
definition of the three groups of goods and respective procurement strategies is presented in Table 3.6. It must
be noted that in case the number of registered bidders for maximized or empowered goods is less than three,
then the bid is extended and ultimately open to all suppliers (BPMIGAS 2011c).
Table 3.6 Indonesia: Definition of Goods and Respective Procurement Strategy
Category
Mandatory Goods
Maximized
Goods
Primary
Supporting
Empowered
Goods
Primary
Supporting
Local content (LC) requirements

At least one domestic
manufacturer has LC + BMP
40%
manufacturer has LC 25% and
no domestic manufacturer has
LC+ BMP 40%
Contract
value
Procurement
method
Any
Limited
Bidding
> $100,000
Limited
Bidding
Public Bidding

manufacturer has LC < 25% and
no domestic manufacturer has
LC 25%
> $100,000
Limited
Bidding
Public Bidding
Invited bidders
Domestic manufacturers
with minimum LC
achievement of 15%
with minimum LC
achievement of 10%
with minimum LC
achievement of 5%
Source: Based on data from BPMIGAS 2011c.
For the procurement of services, bidders must commit to a minimum local content level of 35 percent 44 for
contracts with a value more than $100,000. Domestic companies45 get a priority such that they are extended the
privilege to form a consortium with national companies46 or foreign ones when in-house capabilities are not
adequate. In case no domestic company participates in the bid, this privilege is extended to national
companies. Additional procurement rules concerning the mode of delivery, share of contract value going to a
domestic company,47 amount of physical work to be carried out in Indonesia, and subcontracting rules are
determined based on the type of the service procured. To this end, BPMIGAS splits services into two types:
engineering, procurement and construction (EPC) services, or other/combined services. Additional factors
affecting the procurement rules include the contract value and type of asset. To illustrate the rules, consider the
procurement of a non-EPC service; in case no domestic company possesses required capabilities, the company
is suggested to partner with another domestic company, a national, or a foreign one. Under the latter two
modes of partnership, at least 30 percent of the contract value must be carried out by the domestic company
and at least 50 percent of the work must be carried out in Indonesia. A summary of the procurement
requirements across the different types of services is provided in Table 3.7.
In that case, PS contractors are represented on the procurement committee.

Or as determined by BPMIGAS.
45 A company with more than 50 percent of its shares being owned by an Indonesian citizen, state, or regional government.
46 A company with less than 50 percent of its shares being owned by an Indonesian citizen, state, or regional government.
47 Or consortium of domestic companies.
43
44
86
Table 3.7 Indonesia: Procurement Requirements for Services
Service type
Other/
Combined
Contract value (CV)
Any
EPC
100,000 < CV $5 Mn
Asset
type
Any
Onshore
Offshore
Onshore
$5 Mn < CV 200 Mn
200 Mn < CV
Privileged modes of delivery for

domestic companies
(in case of no adequate local
capabilities)
Min
share of
CV going
to DC
Consortium with NC or FC
30%
Consortium with NC, DC acting as

lead
50%
Consortium with NC, DC acting as

lead
Offshore
Consortium with NC or FC, DC

acting as lead
Onshore
Consortium with NC or FC, DC

acting as lead
Offshore
Consortium with NC or FC
Min share
of
physical
execution
in
countrya
Max
value of
subcontr
act to FC
50%
70%
50%
50%
50%
50%
50%
50%
50%
Source: Based on from BPMIGAS 2011c.

Note: DC = domestic company; NC = national company; FC= foreign company.
(a) If not met, this is reduced to 30 percent.
Not available.
Any of the requirements (that is, local content, value of contract implemented by domestic company,
amount of physical work carried out in Indonesia) may be compensated by a loan from a state-owned
enterprise (BUMN) or a regional government-owned enterprise (BUMD).48 This action aims at increasing the
role of local banks in financing procurement transactions given their historically limited role in that,
underpinned by limited competitiveness, compared to international banks.
Going back to the overarching policy statement, the right-hand side of the statement mentions four criteria that
domestic suppliers must meet for the procurement strategies to apply. The quantity criterion refers to the
ability of domestic manufacturers to meet the demand given installed capacity. This said, PS contractors
should include reasonable handover and delivery schedules in their procurement plans. The quality criterion
requires local manufacturers to meet Indonesian National Standards 49 or minimum industry requirements. As
for the price criteria, upon meeting quantity, quality, and handover time requirements, suppliers of goods and
services gain a price preference based their local content levels as well as their company status. A price
preference is given for goods that include a minimum of 25 percent of local content. For services, a price
preference is given in case of a promise or commitment to achieve a minimum of 30 percent of local content.
For goods, the maximum price preference given is 15 percent applied proportionally on the local content level.
For services, the maximum price preference offered is 7.5 percent, calculated proportionally to the local content
commitment. In addition to the price preferences based on local content, companies can gain a higher level of
price preferences based on the company status (that is, whether the company is a domestic one or not). The
schedule of requirements and associated price preferences is summarized in Table 3.8.
These are business entities with at least 50 percent of capital or shares owned by the Government of the Republic of
Indonesia/regional government. Additional rules on the loan are laid out in the procurement manual. Additional rules related to the
cap on the loan are outlined in the procurement guidelines.
49 Mainly derived from U.S. industry standards.
48
87
Table 3.8 Indonesia: Summary of Price Preferences Based on Local Content (LC) Level and Company Status
Category
Minimum
LC
Goods
25%
Company status
Other requirements
Price preference
Any
None
A maximum of 15%
Proportional to LC
Domestic
None
Additional 2.5%
Flat
Any
None
A maximum of 7.5%
Proportional to LC
At least 50% of the service is Additional 7.5%

performed by a Domestic
Domestic acting as
Company; and
a lead of a
At least 50% of the service is Additional 5%

consortiumb
carried out in Indonesia
Domestic
Services
30%a
Schedule
Flat
Flat

Note: (a) Promise/commitment to achieve 30 percent; (b) Consortium with national company that has a status of foreign investment and/or with
foreign company.
The local-content-related price preference (Pb) is applied on the direct production cost of the goods (HPb).
For instance, the price preference does not apply on the transportation and handling component of the cost
(TH). As such, the evaluation price reflecting the price preference for local content is expressed as:
EP L C
1
HP b
1 Pb
As for the company status price preference (PSp), that is applied on the total cost components, which
includes a noncost component (NC). To this end, the bid evaluation price (BEP) can be defined as:
BEP
1
EPL CTH NC
1 PSp
An example for the evaluation of a bid price in comparison to the contract value is presented in Table 3.9.
Table 3.9 Indonesia: Example of Calculating a Bid Evaluation Price for the Supply of a Good
Component
A
Direct production cost (HPb)
Transport and handling (TH)
Total cost components
Company status
Noncost component
Total
Local Content
Contract Value ($
Mn)
Value ($ Mn)
%
B
c
d=c/b
25.00
7.00
28.00%
1.50
26.50
Manufacturer has domestic company status (55% of
shares owned by Indonesian)
2.00
28.50
Price Preference
%
f=d*15%
4.20%
2.50%
BEP ($ Mn)
g
23.99
1.50
25.49
24.87
2.00
26.87
Suppliers can gain a value of appreciation on the local content level achieved, called BMP, in case a
companys investment in Indonesia is directed toward the development of a domestic industry. BMP allows PS
contractors (through their suppliers and service providers) to increase the level of achieved local content by up
to 15 percent. As shown in Table 3.10, companies can gain a BMP through four activities. Each activity has
defined criteria that are translated into weights applied on the maximum BMP level of 15 percent. A maximum
weight limit applied also to each activity (BPMIGAS 2011c).
88
Table 3.10 Indonesia: Activities, Criteria, and Weights for the Local Content Level Achieved
#
II
Local industry development activities

Empowering micro and small businesses as
well as small cooperatives by means of
partnerships
Certificate owning:
- Health and work safety (SMK3/OHSAS
18000) (30%)
- Environmental management (ISO 14000)
(70%)
III
Community development
IV
After sales service facilities
Criteria
Weight
Minimal Rp 500 Mn
5%
Any multiples of Rp 500 Mn
5%
None
0%
Available
6%
None
Available
Minimal Rp 250 Mn
Any multiples of Rp 250 Mn
Minimal investment of Rp 1 Bn
Any multiples of Rp 1 Bn
0%
14%
3%
3%
5%
5%
Maximum
weight limit
BMP
values
30%
4.5%
20%
3.0%
30%
4.5%
20%
3.0%
On another front, the new procurement rules include stipulations offering small- and medium-sized
enterprises (SMEs) with cash advances based on the financial conditions of the PS contractors. Here it must be
noted that the procurement rules outline caps on the contract values that SMEs can bid for.
Failing to deliver the local content targets specified in the contract subjects the goods or services provider
to administrative and financial penalties. Administratively, a goods or services provider is prohibited to bid for
future contracts under the relevant PS contract over the following year. Furthermore, in case the goods or
services provider fails in delivering local content commitments under other contracts within the year of
administrative sanctions, the provider is placed on the blacklist. As for the financial penalty, this is defined
based on the results of the original bid evaluation process:
In case the achieved lower local content level does not change the rank of the winning bidder, the
penalty is the difference between the BEP of contract realization and the original BEP
In case the rank changes, then the difference between the contract value of the winning bid and that of
the first-rank bid under the local content level upon implementation is added to the above
If realization of local content goods is less than that stated in the contract, and the goods/service
provider changes source of procurement of goods partially or entirely from a domestic source to a
foreign source then the PSA contractor must use imported facilities, the relevant goods/service
provider is imposed with additional sanctions as much as the value of import duty (ID) plus a charge
for the purpose of import (CPI) from the value of domestic components that cannot be fulfilled.
Considering the example of Table 3.11, in case the winner of the bid (provider A) achieves a local content level
of 22 percent upon implementation then it is no more eligible for the price preference. In that case, and
considering the bid evaluation results outlined in Table 3.113.13, the monetary penalty is equivalent to $2.13
million ($1.63 million being the difference between the BEP of contract realization and the original BEP, and
$0.5 million being the difference between the contract value of the winning bid and the second-rank one).
Table 3.11 Indonesia: Calculating the Penalty Given for Unachieved Local Content, and Rank Changes
Bid phase
Implementation phase
Goods/
service
provider
Value ($ Mn)
LC
BEP ($ Mn)
Ranking
LC
BEP ($ Mn)
Ranking
A
B
C
28.5
27.5
28.0
28%
0%
25%
26.87
27.5
27.10
I
II
III
22%
0%
25%
28.50
27.5
27.10
III
II
I
Importing goods and services requires the approval of BPMIGAS. For goods, the approval is granted in
any of the following cases:
Goods are not yet produced domestically
89
Domestic production capacity does not enable timely delivery or does not meet minimum quality
standards
Price of domestic sourcing, including local content preference, is not competitive with imports (that is,
higher than the lowest price of cost, insurance, and freight [CIF] of imported products) (BPMIGAS
2011c).
For IT software, BPMIGAS approval is granted in case of intellectual property requirements when there is
no local representative agent for the supplier.
To complement the above policies, MIGAS issues OFSE companies certificates for business ability. The
certificates are issued based on a formula that weights ownership status, production ability (output,
standard/quality, capacity, and local content and company benefit weight values), management
(quality/environment/work safety and health), marketing network, and after-sales service. Based on the
evaluation process, companies are categorized as follows:
Incompetent in case the evaluation value is below 40 (here a certificate is not issued)
Competent with one star in case the evaluation value is equal or above 40 and below 60
Competent with two stars in case the evaluation value is equal or above 60 and below 80
Competent with three stars in case the evaluation value is equal or above 80 (DGOG 2011a).
At this stage, the rating of the companies is not part of the tendering process.
Concerning the aggregation and splitting of procurement packages, BPMIGAS allows the aggregation of
procurement packages given three criteria: (i) it is done based on technical and economic considerations, (ii) it
is not a type of work that should be carried out by small-scale enterprises including small cooperatives, and
(iii) it does not hinder the utilization of domestic capabilities. On the other hand, splitting of procurement
packages is permitted in case, among other criteria, it intends to increase the level of local content or it offers
business opportunities to small-scale enterprises including small cooperatives.
3.3.3 Policy Channels
Today, LCPs are legislated via the:
Oil and Gas Law No. 22/2001 segregating regulatory roles and commercial operations
Supply Chain Management Manual PTK 007/2009 as revised in 201150
Ministry of Industry Regulation No. 16-16/2011 on local content calculation
Investment Law No. 25/2007 (applicable only to limited liability companies domiciled in Indonesia
and owned by Indonesian investors)
Regulation No. 258/PMK.011/2011 on caps applicable to expatriate costs
Company Law No. 40/2007
The 2005 Guidelines for Human Resource Management of BPMIGAS and revision of 2008
Joint cooperation contracts for upstream activities.51
Local-content-related responsibilities are mainly split between the MEMR, BPMIGAS, PS contractors, and the
Department of Industry. Overall, there is no clear split of responsibilities between the ministry and BPMIGAS.
The DGOG, under the MEMR, is responsible for formulating policies and laws related to local content. The
directorate also engages in the execution of some aspects of the laws as it assures compliance with the issued
laws. To this end, the Subdirectorate for Home Potential Empowerment is mainly tasked with:
50
51
Developing policies, norms, and criteria for local empowerment
Launched in 2004 the first edition was published in 2009, and the second revision published in 2011.
Local content is not a parameter in awarding PSAs.
90
Collecting and reviewing information related to domestic procurement of goods and services
Crafting work procedures and guidelines for importing goods and the expatriate workforce
Preparing plans for employment nationals and the expatriate workforce
Publishing the APDN book for goods and services.
In addition, the subdirectorate engages in labor productivity improvement initiatives (DGOG 2012).
BPMIGAS is tasked with representing government interests in PSAs. In relation to LCPs, BPMIGAS leads
the implementation of laws issued by the DGOG as it issues guidelines to facilitate implementation of laws.
Among the various responsibilities, BPMIGAS:
Reviews and approves work plans and PSA annual budgets (these include procurement plans)
Regulates the implementation of local-content-related policies issued by the DGOG
Approves goods and services procurement bid plan and award for contract values of $5 million and
above
Carries out post-implementation audits for procurement activities with contract value below $5
million
Approves cost-recovery items
Develops and implements procurement guidelines
Monitors and reports local-content-related performance.
In driving the local content agenda, BPMIGAS coordinates with the Department of Finance, Department of
Manpower and Transmigration, Department of Industry as well as multiple industry players. For instance, the
Department of Industry is responsible for issuing local content certificates to goods manufacturers. PS
contractors are responsible for the implementation of recruitment and procurement activities in accordance
with sectoral procedures and regulations.
3.3.5 Interlinks
Indonesia joined the World Trade Organization (WTO) in January of 1995. Under the General Agreement on
Trade in Services (GATS), Indonesia has commitments for professional and business services,
telecommunications, construction and engineering services, educational services, financial services, health
services, tourism, and maritime cargo handling. In October 2010 U.S. and European Union (EU) representatives
raised their concerns around the LCPs pursued by Indonesia in the mining sector.52 The U.S. commission filed a
list of four questions requesting clarifications on the LCPs pursued by Indonesia (WTO 2010). The answers
provided by Indonesia were followed by a new series of questions filed by the U.S. commission in 2012. In a
nutshell, the U.S. questions were centered on violations of LCPs with terms under the GATS. Indonesias
response denied that the countrys commitments violated any of the terms. For instance, concerning the
countrys commitment for civil engineering under the GATS, Indonesia stated that any foreign engineering
firm shall establish a joint venture with a domestic company in case it wants to engage in business in Indonesia
(WTO 2012a).
BPMIGAS monitors the level and evolution of Indonesianization through annual reviews of the organization
structure and the recruitment rules put in place. In addition, the regulator deploys an integrated online system
allowing it to monitor compensation spending, delivered educational and training programs, and succession
plans put in place.
Concerning the domestic sourcing of goods and services, PS contractors must agree with BPMIGAS on
local content targets over a certain period or work package, as part of the procurement planning process. To
this end, a BPMIGAS template must be filled by PS contractors specifying details related to procurement
52
Relating to backward and forward links.
91
activities and targeted local content levels. Subsequently BPMIGAS monitors the achievements of PS
contractors against set targets for the year under consideration as well as the previous five years. PS contractors
must submit monthly reports to BPMIGAS on the procurement activities of goods and services. The reports are
standardized based on forms developed by BPMIGAS and made available in the revised version of the
procurement guidelines.53 Among other information, PS contractors must report on the local content level and
contribution of SMEs.
Local content levels for goods are demonstrated either via the APDN book published by the DGOG, or
through certificates that are issued by any government agency that deals with the industry54 (BPMIGAS
2011c). For services, this is done via a statement letter specifying the level of local content to be achieved over
the implementation of the service. The value of local content in goods resulting from verification is valid for
two years (MoI 2011). The local content in goods is measured as the ratio of the price of the finished product
excluding the price of foreign-made components and the price of the finished product. The prices should
reflect direct material and labor costs in addition to indirect factory overheads. 55 For services, the local content
is calculated as the ratio of the whole service costs excluding foreign services costs and whole service costs. The
costs should reflect labor, tool/facility, and general services costs. The local content is defined based on the
following criteria:
Country of origin for material

Ownership and country of origin for work tools and facilitiesfor work tools the local content level is
defined based on the geography of production an ownership status of the producer, as outlined in
Table 3.12
Citizenship for labor force
Table 3.12 Indonesia: Local Content Levels for Work Tools

Geography of production
Local
Local
Local
Foreign
Foreign
Foreign
Ownership status of producer

Domestic
Foreign
Joint
Domestic
Foreign
Joint
Local content level

100%
75%
75% + SODS1 x 25%
75%
0%
SODS
Source: Based on data from MPRI 2011.

Note: Portion of stocks owned by domestic supplier (SODS).
It must be noted that the calculation of local content for goods and services traces down to the second level of
production of goods and provision of services. At the second level, the local content is 100 percent in case:
The second-level good is produced locally

The cost of the second-level good constitutes less than 3 percent of the first-level goods production
cost
The accumulation of the second-level goods cost is 10 percent, at most, of the first-level goods
production cost.
In case second-level goods and services make use of third-level ones, than these are considered to be 100
percent local if supplied by a local company.
For the service of equipment used in the implementation of physical work and other services, the local
content level is defined as per Table 3.13. For consultancy services, the value of local content is calculated
based on value of service of the use of domestic workers, including value of cost of goods/services to support
the workers activity. It must be noted that imported goods sold by local companies are not considered as
http://www.bpmigas.go.id/blog/2011/05/02/ptk-no-007-revisi-iiptki2011/.
It is reported by the Ministry of Trade and Industry.
55 The prices should not include profits, company overheads, and output taxes.
53
54
92
domestic goods. In addition, foreign workers employed in Indonesia are not considered as domestic
components (BPMIGAS 2011c).
Table 3.13 Indonesia: Local Content of Value of Service of Equipment Use in Implementation of Physical Work
and Other Services
Geography of
production
Domestic
Abroad
Ownership status
LC level
100%
100%
Domestic company or Indonesian citizen

National company with more than 50 percent of shares owned by a foreign citizen or foreign
company
National company with more than 50 percent of shares owned by foreign citizen or foreign company
Domestic
Abroad
75%
0%
Originally, a domestic manufacturer was considered as one who produces goods on Indonesian territories
regardless of the ownership status (Nordas, Vante, and Heum 2003). Today, a domestic company is one with at
least 50 percent of the shares being owned by an Indonesian citizen, the Republic of Indonesia, a regional
government, a state-owned enterprise (BUMN), or a regional government-owned enterprise (BPMIGAS 2011c).
Prior to the implementation of the new LCPs on procurement of goods and services, local content levels in
procurement were believed to be in the range of 10 to 20 percent (EEPC 2002). As reported by Nordas, Vante,
and Heum (2003), earlier policies related to the domestic sourcing of goods and services were not seen as
successful. For instance, the late 1970s policy that required international companies to partner with domestic
ones in delivering OFSE has led to the establishment of multiple joint ventures. While the objective of the
policy is to drive knowledge transfer, it is reported that limited transfer has been achieved. Looking at the
drilling sector, 48 drilling companies were registered; however, still all offshore drilling has been led by the
foreign partner of the joint venture (Nordas, Vante, and Heum 2003).
Today, despite the strong monitoring system in place and the strong regulatory grip of BPMIGAS over the
sector, the regulator does not formally publish metrics and analysis on local content levels achieved in the
procurement of goods and services. The only publicly available sources that enable the analysis of current local
content levels are the 2011 annual report by BPMIGAS and the APDN book of 2011 published by the DGOG.
As per BPMIGAS numbers, local content levels have increased by 18 percentage points between 2006 and
2011. But and as shown in Figure 3.9, this is coupled with a nearly 50 percent reduction in upstream
investments. BPMIGAS presents the value of procurement of goods and that of services that qualify as local
content, Figure 3.10, without the split in total values.
Figure 3.9 Indonesia: Evolution of Upstream Investments and Local Content Levels, 200611
Bn $
% LC
LC %
Investment
63%
40
36.8
61%
60
54%
35
55
49%
30
43%
65
50
43%
45
25
40
20
18.5
18.3
19.4
17.1
35
30
25
15
12.2
20
10
15
10
5
0
2006
2007
2008
2009
93
2010
2011
Source: Adapted from BPMIGAS 2011a.

Figure 3.10 Indonesia: Local Content Procurement of Goods and Services, 200611 ($ billion)
15.8
37%
11.8
10.8
9.0
8.0
65%
6.6
69%
Services
Goods
60%
63%
72%
2006
82%
28%
18%
2007
2008
40%
35%
31%
2009
2010
2011
Source: Adapted from BPMIGAS 2011a.
As per the classification used in the APDN, 10 segments of goods fall under the mandatory category where
at least there exists one Indonesian supplier enjoying a local content plus BMP level of 40 percent. Only two
segments of supplies fall under the maximized goods category and the 28 remaining segments fall under
empowered goods. Table 3.14 lists the segments of goods by local content category.
Table 3.14 Indonesia: APDN Distribution of Goods by Category
Mandatory
CasingTubing
Wire, Cables, and Accessories
Tubular Goods
Marine and Offshore Installations
Wellhead and X-Mas Tree Accessories
Electric Power Sources
Chemicals
Pumps Centrifugal and Rotary
Valve Fittings
Oil and Oil Products
Maximized
Cementing Equipment and Liner Hanger Systems
Wellhead Equipment and Accessories
Empowered
Boilers and Accessories
Oil and Oil Products
Building Material and Hardware
Paints and Varnishes
Building Material, Metals, and Hardware (Bolts and Nuts)
Plant Elements and Parts
Building Structure and Tanks
Production Well Test and Monitoring Instruments
Casing, Tubing, and Accessories
Pumps, Centrifugal, and Rotary
Cementing Equipment and Liner Hanger Systems
Pumps, Reciprocating
Chemicals
Pumps, Other Types
Compressor and Vacuum Pumps
Switch, Control Gear, and Electrical Instruments
Drilling Tools and Retrievable Production Tools
Transportation
Drilling Machinery, Mud Equipment, and Accessories
Tubular Goods
Fire, Safety, and Environmental Conservation Equipment
Valve Fittings
Jointing (Gaskets), Insulating Materials
Wellhead Equipment and Accessories
Machinery Accessories and Transmissions
Wireline Tool Box and Unit Complete with Power Pack
Marine Offshore and Installations
Wire, Cables, and Accessories
Source: Based on data from DGOG 2011b.
Within each segment, the APDN lists the standards and available local suppliers with their respective
characteristics (that is, local content levels, BMP rating) by subproduct type. A snapshot of compressors and
vacuum pumps suppliers is provided in Table 3.15. Out of the 97 companies featured in the APDN book of
2011, only 18 companies seem to benefit from BMP appreciation. Of these companies, only one company took
the maximum BMP appreciation of 15 percent while most of the remaining companies achieved BMP levels
below 6 percent.
94
Figure 3.11 presents the distribution of companies by BMP value and Figure 3.12 presents the distribution
by segment of activities.
Table 3.15 Indonesia: Snapshot of Domestic Suppliers of Compressors and Vacuum Pumps
Product
#
Code
Type
B-24
B-24
Specification
Instrument
Air
Compressor
Package
Air
Compressor
Package
Oil Free/Oil
Lubricated
Air
Compressor
Air
Compressor
Package
Supplier
Rating
Local
Content
(%)
BMP
Capacity
Standard
Consist of 2x100% Air

Compressor on Skid
2x100% Air Dryer on
Skid, 2 unit of air
receiver, Interconnecting
Pipe, Valve and
Instrumentation, PLC
Based Lead/Lag
Controller
Client Spec.
Kota
Minyak
Internusa,
PT
4
Units/year
Pressure range
: up to 13 Bar, Capacity
1.5 kW-500 kW (6 cfm2988 cfm)
1 to 8, 61
508-1 to 7
NAS 1638
ISA S 5-1, 52,
5-3, 18-1, 20,
51-1, 75-1, 7517
ISA SP 84
SP-INS-000,
010, 015, 020,
100, 101, 120,
140, 240, 900
SP-COR-181
Kota
Minyak
Internusa,
PT
19,30
5
Units/year
Source: Adapted from DGOG 2011b.

Figure 3.11 Indonesia: Distribution of Companies by Local Content Value Achieved
8
7
1
0
BMP=15
15<BMP12
12<BMP9
9<BMP6
6<BMP3
95
BMP3
Figure 3.12 Indonesia: Distribution of Local Content Value by Segment of Activities

9
1
1
1
3
BMP=15
15<BMP12
12<BMP9
9<BMP6
6<BMP3
BMP3
Casing, tubing & accessories
Oils and oil products
Wellhead equipment and accessories
Chemicals
Paints, varnishes
Wire, cables and accessories
Drilling tools and retrievable production tools
Pumps, centrifugal and rotary
Drilling, machinery, mud equipment & accessories
Transportation
Fire, safety and environmental conservation equipment
Tubular goods
As for the certificate of business ability, 68 companies are featured as competent ones. As shown in Figure
3.13, out of these companies, 34 companies enjoyed a rating of three stars, 30 companies enjoyed two stars, and
four companies received one star.
Figure 3.13 Indonesia: Distribution of Companies by Category of Certificate of Business Ability
34
30
Competent with one star in case the evaluation value is

equal or above 40 and below 60;
Competent with two starts in case the evaluation value is
equal or above 60 and below 80;
Competent with three stars in case the evaluation value is
equal or above 80
4
Concerning the involvement of the domestic banking sector in financing OFSE procurement transactions,
BPMIGAS reports that state-owned banks have financed a total of $14 billion between 2009 and 2011. Looking
at the local content levels in the upstream workforce, the level of Indonesianization has been maintained
between 96 and 97 percent in producing PSAs between 2006 and 2011. Looking at exploration PSAs, the
Indonesianization level appears to be lower, though there is a five percentage points improvements between
2006 and 2011. Figure 3.14 presents the evolution of employment in E&P PSAs by nationality. Here we note that
no information is available on the Indonesianization levels by discipline.
96
Figure 3.14 Evolution of Indonesianization in Exploration (left) and Production (right) Activities (in thousand
workers)
Exploration PSC Contractors
Production PSC Contractors
2.5
2.4
27.6
4%
10%
10%
24.7
22.2
22.2
22.5
4%
3%
3%
3%
96%
96%
97%
97%
97%
2006
2007
2008
2009
2010
4%
1.8
13%
1.6
22.1
21.3
1.9
3%
1.6
9%
1.5
17%
12%
12%
96%
90%
90%
87%
91%
83%
88%
2006
2007
2008
2009
2010
2011
97%
88%
2012E
Expatriate
2011
2012E
Local
Source: Based on data from BPMIGAS 2011a.
Looking at the development of local capabilities, the number of Indonesian employees engaged in
technical development exchange, job swapping, job assignment, and internationalization has increased from
212 employees in 2008 to 396 in 2011. The evolution of engaged Indonesian workers by type of development
program is presented in Figure 3.15.
Figure 3.15 Number of Indonesians Engaged in Capability Development Programs, 200811
Job Swapping
Technical Development Exchange
30
70
55
55
2009
2010
44
18
14
10
2008
2009
2010
2011
2008
Job Assignment
Internationalization
72
69
36
2011
204
41
224
128
85
2008
2009
2010
2011
2008
Source: Based on data from BPMIGAS 2011a.
97
2009
2010
2011
References
Amuzegar, J. 1999. Managing The Oil Wealth: OPEC's Windfalls and Pitfalls. I. B. Tauris.
Asian Development Bank Institute. 2005. Poverty Targeting in Asia. (J. Weiss, Ed.) Cheltenham, UK: Edward
Elgar Publishing Limited.
Bey, F. 2012. Three Most Important Features of Indonesian Legal System that Others Should Understand.
http://www.ialsnet.org/meetings/enriching/bey.pdf.
. 2012. BP Statistical Review 2012. London: BP.
BPMIGAS. 2011a. Annual Report 2011. Jakarta: BPMIGAS.
. 2011b. BPMIGAS. http://www.bpmigas.go.id/en/?page_id=24.
. 2011c. Work System Manual On Supply Chain Management For Production Sharing Contract Contractor.
Revision 2. Jakarta: BPMIGAS.
CIA (Central Intelligence Agency). 2012. The World Factbook. Washington, DC: CIA.
DBS. 2011. Indonesia FDI: More Coming, More Needed. DBS Group Research.
https://www.dbsvresearch.com/research/DBS/research.nsf/(vwAllDocs)/0D805E319E4A9FD9482578B000036B0
7/$FILE/id_2011Jun14.pdf
DGOG (Directorate General of Oil and Gas). 2011a. ADPN 2011. Jakarta: Ministry of Energy and Mineral
Resources, DGOG.
. 2011b. Buku Apresiasi Produksi Dalam Negeri. Jakarta: Ministry of Energy and Mineral Resources, DGOG.
. 2012. Duty and Function of Sub Directorate for Empowerment Potential of Home Affairs Section. Jakarta:
Ministry of Energy and Mineral Resources, DGOG. http://www.migas.esdm.go.id/?newlang=english#
Dousta, H., and R. A. Noble. 2007. Petroleum Systems of Indonesia. University of Amsterdam and Unocal
Indonesia Company.
EEPC. 2002. Report on Oil and Gas Field Equipment and Services Market in Indonesia. Singapore: EEPC.
Eifert, B., A. Gelb, and N. Borje Tallroth. 2003. Managing Oil Wealth. Washington, DC: International Monetary
Fund.
Hertzmark, D. 2011. Pertamina's Evolution: From King of the Hills to One of the Guys. Washington, DC: Baker
Center NOC Study.
Hunter, A. 1966. The Indonesian Oil Industry. Australian Economic Papers. Canberra, Australia.
Idris, A. 2012. Doing Business in Indonesia Challenges and Opportunities in the Oil and Gas Industry. INTSOK,
Bergen.
ILO (International Labour Organization). 2010. http://www.ilo.org/wcmsp5/groups/public/---ed_dialogue/--sector/documents/publication/wcms_161281.pdf
98
IPA (Indonesian Petroleum Association). 2009a. Gas. Jakarta: Indonesian Petroleum Association.
http://www.ipa.or.id/home.php?page_id=9&page_category_id=3&event_category_id_send=0&report_
category_id_send=0&news_category_id_send=0.
. 2009b. History of OIl and Gas in Indonesia. Jakarta: Indonesian Petroleum Association.
. 2009c. Oil. Jakarta: Indonesian Petroleum Association.
. 2009d. Statistics. Jakarta: Indonesian Petroleum Association.
http://www.ipa.or.id/report.php?page_id=59&page_category_id=3&event_category_id_send=0&report
_category_id_send=4&news_category_id_send=0.
. 2012a. 4th edition of IPA Newsletter. Jakarta: Indonesian Petroleum Association.
. 2012b. Report On 2011 Activities And 2012 Plans. Jakarta: Indonesian Petroleum Association.
Kaufmann, D., A. Kraay, and M. Mastruzzi 2011. The Worldwide Governance Indicators (WGI) Project.
MGI (Mckinsey Global Institute). . 2012. Trading Myths: Addressing Misconseptions about Trade, Jobs, and
Comptetitveness. Mckinsey Global Institute.
Ministry of Industry. 2005. Penjelasan Mengenai Peraturan Menteri Perindustrian Tentang Pedoman Teknis
Penggunaan Produksi Dalam Negeri. Jakarta: Ministry of Industry.
MOEMR (Ministry of Energy and Mineral Resources). 2009. BPMIGAS Will Prioritize Local Content in the Oil and
Gas Industry. Jakarta: Ministry of Energy and Mineral Resources Republic of Indonesia.
MoI (Ministry of Industry). 2011. Regulation Of The Minister Of Industry No. 15/M-IND/PER/2/2011. Jakarta:
Ministry of Industry.
MPRI (Menteri Perindustrian Republik Indonesia). 2011. Ketentuan Dan Tata Cara Penghitungan Tingkat
Komponen Dalam Negeri. Jakarta: Menteri Perindustrian Republik Indonesia.
Natural Gas Asia. 2012. Indonesia Plans 'Fund' for Oil, Gas Sector. http://www.naturalgasasia.com:
http://www.naturalgasasia.com/indonesia-plans-fund-for-oil-gas-sector
Nordas, H. K., E. Vante, and P. Heum. 2003. The Upstream Petroleum Industry and Local Industrial Developement A Comparative Study. Bergen: Institute for Research in Economics and Business Administration.
OECD (Organisation for Economic Co-operation and Development). 2012. FDI in Figures. Paris: OECD.
OECD/International Energy Agency (IEA). 2008. Energy Policy Review of Indonesia. Paris: OECD.
OPEC (Organization of the Petroleum Exporting Countries). 2008. Annual Statistical Bulletin. Vienna: OPEC.
. 2011. Annual Statistical Bulletin. Vienna: OPEC.
OSP (Oentoeng Suria and Partners). 2011. Indonesia's Oil and Gas Laws. Jakarta: Oentoeng Suria and Partners.
Pertamina. 2011. History. Pertamina: http://www.pertamina.com/index.php/detail/read/company_history
Pillai, V. 2010. IndonesiaSeeking Production Growth. Petromin Pipeliner.
PKF. 2012. Indonesia Tax Guide 2012. http://www.pkf.com/media/387092/indonesia_2012.pdf.
Pradhan, M. 2001. Welfare Analysis with a Proxy Consumption Measure: Evidence from a Repeated Experiment in
Indonesia. Free University, Cornell University.
99
PT. Bina Media Tenggara. 2012. Govt To Allot Special Funds for Oil and Gas Development. (P. B. Tenggara,
Producer) The Jakarta Post: http://www.thejakartapost.com/news/2012/07/26/govt-allot-special-fundsoil-and-gas-development.html.
PWC (PricewaterhouseCoopers). 2012a. Oil and Gas in Indonesia. Investment and Taxation Guide. Jakarta: PWC.
. 2012b. Staring Down the Barrel: An Investor Survey of the Indonesian Oil and Gas Industry. Jakarta: PWC.
RSM. 2012. Doing Business in Indonesia. RSM International. Jakarta, Indonesia.
Satiotomo, Y. 1999. Indonesia Keio University:
http://www.ic.keio.ac.jp/en/download/jjwbgsp/1998/1998_1Indonesia.pdf.
Schwab, K. 2011. The Global Competitiveness Report. World Economic Forum.
Suryantoro, S., and M. Manaf. 2002. The Indonesian Energy and Mineral Resources Development and its
Environmental Management to Support Sutainable National Economic Development. The Republic Of
Indonesia, Department Of Energy And Mineral Resources.
Thieme, N., P. Lujala, and J. K. Rd. 2007. The Petroleum Dataset: Country Profiles Peace Research Institute Oslo.
Oslo, Norway.
Twomey, M. D., G. Watkins, and V. Galuh. 2004. Gas Regulation 2004Getting the Deal Through. Jakarta.
UN (United Nations). 2010a. National Accounts Main Aggregates Database. New York: United Nations Statistics.
. 2010b. Department of Economic and Social Affairs. Population Division, Population Estimates, and
Projections Section: http://esa.un.org/unpd/wpp/unpp/panel_indicators.htm.
World Bank. 2004. Education in Indonesia: Managing the Transition to Decentralization. Washington, DC: World
Bank.
. 2010a. Doing Business in Indonesia. Washington, DC: World Bank and International Finance
Corporation.
. 2010b. Indonesia Skills Report: Trends in Skills Demand, Gaps, and Supply in Indonesia. Washington, DC:
World Bank.
. 2011. World Bank Development Indicators. Washington, DC: World Bank.
. 2012a. Doing Business in Indonesia 2012. Washington, DC: World Bank and International Finance
Corporation.
. 2012b. World Development Indicators and Global Development Finance. Washington, DC: World
Bank.
WTO (World Trade Organization). 2010. Indonesia's Replies to Questions Posed by the United States and Comments
Made by Canada and the EU during the Committee Meeting of 1 October 2010. WTO.
. 2012a. Indonesia: Certain Local Content Provisions In The Energy Sector. WTO.
. 2012b. Statistics Database.
Yusgiantoro, L. 2012. Developing a Dynamic Techno-Economic Gas Network Model for the Indonesian Natural Gas
Market. Colorado School of Mines.
100
4. Kazakhstan
In 1991 Kazakhstan was the last country to declare its independence from the Soviet republic. During the
Soviet era, petroleum-related policies and activities were controlled by the central government, and
Kazakhstans hydrocarbon resources were not a priority (Johnston and Johnston 2001). Upon independence,
the petroleum sector was central to Kazakhstans economic activity and following the major discoveries of year
2000, the sector became a catalyst for economic growth. The governance of the petroleum sector evolved in a
way that reflected the countrys learning curve, and size of discoveries in addition to the political and economic
environments. In this context, local content policies (LCPs) were marked by three main periods
postindependence. The first period was when the country began the transition phase from 1991 to 2000, the
second period began in 2000 and extended till 2010, and the third was 2010 onwards.
During the Soviet era, petroleum-related knowledge and human capital used to be maintained and
managed at the central level. Upon independence, Kazakhstan had to develop its own capabilities. As a first
step, the country relied on international oil companies (IOCs) to develop employment and local capabilities by
including obligations to this effect in the contractual agreements with these companies. In addition, IOCs were
required to carry out social development programs especially in the vicinity of operations (Domjan 2004). Over
this period, LCPs were regarded as corporate social responsibility (CSR) activities and were often pioneered by
the companies themselves (Kalyuzhnova 2008). LCPs were lenient and not clearly defined by authorities.
Additionally, during the 1990s, authorities were more interested in developing the countrys hydrocarbon
resources and maximizing the government revenues from taxes (Luong 2010). As a result IOCs had regularly
eluded local content requirements, procuring their goods and services from international sources and hiring
locals according to their own discretion, mostly in lower-skilled personnel and trainees (Kalyuzhnova 2008).
Toward the turn of the century, the local content scene began to witness some changes, marked by the
introduction of the term Kazakh content (KC) in 2004, a term that refers to the origin of goods and services
used in any resource or subsoil project, including oil and gas (MENAS 2009). But there was a lack of
monitoring system and methodology for calculating KC. The period from 2000 until 2010 was marked by
several trends. First, the oil discoveries in offshore fields in the North Caspian dramatically increased the
countrys reserves, especially the Kashagan oil field, which is considered the fifth largest in the world. This has
afforded the state a stronger ground to renegotiate contracts with IOCs and to increase its control over the
sector, through the creation of a single-state oil company with monopoly equity rights and regulatory
responsibilities. The government policy was also evidenced by several legal and regulatory changes that raised
the bar for local content deliverables by the oil companies. On the political front, the period from the late 1990s
to early 2000 saw a rise in dissent against President Nazarbayevs rule.
The year 2010 marked the start of a new era for local content characterized by well-defined policies that
were strongly enforced and monitored. In fact, LCPs became central to the development of the countrys
resources and overall development plan. This new local content scene cannot be understood in isolation from
economic and political factors. During 2010 and subsequent years, the economic scene was recovering from the
fallouts of the 2009 global crisis, which affected the countrys gross domestic product (GDP) growth and the
influx of new foreign investment to both the economy and the oil sector (Ernst and Young 2011). Higher
inflation and a rising unemployment rate were also observed in the period leading to 2010 (World Bank 2010).
These conditions were later reflected through labor strikes that led to brutal confrontations in the oil sector
(EoN 2011).
101
Kazakhstan authorities nonetheless were in the process of forming new and formalized local content
measures, drawing from experiences and success stories from other countries (Yerkebulanov 2012). The surge
in upstream investments encouraged positive trickle-down effects to the countrys economy. In addition, there
was a stronger public sentiment toward a better utilization of oil resources. This was supported by continuous
media efforts shedding light on cases where potential businesses were lost to foreign enterprises while local
capabilities existed. Over the near future, more stringent enforcement of LCPs is likely to be observed.

For over 20 years, Kazakhstan has been in a gradual transition from Soviet influence to independent
governance. Although political independence was granted in 1991, a Soviet legacy carries on in several fronts
of the countrys social and economic scene. Despite the growth and development achieved on the back of the
discovery of natural resources, mainly oil and gas, the country still faces a number of structural difficulties.
Limited access to capital, lack of adequate education, corruption, and bureaucracy are among the top
challenges facing businesses in Kazakhstan (WEF 2011).
4.1.1 Economy
Upon receiving its independence, Kazakhstan launched a reform plan centered on liberalization of prices and
privatization. This was followed by macroeconomic stability measures upon leaving the ruble currency in 1993.
Despite these efforts, the 1990s era was characterized by hyperinflation and limited growth that was highly
impacted by the Russian financial crisis of 1998 (Kalyuzhnova 2008). Driven by currency devaluation and oil
market dynamics, Kazakhstans GDP steadily increased from 1999 to 2008. Following the global recession, the
countrys GDP dropped by 1.2 percent in 2009 before returning to it precrisis growth path. In 2010
Kazakhstans GDP per capita was approximately $9,070, the highest it had been since 1990 (World Bank 2012b).
Upon leaving the ruble zone in 1993, the country experienced a period of hyperinflation (Kalyuzhnova
2008). In fact the inflation rate did not come under control until recently. In 2000 the inflation rate reached 13.2
percent, which was a significant drop from the 170 percent experienced in 1994. In 2004 Kazakhstans real
interest rates became positive, but have since gradually decreased from very high levels at the beginning of
reforms (Craig and others 1999). In 2010 the International Monetary Fund (IMF) directors agreed that real
interest rates should be kept positive to maintain depositor confidence, and cautioned against the use of
subsidized interest rates (IMF 2010). Projections show inflation rates in the range of 6 percent until 2017 (IMF
2012). Table 4.1 presents key economic indicators for Kazakhstan.
Table 4.1 Key Economic Indicators of Kazakhstan, 19902010
1990
1995
2000
2005
2006
2007
2008
2009
2010
26.3
16.2
18.3
30.0
33.2
36.1
37.3
37.8
40.5
1,611.7
1,022.9
1,229.0
1,977.7
2,166.3
2,332.3
2,380.1
2,345.9
2,481.7
176.2
13.2
7.6
8.6
10.8
17.2
7.3
7.1
61.0
142.1
132.9
126.1
122.6
120.3
147.5
147.4
Trade (% of GDP)
82.5
105.7
98.3
91.6
92.2
94.4
75.9
73.2
21.6
7.0
5.9
5.3
6.3
9.5
10.2

Inflation, CPI (%)
Government debt (% of GDP)
Source: Based on data from World Bank 2012b.

Compared to neighboring countries and developed economies (for example, the United Kingdom and
Canada), Kazakhstan relies more heavily on exports. Between 1992 and 2010, 4060 percent of Kazakhstans
GDP was derived from exports of goods and services.56 In 2009 total exports were comprised mostly of
56
Over the same period the UK share of GDP from export of goods and services ranged from 20 to 30 percent.
102
merchandise (92 percent), but also commercial services (8 percent). As shown in Figure 4.1, petroleum products
have increasingly dominated the basket of goods exported by Kazakhstan. In fact the share of petroleum
products in the total value of exports increased from 25 percent in 1995 to 70 percent in 2010 (WTO 2012).
Figure 4.1 Kazakhstans Exports by Commodity, 19952010 ($ billion)
5.3
6%
8.8
4%
5%
2%
1%
12%
13%
27.8
2%
2%
7%
59.5
2%
5%
6%
14%
13%
1%
1%
10%
100%
20%
18%
Other
Machinery and transport equipment
24%
70%
70%
52%
Chemicals
Iron and steel
25%
Mining Products
Fuels
1995
2000
2005
2010
Source: Based on data from WTO 2012.
Net foreign direct investment (FDI) was $2.9 billion for 2010, ranking it the highest among its neighboring
countries. From a GDP percentage point of view, about 7.2 percent was FDI inflow and 5.2 percent was FDI
outflow. Kazakhstan is receiving FDI primarily to improve infrastructure to facilitate business activity.
4.1.2 Taxation
The overall tax burden in Kazakhstan is among the lowest in the world, as shown in Figure 4.2. Corporate tax
rates depend on whether a company is considered resident or nonresident. In the case of a resident company,
taxes are based on worldwide income; a nonresident company simply pays tax based on its income sourced in
Kazakhstan. In addition, overseas companies permanently situated in Kazakhstan are not only required to
pay corporate tax but also a branch tax, which depends on the nationality of the parent company. Small and
medium businesses are subject to special tax regimes. The standard corporate tax rate for Kazakhstan in 2011
was 20 percent. This is a dramatic decrease from 2008 rates, when corporate taxes reached 30 percent.
Figure 4.2 Comparison of Kazakhstans Corporate Tax Rate to Other Countries, 2009 and 2010 (%)
Norway
27%
Brazil
Trinidad and Tobago
26%
Australia
30%
India
30%
United Kingdom
26%
South Africa
26%
Netherlands
23%
Australia
22%
Malaysia
16%
Chile
16%
Brazil
16%
Russia
13%
Canada
12%
Uganda
12%
Indonesia
India
Kazakhstan
Uganda
10%
30%
Canada
28%
Norway
28%
South Africa
28%
Malaysia
25%
Indonesia
25%
Netherlands
25%
Trinidad and Tobago

UK
11%
8%
34%
25%
24%
Chile
20%
Kazakhstan
20%
Russia
20%
OECD 14%
Source: Based on data from CIA 2012; Deloitte 2012; World Bank 2011.
hospital insurancegrants, and net revenues from public enterprises. OECD = Organisation for Economic Co-operation and Development.
103
Kazakhstans population steadily increased from 1950 to 1990. Postindependence and until 2000, the countrys
population dropped by approximately 5 percent. Following 2000 and as forecasted until 2050, growth in total
population is expected to increase, but at a slower rate than that observed from the period 1950 to 1990, while
the countrys labor force (aged 1564) is expected to follow a downward trend (Figure 4.3). Compared to
neighboring countries such as Turkmenistan, Uzbekistan, and Russia, Kazakhstan has a higher labor force as a
percentage of the total population (UN 2010b), and relatively low unemployment rates.
Figure 4.3 Kazakhstan: Population by Age Group from 1950 to 2050
25.0
80%
70%
Million People
20.0
60+
60%
50-59
50%
15.0
10.0
40-49
40%
30-39
30%
20-29
10-19
20%
5.0
0-9
10%
2050
2045
2040
2035
2030
2025
2020
2015
2010
2005
2000
1995
1990
1985
1980
1975
1970
1965
1960
1955
0%
1950
0.0
% 15 - 64
Source: Based on data from UN 2010b.
As of 2009, the minimum wage in Kazakhstan was set around $147 per month. This is equivalent to
approximately 23 percent of the countrys average wage (Klaveren and others 2010). It is worth noting that a
joint treaty was signed between the three Customs Union countries (Kazakhstan, Russia, and Belarus) allowing
citizens of each country to work in the other treaty countries without a work permit as of January 2012 (Baker
and McKenzie 2011). Table 4.2 presents an overview of the Kazakh labor market in comparison to a select
group of countries.
Table 4.2 Kazakhstans Labor Force Indicators Compared to Select Countries, 2010
Labor force
(million)
Angola
Australia
Brazil
Canada
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
T&T
Uganda
UK
7.1
11.8
101.6
19.0
11.8
8.8
12.0
2.6
18.2
22.1
0.7
13.4
31.8

Primary
n.a.
27.3
n.a.
13.5
n.a.
n.a.
18.3
19.9
15.8
n.a.
25.3
n.a.
19.2
Secondary
n.a.
38.9
n.a.
40
n.a.
n.a.
56
43.5
74.2
n.a.
63
n.a.
44.4
Tertiary
n.a.
33.8
n.a.
46.5
n.a.
n.a.
21.1
35.8
5.2
n.a.
11.1
n.a.
35.4
Mean years
of education
Minimum wage
($ per month)
Unemployment,
total (% of total
labor force)
4.4
12
7.2
12.1
5.8
10.4
9.5
12.6
8.5
5.1
9.2
4.7
9.3
127
1,597
300
1,903
133
n.a.
n.a.
3,609
543
59
n.a.
3
1,655
25.0
5.2
8.3
8.0
7.1
6.6
3.7
3.6
23.8
10.7
5.4
4.2
7.8
Source: Based on data from The World Bank Group 2012; World Bank 2011; UNDP 2010; Klaveren and others 2010.
Note: Educational attainment data for Australia, Canada, Malaysia, South Africa, and T&T represent year 2008 levels. Unemployment data for
Brazil, Kazakhstan, Malaysia, South Africa, and Uganda represent year 2009 levels.
n.a. Not applicable.
104
Looking at the employment levels by sector, Kazakhstans labor force is largely concentrated in resources
and service industries; both constituted over 95 percent of employment as shown in Figure 4.4. Between 2001
and 2007 employment in primary resources industries decreased from 38.5 percent to 34.5 percent.
Employment in the knowledge-intensive manufacturing remains much lower than mature economies.
Figure 4.4 Kazakhstan: Breakdown of Labor Force by Sector, 200107
6.6
7.5

2007
Total change in
(Million jobs)
Primary Resources
0.0
0.0
34.5%
38.5%
4.2%
100%
0.6%
1.7%
3.8%
37.3%
34.2%
0.7%
1.2%
20.0%
21.5%
2001
2007
0.3%
1.4%
0.0
0.0
42
0.5
17
0.0
26
0.3
Note: The number of employees engaged in manufacturing activities are based on the UNIDO statistics while the rest are based on the ILO
data.
4.1.4 Education
During the Soviet era, the Central Committee controlled the educational system in Kazakhstan. Over that
period, educational programs were designed to produce workers in various fields according to the Soviet
central plan (Burkhalter and Shegebayev 2012). By the time of independence, the country inherited a strong
primary and secondary educational institution system from the Soviet Union, especially with the compulsory
education policy that was effective until the age of 15. As a result Kazakhstans literacy rate reached very high
levels that continued over the years, but the Soviet legacy exhibited some qualitative educational issues.
Among the issues lately identified were the general absence of independent thinking among students, lack of
initiative and creativity, as well as fear-based behavior (Burkhalter and Shegebayev 2012).
A recent educational assessment review recently published by the United Nations Childrens Fund
(UNICEF) concludes that there is a shortage of schools in Kazakhstan mainly due to poor maintenance since
the Soviet era. The review also points to a deficiency in trained teachers, especially in remote rural areas.
Additionally, most of the current Kazakh curriculum and instructional materials date back to the Soviet period
(UNICEF 2008). Public spending on education and research is low by international levels. In fact, 12 percent of
government expenditure in 2000 was designated to the educational sector, which is 10 percent lower than
Azerbaijans allocation during that year (UN 2010a). The percentage of GDP spent on education rose from 3.2
in 1990 to 3.7 in 2001 (Kalyuzhnova and Kaser 2005). In 2011 public expenditure on education as a percentage
of GDP reached 3.1 percent, and on research and development (R&D) was 0.2 percent; however, there is a lack
of information on the allocation of that spending (UNICEF 2008).
In terms of enrollment, while primary and secondary education show strong performance, the percentage
of gross enrollment in tertiary education (38.5 percent) is quite low relative to neighboring countries such as
Iran and Russia. As for the quality of higher education, none of the 97 universities in Kazakhstan made it to the
top 500 listing in the 2010 Academic Ranking of World Universities (Academic Ranking of World Universities
2010). In addition, research facilities are generally worn out with poor IT and knowledge infrastructures
105
(Whitman 2008). Table 4.3 contains select indicators on education in Kazakhstan in comparison to other
countries.
A survey on the quality of education and local staff in the oil and gas sector conducted among IOCs
executives suggested a number of shortcomings, including lack of proactivity, poor English-speaking abilities,
and a lack of familiarity with Western business practices (Kalyuzhnova 2008).
Table 4.3 Kazakhstans Educational Indicators Compared to Select Countries, 2010
Literacy rate (%)
Adult (15+)
Angola
Australia
Brazil
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
T&T
Uganda
UK
70.1
n.a.
90.3(a)
92.2(b)
99.7
93.1
n.a.
88.7(c)
73.2
98.8
73.2
n.a.
Youth
(1524)
73.1
n.a.
98.1(a)
99.5(b)
99.8
98.4
n.a.
n.a.
77.3
99.6
87.4
n.a.

Primary
Secondary
Tertiary
Public expenditure
on education
(% of GDP)
85.7
97.1
94.1(b)
95.9
89.5
n.a.
99.1
85.1(a)
98.0(b)
93.9
90.9
99.6(a)
11.5(a)
85.5
82.0(b)
67.3
88.2
67.9(a)
93.9
n.a.
n.a.
n.a.
n.a.
96(a)
3.7
79.9
36.1(a)
23.1
38.5
40.2(a)
74.4
n.a.
2.1
40(b)
4.2(a)
58.5(a)
3.6
5.1(a)
5.4(b)
2.8(b)
3.1(a)
5.8(a)
6.5(b)
6.0
6.2
3.8(d)
3.2(a)
5.4(b)
Source: Based on data from Gomes and Weimer 2011; UNDP 2010; World Bank 2012b; MSTTE 2011.
Note:(a) year 2009, (b) year 2008, (c) year 2007, (d) year 2006 data.
Overall, higher education and vocational training in Kazakhstan would seem to offer room for
improvements. A revised version of the Law on Education was approved in 2007 with the objective of
developing a more competitive educational structure and improving the countrys regulatory systems on
education (UNICEF 2008).
Weak governance remains one of the key problems facing Kazakhstan. Although the country has shown some
improvement along the six pillars of governance since 2000, it remains well behind the Organisation for
Economic Co-operation and Development (OECD) levels, as shown in Figure 4.5. Corruption and
accountability levels have barely improved since 2000, and improvement in the rule of law and overall
regulatory quality has been minor.
Figure 4.5 Governance Indicators in Kazakhstan Compared to the OECD Average
Voice and
Accountability
100
80
60
40
20
0
Political
Violence
2010 Kazakhstan 2010

Government
Effectiveness
Rule of Law
2000 Kazakhstan 2000
Regulatory Quality

Note: OECD = Organisation for Economic Co-operation and Development.
106
2010 OECD 2010
Several surveys and corruption indices have labeled the country with corrupt flags. The Transparency
Internationals Corruption Perception Index (CPI), which ranks countries according to perceived levels of
public sector corruption, scored Kazakhstan at 2.757 points in 2011 (CPI 2011), although it fares better than its
neighboring countries (Russia at 2.4, and Uzbekistan and Turkmenistan at 1.6).
Bureaucracy remains one of the issues that Kazakhstan inherited from the Soviet era. The centralized
leadership structure of the public sector and the rotational program of key public sector personnel have
resulted in a general lack of transparency and accountability of institutions and government officials (Arkhipov
and others 2010).
According to the 2011 Doing Business survey of the World Bank, dealing with construction permits and
cross-border trading are two of the most problematic issues in doing business in Kazakhstan. For instance, the
costs of import or export of a single container was more than triple the OECD average, and the estimated time
to complete cross-border transactions is at 76 days for export and 62 days for import is far above the OECD
average (of 10 and 11 days, respectively) and requiring more than double the documentations. Table 4.4
provides a snapshot of the latest doing business indicators for Kazakhstan.
Table 4.4 Indicators for Doing Business in Kazakhstan in Comparison to OECD Average, 2012
Kazakhstan
OECD
Kazakhstan
OECD
Procedures (#)
Time (days)
19
12
0.8
4.7
0.0
14.1
8.0
10 (+34)
57 (-8)
7. Paying Taxes
Procedures (number)
Time (days)
32
14
13
189
152
188
186
93.2
45.7
Profit tax (%)
15.9
15.4
11.2
24
1.6
3.2
28.6
42.7
147 (+1)
Other taxes (%)
Procedures (number)
Time (days)
88
103
88.4
92.8
86 (+1)
13 (+13)

76
10
3130
1032
Procedures (number)
12
Time (days)
40
31
62
11
0.1
4.4
3290
1085
176 (0)

29 (-2)
5. Getting Credit
Time (days)
390
518
Cost (% of claim)
22.0
19.7
36
31
0.0
9.5
37.6
63.9
Procedures (number)
27 (-1)
78 (-3)

Time (years)
1.5
Cost (% of estate)
15
42.7
68.2

1.7
54 (-5)
Kazakhstan is considered to have a strong infrastructure in terms of automobile and railway routes, and is
one of four international transport corridors between Asia and Europe, but its transportation infrastructure is
deteriorating at a fast pace (UN 2006). Since the countrys independence, most of the investments were directed
57
This is measured on a scale of zero to 10, zero being highly corrupt.
107
toward the countrys telecom and energy infrastructures connecting the country to Western markets through
Russia. It is expected that $25 billion will be invested through 2011 to 2030 in infrastructureout of which 40
percent will be allocated to the railway system, 23 percent to highways, 25 percent to telecommunications, and
12 percent to water transport (RoK 2010b).

In 2010 the oil sector accounted for 11.5 percent of the countrys GDP, and about 46.5 percent of government
revenues (Coronel, Rozhkov, and Al-Eyd 2011). The value of oil exports reached $37 billion, which represented
57 percent of total exports of goods and services in 2010. According to the IMF, oil exports values are expected
to reach $56 billion in 2016 (IMF 2012). Figure 4.6 shows the evolution of the contribution of mining,
manufacturing, and utilities to GDP over time, and Figure 4.7 compares the breakdown of Kazakhstans GDP
by activity to other countries in 2010.
On the employment front, the mining and quarrying activity in Kazakhstanwhich includes oil and gas
extractionemployed on average 2.7 percent of total employment between 1999 and 2008. In 2008 over 200,000
workers were employed in the sector, representing around 2.5 percent of the total labor forcea drop from 4.2
percent in 1999 (UN 2012).
60
35%
50
30%
25%
40
20%
30
15%
20
10%
10
Share of GDP
GDP (Bn $)
Figure 4.6 Kazakhstan: Contribution of Mining, Manufacturing, and Utilities to Value-added, 19902010
5%
0%
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10
Contribution to GDP
Percentage Share

Figure 4.7 Kazakhstan: Breakdown of Value-added by Economic Activity in 2010 ($ billion)
85
1,296
2,066
1,637
883
159
304
402
377
39%
38%
24
17
22%
23%
2,236
100%
7%
14%
25%
15%
5%
33%
11%
43%
45%
11%
5%
6%
13%
8%
20%
18%
9%
8%
8%
6%
8%
9%
50%
7%
2%
14%
12%
10%
5%
5%
Angola
Australia
19%
Brazil
5%
12%
7%
3%
8%
8%
4%
3%
32%
2%
12%
12%
6%
21%
36%
33%
10%
6%
24%
20%
Canada
8%
0%
13%
1%
6%
7%
8%
6%
1%
30%
16%
6%
11%
4%
29%
19%
19%
8%
20%
51%
12%
5%
10%
13%
11%
20%
Norway
South
Africa
Trinidad
& Tobago
Other Activities
Construction
Manufacturing
108
12%
14%
Uganda
UK
1%
4.2.2 Petroleum Geography and Geology
The country is endowed with 15 sedimentary basins that spread over 60 percent of its area. But most of
onshore and offshore oil and other mineral deposits are located in the North Caspian Basin. Some oil reserves
are also located in Southern Kazakhstan but the prospects for new discoveries there are limited (Deutsche Bank
2010).
The North Caspian basin is spread over Russian and Kazakh territory. On the Kazakh side (northern
Caspian), the offshore Kashagan, located near Atyrau city, and onshore Tengiz are by far the largest Kazakh
fields. To the north of the country, close to the Russian borders, rests the Karachaganak field. Kashagan,
Tengiz, and Karachaganak are referred to as the three whales (Yerkebulanov 2012), which suggests the massive
reserves they hold.
The North Caspian basin is bound by the Hercynian Ural Mountains to the east and by other orogenic
belts to the southeast and south. In the north, the basin is separated by the Voronezh Massif in the west and by
the Volga-Urals Platform in the north (Talwani, Belopolsky and Berry 1998). The basin is divided into 15
licensed blocks that include 20 different offshore fields in shallow water. Most fields are under appraisal or
development.
Tengiz and Kashagan, the two major fields in the country, are considered as twins because they both
possess similar geological characteristics with reservoir rocks, fluid properties, pressure gradients, reservoir
depths, and sulfur content as shown in Table 4.5. Recoverable reserves are rated at 69 billion barrels of light
oil (out of 24 billion barrels in place) with associated gas reserves of 64 trillion cubic feet (tcf).
Table 4.5 Tengiz and Kashagan: A Comparison
Kashagan
Tengiz
Discovered
Location
2000
1979
Onshore
100,000
Crude characteristics
42-45 API Gravity 18-20 mol % H2S
Pressure gradient
Assumed to be roughly the same as

Tengizvery high
1,9002,200 from KE-1 and KW-1
tests
Offshore 1022 feet of water

Size of potential productive area (acres) 320,000
Reservoir depth (feet)
13,00014,000
Gas oil ratio (cubic feet per barrel)
Likely 14,000 (data not available)

48.2 API Gravity 12.5 mol % H2S
Very high, approximately 0.82 psi/ft
Likely high (data not available)
Source: Based on data from Johnston and Johnston 2001.

Kazakhstan is a resource-rich country that ranks first in terms of quantity of subsoil minerals among the
Commonwealth of Independent States (CIS) other than the Russian Federation (Yerkebulanov 2012). The
country sits on large reserves of metallic ores, industrial minerals, and hydrocarbons. In terms of the explored
reserves of uranium, chrome, lead, and zinc, Kazakhstan ranks number two in the world; it is number three in
manganese, and number five in copper. As for the reserves of coal, iron, and gold, Kazakhstan is among the
worlds top 10 countries.
Kazakhstans petroleum sector went through several stages of development. During the period following
independence in 1991, Kazakhstans petroleum industry witnessed stagnant growth and limited production.
But since the late discoveries of offshore reserves, petroleum suddenly became the most abundant resource in
the country. Today, Kazakhstan's oil resources are the largest of all the former Soviet republics apart from
theRussian Federation. Oil reserves at the end of 2011 were estimated at 30.0 billion barrels representing 1.8
percent of world reserves, and 28.5 percent of total reserves in Europe and Eurasia, increasing from 5.4 billion
barrels in 2000 (BP 2012). The Tengiz, Kashagan, and Karachaganak fields contain over 50 percent of the
countrys reserves, while Uzen, Zhetybai, Zhanazhol, Kalamkas, Kenkiyak, Karazhanbas, Kumkol, North
109
Buzachi , Alibekmola, Central and Eastern Prorva, Kenbai, and Korolevskoye contain nearly 40 percent (Ernst
and Young 2011). Gas reserves on the other hand were estimated at 66.4 tcf at the end of 2011, and represented
less than 1 percent of world reserves (BP 2012). Table 4.6 provides a snapshot of the oil and gas sector in
Kazakhstan.
Table 4.6 Snapshot of the Oil and Gas Sector in Kazakhstan (2011)
2011
30.0
1,840.7
212.4
66.4
1.9
0.9
50.5
% of World
1.8
2.1
0.3
0.9
0.6
0.3
0.4
Global Rank
12
13
51
19
15
43
36
1 yr
0.0
0.9
7.6
0.0
9.6
13.0
0.5
% Change
3 yrs
5 yrs
0.0
0.0
5.4
20.0
11.9
-9.0
0.0
0.0
8.3
15.6
18.6
10.1
0.6
-3.6
10 yrs
455.6
74.4
25.4
2.6
112.4
6.1
23.4

Note: bcfd = billion cubic feet per day; boe = barrel of oil equivalent; mmbpd = million barrels per day; tcf = trillion cubic feet; toe = tons of oil
equivalent.
The Kashagan field holds the largest oil reserves in Kazakhstan with an estimated potential for 38 billion
barrels, of which 79 billion barrels (and up to 13 billion barrels if gas injections is used) are recoverable. Its
prospectivity was cited by the Soviets in the early 1970s but was not officially discovered until 2000 (Campaner
and Yenikeyeff 2008). Tengiz, the countrys second-largest field, was discovered in 1979 and has an estimated
69 billion barrels that are recoverable. The Tengizchevroil (TCO) partnership has been developing the Tengiz
field since 1993. Chevron holds 50 percent equity, ExxonMobil holds 25 percent, the national oil company
(NOC) KazMunayGas (KMG) holds 20 percent, and the remaining 5 percent is held by Russian/US LUKArco
(Ernst and Young 2011).
Oil production has picked up steadily as of 2000 and has increased from 744,000 barrels per day (bpd) to
over 1.7 million bpd in a decade. The increase in production was driven by offshore fields, as most of the
Kazakh onshore oilfields have matured and production has reached a plateau (Gizitdinov 2011). Similarly, gas
production showed a steady increase since 2000. The country produced 33.6 billion cubic meters (bcm) of gas in
2010, almost triple the production in 2000. Gas consumption has shown the same trend increasing from 9.5 to
25.3 bcm between 2000 and 2010 (BP 2012). The increase is transforming the country from a net importer to a
net exporter. But gas resources remain less developed than oil reserves due to the lack of a domestic gas
pipeline infrastructure to transport gas from the production regions in the west to the consumption regions in
east. The Kazakhstan-China gas pipeline due in 2014 is expected to transport gas to the eastern industrial
regions. Figure 4.8 presents the evolution of oil and gas production and consumption in Kazakhstan. At
current production levels, oil proved reserves are forecasted to last for 44.7 years and gas reserves for 97.6
years (BP 2012).
Figure 4.8 Evolution of Oil and Gas Production and Consumption in Kazakhstan, 19912011
2.0
2.0
Oil Production
Oil Consumption
1.8
1.6
1.4
1.4
1.2
1.2
BCF
1.6
1.0
Gas Production
Gas Consumption
1.0
0.8
0.6
0.6
0.4
0.4
0.2
0.2
0.0
0.0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
0.8
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Million bpd
1.8
110
In the downstream sector, Kazakhstan has three processing plants. They had a capacity of 130 million barrels in
2009, showing an increase of 17 percent relative to 2008 (KMG, 2011c):
The Atyrau refinery was the first refinery in Kazakhstan, put into operation in 1945 (KMG, 2011c).
During the Soviet era the refinery received a major technical upgrade that included all refinery
technological equipment. This enabled the refinery to increase the capacity to 31.5 million barrels per
year.
The Shymkent refinery was put into operation in 1985. The estimated capacity of the plant amounts to
43.9 million barrels per year.
The Pavlodar petrochemical Plant (PPCP) started operations in 1978. A new joint venture between
KMG and ENI took over the plant with plans for upgrading it, which included increasing refining
capabilities to 54.9 million barrels per year and increasing petroleum product output and quality (EoN
2011).
Transport is carried out through the main active export routesthe Atyrau-Samara pipeline, CPC pipeline,
and Atasu-Alashankou.
Today, the Ministry of Oil and Gas (MOG) is the executive body that carries out policy design. The ministry
also acts on behalf of the state, or mandates a competent body in contracts and agreements for exploration
and/or production with subsoil companies (MOG 2012a).
On the operations front, the national oil company KMG, is a joint venture established in 2002 between two
former state-owned enterprises, KazakhOil NC CJSC and Oil and Gas Transportation NC CJSC (the national
transportation company). KMG is a fully state-owned operator responsible for services for exploration,
development, production, processing, transportation, and marketing of oil and gas in Kazakhstan (KMG 2010).
During the past decade, a series of legislations were enforced and have provided the NOC with additional
mandates. The Petroleum Law of 2005 authorized KMG to act as a regulator for monitoring and controlling of
compliance of subsoil companies in accordance to their subsoil use contracts. Additionally, the Petroleum Law
provided KMG with further mandates namely:
Taking part in strategy formation for the use petroleum resources

Representing the state in contracts and agreements
Organizing tenders for subsoil operations
Exploring and producing of oil and gas (KMG 2010).
One of the major mandates given to the NOC was via the amendment to the industrial development law in
2004, the PSA Law of 2005 that required all production sharing agreements (PSAs) to include KMG with a
minimum of 50 percent equity in oil and gas projects (Tordo, Tracy, and Arfaa 2011).
Exploration contracts in Kazakhstan are valid for up to six years and may be extended twice for a two-year
period. The typical duration of PSAs is 25 years and they can be extended to 45 years for hydrocarbon deposits
with more than 100 million tons of crude oil and/or more than 100 bcm of natural gas. Extensions may not be
granted on the same terms and conditions of the original petroleum contract (Utegenova 2010). In line with
industry practices, the Kazakh authorities may terminate a contract in case the company fails to comply with
material obligations or to remedy previously identified violations (National Regulation of the Hydrocarbon
Industry, n.d.).
4.2.5 Evolution of Local Capabilities and Market Structure
The extent and evolution of Kazakhstans experience and capability in the petroleum sector have been affected
by the countrys political and economic history. During the Soviet era, Kazakhstans oil and gas activities (that
is, policy, operation, production, and transportation) and knowledge capital were under the central control of
the Soviet state. Subsoil exploration and energy matter were not a priority. Following independence in 1991,
111
the country proceeded to form its own institutions as it had to fully govern its assets and resources (KMG
2012).
During the 1990s there was no expectation that the oil and gas would become a prominent sector:
production was stagnant, and offshore reserves had not been discovered yet. At the time, the authorities were
more interested in generating tax revenues in the short term. Some have attributed this approach to the
presidents need to obtain political gains over his opposition (Luong 2010). During this period the government
was open to foreign investment, and, in the early 1990s, it often stood in a weaker negotiation position with
IOCs. The government was aware that lack of technology, funding, and offshore expertise were the main
challenges for the development of a local petroleum industry (World Bank 2012a). Thus authorities were
relying on the transfer of knowledge from the IOCs. Since 1992 the authorities mandated IOCs with training
activities and educational and social initiatives marking the beginning of LCPs (Kalyuzhnova 2008).
The Petroleum Law of 1995and the Law on Subsoil and Subsoil Use 1996 were the main laws governing
the petroleum sector. The majority of agreements in the 1990s was under concessionary contracts and had
taken place in Tengiz (the highest producer and third-largest reserve holder) and other fields (Aktobe, Emba,
Kumkol, and Uzen) that had much smaller reserves but collectively accounted for 50 percent of production
(Luong 2010). After its creation in 2002, KMG was mandated to act on behalf of the state in PSAs and relevant
agreements, and was provided increasing authority over the years.
The large and promising discoveries in Kashagan and the north Caspian, and the resurgence of resource
nationalism in the country, helped to change Kazakhstans relative bargaining power and underpinned the
development of a new governance model (Buchannan and Anwar, 2009). This was further motivated by the
global financial crisis and the countrys pressing need for development and growth.
In addition, the country was going through a reverse privatization trend, which may have contributed
indirectly to the general inclination toward more control even in the oil and gas sector. This shift began around
a decade ago and was clear in the new legislative framework that reshaped the countrys outlook and
governance of oil and gas until today. The state began increasing its grip over the sector through extending
KMGs authority (Kalyuzhnova 2008). The Petroleum Law of 2005 introduced two crucial reforms. First, PSAs
became the preferred contractual model; second, a minimum equity participation of KMG in all new projects
was mandated. Given the already existing option for the state to acquire majority stakes in existing projects,
KMG emerged as the main player and the majority owner in the countrys petroleum sector. Coupled with the
states increased control was the trend to fortify the weak local content requirements at the time (World Bank
2012a). This policy approach was further consolidated in the new Subsoil Law of 2010, which replaced the Law
on Petroleum of 1995and the Law on the Subsoil and Subsoil Use of 1996, and was aimed to ensure economic
growth and protect the interests of Kazakhstan and its natural resources.
Kazakhstan has a relatively complex value chain. The upstream segment is dominated by IOCs who
compete in exploration and production (E&P) activities, while local companies who enjoy local content
protection dominate the downstream segment. Kazakh companies within the oil and gas value chain are
dominated by state-owned enterprises, particularly KMG, and other companies reportedly enjoying certain ties
to the president (Arkhipov and others 2010).
Capacity building in the upstream segment is challenged by the lack of engineering expertise and
financing and managerial skills particularly needed for the future offshore projects. KMGs management team
was cited as relatively dynamic and competent (Kalyuzhnova 2008), but its talent pool is still limited. KMG
intends to address capacity building via continued PSAs with the IOCs, and through strategic alliances
particularly with Russian oil companies (expectations of a joint venture with Russian Gazprom) (EoN 2011).
Nonetheless, KMGs strategy going forward can be summarized according to each segment of the oil and
gas value chain:
112
Upstream. To increase production, upgrade to novice and promising fields, and acquire strategic
onshore and offshore E&P companies. Joint ventures with IOCs to develop more complex fields are
also on the future agenda.
Midstream. To improve its transportation systems with new routes and additional capacity (develop
the Asia Gas Pipeline, operate and expand the Kazakhstan-China and CPC pipelines, and develop a
gas logistics infrastructure west to south of the country).
Downstream. To modernize refineries to fit Euro 5 fuel standards and improve marketing reach for the
retail end consumer in Kazakhstan and abroad (European countries) (KMG 2011a).
4.2.6 Management of Oil Wealth
Presidential Decree No. 402 of August 23, 2000, created the National Fund for the Republic of Kazakhstan
(NFRK). Within four years the fund accumulated $5 billion, 13 percent of the countrys GDP in 2004, and by
early 2010 the fund reached approximately $25 billion (Faizuldayeva 2010).
The funds objective is to preserve resources for future generations and to evade economic difficulties on
the economy through a stabilization function (Kalyuzhnova 2006). Kazakhstans international reserves along
with assets in the oil fund were boosted by nearly $11.5 billion to reach $73 billion by the first quarter of 2011
(IMF 2011). The fund is run by a management council consisting of high-profile members of the state and state
institutions. In addition to the president, the council comprises the prime minister, the heads of the two
chambers of parliament, the chairman of the National Bank of Kazakhstan, and the minister of finance. The
funds operations, revenues, expenditures, and annual independent audit reports are published in the national
press (Kalyuzhnova 2006).
The NFRKs capital consists of contributions from government income from the oil sector, which includes
taxes (corporation tax, value-added tax), in addition to royalties, bonuses, and revenue from PSAs
(Kalyuzhnova 2006). The NFRK invests in liquid foreign equities and has a long-term investment function (75
percent) and a smaller stabilization function (25 percent). But the fund is bottlenecked by inefficient domestic
capital markets limiting financing opportunities for SMEs (Arkhipov and others 2010).

Kazakhstans LCPs first appeared with the postindependence law governing petroleum activities, the
Petroleum Law of 1995. Following that, multiple local-content-related amendments and laws were introduced
leading up to a significant regulatory change in 2010, represented by the introduction of the new Law on
Subsurface and Subsurface Use. LCP regulations since 1995 have been driven by the governments objectives of
altering the investment climate in the oil sector toward increased use of local goods, services, and personnel
and enhancing its governance of natural resources (IIED 2011).
Toward the early days of independence, provisions on LCPs aimed at increasing the use of local goods and
services, and the employment of Kazakh personnel and developing their capabilities through training and
educational requirements. These requirements fell more under CSR (Kalyuzhnova 2008) and were only broadly
described. The 1995 Petroleum Law included only high-level provisions requiring that subcontractors in the oil
sector be largely Kazakh owned. This was followed by the 1996 Law on Subsurface and Subsurface Use,
which required that companies propose, at an early stage, their own local content commitments. More
specifically, this included:
Employing a specific percentage of local workers

Procuring products and services of Kazakh origin
113
Improving infrastructure and contributing to economic and social development objectives in the
region of operation58 (MENAS 2009).
This approach allowed subsoil users to easily elude local content requirements and didnt result in a
significant improvement in the use of local content in the oil sector. Consequently, the government launched a
review of the local content policy framework. More specific policies were laid out in the 2005 Law Concerning
Production Sharing Agreements when Conducting Offshore Petroleum Operations. The law required that
KMG hold at least 50 percent share of new PSAs and determined specific requirements to ensure purchase of
local goods and services.
These requirements were further detailed in the 2007 rules for procurement of goods, works, and services
(GWS). The rules detailed the procurement process of all subsurface operations and included a positive
discrimination rule in favor of Kazakh contractors (IIED 2011). The 2007 law made local content a mandatory
requirement, outlined a monitoring and measurement procedure, and developed a clear definition of local
content, as follows (MENAS 2009):
Localization of the labor force. The percentage of Kazakhstan personnel engaged in the implementation
of a contract, broken down by category of personnel, indicating separately the percentage for each
individual category in relation to foreign personnel, whose quantity must be reduced over years as
mandatory training and qualification improvement programs are implemented for Kazakhstan
personnel.
Goods. Equipment, final product and other material and technical values, purchased for direct use in
subsoil operations and for the activity, which is specified as auxiliary in the contract.
Works. Carrying out activities on a paid basis on creating (producing) goods, equipment assembly,
construction of facilities and other sites, required for direct use in subsoil operations and for the
activity which is specified as auxiliary in the contract.
Services. Carrying out activities on a paid basis, required for direct use in subsoil operations and for
the activity, which is specified as auxiliary in the contract, not aimed to create (produce) goods or
other material objects.
More recently, LCPs, while still focused on increasing use of local goods, services, and personnel, shifted
toward the overarching objective of economic diversification and the reduction of economic dependency on the
oil sector. Since the petroleum sector is at the heart of Kazakhstans economy, the government aimed to boost
local industrial and service capacity through the development of links. During 2010 new regulations on local
content were introduced in which the main concepts and objectives of previous regulations were preserved. In
addition clear targets, procurement rules, and strict measurement procedures were introduced. This may be
attributed to economic and industry-related factors.
In summary, the governments rationale since 1995 has been to intervene and secure its link with the oil
and gas sector and thus improve employment and turn the economic wheel to the domestic advantage. A
number of fiscal and regulatory tools have been introduced to achieve the governments local content
objectives in localization of the petroleum workforce and domestic sourcing of goods and services. Current
LCPs are legislated through the decrees below:
Law No. 291-IV of 24 June 2010 on subsoil and subsoil use

Decree No. 1139 of 2007 on the rules of procurement of GWS for subsoil use operations
Decree No. 965 and Decree No. 1018 of 2010 that regulate reporting forms of subsoil users
Decree No. 367 and Decree No. 964 of 2010 that regulate and set the calculation methods for KC in
GWS.
As per the laws, local companies were allowed to sue any foreign company in the oil and gas sector that did not show preference
to domestic sources.
58
114
As per the law on subsoil and subsoil use, all regulations apply retroactively (MOG 2012b). These mandate
that local content requirements59 be included in the bids for subsoil use and be negotiated or assessed by the
authorities as part of the bidding process (RoK 2010c). Specific local content obligations are then stated in the
contractual agreement between the government and the subsoil user, and are decided on the basis of the needs
of the area where the project is located.
4.3.2 Policy Tools
Local content policy rules and regulations cover a set of provisions focused primarily on localization of the
labor force and domestic sourcing of GWS.
Localization of Petroleum Workforce
Localization of workforce policy tools are:
Target quotas for foreign staff employed by subsoil users

Limitations on granting of work permits
Minimum budget dedicated to training of the local workforce.
Target Quotas for Foreign Staff Employed by Subsoil Users
Resolution No. 71/2011 contains a schedule limiting the share of foreign employees in oil and gas operations.
This is defined according to three job categories, as outlined in Table 4.7.
Table 4.7 Kazakhstan: Quotas for Foreign Staff Employed by Subsoil Users
Employee
category
Target % foreign personnel
Description
2011
Senior managers, deputy managers, financial and technical

directors and certain engineers, metallurgists, architects,
geologists, and geophysicists.
Managers and highly educated specialists.
Highly educated workers.
2012 and beyond
50
30
30
10
30
10
Source: Based on data from RoK 2011; Baker and McKenzie 2011.
These targets do not apply to the following:
Certain designations within the company, such as company directors of major investment contracts
with the government, branch heads of foreign companies and of representative offices of foreign
companies, and foreigners who have obtained a permanent residency certificate.
Employees working in the major fields of Karachaganak, North Caspian (Kashagan), and Tengiz as
well as their operators, contractors, and subcontractors for 3 years until January 2015 (Yerkebulanov
2012). To obtain the benefit of this exemption, the employer (subsoil user in any of the foregoing
projects) must provide evidence of participation in the implementation of one of the three projects
when applying for an employee work permit (Baker and McKenzie 2011).
Small companies as defined according to the Law on Private Entrepreneurship as companies having
no more than 50 employees, and with average annual assets less than $600,000 (Nisengolts 2011),
unless Kazakhstan becomes a member of the World Trade Organization (WTO) (Baker and McKenzie
2011).
The first category of jobs (the high-level jobs) were later redefined to include a larger sample of
professionals to which the above regulations and ratios apply. The designations were: chief executives, deputy
chief executives, financial and technical directors, chief structure engineers, production engineers, power
Subsoil users must initially offer their local content commitment in relation to goods, works, services, training, and retraining as
well as R&D financing (RoK 2010).
59
115
engineers, metallurgists, architects, geologists, and geophysicists (KPMG 2011).60 In addition, subsoil users and
their subcontractors must grant equal conditions and rewards to local and foreign personnel.
Limitations on Granting of Work Permits
Resolution 71 also introduced the geographical ring-fencing of work permits. In Kazakhstan subsoil work
permits must be requested from and are valid in the administrative-territorial units of issuance. This entails
that any relocation of foreign employees among the territories of Kazakhstan or any geographical job rotation
program is bound by certain limitations. For example, the duration of business trips to administrativeterritorial units other than that in which a work permit has been issued was reduced from 120 to 60 calendar
days during a calendar year (RoK 2011). In case foreign employees are seconded to other companies in the
country, or if foreign staff limits are violated, work permits are cancelled. If a violation occurs, the authorities
can impose a 12-month bar on obtaining new work permits.
Minimum Budget Dedicated to Training of Local Workforce
In addition, the new law on subsoil useLaw No. 291/2010mandates subsoil users to commit to a minimum
amount of money to be allocated to education and training activities, as part of other requirements such as
social programs. This includes education, training, and retraining of Kazakh workers and personnel involved
in the execution of the contract. Subsoil users are also required to train and finance the training of other
personnel, specified by the MOG (RoK 2010c).
Domestic Sourcing of Goods, Works, and Services
Three key categories of policy tools are being used by the Kazakh government to increase domestic sourcing of
GWS in the oil and gas sector:
Specification of GWS procurement rules for subsoil users

MOG Kazakhstan Content Development Programs
KMG (National Oil Company) local content development efforts.
Goods, Works, and Services Procurement Rules
The permissible methods for procurement of local content GWS are specified in Resolution No. 1139 of
November 2007 on Procurement Rules for Subsoil Users. The rules also define the monetary fines a subsoil
user is subject to in case of noncompliance. In particular, the procurement of GWS shall be carried out through
one of the following procedures:
Open tenders giving potential contractors at least 30 days of notice

A restricted bidders list based on a request for proposal
An online purchasing system managed by the Kazakhstan Contract Agency (KCA)
A commodities stock exchange.
Upon technical evaluation, winning contractors shall be chosen on the basis of the lowest price across all
relevant procurement methods. Under the procurement rules, subsoil users are required to publish
announcements of forthcoming purchases, tender documentation, draft procurement agreements, and results
onto an online registry of GWS.61 Subsoil users should also publish such information in company periodicals in
both the Kazakh and Russian languages.
The bid evaluation criteria provides for the inclusion of a 20 percent price premium for the following
categories of suppliers:
60
61
The above-mentioned individuals must fulfil certain criteria of higher education and experience of five years in relevant positions.
This is publicly accessible at http://www.report.camng.kz/Default.aspx.
116
Suppliers of goods who possess a CT-KZ certificate62

Suppliers of works and services with over 95 percent of their employees as Kazakh.
The CT-KZ certificate is a legal confirmation that goods were produced in Kazakhstan, and that the
producer is considered a domestic company. To issue a CT-KZ Certificate, the authorities assess the origin of
the goods and expertise employed in production to then compute the rate of KC. The certificate is valid for one
year and entitles its holder to the 20 percent price premium. The incentive was provided to domestic
companies in previous regulations and confirmed in the 2010 regulatory. It denotes that each Kazakh company
that is registered within the Unified Register of Domestic Producers and Foreign Investors (discussed later)
will have the right to be awarded a bid, provided that the price is not 20 percent higher than that of the foreign
supplier.
In case of noncompliance with the procurement rules of Resolution 1139, subsoil users are subject to a
monetary fine or termination of the contract depending on the amount in violation, as follows:
For violations below 50 percent of the annual financial obligations, 63 a subsoil user is subject to a
monetary fine equivalent to 30 percent of the amount in violation.
For violations above 50 percent of annual financial obligations, companies are subject to contract
termination (MOG 2011).
The Kazakh authorities have also set specific local content aspirations for 2014, which are shown in Table 4.8
together with local content achievements.
Table 4.8 Kazakhstan: Local Content Targets and Attained Levels in 2011
Kazakh Content in:
Goods
Works
Services
Achieved in 2011
%
12.2
58.0
69.1
Targets for 2014

%
16
85
85
Source: Based on data from Yerkebulanov 2012; Decree 1135 of 29/12/2010.

Ministry of Oil and Gas KC Development Programs
In addition to setting procurement rules for subsoil users, additional local content policy tools were developed
by the MOG. These include:
Identifying the most demanded goods and services and mapping those with potential Kazakh
manufacturers
Supporting Kazakh companies involvement as coexecuters/subcontractors in foreign suppliers
contracts
Introducing long-term contracts for commonly procured GWS
Transitioning to online procurement
Training contractor and subcontractor Kazakh employees
Supporting companies in acquiring local content certification
Offering interest-free loans and advance payments for KZ-contractors equipment and personnel
mobilization and technology transfer activities (KMOG 2011).
KMG (National Oil Company) Local Content Development Efforts
In addition to the procurement rules and the MOG measures to support local manufacturers in the oil and gas
sector, the national oil company (KMG) has been actively involved in efforts aimed at increasing the share of
CT-KZ is issued (for a period of one year) by the Technical Regulation and Metrology Committee and provided to Kazakh
manufacturers of goods who are interested in working with subsoil companies. It is not mandatory to obtain a CT-KZ certificate to
supply for subsoil companies; however, it is necessary for subsoil companies to purchase from CT-KZ holders so that local content
will be calculated within the subsoil investment quota.
63 As per the Subsoil Law, all subsoil users must commit to an annual investment obligation considered as a financial obligation.
62
117
local content in its procurement of GWS in the oil and gas sector since 2009. In 2009 and throughout 2010, KMG
took several measures to increase the share of KC in procurement of GWS, covering:
Provision of information for Kazakhstan suppliers of GWS on KMGs procurement plans and
provision of catalogs of the goods scheduled for purchase.
Signing cooperation memoranda and contracts for the supply of GWS with local suppliers. In 2009
memoranda for the total amount of 44 billion Kazhaki tenge (KZT) were signed with local suppliers in
more than 15 different areas in Kazakhstan.
Launching of the NC KazMunayGas JSC (joint stock company) Promotion Program of the Oil and Gas
Machine Building Development in the Republic of Kazakhstan for 20102012.
Creation of the Coordination Council for the oil and gas machine-building sector including specialists
from the NC KazMunayGas JSC, and major Kazakh machine-building companies.
In 2011 KMG consolidated its local content support efforts into a holistic program called the Program of
the NC KazMunaiGaz JSC for the Development of Kazakhstans Content for 20112015. The program focused
on the following key objectives:
To increase the volume of purchases of locally produced goods

To assist local commodity producers in producing new commodities that are currently imported
To increase overall KC in large oil and gas projects
To build service and machinery-building assets.
KMG has also set the following quantitative targets to be achieved through the program by 2015:
Increase production of oil equipment by 23 percent from the 2010 level

Increase the share of local content in commodities purchases of the KMG Group to 50 percent
Increase the share of local content in work purchases of the KMG Group to 90 percent
Increase the share of local content in purchases of operators of large oil and gas projects
Set up new joint production, service, and machinery-building assets of the KMG Group.
KMG has already started working toward achieving the above goals. In fact, long-term agreements with a
total value of KZT 53.6 billion are planned for 201115 between KMGs affiliates and subsidiaries on the one
hand and domestic commodity producers on the other. Table 4.9 shows the breakdown of the planned
agreements value (in million KZT).
Table 4.9 Kazakhstan: Breakdown of the Planned KMG Agreements by Value (million KZT)
Name of KMG subsidiaries and
affiliates
KazMunaiGaz EP JSC
KazTransOil JSC
KazTransGaz Group
Total
2011
2012
2013
2014
2015
Total
8,019
1,357
3,981
13,357
8,243
1,357
3,937
13,537
8,499
1,598
1,598
7,779
1,356
3,393
12,528
32,540
4,070
17,026
53,636
4,117
12,616
Source: Based on data from KMG 2011b.

In addition, KMG has set specific targets for share of local content in procurement of GWS. The groups
objective for the 2011 share of local content was set at 55 percent. Indeed, in the first half of 2011, the KMG
Group purchases of locally produced GWS reached 48 percent. More specifically, the local content share of the
volume of goods purchased amounted to 40 percent, while the share of KC in purchased work comprised 66
percent and 57 percent of the volume of purchased services. Table 4.10 shows the actual figures for 2010 and
the targets for 2011.
118
Table 4.10 KMGs Kazakh Content in Purchased Goods, Works, and Services: 2010 and 2011
Goods
Work
Services
Year
KZT
billion
KC
%
KZT
billion
KC
%
KZT
billion
Kazakh
content
%
2010 (achieved)
2011 (plan)
First half of 2011 (achieved)
608
735
725
36
40
40
396
320
189
56
60
66
434
400
300
72
75
57
Total
in KZT
billion
KC
%
1,438
1,455
1,214
52
55
48
Source: Based on data from KMG 2011b.

Note: KC = Kazakh content.
KMG has also initiated its support programs for oil and gas machinery building in Kazakhstan through
cofinancing of plants and provision of long-term orders for overhauling, servicing, and troubleshooting. In fact,
such programs have been in place since November 2010, when KMG signed a technological agreement for
production of new oil and gas equipment with the Ministry of Transport. The agreement required that the JSC
Center of Engineering and Technologies Transfer of the Ministry of Transport provide technical and
technological documentation to local machine-building companies for enhancing the production of products
demanded by KMG and arranging for testing procedures after production of prototypes. Shortly after this
agreement, the oil and gas machine-building support program, JSC NC KMG Promotion Program of the Oil
and Gas Machine Building in the Republic of Kazakhstan, was launched. The program continues to be a key
pillar of KMGs overall local content support project, the Program of the NC KazMunaiGaz JSC for the
Development of Kazakhstans Content for 20112015. Since program implementation, local oil and gas
machine-building companies have been expanding their capabilities to produce different types of oil and gas
equipment. Today, these companies have the capabilities to produce more than 320 different types of highquality oil and gas equipment (KMG 2011b).
KC-related policies are legislated through:
Law 291-IV/2010 on subsoil and subsoil users

Law 156-IV/2009 on public procurement
Decree 1139/2007 on the rules for the procurement of GWS for subsoil users
Decrees 965/2010 and 1018/2010 on reporting forms
Decree 1135/2010 on state program for local content development
Decrees 367/2010 and 964/2010 on the measurement of local content and the unified calculation
method
Decree 45/2012 on expatriates workforce quotas and work permit rules
PSAs containing local content obligations specific to the project/area of operation.
4.3.4 Institutional Responsibility for Policy Design and Monitoring of Implementation
Four entities govern Kazakhstans petroleum sector local content policy design and implementation: the MOG,
Ministry of New Technologies, KCA, and Expert Council on Local Content. While the two ministries lead
policy design, the KCA is responsible for facilitating local content policy implementation. More specifically,
KCAs mission is to:
Promote local content through the involvement of Kazakhstan producers of GWS into the oil and gas
supply sector
Manage, document, and analyze local content operations in the procurements of subsoil users and
update the Unified Register of Domestic Producers and Foreign Investors (KCA Register)
Assist local manufacturers in meeting industry standards and requirements (KCA 2012a).
119
The KCA Register was created to fulfill transparency and complete disclosure in the procurement process.
Subsoil users are required to upload all procurement information and documents through the Subsoil User
Report Acceptance System (SURAC) for each tender (MOG 2012b). The SURAC is responsible for planning the
procurement process, and maintaining the register of local content requirements and the GWS procurement
plan. Via the SURAC, companies are able to upload all required information constituting the whole
procurement process from the initial call for supply of GWS, to GWS specifications, until the awarding of the
contract and the uploaded information are authenticated through electronic digital signatures (EDS). By
adopting this methodology, disputes related to noncompliance with the regulations and/or the contract can be
promptly solved through a transparent process. 64 Additionally, subsoil users and their subcontractors are
mandated to publish in the KCA Register their procurement calendars for all upcoming and planned requests
for GWS, and as well as past awards.
In 2012 the KCA announced that 99 percent of subsoil users have performed reporting procedures on GWS
in 2011 using the new system compared to 50 percent in 2008. Moreover, 98 percent of subsoil users reported
on their procurement plans using the new system compared to 45 percent of the companies in 2008.
Investments in procurement of GWS in 2011 were around $8.3 billion, nearly double that of 2010 ($4.7 billion)
and increasing from $2 billion in 2005.
In 2010 the KCA, with the cooperation with MOG, established the Expert Council on Local Content. The
council incorporates delegates from all major stakeholders in the oil and gas sector, including:
Associations and unions of entrepreneurs

Suppliers of goods and services
Subsoil users
Government and policy experts.
The council, which operates under the supervision of the MOG, is responsible for participation in the
assessment of local content of major projects; the development of working programs in Kashagan, Tengiz, and
Karachaganak; and communication and ensuring of the interests of domestic suppliers and contractors.
4.3.5 Interlinks
LCPs in Kazakhstan extend to other sectors such as mining, agriculture, and manufacturing. Concerning
international agreements, Kazakhstan has been an observer member of the WTO since its submission to join
the organization in 1996. Currently, the country is undergoing the final stages of negotiations toward becoming
a member of the WTO. During negotiations, the Kazakh team has been facing challenges on preserving local
content requirements in subsoil activities. As per a statement by the Kazakh minister of economic integration,
the government succeeded in preserving the countrys rights in preserving local-content-related policies in
subsoil activities (Gazeta 2012). On September 3, 2012, President Nazarbayev requested the government to
reshape the deployed LCPs in the agriculture, manufacturing, and financial sectors in light of joining the WTO
(KCA 2012c).
Subsoil users are required to file a Quarterly Kazakh Content Monitoring Report and an Annual Procurement
Plan in the KCA Register. Specifically, subsoil users and their subcontractors are mandated to report on:
64
The medium- and long-term procurement calendar

Local content in terms of GWS on a quarterly manner
Status on employment of the Kazakh workforce
Performance of training and retraining obligations of local workforce (own staff, supplier, students)
(MOG 2012b).
Settlement can be drawn to the judicial system should any side of the dispute consider the KCA verdict as unlawful.
120
To standardize measurement and reporting on local content, the Kazakh authorities have developed specific
formulae for the calculation of use of local content by subsoil users.
Local Content in the Labor Force
Local content in the petroleum workforce is monitored via work permits and through the periodical reports
submitted by subsoil users on the status of their employment obligations. As for educational commitments, the
MOG represented by the KCA is responsible for monitoring educational contracts execution and detection of
any breaches. In case of a breach, subsoil users are sent notices for their violations, and any amount that
remains unspent is considered as educational debt that must be carried out by the subsoil user before the end
of the contract.
Local Content in the Procurement of Goods, Works, and Services
The measurement of KC in the procurement process is a two-way process that varies by GWS. The percentage
of KC in goods is stated in the CT-KZ certificate65 issued by the Technical Regulation and Metrology
Committee66 to the Kazakh manufacturer. The percentage of KC in goods procured by a subsoil user that
utilizes the goods produced by a holder of CT-KZ certificate is identical to the percentage indicated on the
certificate.
In March 2009 the Kazakh Government approved Decree No. 367 that formalized the measurement of local
content in GWS. The decree became effective in 2010. In accordance with the Decree No. 367/2010, the KC in
goods (KCT) is measured as follows:
n
Equation 1
KCT 100%
CT K
i
i 1
Where:
n is the total number of goods purchased by a supplier and its subcontractors for the execution of a
contract for the provision of goods to a subsoil user.
i is the cost of good i.
Ki is the share of KC in goods indicated in the -KZ certificate.
S is the total cost of goods purchases.
The KC in works and services (KCp/y) is measured as follows:
CT K CA
n
Equation 2
KC p / y 100%
i 1
j 1
CT j CCA j R j
Where:
n is the total number of goods purchased by the suppliers and subcontractors for the execution of a
contract for provision of works (services) to a subsoil user
CTi and Ki are as per the definitions above
m is the total number of contracts for provision of works (services) signed by a subsoil user and its
contractors
Aj is the value of jth contract
To understand Kazakh content in goods produced by local producers, a CT-KZ certificate was introduced. CT-KZ is issued (for a
period of one year) by the Technical Regulation and Metrology Committee and provided to Kazakh manufacturers of goods who
are interested in working with subsoil companies. It is not mandatory to obtain a CT-KZ certificate to supply for subsoil companies;
however, it is necessary for subsoil companies to purchase from CT-KZ holders so that local content will be calculated within the
subsoil investment quota.
66 Issuance, verification, and registration of CT-KZ are performed by the territory departments of the Committee of the Technical
Regulation and Metrology of the Ministry of Industry and Trade.
65
121
j is the total cost of goods purchased under the jth contract

Aj is the total value of subcontracting agreements signed under the jth contract
Rj reflects the share of Kazakh staff payroll in total compensation
S is the total value of the contract for provision of works (services).
For quarterly reporting purposes, Kazakh content is calculated as:

n
KC 100%
CA KC
i 1
Where:
n is the total number of contracts signed by a subsoil user with suppliers of GWS
Ai is the value of each contract for the purchase of GWS
i is the Kazakhstani content of a supplier of GWS under each procurement contract
S is the total cost of GWS purchased by a subsoil user in the relevant reporting period (RoK 2010a).
Information on local content so collected by the government is used for monitoring purposes, as well as to
measure the level of involvement of local enterprises and the assessment of domestic competitiveness (RoK
2010a).
Levels of local content in employment and GWS improved significantly after the introduction of the unified
methodology and certification process; however, some violations and drivers for subsoil users inability to
comply with requirements remain, suggesting room for improvement in LCPs.
Prior to the publication of the unified methodology and the introduction of the certification process, each
company reported local content levels using its own formulas. Some reported committed expenditure while
others used actual spending. This inconsistency led to difficulty in accounting for the impact of LCPs. The
introduction of the unified calculation methodology and certification process, however, eliminated the
inconsistency in accounting for local content leading to improved reporting and local content levels. In fact, in
the first quarter of 2012, the KCA reported an overall level of 96.6 percent local content in employment, well
above the regulators targets (see tables 4.7 and 4.11). In general, local content across all categories has shown
improvement from the Q1 2011 levels.
Table 4.11 Kazakh Content in Subsoil Personnel
Category I
Q1 2011
Q2 2011
Q3 2011
Q4 2011
Q1 2012
Category II
Category III
Total
Total (#)
% Kazakh
Total (#)
% Kazakh
Total (#)
% Kazakh
Total (#)
% Kazakh
3,495
3,756
3,627
3,639
3,696
77.2
79.7
81.3
82.5
83.1
18,837
24,937
24,359
24,615
24,793
91.2
92.9
93.5
93.8
94.0
36,267
41,447
40,414
41,209
42,847
98.8
99.1
99.1
99.2
99.3
58,599
70,140
68,400
69,463
71,336
95.8
96.4
96.7
96.9
96.6
Source: Based on data from KCA 2012a.
In 2011 a total of $10.4 million allocation was set by subsoil users for education and training, which
secured the training of 1,068 Kazakh citizens involved in the oil and gas sector (KCA 2012a). According to the
MOG, over 83 percent of the trainees will be employed gradually by subsoil users.
Looking at GWS, the level of reporting has dramatically increased upon the enforcement of the reporting
system in 2010, as shown in Figure 4.9. In addition, the number of violations has decreased in value from KZT
158 billion in 2010 or 25.4 percent of annual investments, to KZT 113 billion or 17.8 percent of the investments.
122
Figure 4.9 Kazakhstan: Reports Filed by Subsoil Companies, 200811

Reports on Commodites and services
50%
Yearly Purchase Plans
95% 95%
99% 98%
2010
2011
59% 59%
42%
2008
2009
Source: Based on data from MOG 2012c.
Additionally, the level of local content in GWS in 2011 is showing an increase compared to 2010 (Figure
4.10). More specifically, the level of local content in goods increased by 2 percentage points in 2011, while local
content in works and services increased by 8 percentage points each (Table 4.12).
Figure 4.10 Evolution of Kazakh Content in Monetary Presentation for the Purchase of Goods, Works, and
Services, 200911 (in KZT billion)
% Change
2009 - 2011
2,207
44%
Imported
553%
56%
KC
309%
1,505
+390%
54%
450
33%
46%
67%
2009
2010
2011

Table 4.12 Kazakh Content in Goods, Works, and Services: 201011
Goods
Works
Services
2010
Total spend (KZT billion)
354
405
746
% KC
10.3
50.0
60.6
2011
Total spend (KZT billion)
352
889
967
% KC
12.2
58.0
69.1

In purchases of goods in offshore operations, the share of local goods was highest in development activities
compared to exploration and operations activities, where the share of local goods didnt exceed 9 percent.
More specifically, the highest share of local goods purchases was in development activities such as foundation
construction purchases (83 percent), followed by tank farm-system purchases (71 percent), and offshore fixedplatform-construction-related purchases (46 percent). On the other hand, the lowest share of local goods
purchases was at 7 percent in development-related software products and nitrogen units and operationsrelated spare parts (Figure 4.11).
123
Figure 4.11 Kazakh Content in Goods Purchased for Offshore Operations, 2011
Exploration
Well construction
9%
General marine systems
20%
High pressure and low pressure compressors
9%
Software products
7%
Nitrogen units and instrumentation units
7%
Power generation system

Development
9%
Power system and communications
20%
Cofferdam foundation construction
83%
Flare system
14%
Offshore fixed platform construction
46%
Tank farm system
71%
Fuel gas system

Operations
Other
10%
Process system maintenance

Spare parts, tools and accessories
9%
7%
Software products
9%
Source: Based on data from KCA 2012b.

In onshore operations, however, the share of local goods reached 70 percent in development as well as
operations and abandonment activities, as shown in Figure 4.12. More specifically, in development activities,
the share of local goods purchased for supra salt fields tank farm separators and tanks was 70 percent,
followed by a 60 percent share in supra salt oil flowlines/pipelines purchases, and 50 percent of supra salt
power supply system purchases. In operations, the share of local goods purchases was highest in primary
hydrocarbon treatment systems (70 percent). On average, however, local goods purchases lagged in subsalt
field activities, covering exploration, development, and operations such as production, well construction, and
production simulation systems (the share didnt exceed 10 percent).
Figure 4.12 Kazakh Content in Goods Purchased for Onshore Operations by Depth, 2011
Exploration
42%
Exploration well construction
10%
Production well construction
10%
45%
21%
22%
Power system and communications

Power supply system
50%
51%
Oil flowlines / pipelines
51%
Tank farm (separators, tanks)
50%
Development
Production automation systems
60%
70%
10%
6%
41%
Spare parts, tools and accessories
21%
30%
31%
Chemicals for production/transportation

Operations
Production simulation systems
Abandonment
20%
7%
Primary hydrocarbon treatment systems
70%
71%
Well suspension
70%
71%
Suprasalt fields (up to 2,500 m)

124
Subsalt fields (up to 2,500 m)
Purchases of local works and services in offshore operations were significantly high in support activities, such
as environmental surveys, insurance services, and legal services, where their share reached 95 percent of
purchases. But in more technical offshore activities, the share of local works and services is significantly lower
at 6 percent in EPCM (engineering, procurement, construction and management and reaches a maximum of 46
percent in offshore fixed-platform construction (Figure 4.13).
Figure 4.13 Kazakh Content in Works and Services Purchased for Offshore Operations, 2011
Seismic operations
20%
Environmental surveys
Exploration
93%
Geological, geophysical surveys and other research
Drilling operations
Drilling services
40%
8%
10%
Oil spill response and clean-up
18%
Offshore fixed platform construction

Development
46%
Cofferdam foundation construction
43%
Preparation of technical documents
20%
Air conditioning and ventilation system
Equipment maintenance and repair

Operations
27%
10%
Fixed equioment maintenance and repair
40%
Rotating equipment maintenance and repair
30%
Start-up
22%
Industrial waste management
30%
Insurance services
95%
Emergency consultants services / medical treatment

Other
80%
Design / feasibility study, permits and approvals

EPCM
84%
6%
Customs clearance, transport and forwarding
84%
Legal services
95%
Transportation services
55%

Note: KC = Kazakh content; EPCM = Engineering, procurement, construction and construction management.
In purchases of works and services in onshore operations, the level of local content was comparable in
supra and subsalt fields activities as well as across exploration, development, operations, and abandonment
activities (Figure 4.14).
Figure 4.14 Kazakh Content in Works and Services Purchased for Onshore Operations by Depth, 2011
80%
Seismic acquisition
69%
76%
Exploratory drilling
Exploration
40%
80%
Geotechnical studies
69%
60%
59%
Analyses and research
76%
Construction and installation
59%
70%
Well drilling and construction

Directional drilling
Development
40%
40%
30%
76%
75%
76%
75%
Power supply
Pipeline construction
Design
50%
40%
70%
69%
Oilfield equipment maintenance
76%
Well workover
Operations
Enhanced oil recovery
60%
40%
39%
87%
86%
Waste management
50%
49%
Oil / gas transportation
80%
80%
80%
80%
Rig-down operations
Abandonment
Well suspension
90%
90%
EIA (ecology)
Suprasalt fields (up to 2,500 m)

Note: KC = Kazakh content; EIA = Environmental impact assessment.
125
Subsalt fields (up to 2,500 m)
Looking at overall KC by product group in 2011 (Table 4.13), the share of KC is highest in petroleum, oil, and
lubricants (44 percent), followed by transformers (28.8 percent), pump products (24.4 percent), and tabulators
(21.1 percent). But with the exception of tabulators, these products represented a low share of 2011 total spend.
Petroleum oil and lubricants were only 3.1 percent of 2011 total spend while transformers and pump products
represented 4.6 percent and 0.6 percent respectively. The highest share of procurement spend was in other
goods where KC represented only 8 percent.
Table 4.13 Kazakh Content by Product Group and Local Suppliers, 2011
Procurement spend
($ million)
% of total
spend
Average KC
(%)
Kazakh manufacturers
Total
Kazakh
270.2
68.6
19.7
21.1
88.2
13.6
6.4
2.2
87.6
17.6
6.4
11.6
63.1
21
4.6
24.4
50.2
4.1
3.7
44.1
3.2
4.1
Petroleum, oil, and lubricants
42.1
27.2
3.1
44
Almaty Heavy Engineering Plant, Petropavlovsk

Heavy Engineering Plant, Aktau Oil Electronic
Company (ANEK)
RauanNalco, Almatyneftekhim-, Global Chemicals
Company
Aktyubinsk Oil Equipment Plant, Munaimash, ANEK,
Caspian Machine-Building Complex
Kazneftegazmash, Munaimash, Ust-Kamenogorsk
Valve Plant
Kazelektromash, Kazenergokabel, Tolastroy SK,
AktauEnergoKabel
Kazakhstan vendors
Sucker rods
36.7
17
2.7
17
AZNO, Munaimash
Work clothes
25.8
6.8
1.9
15
Zhanarys, KazSPO-N LLP, Symbat LLP
21
3.4
1.5
12.6
8.8
3.4
0.6
28.8
634.8
67.2
46.3
8.2
1,372.7
251.2
100
13.2
Tubulars
Drilling equipment
Chemicals
Pump products
Wellhead equipment, valves
Wires and cables
Separators, tanks
Transformers
Other goods
Total
LLP KSP Steel
West Kazakhstan Machine-Building Company, JV

Byelkamit, Buran Boiler
Kentau Transformer Plant, Alageum Electric

Despite the overall increasing share of local content in the oil sector, some violations remain due to
difficulties faced by subsoil users preventing them from meeting their local content targets. In 2010 the MOG
reported that 122 violations of the Procurement Rules were identified, and 34 notices for termination of
contracts were sent out (Ospanova 2010). Overall, the local industry found difficulty in complying with the
new local content requirements. Among the challenges faced were:
Shortage of suppliers with specialized capacity to construct products in demand by subsurface users
Growth in technological capacity among local suppliers is lower than industry demand
Lack of qualified local workforce, which is challenged by the long-term nature of the training and
education developments
Lack of sufficient investments directed toward the development of small- and medium-sized
enterprises (SMEs) (Ospanova 2010).
Violations of procurement rules in 2011 were reported by the KCA as follows: 54 companies violated the
procurement rule in at least 50 percent of their investment obligations, 32 companies violated in less than 50
percent, and 24 companies were in full compliance of the procurement rules.
126
References
Academic Ranking of World Universities. 2010. ARWU Statistics.
http://www.arwu.org/ARWUStatistics2010.jsp.
Arkhipov, Sergei, William Brennan, George Elfond, Ning Lv, and Akmaral Omarova. 2010. Kazakhstan Oil and
Gas Sector. Harvard Business School, Boston: Harvard Business School.
Baker and McKenzie. 2011.Changes to Kazakhstans Legislation on Foreign Employees. Almaty.
Buchannan, F. Robert, and Syed Tariq Anwar. 2009. Resource Nationalism and the Changing Business Model for
Global Oil. The Journal of World Investment and Trade, V. 10 No. 2.
http://www.adu.ac.ae/en/media/get/20130304_JWITfinal.pdf
Burkhalter, Nancy, and Maganat Shegebayev. 2012. Critical Thinking as Culture: Teaching Post-Soviet Teachers in
Kazakhstan. Springer Science and Business Media. International Review of Education. Volume 58, Issue
1, pp 55-72.
Campaner, Nadia, and Shamil Yenikeyeff. 2008. The Kashagan Field: A Test Case for Kazakhstan's
Governance of Its Oil and Gas Sector. Gouvernance Europenne et gopolitique de lnergie. Paris,
France.
CIA (Central Intelligence Agency). 2012. The World Factbook. Washington, DC.
https://www.cia.gov/library/publications/the-world-factbook/fields/2221.html.
Coronel, Ana Luca, Dmitriy Rozhkov, and Ali Al-Eyd. 2011. Country Report. Washington, DC: International
Monetary Fund.
CPI (Corruption Perceptions Index). 2011. Corruption Perceptions Index.
http://cpi.transparency.org/cpi2011/results/.
J. D. Craig, James McHugh, Harry Snoek, Ron van Rooden, Ivailo Izvorski, Emine Grgen. . 1999. Economic
Reforms in Kazakhstan, Kyrgyz Republic, Tajikistan, Turkmenistan, and Uzbekistan. International
Monetary Fund. Washington DC.
Deloitte Global Services Limited. 2012. Corporate Tax Rates 2008-2012.
Deutsche Bank. 2010. A Guide to the Oil and Gas Industry. London: Deutsche Bank.
Domjan, Paul. 2004. The Supplier Development in the Oil and Gas Sector of Kazakhstan. Ministry of Economy and
Budget Planning of the RK and the World Bank. Kazakhstan.
EIA (Energy Information Administration). 2004. Kazakhstan Country Analysis Brief. Washington, DC: EIA.
EoN (Embassy of the Netherlands in Kazakhstan). 2011. Special Energy Issue on Kazakhstan.
http://kazakhstan.nlembassy.org/binaries/content/assets/postenweb/k/kazachstan/embassy-of-thenetherlands-in-astana-and-almaty/special-energy-issue/energyissue_november2011.pdf.
Ernst and Young. 2011.Kazakhstan Oil and Gas Tax Guide.
http://www.ey.com/Publication/vwLUAssets/Kazakhstan_OGTG_2011_E/$FILE/Kazakhstan_OGTG_2
011_E.pdf.
Faizuldayeva, Dinara. 2010. Oil Wealth Management in Kazakhstan: 1991-2010. Central European University,
Department of Public Policy.Budapest, Hungary.
127
Gazeta. Process of Kazakhstans Accession to WTO at Final Stage. March 29, 2012.
http://engnews.gazeta.kz/art.asp?aid=360033.
Gizitdinov, Nariman. 2011. Kazakhstan Oil Exports to Rise 2.8% Next Year, Ministry Says.
http://mobile.bloomberg.com/news/2011-03-15/kazakhstan-oil-export-to-rise-2-8-next-year-ministrysays?category=.
Gomes, Emanuel, and Markus Weimer. 2011. Education in Angola: Partnership Opportunities for the UK. London:
Chatham House.
IIED (International Institute for Environment and Development). 2011. Local Content Policy Kazakhstan Review.
Technical Report for the British Embassy in Astana.ILO. 2012. Total Employment by Economic
Activity. http://data.un.org/Data.aspx?d=LABORSTA&f=tableCode%3a2B.
IMF (International Monetary Fund). 2010. International Monetary Fund Executive Board Concludes 2010
Article IV Consultation with the Republic of Kazakhstan. Public Information Notice (PIN) No. 10/98,
July 27, 2010. http://www.imf.org/external/np/sec/pn/2010/pn1098.htm.
. 2011. Republic of Kazakhstan: 2011 Article IV ConsultationStaff Report; Supplement; and Public Information
Notice. Washington, DC: IMF.
. 2012. World Economic Outlook Database. Washington, DC: IMF.
http://www.imf.org/external/pubs/ft/weo/2012/01/weodata/weorept.aspx?sy=2010&ey=2017&scsm=1&
ssd=1&sort=country&ds=.&br=1&pr1.x=49&pr1.y=15&c=916&s=NGDPD%2CTX_RPCH%2CTXGO%2
CTMGO%2CGGR%2CGGR_NGDP&grp=0&a=.
Johnston, Daniel, and David Johnston. 2001. Kashagan and Tengiz. PetroMin Magazine, 2001.
http://www.danieljohnston.com/pdf/kashagan_and_tengiz.pdf.
Kalyuzhnova, Yelena. 2006. Overcoming the Curse of Hydrocarbon: Goals and Governance in the Oil Funds
of Kazakhstan and Azerbaijan. Comparative Economic Studies, 48 (4), 583-613.
. 2008. Economics of the Caspian Oil and Gas Wealth. Palgrave MacMillan. New York.
Kalyuzhnova, Yelena, and Michael Kaser. 2005. Prudential Management of Hydrocarbon Revenues in Resource-rich
Economies. Geneva: United Nations Economic Commission For Europe.
Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2011. The Worldwide Governance Indicators (WGI)
Project. http://info.worldbank.org/governance/wgi/index.asp.
KMG (KazMunaiGas). 2010. The Company. http://www.kmgep.kz/eng/the_company/our_business/.
. 2011a. KMG Investor Presentation . http://www.kmgep.kz/eng/investor_relations/presentations/
. 2011b. KMGKazakhstan's Local Content. http://kmg.kz/en/kaz_content/2011/.
. 2011c. Oil Refining and Marketing. http://www.kmg.kz/en/manufacturing/refining/.
. 2012. History. http://www.kmg.kz/en/about/history/chronology/.
KCA (Kazakhstan Contract Agency). 2012a. http://camng.kz/en/2-e/2-1-e.html.
. 2012b. Kazakhstani Content in the Oil and Gas Industry. Ministry of Oil and Gas.
. 2012c. President Speech. September 07, 2012. http://www.kca.kz/?module=news&news_id=253496.
Klaveren, Maarten van, Kea Tijdens, Melanie Hughie-Williams, and Nuria Ramos Martin. 2010. Kazakhstan
An Overview of Women's Work, Minimum Wages and Employment. Amsterdam: University of Amsterdam
/Amsterdam Institute for Advanced Labour Studies (AIAS).
KMOG (Kazakhstan Ministry of Oil and Gas). 2011.Oil and Gas: Kakhstan Content. Astana: KMOG.
128
KPMG. 2011. Tax and Legal News Flash.

http://www.kpmg.com/KZ/en/IssuesAndInsights/ArticlesAndPublications/NewsFlash/Documents/Ma
y_Eng-2011.pdf.
Luong, Pauline. 2010. Beyond Resource Nationalism Implications of State Ownership in Kazakhstans Petroleum
Sector. Brown University. Rhode Island, United States.
MENAS. 2009. Local Content Online. London: MENAS.
http://www.menas.co.uk/localcontent/home.aspx?country=6&tab=law.
Comptetitveness. MGI.
hs_about_trade
MOG (Ministry of Oil and Gas). 2011. Oil and Gas: Kazakhstan Content. Astana. http://camng.kz/en/
. 2012a. http://mgm.gov.kz/index.php?lang=en.
. 2012b. Kazakhstani Content in the Oil and Gas Industry.
http://camng.kz/images/stories/slides/kazakhstani%20content%20in%20the%20oil%20and%20gas%20i
ndustry.pdf
. 2012c. Report on the Development of the Kazakhstan Content in Oil and Gas Industry in Year 2011. Astana:
MOG.
Technical Vocational Education and Training and Lifelong Learning in Trinidad and Tobago that was
laid in Parliament on January 12th 2011. http://www.stte.gov.tt/.
Nisengolts, Alex. 2011. Amendments to the Work Permit Rules: Problematic Issues. KPMG, Kazakhstan.
Ospanova, Saule. 2010. Local Content Policy: Kazakhstan review. Astana: British Embassy.
RoK (Republic of Kazakhstan). 2010a. Decree of the Government of the Republic of Kazakhstan dated September 20,
2010 # 964. On Approval of Uniform Accounting Treatment to Kazakhstani Local Content by Organizations
when Purchasing Goods, Works, and Services. Astana: Republic of Kazakhstan.
. 2010b. Embassy of the Republic of Kazakhstan. Astana: Republic of Kazakhstan.
http://www.kazakhembus.com/index.php?page=infrastructure.
. 2010c. Law of the Republic of Kazakhstan on Subsurface and Subsurface Use. Astana: Republic of
Kazakhstan.
. 2011. Resolution No. 71 of the Government of the Republic of Kazakhstan on Changes and Amendements to the
19 June 2001 Resolution No. 836. Astana: Republic of Kazakhstan.
Talwani, Manik, Andrei Belopolsky, and Dianne L. Berry. 1998. Geology and Petroleum Potential of Central Asia.
Houston: Rice University.
The World Bank Group. 2012. http://www.doingbusiness.org/.
Tordo, Silvana, Brandon S. Tracy, and Noora Arfaa. 2011. National Oil Companies and Value Creation.
Washington, DC: World Bank.
UN (United Nations). 2006. National Plan of Actions Presentation Project. Bangkok: UN ESCAP.
. 2010a. National Accounts Main Aggregates Database. New York: United Nations.
. 2010b. Department of Economic and Social Affairs. Population Division, Population Estimates and
Projections Section. http://esa.un.org/unpd/wpp/unpp/panel_indicators.htm.
129
. 2012. United Nations. http://data.un.org/.

UNIDO. 2012. Statistical Country Briefs. http://www.unido.org/index.php?id=1002110.
http://hdr.undp.org/en/statistics/
UNICEF (United Nations Childrens Fund). 2008. Country Profile: Education in Kazakhstan.
http://www.unicef.org/ceecis/Kazakhstan.pdf.
Utegenova, Gulmira. 2010. National Regulation of the Hydrocarbon Industry. Hydrocarbons: Economics, Policies
And Legislation. Encyclopidia of Hydrocarbons. Volume IV, 683-695. Almaty, Kazakhstan.
WEF (World Economic Forum). 2011. The Global Competitiveness Index 2011-2012 rankings.
Whitman, Ian. 2008. Tertiary Education in ECA: Challenges and Opportunities. OECD. Kiyev, Ukraine.
World Bank. 2010. http://search.worldbank.org/data?qterm=unemployment&language=EN.
. 2011. World Bank Development Indicators.
. 2012a. Business Environment Snapshot for Kazakhstan.
http://rru.worldbank.org/besnapshots/BecpProfilePDF.aspx?economy=kazakhstan.
. 2012b. World Development Indicators and Global Development Finance. Washington, DC: World Bank.
WTO (World Trade Organization). 2012. Statistics Database.
Yerkebulanov, Yerbolat. 2012. Kazakhstan: New Local Content Approach. GRATA Law Firm, Oil, Gas and Energy
Law Intelligence. http://www.gratanet.com/en/publications/466.
130
5.Malaysia
Malaysias history in the hydrocarbon sector dates back to 1910, when Shell discovered oil in Sarawak.
Historically, international oil companies (IOCs) have played a key role in the countrys hydrocarbon landscape.
A major milestone related to the mode of IOC engagement was the foundation of Malaysias national oil
company (NOC), Petronas, in 1974. The event was driven by a confluence of political and economic factors and
a growing sense of nationalization (Bank Pembangunan 2011). Since then, IOCs have been engaged under
production sharing agreements (PSAs). The establishment of the NOC came along with a local content agenda
that looked at developing local capabilities, gaining further control over the sector, and driving links to the
industry.
More recently, the governments Economic Transformation Program (ETP) of 2010 marked a turning point
in relation to local content and backward links from the petroleum sector. The ETP aims at transforming the
nation into a high-income country by 2020. Through this program the country plans on growing its gross
national income (GNI) by 6 percent every year, allowing it to grow its GNI per capita from the 2009 level of
$6,700 to $15,000 by 2020. Under the new program the petroleum and energy sector is the first of the 12
National Key Economic Areas.67 Three of the 12 sectoral ETPs fall under local content policies (LCPs), all
aiming at the creation and strengthening of value creating activities along the oil and gas value chain. Indeed,
the government aims at increasing the competitiveness of its domestic oil field services and equipment (OFSE)
industry to become a regional hub by 2017. Drivers for these aspirations are centered on:
A growing regional market for OFSE (but no current regional hub)

A growing domestic petroleum industry that is exposed to a complex geology (as Malaysias
reservoirs become depleted, future discoveries are expected to be more technically challenging)
The countrys geographical proximity to resource rich-countries in Asia and the Middle East
Existence of a domestic competitive local workforce.
At this stage and in coordination with Petronas, the government has defined specific initiatives, targets,
and an implementation road map that is being closely monitored (Pemandu 2012).

In 2010 Malaysia had the 37th-largest gross domestic product (GDP) and 39th-largest population in the world.
The country enjoys a well-developed infrastructure, which was classified 23rd out of 142 countries worldwide,
out-ranking the United States by one spot in 2010. As per the World Economic Forum (WEF) classification,
Malaysias economy is in its second stage of development and is considered as an efficiency-driven economy.
The GDP per capita in 2011 was $9,656, the highest among its largely populated neighbors (World Bank 2012c).
The countrys constitutional monarchy, with a democratically elected parliament along with its well-developed
infrastructure system, provides a favorable and stable business environment. In fact, Malaysia ranked 21st out
of 142 in global competitiveness, improving five spots from last year. Despite that improvement, the country
ranks behind neighboring Singapore (second position) and Hong Kong (eleventh position). Malaysia ranked in
the low 20s among other countries on basic requirements, efficiency enhancers, and innovation subindices.
According to the Global Competitiveness Report, Malaysia ranks high due to its efficient and sound financial
67
For a detailed overview, visit http://etp.pemandu.gov.my.
131
sector, highly efficient goods market, and a transparent and relatively well-developed tax system. The country
also witnessed significant improvement in education over the past two decades with a significant increase in
the percentage of secondary- and tertiary-educated workers, and adult literacy rate reaching 92.5 percent (WEF
2011).
Nonetheless, the country is faced with several challenges. In fact, the countrys depleting natural resources are
largely affecting current and future of government revenues. In addition, the fuel subsidy burden is also
mounting as oil reserves are depleting and the country is turning into a net importer. The maintained high
growth in population experienced and expected for the next decades also applies pressure on unemployment
levels, and there is a growing tendency for brain drain. On the other hand, the macro challenges include
competition from neighboring countries with lower-cost labor and resources (such as China, India, Indonesia,
and Vietnam).
5.1.1 Economy
Malaysias 2011 GDP was at $278.6 billion and its growth rate was at 7 percent in 2010, and 5 percent in 2011
(World Bank 2012c). Its GDP per capita in 2011 was at $9,656, the highest among its largely populated
neighbors, and significantly higher than the South Asian average GDP per capita of $1,371 (World Bank 2012c).
In fact, Malaysia was ranked 4th in terms of GDP per capita adjusted for purchasing power parity in Southeast
Asia in 2011, and across the world it was ranked 77th of 226 countries (CIA 2012).
The 1970s were a turning point for the Malaysian economy, which witnessed momentous growth in GDP,
as growth rates reached a record high of 12 percent in 1973 and 1976. Malaysias GDP growth was interrupted
by the Asian financial crisis in the late 1990s, during which its GDP contracted to 7 percent in 1998. Malaysias
economy, however, demonstrated resilience as it started growing shortly after this contraction with growth
rates reaching 6 and 9 percent in 1999 and 2000. In doing so, the economy recorded a faster recovery than its
neighboring countries such as Thailand, Philippines, and Indonesia.
Since independence in 1957, the Malaysian authorities began to take a proactive role in the development
and industrialization of the economy. Traditionally, successive governments have adopted five-year plans each
with set targets for developing the countrys key economic, social, and environmental segments. These plans
focused primarily on diversifying the countrys economic base by transforming it from an agriculturedominated economy to a more industrial and export-oriented economy (Mun 2007). Indeed, the agricultural
sectors annual contribution to GDP did decline to 15 percent in recent years compared to a 30 percent in the
early 1960s. On the other hand, the contribution of the manufacturing sector has risen from below 10 percent
during the 1960s to 28 percent during the past five years (World Bank 2012c).
Along with the manufacturing base and the export sector, Malaysian governments have also focused on
foreign direct investment (FDI) promotion. In fact, during the past decade, FDI in Malaysia steeply increased to
reach over $10 billion in 2011. Promoting FDI as a government policy began in the late 1960s when authorities
introduced the first investment incentive regulations. Later in 1971, the Free Trade Zone Act was issued and in
1972 the first free trade zone was launched. It was then that FDI began to play a significant role in the countrys
development (Athukorala and Wagl 2011). From the late 1980s to 2000 FDI in Malaysia made a leap,
increasing from annual levels below $2 billion to above $4 billion. But the financial crisis of 199798 disrupted
Malaysias remarkable record of attracting FDI, which contracted from $5 billion in 1996 to $2.1 billion in 1998.
Table 5.1 presents key economic indicators for Malaysia.
The countrys trade as a percent of GDP has also increased over the years. Exports in particular have
increased since 1990 by nearly six-fold, with manufacturing goods being the chief export commodity. Malaysia
is a leading exporter of electrical appliances, electronic parts, and components, in addition to palm oil and
natural gas (World Bank 2012b). Among total merchandise exports (imports), about 15 percent (10 percent)
were agricultural products, 16 percent (15 percent) were fuels and mining products, and 67 percent (73 percent)
were manufactured products. Malaysias largest trade partner in exports in 2010 was Singapore, and Japan in
132
imports. For total commercial services exports (imports), about 15 percent (37 percent) represented
transportation, 56 percent (25 percent) represent travel, and 30 percent (38 percent) represent other services
(WTO 2012a). The evolution of Malaysias exports by commodity is shown in Figure 5.1.
Table 5.1 Key Economic Indicators for Malaysia, 19802010

1980
1985
1990
1995
2000
2005
2006
2007
2008
2009
2010
26.4
33.9
47.2
74.2
93.8
118.2
124.8
132.7
139.1
137.0
146.8
1,909.6 2,149.4 2,592.5 3,581.9 4,005.6 4,529.6 4,695.2 4,905.1 5,057.8 4,901.5 5,168.7
Inflation, CPI (%)
6.7
0.3
2.6
3.5
1.5
3.0
3.6
2.0
5.4
0.6
1.7
4.8
4.9
-1.1
1.3
2.5
1.4
-3.9
12.9
-0.1
2.2
2.5
2.7
2.5
3.8
3.8
3.7
3.4
3.3
3.5
3.2
Trade (% of GDP)
111.0
103.2
147.0
192.1
220.4
212.1
210.5
199.4
183.2
171.2
176.8
Source: World Bank 2012c.
Not available.
Figure 5.1 Malaysias Exports by Commodity, 19802010 ($ billion)
13.0
29.5
73.9
98.2
141.0
198.6
25%
29%
24%
28%
27%
13%
1%
5%
10%
2%
6%
7%
21%
16%
100%
10%
10%
1% 1% 0%
46%
2% 2%
11%
2%
25%
8%
25%
1980
3% 1%
4% 1%
17%
10%
16%
8%
15%
Chemicals
Telecommunications equipment
19%
17%
7%
10%
13%
16%
1995
2000
2005
2010
18%
Other Manufactures
Mining Products
15%
15%
18%
1990
9%
12%
Electronic data processing and office equipment

Integrated circuits and electronic components
Fuels
Source: Based on data from WTO 2012a.

5.1.2 Taxation
Malaysias tax system is transparent and relatively well developed; it is based on the UK and Australian tax
systems. The tax burden is moderate and generally in line with those of other neighboring countries. Taxes are
levied on yearly income accumulated inside or derived from Malaysia. The tax burden is composed of direct
and indirect obligations. Direct taxes are levied for income, real property gains, petroleum income,68 as well as
stamp duty. On the other hand, indirect taxes are levied on excise duty, cross-border trade, sales, and services
tax (UHY 2011).
Corporate tax is at 25 percent,69 a lower bracket compared to neighboring countries such as Australia, and
the Philippines, but in line with Indonesia and Thailand. Sales tax is between 5 to 10 percent, and service tax is
at 6 percent (KPMG 2012). In terms of tax revenue as a percentage of GDP, Malaysia ranks above average
against neighboring countries. Malaysia also levies ad valorem import duties that range from zero to 60
percent. Duties on raw materials and machinery are generally lower. Figure 5.2 presents a comparison of
68
69
Petroleum income tax is at 38 percent.

This is a reduction of 1 percentage point from the 2010 corporate tax rates.
133
Malaysias revenues from taxes and the countrys corporate tax rate to other countries.
Figure 5.2 Malaysias Tax Revenues and Corporate Tax Rate Compared to Select Countries, 2009 and 2010
Angola
43%
Norway
Angola
35%
27%
Brazil
Trinidad and Tobago
26%
Australia
30%
United Kingdom
26%
India
30%
South Africa
26%
Uganda
Netherlands
23%
Australia
22%
Malaysia
16%
Chile
16%
Brazil
13%
Canada
12%
Uganda
12%
Indonesia
India
Kazakhstan
30%
Canada
28%
Norway
28%
South Africa
16%
Russia
34%
28%
Indonesia
25%
Malaysia
25%
Netherlands
25%
Trinidad and Tobago

UK
11%
10%
8%
25%
24%
Chile
20%
Kazakhstan
20%
Russia
20%
OECD 14%
Source: Based on data from CIA 2012; Deloitte 2012; World Bank 2011b.
Note: For Angola, tax revenues reflect 2011 levels and include social contributionssuch as payments for social security and hospital
insurancegrants, and net revenues from public enterprises.
Malaysia offers a basket of tax incentives to promote investments in selected industries. Tax incentives are
offered for foreign investments in the following business categories: manufacturing, tourism, agriculture,
environment protection, training, research and development (R&D) as well as transport and communication
(UHY 2011). Some industries that may qualify for tax incentives also include biotechnology industries, venture
capital companies, and operation headquarters. Malaysia also has extended tax incentives to companies
generating renewable energy to promote the advancement of green technology and efficient utilization of
energy until December 31, 2015 (PKF 2012). In addition, Malaysia is signatory to a wide network of more than
70 treaties, which may indicate possible further reductions to tax rates in the future.70
The Malaysian population totaled 28.8 million in 2011 and is composed of three main ethnicities.
Approximately 53 percent are Malay Muslims, while the other two main ethnic groups are Chinese,
constituting 26 percent, and Indians, constituting 7.7 percent. The Chinese mostly follow Buddhism and
Confucianism while the majority of Indians follow Hinduism (Khader 2012).
The population in Malaysia has been growing steadily since 1950; it is expected to still increase, but at a
slower rate (UN 2010). More specifically, Malaysia is expected to have a growing workforce driven by growth
in the population aged 1564. Figure 5.3 illustrates the evolution of Malaysias population by age group from
1950 to estimates for 2050.
2012 Investment Climate Statement Malaysia, US State Department, Bureau of Economic and Business Affairs, June 2012 Report.
http://www.state.gov/e/eb/rls/othr/ics/2012/191191.htm
70
134
50
45
40
35
30
25
20
15
10
5
0
70%
60%
50%
40%
30%
20%
10%
0%
1950
1955
1960
1965
1970
1975
1980
1985
1990
1995
2000
2005
2010
2015
2020
2025
2030
2035
2040
2045
2050
Million People
Figure 5.3 Evolution of the Malaysian Population and Labor Force over Time, 19502050 (in millions of people)
60+
50 to 59
40 to 49
30 to 39
20 to 29
10 to 19
0 to 9
% 15 - 64
Malaysias total workforce amounted to 11.7 million people in 2010, of which around 21 percent had
attained tertiary education. Malaysias net tertiary enrollment is higher than its neighboring countries, with the
exception of Australia (a more-developed country) and Thailand. The country also has one of the highest mean
years of education, outperforming that of the United Kingdom. But quality of education has been an issue,
with the inadequately educated workforce being the fifth-most problematic factor for doing business in 2011 in
Malaysia (Schwab 2011).
The overall unemployment rate in Malaysia is relatively low. In 2009 unemployment stood at 3.7 percent,
lower than the Organisation for Economic Co-operation and Development (OECD) average of 8.3, and below
the levels for some regional countries such as Philippines and Indonesia (as shown in Table 5.2). In fact,
unemployment rate has been below 4 percent since 2000, and it is ranked third in compensation per year per
worker in Southeast Asia, behind Australia and Singapore.
Table 5.2 Malaysia Labor Force Indicators Compared to Select Countries, 2010
Labor force
(Million)
Angola
Australia
Brazil
Canada
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
T&T
Uganda
UK
7.1
11.8
101.6
19.0
11.8
8.8
12.0
2.6
18.2
22.1
0.7
13.4
31.8

Primary
Secondary
Tertiary
27.3
13.5
18.3
19.9
15.8
25.3
19.2
38.9
40
56
43.5
74.2
63
44.4
33.8
46.5
21.1
35.8
5.2
11.1
35.4
Mean years Minimum wage

of education ($ per month)
Unemployment,
total (% of total
labor force)
4.4
12
7.2
12.1
5.8
10.4
9.5
12.6
8.5
5.1
9.2
4.7
9.3
25.0
5.2
8.3
8.0
7.1
6.6
3.7
3.6
23.8
10.7
5.4
4.2
7.8
127
1,597
300
1,903
133
3,609
543
59
3
1655
Source: Based on data from World Bank 2011b; UNDP,2010.

Note: T&T = Trinidad and Tobago. Educational attainment data for Australia, Canada, Malaysia, South Africa, and T&T represent year 2008
levels. Unemployment data for Brazil, Kazakhstan, Malaysia, South Africa, and Uganda represent year 2009 levels.
In terms of the sectoral distribution of the Malaysian labor force, the services sector continues to be the
largest recruiter of Malaysians, followed by health, education, and public services. Knowledge-intensive
manufacturing activities, on the other hand, recruited 6.6 percent of the labor force in 2008, which is above the
mature economies levels for the year 2007. As for primary resources, the share of labor force has declined by
over 5 percentage points between 2000 and 2008 to reach 14.7 percent. Figure 5.4 shows the breakdown of the
Malaysian labor force by sector for the years 2000 and 2008.
135
Figure 5.4 Malaysia: Breakdown of Labor Force by Sector, 200008 (millions)

8.9
10.5
16.2%
14.7%
3.8%
6.3%
3.1%
7.1%
9.3%
44.6%
100%

2007
Total change in
(Million jobs)
Primary Resources
0.1
0.0
0.2
-0.1
42
1.0
17
0.1
26
0.4
6.6%
47.4%
2.5%
2.6%
17.3%
18.5%
2000
2008
Note: The number of employees engaged in manufacturing activities are based on the UNIDO statistics, while the rest are based on the ILO
data.
5.1.4 Education
Education has witnessed significant developments and increased attention from policy makers in Malaysia
since the 1970s. A number of legislative acts, institutions, committees, and initiatives for the development of
education standards and levels have been active over the past decades. Despite measurable improvements in
education and enrollment levels, a number of issues remain. These issues include: the mismatch between
supply and demand, national brain drain (Fleming and Sborg 2012), as well as a relatively high
unemployment rate among fresh graduates (Woo 2006).
A closer look at the countrys achievements in education over the past two decades shows a significant
increase in the percentage of secondary- and tertiary-educated workers. In 2010 the share of secondaryeducated workers in the total workforce reached 56 percent, an increase from 36 percent in 1982. A similar
increase was achieved in tertiary education levels. Graduates with tertiary education constituted 6 percent of
the total labor force in 1982; two decades later, the percentage reached 24 percent of the total labor force
(Fleming and Sborg 2012). This can be potentially credited to an increase in government spending on
education. In 2009 Malaysian expenditure on education reached 5.8 percent of GDP, higher than the 2008 U.S.
estimates of 5.5 percent and higher than other regional countries such as Thailand with 4.1 percent and
Indonesia with 3.5 percent of GDP (as shown in Table 5.3).
Although, the overall quality of education remains a challenge for doing business in Malaysia (Schwab
2011)the quality of primary education was rated 5 out of 7 in the Global Competitiveness Report of 2010. The
enrollment rate was 94.1 and 68.7 percent for primary and secondary education, respectively (WEF 2011). The
mean year of schooling of adults over 25 years was 9.5 years and adult literacy rate was 92.5 percent (UNDP
2011). The countrys facilities for higher education are located predominantly in the Peninsular Malaysia
surrounding the urban area of the capital and main cities (MOHE 2012). Currently, there are 20 public
universities and 26 private universities (Fleming and Sborg 2012).
136
Table 5.3 Malaysias Educational Indicators

Literacy rate (%)
Angola
70.1
Youth
(1524)
73.1
85.7
11.5(a)
3.7
Public expenditure
on education
(% of GDP)
3.6
Australia
97.1
85.5
79.9
5.1(a)
Brazil
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
T&T
Uganda
UK
90.3(a)
98.1(a)
94.1(b)
82.0(b)
36.1(a)
5.4(b)
3.5(b)
3.1(a)
5.8(a)
6.5(b)
6.0
6.2
3.8(d)
3.2(a)
5.4(b)
Adult (15+)
92.2(b)
99.7
93.1
88.7(c)
73.2
98.8
73.2
99.5(b)
99.8
98.4
77.3
99.6
87.4
Primary
Secondary
Tertiary
95.9
89.5
94.1(5)
99.1
85.1(a)
98.0(b)
93.9
90.9
99.6(a)
67.3
88.2
68.7(5)
93.9
96(a)
23.1
38.5
40.2(a)
74.4
2.1
40(b)
4.2(a)
58.5(a)
Source: Based on data from Gomes and Weimer 2011; UNDP 2010; World Bank 2012c; MSTTE 2011.
Note: T&T = Trinidad and Tobago; UK = United Kingdom; (a) year 2009, (b) year 2008, (c) year 2007, (d) year 2006 data, (5) Global
Competitiveness Report.
The business environment in Malaysia is competitive. The countrys constitutional monarchy, with its
democratically elected parliament and well-developed infrastructure system provide a favorable and stable
business environment (PKF 2009). Despite its overall competitive and favorable business environment,
businesses in Malaysia still face several obstacles, with the most problematic ones being corruption, inefficient
government bureaucracy, followed by access to financing.
Malaysia ranks well on the ease of doing business and competitiveness indices, and has relatively easy
procedures for business startups compared to its neighbors. The Doing Business Report of 2011 ranked Malaysia
21st among 183 countries on ease of doing business. Malaysia was ranked 4th out of 24 countries in the East
Asia and Pacific region for doing business, after Singapore, Hong Kong, and Thailand (World Bank 2011a). The
Global Competitiveness Index of 201112 ranked Malaysia 21st among 142 countries, and the cost for crossborder trade in Malaysia is also among the lowest in Southeast Asia. The cost of export per container was $450
in 2011 and cost of import, $435. Despite this favorable ranking, governance and corruption remained among
the most problematic aspects of doing business in 2011 (Schwab 2011). The government has acknowledged
corruption as an obstacle to doing business since the 1970s, and has taken various steps in that regard. Several
anti-corruption regulations have been passed and the Anti-Corruption Agency along with other administrative
programs such as the Public Complaints Bureau have been established. Despite these initiatives, corruption has
increased, with Malaysias Corruption Perception Index decreasing in 2011 to 4.3 points from 5.3 points in
2003. The country, however, still has a better standing than its neighbors in Southeast Asia, with Indonesias
Corruption Perception Index at 3 points, Thailands at 3.4, Vietnams at 2.9, and Philippines at 2.6 points71
(Transparency International 2012). Ethnic and political motivations were considered as reasons for corrupt
conduct in Malaysia; however, these are thought to affect local companies more frequently than international
firms.
Table 5.4 shows a snapshot of indicators on Malaysias business environment and doing business, and
Figure 5.5 shows how governance indicators in Malaysia have been stable during the past decade but remain
below the OECD indicators.
71
A Corruption Perception Index ranking of 1 point implies highly corrupt.
137
Table 5.4 Indicators for Doing Business in Malaysia

Malaysia
OECD
Malaysia
OECD
Procedures (#)
10
Time (days)
12
16.4
4.7
0.0
14.1
8.7
4 (0)

50 (+61)

Procedures (number)
Time (days)
7. Paying Taxes
22
14
13
13
260
152
133
186
7.1
45.7
Profit tax (%)
17.0
15.4
15.6
24
1.4
3.2
34.0
42.7
113 (-2)
Other taxes (%)
Procedures (number)
Time (days)
51
103
95.5
92.8
59 (+1)
41 (-2)

17
10
450
1032
Procedures (number)
Time (days)
48
31
14
11
3.3
4.4
435
1085
29 (-1)

59 (0)
5. Getting Credit
10
Time (days)
425
518
Cost (% of claim)
27.5
19.7
49.4
9.5
29
31
83.4
63.9
1 (0)
Procedures (number)
31 (+29)

Time (years)
1.5
Cost (% of estate)
15
44.6
68.2

Rank (Chang+F14e in rank from
2011)
1.7
47 (+10)
Source: World Bank 2012c.

Note: Ranking is out of 183 countries.
Figure 5.5 Governance Indicators in Malaysia Compared to OECD Average
Voice and
Accountability
100
80
60
40
20
0
Political
Violence
2000 Malaysia 2000

2010 Malaysia 2010
2010 OECD 2010
Government
Effectiveness
Rule of Law
Regulatory Quality
138

Malaysia is a resource-rich country with geographical proximity to dynamic economies that are dependent on
imported fuelssuch as Japan, South Korea, Singapore, and Taiwan. Historically, and as can be implied from
Figures 5.6 and 5.7, the petroleum sector never played a dominant role in the Malaysian economy; however, it
has been a driver of the economic expansion for decades. This is especially true for the well-established
downstream clusters that rely heavily on the countrys gas resources (Nordas, Vante, and Heum 2003).
Looking at the sectors contribution to GDP, the mining manufacturing, and utilities sector accounted for
32 percent of the countrys GDP in 2010, followed by the manufacturing sector with a 20 percent share of GDP,
as shown in Figure 5.6. In subsequent years, the petroleum and energy sector contributed 1620 percent of the
countrys GDP (Pemandu 2010). Petroleum exports constituted a large portion of the countrys external trade.
Exports of crude oil slightly decreased from 236,000 barrels per day (bpd) in 2009 to 234,000 bpd in 2010,
constituting around 35 percent of Malaysias crude oil production. Imports during 2010 reached 205,000 bpd of
lower-cost crude oil for processing at local oil refineries (EIA 2011). Petronas is the single-largest contributor to
the countrys revenue. In 2009 the company earned nearly half of government revenues by means of taxes and
dividends (PetroMin 2011). In 2008 Petronas payment to the federal government represented 44 percent of
total revenues (Fleming and Sborg 2012) and over 40 percent in 2010 (EIA 2011).
Figure 5.6 Malaysia and Select Countries: Breakdown of GDP by Economic Activity in 2010 ($ billion)
85
1,296
2,066
1,637
883
159
304
402
377
39%
38%
24
17
22%
23%
2,236
100%
7%
14%
25%
15%
5%
33%
11%
43%
45%
11%
5%
6%
13%
8%
20%
18%
9%
8%
8%
6%
8%
9%
50%
7%
2%
14%
12%
10%
5%
5%
Angola
Australia
19%
Brazil
5%
12%
11%
7%
3%
8%
8%
4%
1%
6%
1%
30%
8%
0%
13%
2%
12%
12%
6%
21%
36%
33%
10%
6%
24%
20%
Canada
6%
7%
8%
3%
32%
16%
6%
4%
29%
19%
19%
8%
20%
51%
12%
5%
10%
13%
11%
20%
Norway
South
Africa
Trinidad
& Tobago
Other Activities
Construction
Manufacturing
139
12%
14%
Uganda
UK
1%
120
35%
100
30%
25%
80
20%
60
15%
40
10%
20
Share of Value Add
Value Add (Bn $)
Figure 5.7 Malaysia: Contribution of Mining, Manufacturing, and Utilities to GDP, 19702010
5%
0%
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Contribution to GDP
Percentage Share

Malaysias geography is uniqueit is divided into two distinct parts: the first is Peninsular Malaysia to the
west, bordering Thailand; the second is to the east, constituting of the two states of Sabah and Sarawak,
bordering Indonesia. The continental shelf spreads alongside both regions and contains a total of six
sedimentary basins forming the majority of the countrys petroleum geology (Bank Pembangunan 2011).
The western Malay Basin and the Penyu Basin are located off the east coast of Peninsular Malaysia, while a
number of subbasins are held within the major Sabah and Sarawak basins off the west coast of Borneo.
Offshore of northeast Borneo lie the two small basins of Sandakan and Tarakans northern extension.
The majority of offshore hydrocarbons are distributed across three main basins: the Malay basin in the
west, and the Sarawak and Sabah basins in the east. The Malay basin holds oil and gas accumulations and is
divided into the northern and southern fields. The southern Malay field holds oil and associated gas, while the
northern Malay field mostly holds gas resources. Malay is a mature basin and has been in production for
decades and covers approximately 83,000 square kilometers (km2) (Bishop 2002). The Sarawak basin contains
eight geological regions, four of which are considered to be the major plays. Sabah currently holds 1.5 billion
barrels of oil and 11 trillion cubic feet (tcf) of gas (IEC Midas 2012).
Offshore reservoirs constitute most of the petroleum reserves in the country. The first offshore field began
production in 1968 (Nordas, Vante, and Heum 2003). The depletion of mature oil reservoirs, however, has
motivated the country to pursue deep-water exploration. The first deep-water discovery was the Kikeh oil field
in 2002. Most of the countrys oil reserves are located in the Malay basin (PetroMin 2010). In 2010 the Tapis
field 209 km off the east coast of Peninsular Malaysia in the Malay basin (Thu 1983) contributed half of all
Malaysian oil production (PetroMin 2010). Going forward, it is estimated that deep-water fields will constitute
between 20 to 30 percent of production in the next decade (Parshall 2011). Currently there is only one deepwater field in production capacity; others are still in their development phases.
Oil reserves in Malaysia have been generally on a rise since 1980. Over the past two decades, oil reserves
increased from 3.6 billion barrels in 1990 to 5.9 billion barrels in 2011 (BP 2012), but most of Malaysias oil fields
are mature and in the decline phase. Estimates for 2016 predict a decrease in oil reserves down to 4.9 billion
barrels (Business Monitor International 2012). On the other hand, natural gas reserves have been steady over
the past two decades. Gas reserves in 2010 amounted to 86 tcf, constituting around 1.2 percent of world
140
reserves and ranking fourth largest amongst the Asia-Pacific countries (BP 2011). The current gas reserves are
at almost the same levels as of 1996. Under current production rates, oil and gas reserves are expected to last
for 28 and 39 years, respectively. Overall, maintaining the reserve base has been a key pillar in Malaysias oil
and gas sectoral policy, which is centered on ensuring long-term supply security while providing affordable
fuel to the growing population and consumption (EIA 2011). Table 5.5 provides a snapshot of the oil and gas
industry in Malaysia.
Table 5.5 Snapshot of the Oil and Gas Industry in Malaysia (2010)
% Change
2011
Oil proved reserves, billion bbl
5.9
573.0
608.3
86.0
6.0
2.8
69.2
% of
world
0.4%
0.7%
0.7%
1.2%
1.9%
0.9%
0.6%
Global
rank
23
46
29
15
45
27
31
1 yr
3 yrs
5 yrs
10 yrs
0.0%
-10.9%
0.7%
0.0%
-1.3%
-10.5%
-2.1%
0.0%
-13.0%
2.6%
1.6%
-3.6%
-15.3%
0.3%
7.3%
-16.1%
2.1%
2.2%
-4.3%
-14.7%
2.3%
29.1%
-17.9%
17.0%
-3.4%
27.9%
9.0%
32.6%

Note: bbl = barrels; bcfd = billion cubic feet per day; boe = barrel of oil equivalent; mmbpd = million barrels per day; tcf = trillion cubic feet; toe =
tons of oil equivalent.
Oil production has been relatively stable since the mid-1990s, despite the dip following the peak production of
2004. Production in 2011 reached 573 million barrels per day (mmbpd), decreasing from 762 mmbpd in 2004.
On the other hand, oil consumption has been on a rise, and the country moved to a net importer position in
2011 as can been seen in Figure 5.8 (BP 2012). Gas production has been on an upward trend increasing from
20.4 bcm in 1991 to 66.5 bcm in 2010 (Figure 5.8). The government had recognized the potential for gas
production early on and developed plans for sustaining domestic demand, and for increasing exports of gas
through extensive transport systems (Nordas, Vante, and Heum 2003). But it is expected that gas production
would start its gradual decline phase starting at 60 bcm in 2012 to reach 15.5 bcm in 2025 (ETP 2010). Gas
consumption showed a similar trend to production, increasing from 11.6 bcm in 1991 to 35.7 bcm in 2010 (BP
2011).
Figure 5.8 Evolution of Oil and Gas Production and Consumption in Malaysia, 19912011
mbpd
bcfd
800
700
600
500
4
400
3
300
2
200
100
0
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Oil Consumption (mbpd)
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11
Oil Production (mbpd)
Gas Consumption (mbpd)
Gas Production (mbpd)
Source: BP 2012.
Malaysia has one of the most widespread pipeline networks for transportation of natural gas in Asia. The
Peninsular Gas Utilization project exceeds 1,400 km, and can transport 56 million cubic meters per day.
Malaysia, Singapore, and Indonesia are now connected via the Trans-Thailand-Malaysia Gas Pipeline System, a
step toward the realization of the Trans-ASEAN Gas Pipeline (TAGP) system, linking the producers and
consumers in Southeast Asia (PetroMin 2010). Transport is carried out mostly by the Malaysia International
Shipping Corporation (MISC) with Petronas as a major shareholder (62 percent).
141
Going forward, Petronas will be aggressively exploring around 5060 planned wells with a focus on
increasing recoverability from mature basins through enhanced oil recovery (EOR) (Parshall 2011).
Additionally, $4 billion was allocated in 2011 for exploration and development of deep-water projects (Yunus
2011). To this end, Petronas has recently signed PSAs for the use of EOR technologies with Shell Malaysia. The
EOR contracts, with an investment of $12 billion over 30 years, will be applied in two oil field projects72
offshore East Malaysia (Abdullah 2012).
The governance model of the petroleum sector in Malaysia appears to be highly controlled by the state,
through the office of the prime minister in the absence of a dedicated ministry for oil and gas (Lahn and others
2007). The prime minister has direct control over the energy sector as well over Petronas. The energy policy in
Malaysia is set and overseen by the Economic Planning Unit (EPU) and the Implementation and Coordination
Unit (ICU), which also report directly to the prime minister (EIA 2011). Policy design, targets, regulation, and
operations functions are performed by individual departments within the NOC, Petronas. The Petroleum
Management Unit (the regulator) is Petronas division responsible for planning, investment, and regulation of
all upstream activities.
All IOCs operations are carried out by means of PSAs with Petronasby 2009, there were a total of 72 PSAs
(INTSOK 2010). Petronas subsidiary Petronas Carigali also participates in the PSAs with IOCs (ETP 2010). In
1985 Petronas was granted the right for at least 15 percent equity in PSAs with all foreign and private
companies (EIA 2011).
The Petronas board is appointed by the prime minister, and rights to all exploration and production (E&P)
projects in Malaysia are held solely by Petronas. Its business activities include (i) the exploration, development,
and production of crude oil and natural gas in Malaysia and overseas; (ii) the liquefaction, sale, and
transportation of liquefied natural gas (LNG); (iii) the processing and transmission of natural gas and the sale
of natural gas products; (iv) the refining and marketing of petroleum products; (v) the manufacture and sale of
petrochemical products; (vi) the trading of crude oil, petroleum products, and petrochemical products; and
(vii) shipping and logistics relating to LNG, crude oil, and petroleum products (Petronas 2012a).
Downstream activities are regulated by two ministries: the Ministry of International Trade and Industry
(MITI), which issues processing, refining, and petrochemical production licenses; and the Ministry of Domestic
Trade and Consumer Affairs (MDTCA), which issues licenses for marketing and distribution of petroleum
products.
Looking at the oil and gas sector in Malaysia since its inception over a century ago, one can identify three major
milestones marking its development. The first milestone was the foreign-dominated days during the colonial
era, when oil was discovered. The second was the Malaysian government enactment of the Petroleum
Development Act, soon followed by the founding of the state company, Petronas (Bank Pembangunan 2011).
The third milestone was the period of oil depletion marked by Malaysias ambitious moves on local and
international fronts.
Oils discovery in Malaysia dates back to 1910. The players enabling oil exploration and development in
the early days were the IOCs. Shell was the first and the major operator to discover and develop oil in
Malaysia. In fact, the first discovery of 1910 was announced by Shell, on Canada Hill in Miri city northwest
Sorawak (Abdullah 2012). During the period leading to World War II, oil and gas exploration, drilling, and
general activity experienced a slowdown; colonial policy concentrated on profitable exports such as tin and
rubber (Curtin 2004). It wasnt until after independence in 1957 that oil and gas began to surface as a major
sector in Malaysia. During the 1960s, oil and gas discoveries were made and vast offshore resources were
72
The EOR PSAs will cover nine fields in the Baram Delta off Sarawak and four fields in the North Sabah development area.
142
found. Shell held on to its legacy, and led the upstream activities during the 1960s, to be followed by Esso and
Conoco. The three main companies together dominated production, refining, and sales of petroleum products
in Malaysia (Bank Pembangunan 2011).
Following World War II and through the period of independence and toward the 1960s, a drive toward
economic nationalism was witnessed in Malaysia (Martin 2006). This drive was seen to affect the oil and gas
sector through the parliaments enactment of the Petroleum Development Act in 1974. The new legislation
marked the second milestone in the development of the petroleum sector in Malaysia. The law prioritized the
state interest in all petroleum activities making the state the sole owner of all hydrocarbon resources. The law
also created the state company, Petronas, and ensured its involvement in all upstream and downstream
activities, with direct reporting to the prime ministers office.
Petronas partnering with IOCs for the exploration and development of oil and gas resources has
undoubtedly transformed the local knowledge and capabilities capital, but the IOCs often remained the
providers of technology especially in Malaysias oil and gas formation, which is dominated by technology
demanding offshore and deep-water fields. This was evident in the countrys first LNG plant, where Shell took
over the technical development and Mitsubishi carried out sales and marketing (Nordas, Vante, and Heum
2003). Alongside IOCs dominating upstream technology (mainly for offshore and, recently, deep-water
activities), Petronas started gas operation activities in 1984, and oil operation activities in 1991. Petronass E&P
subsidiary Caligari carried out gas exploration and development in Duyong and production began there in
1984, whereas the first oil field to be operated locally was offshore Dulang in 1991 (Nordas, Vante, and Heum
2003).
Local capabilities were witnessed in the downstream sector particularly in the petrochemical industry. The
Malaysian government was successful in forming three major petrochemical clusters containing international
and local companies operating throughout the entire oil and gas value chain. The most diversified of the
petrochemical clusters is in Kertih, Terengganu; the second is the Gebeng hub; and the third is the Pasir
Gudang (MIDA 2011). The Petronas Petrochemical Integrated Complex (PPIC), for example, was formed in
Kertih and contains gas-processing plants, petrochemical plants, utility facilities, training centers, tankage
facilities, and two ports.
Following the high production period of the 1980s, it was estimated that oil production would begin its
decline. With reserves-to-production ratios decreasing, some estimates predicted oil depletion would be
realized in 2012. This has stirred the authorities to new policies with regard to Malaysias petroleum resources.
Petronas 2011 annual report clearly stated the new direction for petroleum resource management, as follows:
PETRONAS has identified Enhanced Oil Recovery (EOR) and CO2 Management as
critical Exploration and Production (E&P) areas to build capability that will extend the life
of our current assets, improve hydrocarbon recovery and enable the development of
challenging assets.
In parallel, Petronas is widening its scope of operation abroad. Currently, Petronas operates internationally
through partnerships with IOCs in 32 countries.73 Until 2005 Petronas had 101 wholly owned subsidiaries, of
which 57 operate outside Malaysia. Subsidiaries partly owned by Petronas were 19 with 3 overseas.
Additionally, Petronas was associated with 28 local and 29 overseas companies (Petronas 2005). The company
employs over 33,944 people, and has total assets of $34 billion.
73
Algeria, Indonesia, Argentina, Iran, Australia, Japan, Benin, Mauritania, Cambodia, Morocco, Cameroon, Mozambique, Chad,
Myanmar, China, Nigeria, Cuba, Pakistan, Egypt, Philippines, Equatorial Guinea, Russia, Ethiopia, South Africa, India, Sudan,
Thailand, Timor Leste, Turkmenistan, United Kingdom, Uzbekistan, and Vietnam.
143
The Kumpulan Wang Amanah Negara, also referred to as the National Trust Fund (NTF), was created by the
Law 339 of 1988 with the purpose of securing national wealth and making use of the countrys resources for
future investment. The imminent depletion of Malaysias natural resources, particularly oil and gas motivated
authorities to form the NTF for the benefit of future generations. The NTF is under the direct control of the
Prime Ministers Office. Earlier, contributions to the NTF came mainly from Petronas revenues, allocated
through its annual budget (CPPS 2008), but in 2011 the contribution modality was amended (World Bank
2012a). Going forward, Petronas will be contributing annually based on strata that depend on the Weighted
Average Realized Price (WARP) of oil per year. The strata enforced were as follows (Petronas Group 2012c):
If the WARP is less than $70 per barrel, the contribution to the NTF is RM 100 million (approximately
$31.4 million)
If the WARP is between $70 and $100 per barrel, the contribution is RM 500 million (approximately
$157 million)
If the WARP is more than $100 per barrel, the contribution is RM 1 billion (approximately $314
million).
Petronas contributed RM 1 billion to the NTF in 2011 as the WARP was above $100 per barrel. The funds
cumulative assets reached RM 5.68 billion (approximately $1.8 billion) by year-end 2011 (Petronas Group
2012c), up from RM 3.8 billion (approximately $1.1 billion) in 2008 (CPPS 2008). The assets of the NTF are
negligent compared to oil-rich countries such as Kazakhstan whose national oil fund accumulated
approximately $25 billion in 2010 (Faizuldayeva 2010).
There was a lot of criticism around the lack of transparency and public disclosure in the governance model
of NTF. The Democratic Action Party (DAP), an opposition party in Malaysia, voiced its criticism in its 2010
Alternative National Budget proposition. It even suggested the remodeling of the NTF into a National
Stimulus Fund to be activated by injecting funds in cases when economic indicators show GDP growth rates
below 2 percent (DAP 2010).

LCPs originate from the Petroleum Development Act of 1974 that bestowed the ownership of the national
petroleum resources to Petronas. The objectives of the law were to:
Provide affordable petroleum resources to the local market

Build the foundation for forward links
Secure local involvement and control of both upstream and downstream segments (Nordas, Vante,
and Heum 2003).
In relation to the third point, the mission statement of Petronas has always included a general commitment
to the developing and expanding of the countrys industrial base, as well as developing local capabilities.
More recently, and at the government level, backward link from the petroleum industry became a part of
the national development plan of the country. Under the 2020 development plan, the Malaysian government
aims at strengthening value creating activities in the oil and gas value chain and aspires to transform
Malaysia into a hub for OFSE for Asia and the Middle East (Pemandu 2010). By achieving this, the government
forecasted the creation of 40,000 jobs and the contribution of RM 14.3 billion to the countrys GNI by 2020
Figure 5.9.
144
Figure 5.9 Malaysia: Forecasted Contribution of the Energy Sector to the 2020 Gross National Income (RM billion)
23.1
131.4
Multiplier
Total GNI
Impact
109.6
241.0
2009 GNI
2020 GNI
53.8
7.4
20.3
47.1
14.3
8.5
E&P
4.0
Downstream
OFSE
Energy
Total EPPs Business Baseline

Opportunities Growth
Source: Based on data from Pemandu 2010.

5.3.2 Policy Tools
Local-content-related policy tools in Malaysia derive from the horizontal policies linked to the overall ETP and
vertical policies specific to the oil and gas industry. Overall, the country uses a mix of regulations, incentivebased and capability-building programs to achieve the objectives discussed above. Petronas
has
been
Malaysias main vehicle for the oil sector LCPs through its participation in PSAs and its policies focusing on
developing the local workforce technical skills and the efficiency of the local supply industry (Tordo and others
2011). Given below are the different policy tools employed for the achievement of these objectives.
Building Local Capabilities in the Petroleum Sector
Under the PSA terms of 1996, production sharing (PS) contractors are required to:
Minimize the employment of foreign workforceto this end, the recruitment of foreign personnel
requires the approval of Petronas
Train internal Malay personnelthis includes the provision of capability development programs that
enable Malay personnel to replace the expatriate workforce
Commit a minimum monetary amount to be allocated to the training of Petronas personnel, the
amount being contract specific
Offer on-the-job training to personnel of the NOC, upon the request of Petronas.
All training costs are cost recoverable. In addition to the provision of training programs, every PS
contractor is subject to an annual research contribution equivalent to 0.5 percent of the sum of cost oil and
contractors share of profit oil.74 The research contribution is tax-deductible.
In parallel to the terms imposed on PS contractors, Petronas has heavily invested in building oil-and-gasrelated capabilities. On this front, the NOC has established four educational and training institutions and an elearning platform, as it has been sponsoring Malaysian students to pursue tertiary education in the country
and overseas.
Petronas established the Universiti Teknologi of Petrona1 (UTP) in 1996, which hosts over 5,000 students in
engineering and technology-related academic programs. The school is locally recognized for its programs as it
has established several industry and academic partnerships. In addition to this university, Petronas established
74
This is equivalent to 0.5 percent [cost oil + profit oil Petronas share of profit oil].
145
the Maritime Academy of Malaysia (ALAM) in 1983. The ALAM is a one-stop training center for maritime
activities, and is owned and operated by Petronas and is a branch campus of the World Maritime University. In
addition the ALAM has several partnerships with leading maritime educational bodies around the world.
To develop the technical capabilities of its employees, Petronas founded in 1983 the Institut Teknologi
Petroleum of Petronas (INSTEP). Originally, the INSTEP was designed to offer programs for oil and gas
technicians. Over time, the institute evolved to offer technical programs to technicians, engineers, and technical
executives. The institute has engaged most multinational companies operating in Malaysia as it has offered
training services to other NOCs and partners with Petronas, such as Premier Oil of Myanmar, PetroVietnam,
and Sudapet of Sudan. For managerial capability development Petronas established its Leadership Centre in
1992, which offers programs across all disciplines relevant to Petronas activities (Petronas 2012b).
In addition to the above-mentioned institutions, Petronas developed an online e-learning platform. The
available materials are accessible not only to Petronas employees, but also to government agencies as well as
the private sector.
Since 1975 Petronas has sponsored more than 11,000 students to pursue secondary education and over
19,000 students to pursue tertiary education at home and abroad (Petronas 2012b). The evolution of the number
of students between 1975 and 2005 sponsored for tertiary education is presented in Figure 5.10. The share of
students that pursued studies overseas was 38 percent of the considered period (Petronas 2005).
Figure 5.10 Malaysia: Number of Scholars Sponsored by Petronas, 19752005
1,600
1,400
1,200
1,000
800
600
400
200
0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
Source: Adapted from Petronas 2005.
On another front, and under the governments plan to develop OFSE capabilities, a study has been under
way to look at the gaps between the demand for OFSE talent and supply from academic institutions. The study
serves as a basis for a series of programs that will ensure the adequate supply of qualified talent to future oil
and gas projects in Malaysia. More specifically, the programs are expected to:
Create sustainable links and initiatives

Catalyze university-industry collaboration
Support oil and gas international training programs to be done in Malaysia (MPRC 2012).
As a starting point, two programs have been launched:
The Pilot Internship Program for Engineering Consultancy Services

The National Talent Enhancement Programme.
The objective of the first program is to develop hands-on engineering consultancy capabilities for thirdyear engineering students through a 10-week internship. Well-defined company selection criteria and
evaluation guidelines have been laid out. At this stage five memoranda of understanding (MOUs) have been
signed, each extending for five years. The companies and universities engaged in this program are presented in
Table 5.6. Going forward the plan is to expand the structure of the internship program to other OFSE
146
disciplines. Companies engaged in this program are offered a double tax deduction incentive for the expenses
incurred on the interns75 (MPRC 2012). In line with the first program, the second program uses a similar
structure while focusing on fresh graduate talents with less than two years of work experience.
Table 5.6 Companies and Universities Engaged in the Malaysian Governments Internship Program
Companies
Universities
MMC Oil and Gas Engineering
Kebangsaan Malaysia
Aker Engineering Malaysia
Sains Malaysia
Perunding Ranhill Worley
Putra Malaysia
Technip Geoproduction
Malaya
RNZ Integrated
Teknologi Malaysia
Source: Based on data from MPRC 2012.
In relation to labor laws affecting the employment of expatriates by OFSE suppliers, we note that
Malaysian company law links the size of paid-up capital to the number and type of expatriate work visas that
may be requested and obtained by a company (DoS 2012).
Domestic Sourcing of Goods and Services
Traditionally, Petronas has been the main driver for the domestic sourcing agenda in the Malaysian oil and gas
sector. Petronas requires PS contractors to domestically source all goods and services incidental to upstream
activities or source them directly from the manufacturer if not locally available. Procurement from foreign
countries requires the approval of Petronas (Nordas, Vante, and Heum 2003). As per the NOCs procurement
process, suppliers of OFSE must receive a license from Petronas to be considered. Foreign suppliers can obtain
the license in case they partner with local firms or act as contractors. If incorporated locally,76 foreign suppliers
are restricted to a 30 percent equity stake (DoS 2011).77
On another front, and to encourage the engagement of local supplier in oil and gas activities, Petronas has
been holding a touring clinic initiative. The clinic offers a platform for local suppliers to interact with
Petronas stafflocal suppliers learn about the online procurement system of the NOC as they get help in
registering and accessing future opportunities. These include opportunities associated with the international
activities of Petronas.
Incentives for the Manufacturing Sector
The Malaysian government, through the Malaysian Investment Development Authority (MIDA), extends a set
of fiscal incentives for companies investing in the domestic manufacturing sector. These incentives derive from
the Income Tax Act and Customs Act of 1967, Sales Tax Act of 1972, Excise Act of 1976, Promotion of
Investments Act of 1986, and Free Zones Act of 1990 (MIDA 2012). The major incentives include the Pioneer
Status and Investment Tax Allowance (ITA) that are extended based on the level of value-added, technology
sophistication, industrial links, and other parameters.
A Pioneer Status enables the company to enjoy partial exemptions from income tax over five years; tax is
applied on 30 percent of statutory income.78 In addition, companies can carry forward any unabsorbed capital
allowances and accumulated losses incurred during the pioneer period. Alternative to the Pioneer Status,
companies can qualify for ITA. Under ITA, a company is extended an allowance of 60 percent on its qualifying
For details visit http://sip.talentcorp.com.my/about.php.

Such a restriction applies to other sectors such as legal services, engineering services, taxation and accounting services,
professional services, telecommunications, advertising, financial and insurance services, and banking services (DoS 2011).
77 Shipping activities are restricted to Malaysian registered vessels. Foreigners are permitted to hold a 70 percent stake in shipping
and logistics companies and 49 percent in forwarding agencies. The limitation also applies to vessels that support oil and gas
operations.
78 After deducting revenue expenditure and capital allowances from the gross income (MIDA 2012).
75
76
147
capital expenditure.79 In addition, and on a yearly basis, the company with ITA status is allowed to offset its
allowance against 70 percent of its statutory income. Unutilized allowances can be carried forward and the
company is taxed on the remaining 30 percent of its statutory income (MIDA 2012).
Companies engaged in high technology activities80 are extended Pioneer Status with 100 percent income
tax exemption of their statutory income or ITA with allowance against 100 percent of their statutory income. To
qualify for any of these exemptions, companies must spend at least 1 percent of their gross sales on domestic
R&D and at least 15 percent of the companys workforce should have a scientific and technical background
with a minimum five years of experience. Similar, yet extending for a longer period, exemptions are offered to
Strategic Projects81 and the Machinery and Equipment Industry. In addition, fiscal incentives are extended to a
local company82 that acquires a foreign-owned manufacturing company located abroad and engaging in hightechnology activities for the purpose of utilizing the acquired technology in existing operations within
Malaysia (MIDA 2012).
In addition to the above, companies engaged in manufacturing activities are eligible for other exemptions such
as reinvestment allowances, accelerated capital allowances, and tax exemption on the value of increased
exports. Small- and medium-sized enterprises (SMEs) and small-scale manufacturing companies are also
extended additional exemptions (MIDA 2012). Traditionally, all fiscal incentives are linked to performance
requirements specific to every manufacturing license. Performance requirements are in the form of export
targets, local content requirements, and technology transfer requirements. Failure to deliver on the agreed
targets subjects the company to losing the extended benefits and its manufacturing license ultimately. Over the
long run, the government intends to phase out all fiscal incentives (DoS 2011).
Developing a Domestic OFSE Industry
Under the ETP and to achieve the governments objective of transforming Malaysia into a hub for OFSE, three
initiatives have been launched. A description of the initiatives with their aspired contributions to the GDP and
expected jobs to be created is presented in Table 5.7.
Table 5.7 Malaysia: Industry Strategy, Expected Contribution to GNI, and Jobs to be Created
Contribution to 2020 GNI
EPP
Jobs to be created
Billion RM
Share of Energy
EPPs
%
# of Jobs
Share of energy
EPPs
%
Attract multinationals to bring their global oil field

service and equipment operations to Malaysia.
6.1
9.6
20,000
42.4
Consolidating the domestic fabricators.
4.1
6.4
5,000
10.6
Develop engineering, procurement, and installation

capabilities and capacity through strategic partnerships
and JVs.
4.0
6.3
15,000
31.8
Total
14.2
22.3
40,000
84.8

Note: GNI = gross national income; EPP =Entry point projects; JV = joint venture.
Under the first initiative, the governments ambition is to bring 40 percent of the regional business of 1020
multinational OFSE companies to Malaysia. This will be done through offering incentive packages, developing
required infrastructure, and promoting Malaysia as a regional hub for OFSE. More specifically, to deliver these
incentives and facilitate cross-border investment, the Malaysia Petroleum Resources Corporation (MPRC) was
Factory, plant, machinery, or other equipment costs incurred within five years from the date the first qualifying capital
expenditure is incurred.
80 List of activities are available on http://www.mida.gov.my/env3/uploads/images/invest/invest-pdf/APP2_02032012.pdf.
81 Involve heavy capital investments with long gestation periods, have high levels of technology, are integrated, generate extensive
links, and have significant impact on the economy (MIDA 2012).
82 Locally established with at least 60 percent Malaysian equity ownership.
79
148
established in 2011. The MPRC administers programs to support Malaysian oil and gas companies in
identifying business opportunities in other countries and to encourage global petroleum companies to enter the
Asia Pacific Market using Malaysia as their platform. The latter is called the GIFT Program, and it is delivered
jointly by the MPRC and LFSA (Labuan Financial Services Authority) through offering a set of incentives. The
programs incentives include: a flat 3 percent of chargeable income as corporate tax rate, an exemption on gross
employment income for non-Malaysian professional traders and others in a managerial capacity of the Labuan
International Trading Companies of 50 percent, and a 100 percent exemption on non-Malaysian director fees.
By 2011 five companies had joined the GIFT program including: Vitol Trading, YTL Power International
Bhd, BB Energy, and the Rotterdam Group. Going forward, the MPRC is planning on expanding the programs
outreach and attracting more companies to base their operations in Malaysia through a number of international
road shows and through hosting international events (Ministry of Energy Green Technology and Water 2011).
Under the second initiative, the government aims at achieving economies of scale and gains in efficiency
through driving consolidation in the industry. Operationally, the consolidation effort will be led by Petronas
and supported by government agencies. The NOC will limit the number of awarded licenses to fabricators
open for the intervention of consolidation as it will expand the scope of awarded contracts, rather than doing
that in tranches (Pemandu 2010).
Today the Malaysian OFSE fabricators are less competitive than regional players. Overall, the industry is
fragmented with five major local players. Most players experience low revenues and profit margins. According
to Malaysian fabricators:
Locals need to enhance capacity to enjoy economies of scale and drive cost down
Productivity needs to be enhanced for local fabricators to become more competitive
Cannot compete with China and Singapore when it comes to contracts in the Middle East
Locals must be integrated in order to be more competitive
High import content for materials impedes cost-competitiveness (Pemandu 2010).
Going forward, additional mergers and acquisitions are being negotiated with the target of having two
additional mergers/acquisitions finalized by the end of 2012.
Looking at the value chain of OFSE, the Malaysian industry lacks local capabilities in engineering,
procurement, and installation (as shown in Figure 5.11). To close this gap, the government will offer incentive
packages for world-class multinational OFSE companies to establish joint ventures with local players. On this
front, the government aspires that the established joint ventures will enable local companies to gain 15 and 50
percent of the Asia-Pacific OFSE market in shallow water and deep water respectively.
Figure 5.11 Malaysia: Skills Gap in the OFSE Industry
Procurement
Construction
Installation
Commissioning
MMC
KNM
MME
Sime Darby
SapuraCrest
Petroleum
SapuraCrest Petroleum
AkerSolutions
Cameron
Rolls Royce
Keppel Corporation
Hyundai
Heerema
Cameron
Rolls Royce
Technip
McDermott
Halliburton
Skill
Gap
World Class
Multinationals
Local
Players
Engineering

Note: Cells shaded in grey reflect EPPs related to the backward link of the petroleum industry.
149
5.3.3 Policy Channels
In Malaysia, LCPs related to the oil and gas sector derive from:
The Petroleum Mining Act of 1966

The Petroleum Development Act of 1974
Petroleum-sharing contracts
The Companies Act 1965
The Economic Transformation Program 2010.
Local-content-related institutional responsibilities are mainly split between Petronas, the MPRC, and the
MIDA. Petronas has two dedicated units responsible for the design and implementation of local-contentrelated initiatives: the supply chain management unit and the unit of education. Pemandu was established
under the prime ministers office in 2009 with an objective to drive progress and oversee the delivery of the
Government Transformation Programme and the ETP (Pemandu 2012). Additionally, Pemandus role is to
support other governmental entities in the planning process and delivery of objectives and to report
performance and progress to the prime minister and other ministers. In relation to OFSE, Pemandu oversees
and reports on the progress of the three ETP initiatives.
The MPRC was created in April 2011 as a permanent government agency under the prime ministers office. The
agency started its operations in July of 2012 with an overall objective of transforming Malaysia into the leading
regional hub for OFSE by 2017. The agencys key responsibilities include:
Recommending a restructuring road map for the domestic OFSE industry to increase its
competitiveness and set it on a growth path
Overseeing OFSE activities and coordinating cluster activities
Creating an attractive environment for multinationals through streamlining administrative processes
and developing attractive incentives
Promoting the local OFSE industry.
At this point, the agency has a board of four members representing the government, Petronas, and the
MIDA. The MPRC is foreseen to comprise of 20 full-time employees with an expected annual operating budget
of RM 5 million and a capital requirement of RM 6.8 billion to ensure the success of its mission. The agencies
work engages the different industry stakeholders including government agencies, financial institutions, and
domestic and foreign oil and gas companies.
5.3.5 Interlinks
As discussed earlier, the LCPs in the oil and gas industry are part of the countrys economic development plan.
Thus, there is a high interlink between the sector-specific policies and other sectoral and cross-sectoral policies.
In fact as per the ETP, there are six cross-sectoral strategic reform initiatives, four of which are relevant to the
backward link of the petroleum sector:
Implementation of competition laws, adoption of international standards, and a liberalization of the

services program shall all contribute to making local industries competitive in the international arena
and attract FDI
Reforming of public finance through the adoption of efficient broad-based taxes and reforming of
fiscal policies and institutions
Improvement of the performance of public services, and transformation of the role of the government
into a lean, efficient, and facilitative one
Development of the countrys human capital
Streamlining of the governments role in business.
150
Specific to the development of local capabilities, the overall plan is to:
Modernize labor legislation

Focus on up-skilling and upgrading the workforce
Strengthen human resource management
Leverage on womens talent to increase productivity
Undertake a labor market forecast and survey program
Enhance labor safety net by introducing unemployment insurance (Pemandu 2012).
In addition to the above cross-sectoral reform initiatives, international trade has been a key pillar of
Malaysias economic development. As a member of the World Trade Organization (WTO) since 1995, the
countrys trade policy has been focused on supporting global trade liberalization and ensuring a fair trade
environment. In pursuit of these goals, Malaysia has also signed several bilateral and regional trade
agreements (Ministry of International Trade and Industry 2008).
As a member of the WTO, Malaysia has participated in WTO negotiation rounds and has made several
commitments related to trade in goods and services. Negotiations on trade in services have covered
liberalization and regulation of services sectors, in addition to regulations related to government procurement
and subsidies. In such negotiations, developing countries have been seeking increased market access in several
services subsectors such as telecommunications, financial, environmental, construction, distribution, maritime
transport, and professional services, particularly architecture and engineering. Malaysias position on these
negotiations has been in support of offering market access for foreign services providers only in sectors where
domestic suppliers are ready to compete and contribute to the development of the sector (Ministry of
International Trade and Industry 2008). To date, Malaysia has made commitments under the General
Agreement on Trade in Services (GATS) in the following sectors: business and professional services,
communications services, construction and related services, financial services, transportation services, healthrelated social services, tourism and travel-related services, and recreational and cultural services (Ministry of
International Trade and Industry 2008). So far, no cases or complaints have been raised against Malaysia
regarding its oil sector LCPs by any WTO member (WTO 2012b). But depending on the direction of these WTO
negotiations, liberalization in sectors such as engineering services as well as in government procurement may
have a direct impact on Malaysias oil sector LCPs.
In addition to its WTO commitments, Malaysia has signed several bilateral and regional trade agreements.
Today, Malaysia has bilateral trade agreements with Japan, Pakistan, New Zealand, India, Chile, and Australia,
and it is a member of the Association of Southeast Asian Nations (ASEAN) free trade area. As a member of the
ASEAN, Malaysia is also part of the ASEAN-Japan, ASEAN-China, ASEAN-Korea, ASEAN-India, and ASEANew Zealand/Australia trade agreements (Ministry of International Trade and Industry 2008). The countrys
bilateral and regional trade agreements cover liberalization and reduction in tariffs on trade in goods and
services as well as facilitation of cross-border investment and economic cooperation (Ministry of International
Trade and Industry 2008). Most of these agreements, however, have attempted to exclude or maintain a certain
level of protectionism in government procurement, mining and natural resources sectors, and oil-sector-related
services, such as engineering services. For instance, the Malaysia-Australia Free Trade Agreement covers
engineering services but allows commercial presence only through a representative office, regional office, or a
locally incorporated corporation of Malaysian individuals or Malaysian controlled or both. Additionally, the
agreement limits the aggregate foreign shareholding in the joint-venture corporation to 30 percent. Moreover,
R&D services are permitted with no restriction, except for those involving Malaysias natural resources.
Another example is the trade agreement with India, where the investment provisions exclude government
procurement (Investment Provision of the Malaysia-India Trade Agreement).
Going forward, Malaysia is negotiating several new trade agreements including a trade agreement with
Turkey, a trade agreement with the European Union (EU), the Trans-Pacific Agreement, Trade Preferential
System-Organization of Islamic Conference (TPS-OIC), and Developing Eight (D-8) Preferential Tariff
Agreement (PTA) (Ministry of International Trade and Industry 2008). The result of these negotiations may
151
also impact the Malaysian oil sectors LCPs. For instance, negotiations with the EU specifically cover
government procurement, where a dedicated working group has been established to negotiate this area
(Ministry of International Trade and Industry 2008).
On the ETP front, each initiative is associated with well-defined targets and key performance indicators (KPIs).
For the OFSE EPPs (entry point projects), the KPIs and 2011 targets are presented in Table 5.8.
Table 5.8 Malaysia: OFSE EPPs, KPIs, and Targets for 2011
EPP
KPI
2011 Target
Attract multinationals to bring their global oil field service and

equipment operations to Malaysia.
Amount of investment made by OFSE

multinationals.
Consolidating the domestic fabricators.
Number of successful merger of fabricators.
Develop engineering, procurement, and installation capabilities

and capacity through strategic partnerships and JVs.
Number of JVs between multinationals and local

OFSE companies.
RM 320 million
Source: Based on data from CIMB 2012.

Note: EPP = entry point project; KPI = key performance indicator; JV = joint venture; OFSE = oil field services and equipment.
Monitoring of the progress is continuously managed by Pemandu. Limited information is available around
Petronas internal monitoring and measuring procedures in relation to the NOCs local-content-related
activities.
Information around the achieved local content levels in OFSE is limited. Nordas, Vante, and Heum (2003)
report that local companies captured 74 percent of the value of OFSE contracts in 1995.
Under the government ETP, the goal is to transform Malaysia into a regional hub for OFSE. Thus, the local
content level in OFSE is not tracked. On the other hand, progress against set targets is monitored continuously.
Progress for the year 2011 is presented in Table 5.9.
Table 5.9 Malaysia: OFSE-related EPP Progress over 2011, and Target for 2012
KPI
2011 Target
2011 Actual
2012 Target
RM 320 million
RM 454 million
Number of successful merger of fabricators
Number of JVs between multinationals and local OFSE companies
Amount of investment made by OFSE multinationals
Source: Based on data from CIMB 2012.

Note: EPP = Entry point project; KPI = key performance indicator; JV = joint venture; OFSE = oil field services and equipment.
Under the first EPP, Schlumberger launched a manufacturing plant for marine and land seismic equipment
in July 2011. The plant is expected to combine local talent with international expertise. By the end of 2012, the
plant is expected to employ 300 people. Under the same ETP, five trading companies have signed up to the
Global Incentive for Trading Program, offering these companies with fiscal incentives to use Malaysia as a base
for the Asia-Pacific markets. As for the second EPP, the Marine and Heavy Engineering Holdings (MMHE)
acquired Sime Darbys fabrication yard for RM 393 million in March 2012 (Mahalingam 2012). The acquisition
made the MMHE the largest Malaysian fabricator. Going forward, two mergers or acquisitions should be
concluded by the end of 2012. Under the third EPP, the global leader in conformity assessment and certification
services recently acquired a Malaysian company specialized in asset integrity management services. The
company is expected to compete in the Southeast Asia region. Other multiple joint venture agreements were
also facilitated.
152
References
Abdullah, Rao. 2012. Oil and Gas IndustryOpportunities and Challenges Ahead. Halliburton.Malaysia.
Athukorala, Prema-chandra, and Swarnim Wagl. 2011. Foreign Direct Investment in Southeast Asia: Is Malaysia
Falling Behind? Arndt-Corden Department of Economics, Crawford School of Economics and Government,
Australian National University. Canberra, Australia.
Bank Pembangunan. 2011. Report on Malaysia Oil and Gas Exploration and production. Kuala Lumpur: Bank
Pembangunan.
Bishop, Michele G. 2002. Petroleum Systems of the Malay Basin Province, Malaysia. Central Region Energy
Resource Team, U. S. Department of the Interior.
. 2012. BP Statistical Review 2012. London: BP.
Business Monitor International. 2012. Malaysia Oil and Gas Report Q3 2012. Market Research.
http://www.marketresearch.com/Business-Monitor-International-v304/Malaysia-Oil-Gas-Q3-7011591/.
CIA
(Central
Intelligence
Agency).
2012.
The
World
Factbook.
Washington,
https://www.cia.gov/library/publications/the-world-factbook/fields/2221.html
DC:
CIA.
CIMB. 2012. ETP 2011 Annual ReportA for Trasnformation. Kuala Lumpur: CIMB.
CPPS
(Centre
for
Public
Policy
Studies).
2008.
Policy
http://www.cpps.org.my/downloads/factsheets/Oil%20and%20gas%20factsheet.pdf.
Factsheet.
Curtin. 2004. Ethics, Equity and Social Justice. Curtin University of Technology. Perth, Australia.
DAP (Democratic Action Party). 2010. Democratizing Malaysia's Economy: DAP Alternative National Budget 2010.
DAP Economic Bureau, Democratic Action Party, Selangor.
Deloitte Global Services Limited. Corporate Tax Rates 2008-2012. http://www.deloitte.com/assets/DcomGlobal/Local%20Assets/Documents/Tax/Taxation%20and%20Investment%20Guides/matrices/dttl_corpora
te_tax_rates_2008_2012.pdf, 2012.
DoS. 2011. 2011 Investment Climate Statement - Malaysia.US Department of State. Washington D.C.
. 2012. 2012 Investment Climate Statement - Malaysia.US Department of State. Washington D.C.
EIA (Energy Information Administration). 2011. Country Analysis Brief. Washington, DC: EIA.
ETP (Economic Transformation Programme). 2010. Powering the Malaysian Economy with Oil, Gas and
Energy. http://etp.pemandu.gov.my/upload/etp_handbook_chapter_6_oil_gas_and_energy.pdf.
Fleming, Daniel, and Henrik Sborg. 2012. Malaysian Skills Development and the Middle-Income Trap.
Department of Society and Globalisation, Roskilde University. Trekroner, Denmark.
Gomes, Emanuel, and Markus Weimer. 2011. Education in Angola: Partnership Opportunities for the UK. London:
Chatham House.
IEC Midas. 2012. Sabah Oil and Gas. Kota Kinabalu: IEC Midas.
INTSOK. 2010. INTSOK Annual Market Report (2011-2014). Rystad Energy, INTSOK. Oslo, Norway.
Kaufmann, Daniel, Aart Kraay, and Massimo Mastruzzi. 2011. The Worldwide Governance Indicators (WGI)
Project. http://info.worldbank.org/governance/wgi/index.asp.
Khader, Fakhri R. 2012. The Malaysian Experience in Developing National Identity, Multicultural Tolerance
and Understanding through Teaching Curricula: Lessons Learned and Possible Applications in the
Jordanian Context. Department of Educational Sciences, Petra University, Amman.
153
KPMG,
2012.
Corporate
and
Indirect
Tax
Survey
2012
http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/corporate-indirecttax-survey.pdf, 2012.
Lahn, Glada, Dr. Valrie Marcel, John Mitchell, and Dr. Keith Myers. 2007. Report on Good Governance of the
National Petroleum Sector. Chatham House, Royal Institute of International Affairs.London, United
Kingdom.
Mahalingam, Eugene. 2012. MMHE Sees Oil Prices Just Right for Investment in O&G Sector. Kuala Lampur: The
Star.
Martin, Sue. 2006. Foreign Companies and Economic Nationalism in the Developing World after World War
II. University of Hertfordshire Business School. United Kingdom.
Comptetitveness.
Mckinsey
Global
Institute.
http://www.mckinsey.com/insights/mgi/research/productivity_competitiveness_and_growth/six_myths_a
bout_trade
MIDA
(Malaysian
Investment
Development
Authority).
2011.
MIDA.gov.
http://www.mida.gov.my/env3/uploads/Publications_pdf/Profit_%20MalaysiaPetrochemical/Petrochemica
l_Nov11.pdf.
Ministry of Energy Green Technology and Water. 2011. NKEA: Oil, Gas and Energy - ETP Annual Report
Kuala Lampur, Malaysia.
Ministry
of
International
Trade
and
Industry.
2008.
Malaysia
and
the
WTO.
http://www.miti.gov.my/cms/content.jsp?id=com.tms.cms.section.Section_f5694606-c0a81573-78d578d5759be8c9
MOHE (Ministry of Higher Education). 2012. http://educationmalaysia.gov.my/where-to-study/map.
MPRC (Malaysia Petroleum Resources Corporation). 2012. http://mprc.gov.my.
Technical Vocational Education and Training and Lifelong Learning in Trinidad and Tobago that Was Laid
in Parliament on January 12th, 2011. http://www.stte.gov.tt/.
Mun,
Har
Wai.
2007.
Malaysian
Economic
Development:
http://harwaimun.com/Malaysian_Economics_Development.pdf
Issues
and
Debates.
Nordas, Hildegunn Kyvik, Eirik Vante, and Per Heum. 2003. The Upstream Petroleum Industry and Local
Industrial DevelopmentA Comparative Study. Bergen: Institute for Research in Economics and Business
Administration.
Parshall, Joel. 2011. Interest Grows in Asia Pacific Offshore Projects. Journal Of Petroleum Technology. Volume: 63,
Issue: 11, Pages: 40-48 .Pemandu. 2010. Powering the Malaysian Economy with Oil, Gas and Energy. KL:
Pemandu.
. 2012. Performance Management and Delivery Unit. http://www.pemandu.gov.my.
PetroMin. 2010. Malaysias New Fields Offer Optimism. Country Report (PetroMin).
. 2011.Deepwater Sector Leads Malaysian Upstream Growth. Country Report (PetroMin).
Petronas. 2005. Investing in Oil Sector Capacity Building: Petronas Case Study on Education. Presentation to
Good Governance of the National Petroleum Workshop 2, London, September 21-23, 2005.
. 2012a. Corporate Profile. http://www.petronas.com.my/about-us/Pages/corporate-profile.aspx.
. 2012b. Education. http://www.petronas.com.my/community-education/education/Pages/default.aspx
154
. 2012c. Petronas Group Financial Results Announcement: Financial Period Ended 31 December 2011. KL:
Petronas Group.
PKF. 2012. Malaysia Tax Guide 2012. http://www.pkf.com/media/387143/malaysia_2012.pdf.
Schwab, Klaus. 2011. The Global Competitiveness Report. Geneva: World Economic Forum.
Thu, Goh Sing. 1983. Exploration, Development and Reservoir Engineering Studies for the Tapis Field
Offshore Peninsular Malaysia. Journal of Petroleum Technology. Volume 35, Number 6, Pages1051-1060.
Tordo, S.; Tracy, B; and Arfaa, N. 2011. National Oil Companies and Value Creation. World Bank Working
Paper, Washington D.C.
Transparency
International.
2012.
http://cpi.transparency.org/cpi2011/results/.
Corruption
Perceptions
Index
UHY
(Urbach
Hacker
Young
International
Limited).
2011.
Doing
Malaysia.http://www.uhy.com/wp-content/uploads/Doing-Business-in-Malaysia.pdf.
UN
(United
Nations),
Department
of
Economic
http://esa.un.org/unpd/wpp/unpp/panel_indicators.htm.
and
Social
2011.
Business
Affairs.
In
2010.
UNDP
(United
Nations
Development
Programme).
2010.
Human
Development
Index.
http://hdr.undp.org/en/statistics/. 2011. International Human Development Indicators.
http://hdrstats.undp.org/en/countries/profiles/MYS.html.
United Nations Statistics. National Accounts Main Aggregates Database. New York: United Nations, 2010.
USGS (U.S. Geological Survey). 2010. World Petroleum Resource Project 2010 . Washington, DC: USGS.
World Bank. 2011a. Ranking of Economies. http://doingbusiness.org/rankings.
.
2011b.
World
Bank
Development
http://data.worldbank.org/indicator/IC.TAX.TOTL.CP.ZS/countries/1W-TT-ZJ?display=graph
Indicators.
. 2012a. Malaysia Economic Monitor. World Bank office Bangkok: World Bank.
. 2012b. The World Bank. http://www.worldbank.org/en/country/malaysia/overview.
.
2012c.
World
Development
Indicators
http://databank.worldbank.org/data/home.aspx
and
Global
Development
WTO
(World
Trade
Organization).
2012a.
Statistics
.
2012b.
Trade
http://stat.wto.org/CountryProfile/WSDBCountryPFView.aspx?Language=E&Country=MY.
Finance.
Database.
Profiles.
WEF (World Economic Forum). 2011. The Global Competitiveness Report 2011-2012. Geneva: WEF.
Woo, K.Y. 2006. Malaysian Private Higher Education: A Need to Study the Different Interpretations of
Quality. University Examination Board, UCSI, Kuala Lumpur, Malaysia.
Yunus, Kamarul. The Oil and Gas Finds are Timely When Malaysia's Oil and Gas Reserves and Production
Capacity are Seen Dwindling. (Read more: Petronas Discoveries Come At Right Time.)
http://www.btimes.com.my/Current_News/BTIMES/articles/monv211/Article/index_html.
155
6. Trinidad and Tobago
The petroleum sector sits at the heart of this Caribbean island, population 1.3 million. In 2008 the sector
contributed to 40 percent of the countrys GDP, 58 percent of government revenues, and 88 percent of exports
(World Bank 2008). Trinidad and Tobago (T&T) has a long history in the petroleum sector that dates back to
1908, when oil was first produced. Under the British colony, until 1962, the country supplied a major share of
the British Empire oil consumption, which reached 40 percent in 1930 (Muclshansingh 1971). While oil
production peaked in 1978, natural gas production has been on an increase and major discoveries have been
made in the 1990s. In 1998 T&T started exporting liquefied natural gas (LNG) to become the fifth-largest LNG
exporter and major supplier of LNG to the United States.
Historically, T&Ts government has played an active role in developing select sectors in the economy
through industrial and import substitution policies. Such policies achieved mixed results. More recently, the
government adopted a modern approach to productive development policies centered on addressing market
failures83 (Moya, Mohammed, and Sookram 2010). In relation to local content in the petroleum sector, the topic
first appeared in T&T in the year 2000 when the government agreed to the establishment of Policy Guidelines
for the Utilisation of Local Goods and Services for Government and Government Related Projects. Early efforts
were driven by the private sector, mainly the National Energy Business Alliance84 and the Energy Chamber of
T&T. Four years later the Ministry of Energy and Energy Affairs (MMEA) developed a Local Content and
Local Participation Policy Framework specific to the energy industry and appointed a Permanent Local
Content Committee. The policy framework was officially launched in 2006 (MENAS 2008).
This latter effort was driven by a national strategic plan. In 2005 a national committee finalized Vision 2020
Strategic Plan that was approved a year later by the parliament. The plan calls for the adoption of sustainable
development and the transformation of T&T into a developed country by 2020 through:
Developing innovative people

Nurturing a caring society
Governing effectively
Enabling competitive business
Investing in sound infrastructure and environment (National Committee 2005).
Overall, the country aims at increasing its gross national product (GNP) versus GDP and the production
of higher-value-added goods and services directed toward export markets. Driven by its central role to the
economy, future developments, and low levels of local capture, which were around 10 percent, the energy
sector was at the center of this strategic plan (MEEA 2006) The first goal for the energy sector within the
strategic plan was to encourage local players within the energy sector (National Committee 2005).
As argued by the MEEA: Local Content is intended to aid the Governments sustainable development
goals by providing economic opportunities for T&T businesses to capture greater value-added and by allowing
locals to have more meaningful participation in the energy sector and its decision making process (MEEA
2011). Despite all these developments, there is an absence of a well-articulated local content strategy that
83
84
A review of productive development policies adopted in T&T is presented by Moya, Mohammed, and Sookram (2010).
Represents a group of organizations involved in the energy sector.
156
includes measuring and monitoring tools. Today, T&T is at the early stages of implementing local content
policies (LCPs) as it is faced by the challenge to replenish its depleting reserves.

In the 2011 Global Competitiveness Report, the World Economic Forum (WEF) improved its rating of T&T for the
second consecutive year, placing the country 81st out of 142 countries. This is a five-position improvement
from the 2009 placement. T&T ranks well above neighboring Haiti and Venezuela (141st, 124th), though it is
behind more-developed Latin American economies such as Brazil and Colombia (53rd, 68th). Financial market
development is T&Ts most noteworthy strength relative to other similarly competitive economies. Quality of
education in the Caribbean nation is also highly ranked (37th of 142) (WEF 2011); however, there is still room
for improvement especially in tertiary and vocational education (MSTTE 2011). Additionally, improvements
can be pursued in the government bureaucracy, which now makes doing business in T&T more challenging
than similarly developed economies.
6.1.1 Economy
As of the early 1960s, T&Ts economy has been highly dependent on revenues from hydrocarbon resources.
Windfall revenues experienced from the rise in oil prices during the oil embargoes of 1973 and 1982 instigated
rises in income, expansion of public sector employment, and improvement in physical infrastructure and living
conditions. But a large share of expenditure was not channeled into sustainable development. Such
expenditures included production subsidies and high public sector salaries. The latter led to the inflation of
overall labor cost throughout all sectors of the economy, hindering the competitiveness of the nonhydrocarbon
sectors of the economy. To this end, a limited number of jobs were created in competitive sectors.
Following the depression in oil prices experienced in the 1980s, T&Ts economy has undergone a severe
contraction. Compared to 1982, per capita GDP in 1993 dropped by 44 percentage points and the
unemployment rate almost doubled to reach 20 percent. Coupled with limited development in competitive
areas, the economic contraction has led T&Ts government to cut on the high levels of spending, thus cutting
on expenditure in social programs and reducing employment in the public sector. Coupled with other
structural factors, this has led to a higher unemployment rate and ultimately to an increase in poverty levels. In
response to this situation, T&T embarked on pursuing an economic reform plan centered on achieving
macroeconomic stability to reduce the countrys economic exposure to volatility in oil prices, economic
diversification away from the hydrocarbons sector, upgrade and expansion of the countrys infrastructure,
development of the private sector, and reform of the public sectors institutional capacities.
Today, T&T is considered a high-income developing country. The country experienced strong growth in
its GDP over the last decade, reaching $22.5 billion in 2011. This growth has been fueled by the hydrocarbon
sector and related inward investments. The 2008 global recession had a high impact on the growth of the
economy given its high dependency on natural gas exports. GDP per capita is among the highest of Latin
American economies. Following the economic reforms experienced in the 1990s, the country has been enjoying
macroeconomic stability. More recently, T&T has been experiencing a surplus in the fiscal balance with
moderate inflation rates. Table 6.1 presents key economic indicators for T&T. As noted in Vision 2020, T&T is
challenged with increasing sustainable economic development beyond the petroleum sector. The sector
accounts for half of the government revenues and over 90 percent of foreign direct investments (FDI). As
shown in Figure 6.1, petroleum products have always dominated the value of T&Ts exports. In 2010
petroleum products constituted 73 percent of the value of exports. Chemicals were the second-largest exports
by value (WTO 2012b).
157
Table 6.1 Key Economic Indicators for T&T, 19802010

1980
1985
1990
1995
2000
2005
2006
2007
2008
2009
2010
7.5
6.7
6.0
6.4
8.2
12.0
13.6
14.2
14.6
14.1
14.1
6,947
5,702
4,912
5,071
6,311
9,102
10,265 10,715 10,960 10,556 10,516
Inflation, CPI (%)
3.6
5.5
4.1
3.8
3.7
6.9
8.3
7.9
12.0
7.0
10.5
3.2
12.4
18.7
1.2
2.8
-6.9
9.0
-0.8
-7.8
48.8
4.6
6.3
6.2
6.2
6.3
6.3
6.3
6.3
6.3
6.3
6.3
6.4
Trade (% of GDP)
104.6
99.9
95.0
90.0
96.7
104.8
107.0
100.6
103.0

Figure 6.1 T&Ts Exports by Commodity, 19802010 ($ billion)
4.1
3%
1%
2%
2.1
18%
2%
2.0
6%
7%
6%
15%
2.5
8%
10%
9%
1%
4.3
6%
6%
6%
9.9
7%
17%
11.0
3%
3%
100%
11%
18%
3%
9%
68%
73%
3%
25%
94%
80%
66%
65%
Other
Iron and steel
Clothing
48%
Chemicals
Fuels
1980
1985
1990
1995
2000
2005
2010
Source: Based on data from WTO 2012a.

6.1.2 Taxation
T&T revenues from taxes constituted 26 percent of the countrys GDP in 2009. This rate is in line with the
United Kingdom and at the higher end of neighboring Latin American countries (Figure 6.2). The Finance Act
of 2006 streamlined the tax regime in T&T. The country applies a flat income tax rate of 25 percent and a valueadded tax rate of 15 percent. 85 The corporate tax rate in T&T is low relative to the regional rates (World Bank
2011a), and companies are taxed as either resident or nonresident based upon the location of their
management. Resident companies, controlled from T&T, are taxed based on their global profits. Nonresident
companies, managed outside of T&T are to pay taxes on profit accrued from doing business in T&T (Inland
Revenue Division 2012).
85
Value-added tax (VAT) is zero percent for certain items.
158
Figure 6.2 T&Ts Tax Revenues and Corporate Tax Rate Compared to Other Countries, 2009 and 2010
Angola
43%
Norway
Angola
35%
27%
Brazil
Trinidad and Tobago
26%
Australia
30%
United Kingdom
26%
India
30%
South Africa
26%
Uganda
Netherlands
23%
Australia
22%
Malaysia
16%
Chile
16%
Brazil
13%
Canada
12%
Uganda
Indonesia
India
Kazakhstan
12%
30%
Canada
28%
Norway
28%
South Africa
16%
Russia
34%
28%
Indonesia
25%
Malaysia
25%
Netherlands
25%
Trinidad and Tobago
25%
UK
11%
10%
8%
24%
Chile
20%
Kazakhstan
20%
Russia
20%
OECD 14%
Source: Based on data from CIA 2012; Deloitte 2012; World Bank 2011a.
hospital insurancegrants, and net revenues from public enterprises.
Since the late 1980s T&Ts population has been growing at a rate of less than 1 percent annually. Totaling 1.36
million in 2010, the population is expected to continue growing at a slow pace until it peaks around 2025, and
eventually declines to the level of year 2010 by 2050. The labor force in T&T has reached its peak in size in 2010.
The elderly population is growing and is Figure 6.3 presents the evolution of T&Ts population by age group.
Million People
Figure 6.3 Evolution of the T&T Population and Labor Force over Time)
1.6
80%
1.4
70%
60+
1.2
60%
50-59
1.0
50%
40-49
0.8
40%
30-39
0.6
30%
20-29
0.4
20%
10-19
0.2
10%
0-9
0.0
0%
% 15 - 64
Backed by the economic growth, the unemployment rate in T&T reached its historical low level of 4.6
percent in 2008 (WTO 2012b). Affected by the global recession, the unemployment rate increased to 5.4 percent
in 2010. The knowledge base of T&Ts labor force is limited relative to other mature economies and oil
producers. The percentage of the labor force with tertiary education in Australia, Canada, Norway, and the
United Kingdom is more than twice that of T&T. In addition, the mean of years of education of T&Ts labor
159
force is in line with the United Kingdom but lower than that of Australia, Canada, and Norway. Table 6.2
presents a summary of indicators on T&Ts labor force in comparison to select countries.
Table 6.2 T&T Labor Force Indicators Compared to Select Countries, 2010
Labor force
(million)
Angola
Australia
Brazil
Canada
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
T&T
Uganda
UK
7.1
11.8
101.6
19.0
11.8
8.8
12.0
2.6
18.2
22.1
0.7
13.4
31.8

Primary
n.a.
27.3
n.a.
13.5
n.a.
n.a.
18.3
19.9
15.8
n.a.
25.3
n.a.
19.2
Secondary
n.a.
38.9
n.a.
40
n.a.
n.a.
56
43.5
74.2
n.a.
63
n.a.
44.4
Tertiary
n.a.
33.8
n.a.
46.5
n.a.
n.a.
21.1
35.8
5.2
n.a.
11.1
n.a.
35.4
Mean years Minimum wage

of education ($ per month)
Unemployment,
total (% of total
labor force)
4.4
12
7.2
12.1
5.8
10.4
9.5
12.6
8.5
5.1
9.2
4.7
9.3
25.0
5.2
8.3
8.0
7.1
6.6
3.7
3.6
23.8
10.7
5.4
4.2
7.8
127
1597
300
1903
133
n.a.
n.a.
3609
543
59
n.a.
3
1655
Source: Based on data from World Bank 2011a; UNDP 2010.

Note: Educational attainment data for Australia, Canada, Malaysia, South Africa, and T&T represent year 2008 levels. Unemployment data for
Brazil, Kazakhstan, Malaysia, South Africa, and Uganda represent year 2009 levels.
6.1.4 Education
T&T is committed to developing a more diversified knowledge intensive economy. In a demonstration of

this commitment, the Ministry of Science Technology and Tertiary Education spent $2 billion between 2000 and
2010 toward enhancing postsecondary education. The expenditure was a success, boosting tertiary enrollment
from 7 percent in 2001 to 40 percent in 2008 with plans to achieving 60 percent enrollment by 2015 (MSTTE
2011). Achieving this target will put tertiary enrollment in T&T above that of the United Kingdom in 2009.
Additionally, the Ministry of Education (MEO) increased expenditure per primary student by 54 percent
from 2007 to 2009. Enrollment in primary education in T&T is below that of Australia, Norway, the United
Kingdom, and the overall OECD average. Youth and adult literacy rates are strong in T&T at 99.6 percent and
99.8 percent, respectively. See Table 6.3 for a comparison of education in T&T to other countries.
Table 6.3 T&T Educational Indicators, 2010
Literacy rate (%)
Adult (15+)
Angola
Australia
Brazil
Indonesia
Kazakhstan
Malaysia
Norway
South Africa
Tanzania
T&T
Uganda
UK
70.1
n.a.
90.3(a)
92.2(b)
99.7
93.1
n.a.
88.7(c)
73.2
98.8
73.2
n.a.

Youth
(1524)
73.1
n.a.
98.1(a)
99.5(b)
99.8
98.4
n.a.
n.a.
77.3
99.6
87.4
n.a.
Primary
Secondary
Tertiary
85.7
97.1
94.1(b)
95.9
89.5
n.a.
99.1
85.1(a)
98.0(2)
93.9
90.9
99.6(a)
11.5(a)
3.7
79.9
36.1(a)
23.1
38.5
40.2(a)
74.4
n.a.
2.1
40(b)
4.2(a)
58.5(a)
85.5
82.0(b)
67.3
88.2
67.9(a)
93.9
n.a.
n.a.
n.a.
n.a.
96(a)
Source: Based on data from Gomes and Weimer 2011; UNDP 2010; World Bank 2012; MSTTE 2011.
Note: (a) year 2009, (b) year 2008, (c) year 2007, (d) year 2006 data.
160
Public expenditure
on education
(% of GDP)
3.6
5.1(a)
5.4(b)
2.8(b)
3.1(a)
5.8(a)
6.5(b)
6.0
6.2
3.8(d)
3.2(a)
5.4(b)
Government bureaucracy, corruption, and a poor work ethic are three of the main issues raised by the WEF
report of 2012 (WEF 2011). A close look at the governance indicators in T&T shows that compared to year 2000
the country has fallen back on all governance indicators in 2010. As shown in Figure 6.4, the country still has a
long way to go to achieve the Organisation for Economic Co-operation and Development (OECD) levels.
Overall, the country was ranked 68 out of 183 in the Doing Business indicators of 2012. The time spent to start a
business in T&T is 42 days, 31 more than in the OECD countries. Another notable impediment attributed to
bureaucracy is registration of property, which takes 162 daysover five times as long as in the OECD
countries on average. Construction permitting is another weakness, averaging 297 days145 days longer than
the OECD average. T&T is relatively efficient at providing access to electricity and credit (World Bank 2011b),
but bureaucratic delays can be frustrating to investors (DoS 2011). A comparison of indicators of the ease of
doing business in T&T and the OECD countries in presented in Table 6.4.
Figure 6.4 Governance Indicators in T&T Compared to the OECD Average
Voice and Accountability

100
80
60
40
20
0
Political Stability/Absence of
Violence
T&T 2010
T&T 2000
OECD 2010
Rule of Law
Government Effectiveness
Regulatory Quality
161
Table 6.4 Indicators for Doing Business in T&T in Comparison to OECD Average, 2012
T&T
OECD
Procedures (#)
Time (days)
9
43
0.9
0
74 (-5)
5
12
4.7
14.1
17
297
6
93 (-5)
14
152
45.7
5
61
7.9
24 (0)
5
103
92.8
8
162
7
175 (-4)
5
31
4.4
8
4
0
46
40 (-3)
7
5
9.5
63.9

Extent of director liability index (0Ease of shareholder suits index (0Investor protection strength (0-10)

Procedures (number)
Time (days)

Profit tax (%)
Other taxes (%)

5. Getting Credit
4
9
7
6.7
24 (-3)
6
5
7
6
39
210
21.6
5.8
1.8
29.1
65 (+32)
13
186
15.4
24
3.2
42.7
6
18
1257
7
20
1546
52 (0)
4
10
1032
5
11
1085
1340
33.5
42
169 (0)
518
19.7
31
4
25
17.9
133 (+6)
1.7
9
68.2
8. Trading across borders
Procedures (number)
Time (days)
OECD
7. Paying Taxes
3. Getting electricity
Procedures (number)
Time (days)
T&T
Time (days)
Cost (% of claim)
Procedures (number)

Time (years)
Cost (% of estate)

T&Ts economy relies heavily on the petroleum sector. As shown in Figure 6.5, the sector has historically
contributed 30 to 40 percent of the countrys GDP. Compared to other countries, the intensity of the petroleum
sector in the economy is similar to that of Kazakhstan, Norway, and Malaysia (Figure 6.6). On the employment
front, the sector has historically employed around 3 percent of the labor force (Central Bank 2012).
162
300
35%
250
30%
25%
200
20%
150
15%
100
10%
50
Share of GDP
GDP (Bn $)
Figure 6.5 T&T: Contribution of Mining, Manufacturing, and Utilities to Value-added, 19702010
5%
0%
70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10
Contribution to GDP
Percentage Share

Figure 6.6 T&T and Select Countries: Breakdown of Value-added by Economic Activity in 2010 ($ billion)
85
1,296
2,066
1,637
883
159
304
402
377
24
17
22%
23%
2,236
100%
7%
14%
25%
15%
5%
33%
11%
43%
45%
11%
13%
8%
20%
18%
9%
6%
8%
9%
50%
7%
2%
14%
12%
10%
5%
5%
Angola
Australia
12%
7%
3%
8%
8%
4%
4%
1%
32%
Canada
6%
7%
8%
8%
0%
13%
3%
30%
16%
6%
11%
2%
12%
12%
6%
21%
36%
33%
10%
6%
24%
20%
19%
Brazil
5%
8%
6%
1%
29%
19%
19%
20%
8%
51%
12%
5%
10%
13%
8%
38%
39%
5%
6%
11%
20%
Norway
South
Africa
Trinidad
& Tobago
Other Activities
Construction
Manufacturing
12%
14%
Uganda
UK
1%

Oil production started in earlier days of the 20th century in the southern areas of Trinidad. The country had its
first offshore development in 1955, and since then production has shifted further to the east and more recently
to the north coast areas. Overall, the country is a mature hydrocarbon province with future developments
expected to come from deep-water areas of the east and north, and the shallow water marginal fields. It must
be noted that T&T is endowed with untapped offshore heavy-oil reserves estimated to range between 2,600
and 5,000 million barrels (McGuire and others 2009).
T&Ts oil production peaked in 1978 at 230 million barrels per day (mmbpd) and has been on a decline
since then. The 2011 countrys reserves stand at 800 million barrels with production output of 135.9
mmbpd. On the gas front, T&Ts proved reserves stand at 14.2 trillion cubic feet (tcf). Production of
natural gas has been on an increase (11 percent compound annual growth rate [CAGR] between 2000 and
163
2010) putting further pressure on the countrys depleting reserves. To reverse this, the government has
recently improved its upstream fiscal terms to attract exploration activities in deep waters. Table 6.5
provides a snapshot of the oil and gas resources in T& T and Figure 6.7 presents the evolution of oil and
gas production.
Table 6.5 Snapshot of the Oil and Gas Industry in T&T 2011

2011
0.8
135.9
34.4
14.2
3.9
2.1
21.5
% of World
0.1
0.1
0.2
1.2
0.7
0.2
Global rank
42
32
67
33
9
33
58
1 yr
0.0
-6.5
-3.5
5.3
-4.2
-2.7
-2.8
% Change
3 yrs
5 yrs
0.0
-4.7
-9.9
-11.8
-2.5
1.8
-1.7
-16.6
0.2
4.3
5.4
8.6
4.8
8.0
10 yrs
-26.2
-12.3
35.2
-31.9
125.7
73.1
69.3

Note: bcfd = billion cubic feet per day; boe = barrel of oil equivalent; mmbpd = million barrels per day; tcf = trillion cubic feet; toe = tons
of oil equivalent.
Not available.
Figure 6.7 T&T: Evolution of Oil and Gas Production, 19702010 (in million tons of oil equivalent)
50
45
Gas
Oil
40
35
30
25
20
15
10
5
0
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
To meet its local oil consumption, T&T complements its domestic production with imports from
Venezuela, Brazil, West Africa, and Colombia. Domestic and imported oil is refined locally and mainly
consumed in the transportation sector. As for natural gas, around half of the production is exported via four
liquefied natural gas (LNG) terminals with a total capacity of 15.1 million tons per year. Over half of the
remaining production is directed to the domestic petrochemicals industry and the rest split mainly between
power generation, the industry, and the energy industrys own use (IEA 2011).
The petroleum sector in T&T is mainly governed by the Petroleum Act of 1969 and its amendments. Petroleum
resources are owned by the citizens of T&T and the state acts as the custodian of these resources (McGuire and
others 2009). The MEEA assumes policy development and regulatory responsibilities. As stated by the
ministry, these responsibilities include:
Formulation and implementation of sectoral policies and legal instruments

Management of the states interests
Leasing and/or licensing of exploration and production (E&P) areas
Regulation and management of development and production activities
164
Administration of domestic marketing of petroleum products, natural gas transmission/sales,

petrochemical manufacture, and other natural-gas-based industries.
Government policies require approval from the cabinet. The ministry is supported by a Standing
Committee on Energy chaired by the prime minister and including the ministers and permanent secretaries of
energy and finance and heads of various state companies.
On the operations front, companies are engaged in upstream activities through production sharing
agreements (PSAs). There are three model agreements customized for oil and gas activities in onshore,
shallow-water, and deep-water activities. Traditionally, PSAs require the approval of the parliament.
Upstream, there are 35 local and international companies engaged in oil and gas operations, including
Chevron, British Petroleum (BP), and British Gas (BG). Among these companies is the Petroleum Company of
T&T Limited (Petrotrin). Petrotrin, wholly owned by the government, was incorporated in 1993 and mandated
to engage in the petroleum value chain from exploration to distribution. The company owns and operates the
only refinery in the country. The company is the result of several mergers and acquisitions outlined in Figure
6.8.
Figure 6.8 T&T: Evolution of Petrotrin
UBOT
(1912-1956)
SHELL
(1956-1974)
TLL
(1911-1956)
TEXACO
(1956-1985)
TPD (1918-1961)
APEX (1919-1960)
KTO (1920-1961)
BP
(1956-1969)
BP, TEXACO,
SHELL
(1952)
TEXACO,
TESORO,
SHELLL
(1969-1974)
TRINTOC
(1974-1985)
TRINTOC
(1985-1993)
PETROTRIN
(1993)
TESORO
(1969-1985)
PETROTRIN
(2000)
TRINTOPEC
(1985-1993)
TRINMAR LTD.
(1993-2000)
TRINMAR,
TEXACO,
PETROTRIN
TEXACO, TESORO,
TRINTOCO
(1974-1985)
Source: Based on data from Petrotrin 2012.
Another state-owned company is the National Gas Company of T&T Limited (NGC), established in 1975.
The company is responsible for the purchase, transportation, and distribution of natural gas to industrial users.
In addition, the NGC is part of the Atlantic LNG company responsible for the liquefaction and export of LNG
(Table 6.6).
Table 6.6 T&T: Capacities and Shareholders of LNG Plants (1999, 2002, 2003, 2006)
Shareholders
Startup date
Capacity (mtpa)
BG
BP
GDF Suez
NGC
Repsol YPF
ALNG Train 1
ALNG Train 2
ALNG Train 3
ALNG Train 4
1999
3.3
26%
34%
10%
10%
20%
2002
3.3
33%
43%
2003
3.3
33%
43%
2006
5.2
29%
38%
25%
25%
11%
22%
Source: Based on data from Deutsche Bank 2010.
In addition, T&T has a well-developed industrial base. The country produced ammonia, urea, methanol,
iron, and steel. Most of the production facilities engage foreign companies, as shown in Table 6.7. Downstream,
another state-owned company, the National Petroleum Marketing Company, is one of two companies licensed
to carry out petroleum products marketing activities (WTO 2012b).
165
Table 6.7 T&T: Energy-Intensive Industrial Base by Company

Company
PCS Nitrogen
Point Lisas Nitrogen Limited
Product
Country of origin of main shareholders
Ammonia and urea
Canada
Ammonia
United States
Nitrogen 2000
Caribbean Nitrogen
Company
Tringen
Ammonia
T&T/Germany
Ammonia
T&T/Germany
Ammonia
T&T/Norway
Yara
Methanol Holdings
Trinidad Limited
Methanex
Ammonia
Norway
Methanol
T&T/Germany
Methanol
Canadian
Mittal
Iron and steel
United Kingdom
Nu Iron
Iron and steel
United States
Source: Adapted from Energy Chamber 2009.
The downturn experienced in the 1980s has strongly affected the domestic base of suppliers in the oil and
gas industry. Many companies closed and others ramped down their operations. The T&T Central Statistical
Office reports that there are around 400 small- and medium-sized enterprises (SMEs) providing services to the
energy industry on T&T, 250 of these being engaged with upstream petroleum operators. The activities these
companies engage in include the provision of goods, equipment rental, maintenance, and consulting services.
Of these companies, three are believed to be among the top ten providers of goods and services to the T&T
petroleum sector.
Driven by the volatility in oil prices and the increase in the domestic production of natural gas, the government
of T&T created an Interim Revenue Stabilization Fund (IRSF) in 2000. In 2007 the fund was enacted by the
parliament, which changed its name to the Heritage and Stabilization Fund (HSF). The objective of the fund is
to invest the surplus from petroleum revenues to support public expenditure in case of a downturn caused by
oil and gas prices or depletion of resources. In addition, the fund is supposed to provide a heritage for future
generations (Finance 2010). The fund is governed by a board of governors composed of five members who are
appointed by the president. Management of the fund is delegated to the central bank of T&T.
As a starting point, the accumulated funds in the IRSF were transferred to HSF. These totaled in $1.3
billion. Subsequently, the fund has been financed from its own investments as well as from petroleum
revenues86 in excess of 10 percent of expected revenues87 on quarterly basis. At least 60 percent of the excess
revenues shall be transferred to HSF. Based on the defined objectives, HSFs funds can be withdrawn in case
petroleum revenues for any year are lower than expected revenues by at least 10 percent (Mcguire 2009). By
September of 2010, HSF had accumulated $3,621 million. The evolution of HSFs funds is presented in Figure
6.9.
As defined by the Petroleum Taxes Act. Signature bonuses and revenues from gas liquefaction and other midstream activities are
not included (Mcguire 2009).
87 In case revenues exceed expected revenues by less than 10 percent, the minister of finance can still transfer the money to HSF.
86
166
Figure 6.9 T&T: Evolution of Funds, September 2001September 2010 ($ billion)

IRSF
HSF
3.62
2.89
2.96
2008
2009
1.68
1.35
0.64
0.45
0.16
0.16
0.25
2001
2002
2003
2004
2005
2006
2007
2010
Source: Adapted from Mcguire 2009; HSF 2010.

The overarching driver for LCPs in T&T is the Vision 2020 strategic plan of 2005. The plan has put the increase
of local industries involvement in the energy sector value chain as the first objective. Objectives, actions, and
stakeholders engaged to achieve this goal are presented in Table 6.8.
Table 6.8 T&T: Vision 2020, Goal 1 for the Energy Sector
Objective 1: To boost local involvement in the energy sector facilitated by government activities
Actions
Develop policies to maximize the level of local participation and equity ownership in the sector value chain.
Assess opportunities/feasibility for state/private sector investment within the value chain in and outside of T&T.
Establish policy to cause operators to partner with local institutions to develop training programs and pursue
research and development projects.
Adopt and implement policy on local content and participation to facilitate local participation and partnering in
new ventures, sustainable development, and so on.
Review regulatory framework regarding investment in energy projects toward inclusion of local participants (for
example, financiers, investors, service providers, and so on).
Establish a certification process of international benchmarking for local energy-based companies, goods, and
services.
Evaluate options and methods for the divestment of state holdings in energy companies.
Objective 2: To Define Metrics, Targets, Measures, and Requirements for Local Content
Actions
Define metrics and establish targets to track upstream performance, percentage of in-country
expenditure/activity.
Identify and empower agencies responsible for policy implementation and monitoring.
Establish processes and framework to enable transparent measurement, management, and reporting on
percentage expenditure/local content.
Define, develop, and implement an independent framework to measure local content and targets for local
participation in subsector activity.
Develop an audit system for local content.
Energy companies to develop a Local Content/Sustainable Development Charter, which defines targets and
strategies for increasing local content in projects and operations.
Establish a special fund to support domestic investment in services that do not currently exist locally.
Owner
PLCC
PLCC
MEEA, MoTI
PLCC, MEEA
MEEA, MoF
MEEA
MoF
Owner
MEEA, PLCC
PLCC
PLCC
PLCC
PLCC
Operators, PLCC
MoF
Source: National Committee 2005.

Note: MoF = Ministry of Finance, MoTI = Ministry of Trade and Industry; PLCC = Permanent Local Content Committee; MEEA = Ministry of
Energy and Energy Affairs.
Compared to other countries, local content in T&T has broader objectives, scope, and definition. Two
interlinked objectives are separately mentioned in the policy framework of 2006:
167
Maximize the level of participation of T&Ts national people, enterprises, technology and capital
Maximize the value to the country from its assets (MEEA 2006).
These objectives are achieved through the development and increasing use of locally owned businesses,
local financing and human capabilities.88 The scope of these efforts covers all activities connected with the
energy sector, along its entire value chain, within and outside of T&T. Extending the scope to external
geographies is underpinned by a view that local capabilities will be essential to capture opportunities beyond
the borders of the island, and a plan to grow the countrys GNP.
In T&T local content is considered as the usage of local goods and services, people, businesses and
financing. More specifically, local content and participation imply local value-added that is defined in terms
of ownership, control, and financing by citizens of T&T (MEEA 2006). In its latest National Energy Policy
Consultations, the MEEA outlines the following potential benefits of LCPs:
Greater retention of foreign exchange earnings and export of services

Development of human capability in key areas of the sector
National development including new business and employment opportunities and increase in the
countrys GDP
Long-term sustainable development and growth
Export of local services and skills (MEEA 2010).
6.3.2 Policy Tools
In the policy framework of 2006, the government laid out the menu of high-level fiscal and nonfiscal
instruments that can be used to capture local content in T&Ts petroleum industry. The fiscal instruments
include:
Taxation and royalty policies

Government expenditure to capture value from the sector and to extend it by building local
capabilities that support the sectors growth.
Nonfiscal instruments include:
Local participationmaximizing the depth and breadth of local ownership, control, and financing in
order to increase local value-capture from all parts of the value chain created from the resource,
including those activities in which nationals, local business and capital are not currently engaged, at
home and abroad
Local contentmaximizing the level of usage of local goods and services, people, businesses, and
financing
Local capability developmentmaximizing the impact of the ongoing sector activities, through the
transfer of technology and know-how to:
o Enhance, deepen and broaden the capability and international competitiveness of our people
and businesses within the sector
o Create and enhance capabilities that are transferable to other sectors within T&T; and
o Create and support cluster developments with other industries that have a natural synergy
with the energy sector and which may have the capacity to diversify and/or sustain the
economy after the resource is depleted (MEEA 2006).
The policy framework also outlined an inclusive approach to maximize local content and participation,
outlined in Figure 6.10.
In the introductory notes of its local content and local participation policy framework, T&T admitted the limited availability of
local human and capital resources and that the country will still rely on foreign expertise and resources.
88
168
Figure 6.10 T&T: Approach to Maximizing Local Content and Participation
Source: Based on data from MEEA 2006.
Upon approval of the policy framework, PSAs were amended to include provisions on local content.
Contracts mandate operators to comply with LCPs issued by the cabinet. In addition, contracts outline local
content provisions on procurement and capability development aspects. On procurement:
Operators must maximize their utilization of local goods, services, and facilities
Within the work programs and budgets submitted to the MEEA, operators must indicate the level of
local content they intend on achieving
Contracts shall be unbundled, as much as economically and practically feasible, to match the timing,
and financial and human capabilities of local enterprises
Contracts shall be advertised locally ensuring access of local enterprises to all tenders
Tender evaluation processes should put a high weight on the local value-added.
On capability development, provisions include:
Priority to employing nationals

Recruitment and training of nationals to be consistent with the operator performance standards
Provision of training and development programs to enable nationals to replace expatriate personnel
Transfer of technology and business expertise in, but not limited to, the following areas:
o Fabrication
o Information technology support, including seismic data acquisition, processing and
interpretation support
o Operations and maintenance support
o Maritime services
o Business support services, including accounting, human resource services, consulting,
marketing and contract negotiations
o Financing
o Trading (MEEA 2012).
The employment side of local content is also managed through a work permit procedure. A Work Permit
Advisory Committee, chaired by the Ministry of National Security and represented by the MEEA, supports
local content objectives through (i) advising the minister on work permit decisions upon ensuring that locals
are not denied from jobs because of foreigners being employed and (ii) appointing a local successor to the
expatriate where expatriate employment is necessary.
169
The sources for LCPs are:
The Petroleum Act Chapter 62:01 and implementing regulations

The Fiscal Incentives Act, Chapter 85:04 as amended, which grants fiscal incentives to qualified
companies in areas that are considered important to economic development
The Foreign Investment Act, Chapter 70:07
The Unemployment Levy Act Chapter 75:03, which provides for training and relief employment for
the unemployed
The Petroleum Production Levy and Subsidy Act Chapter 62:02, which is used to fund subsidies on
petroleum products
The Local Content Policy Framework
Production-sharing contracts.
Appointed in 2004, the PLCC (Permanent Local Content Committee) was mandated to support the
implementation of the local content and participation framework (MEEA 2009). More specifically, the PLCC:
Develops policies and strategies that ensure the transfer of knowledge and technology that improve
local capabilities, in addition to business and the capital market
Updates local content and participation policies, as required
Ensures compliance with set policies.
The PLCC is chaired by the Energy Research and Planning Division (ERPD) of the MEEA, which also takes on
secretariat responsibilities. In addition to the ERPD, the PLCC engages representatives from the Ministry of
Works and Transport, Ministry of Local Government, Oilfield Workers Trade Union, the banking sector, and
other private sector representatives.89
On another front, the ERPD advises on policies related to work permits in the energy sector. It also:
Supports the formulation of LCPs

Acts as a focal point for the PLCC
Identifies critical skills in the energy sector and manages a related database
Advises on policies related to work permits in the energy sector and represents the MEEA on the
Work Permit Committee.
Another major contributor to the local content agenda is the Energy Chamber of T&T. The chamber, an
independent body, helps to:
89
Ensure that LCPs are implemented in all sectors of the energy industry
Monitor future projects and share information about potential opportunities for local companies
Develop a methodology for measuring what is a local company
Strengthen and update existing database of local companies and their scores
Identify export opportunities for local companies in regional/extra-regional markets
Encourage co-operation between local companies and facilitate investment into new equipment,
training, and so on
Lobby the government for changes to the customs and excise legislation and practices that hamper the
movement of equipment in and out of T&T
Educate member companies and the general public about the energy services sector, including the
local capacity and the potential for development (Marajh 2012).
The detailed structure of the PLCC is available in the Local Content and Local Participation Policy Framework document of 2004.
170
6.3.5 Interlinks
At the strategic level, local content activities led by the government are part of the countrys 2020 Vision. The
vision complements LCPs with educational and industrial policies, aimed at building local capabilities and
developing an industrial base for export. But some of these policies appear to be at odds with existing
international treaties. For instance, the 1994 Treaty between T&T and the Government of the United States of
America concerning the Encouragement and Reciprocal Protection of Investment should be renegotiated to
address the significant barrier presented by certain clauses of this Treaty. The treaty mandates T&T to accord
treatment to U.S. companies that is not less favorable than what is accorded to local companies (Governments
of T&T and United States 1994). Another issue is raised by the Caribbean Community90 (CARICOM) treaty,
which would require the inclusion of CARICOM nationals in LCPs. It must be noted that T&T has been a
member of the World Trade Organization (WTO) since 1995 and grants most favored nation (MFN) treatment
to all its trading partners. The country has to incorporate the WTO Agreements into its law to make it legally
binding (WTO 2012b).
While the government has laid out a policy framework in 2006, implementation remains piecemeal. As stated
by the MEEA, the main challenges at this stage are:
The absence of regulatory measures to ensure mandatory compliance with objectives local
participation in the energy sector
The development of institutional capacity for the implementation, monitoring and auditing of local
content targets
State support for programs to encourage research and development, technology transfer, skills
development and business incubation in the energy sector
Mobilization of local financing to support the services sector
The existence of bilateral treaties with other states, which seek to discourage the implementation of
local content program (MEEA 2006).
Overall, LCPs are not integrated in the governments regulatory activities of the sector. More specifically,
there is absence of a well-defined monitoring and measurement system. For instance, more recent PSAs include
a provision mandating:
Operators to maintain records to facilitate the determination of the local content of expenditure
incurred for petroleum operations; these records shall include supporting documentation certifying
the cost of local goods, labor, and services used and shall be subject to audit by minister
Operators to report on their local content activities to the MEEA on a quarterly basis
Training and development programs to be approved by the MEEA and progress to be reported
quarterly
Monitoring of the transfer of knowledge and expertise to the appointed local successor, when an
expatriate is appointed.
But no guidance on certification of local content or reporting is outlined.

Within the regulatory context discussed above, most local content activities have been driven by the private
sector. In fact, a survey was recently carried out to evaluate the satisfaction of T&Ts oil and gas service
companies with LCPs. Results show that 51 percent of local companies are somewhat satisfied with the
government LCPs, and 44 percent are not satisfied. Local companies showed higher satisfaction rates with
multinationals efforts (Figure 6.11). The results were driven by the absence of a well-articulated policy and a
90
Includes 15 Caribbean nations.
171
perception that the government has not been active in promoting and pushing the local content agenda
(Energy Chamber 2009).
Figure 6.11 T&T: Survey of Domestic Services Companies
Satisfaction with Government Local Content Policies
Satisfaction with Multinationals Efforts on Local Content
Very Satisfied
2%
Very Satisfied 0%
Satisfied
2%
Satisfied
Somewhat
Satisfied
Not Satisfied
13%
Somewhat
Satisfied
51%
44%
49%
Not Satisfied
38%
Source: Adapted from Energy Chamber 2009.
A major success story promoted in the country is the establishment of the first specialized fabrication yard
in the country in 2004. Driven by the need to increase local spend in upstream activities and its foreseen
investments, BP T&T supported the creation of a fabrication yard through establishing two joint ventures (JVs):
An engineering and construction management JV between the U.S.-based Fluor Company and local
engineering firm Summit
A fabrication JV, TOFCO, between the U.S.-based Chet Morrison Contractors and Weldfab Limited of
T&T.
Both JVs were to be initially mobilized for the development of the Cannonball project platform.
As a starting point, the first JV trained 40 nationals in the area of engineering and procurement and
assigned to them mentors from Fluor. Similarly, TOFCO trained its 230 employees, of which 184 where locals
(Arthur Lok Jack Graduate School of Business 2005).
Initially, BP was concerned with the cost of domestic fabrication. The company estimated that the domestic
fabrication of the Cannonbal platform would cost $10 million more than the $44 million cost of importing it.
Another concern was timely delivery. By the end of the project, the cost premium was $9 million as it achieved
a 40 percent local content in spending, 65 percent in project management hours, and 85 percent in fabrication
hours. These were significant achievements following previous near-zero levels.
Subsequently, the learning curve enabled BP to realize $11 million in cost saving over the Mango and
Cashima platforms. In addition, the TOFCO JV became competitive and won several bids. Today, the yards
facilities are used for manufacturing of topsides for large offshore platforms, jackets, and structures up to 3,000
tons (IPIECA 2011). Table 6.9 presents the local content in expenditure of platform fabrication in T&T.
Table 6.9 Total and Local Content Expenditure on Platform Fabrication in T&T
BP Cannonball Jacket and Deck

EOG Oilbird Jacket and Deck
BP Mango Jacket and Deck
BP Cashima Jacket and Deck
BG Poinsettia Deck
EOG Toucan Deck
BP Savonnette Jacket and Deck
BHP Angustura Ventboom and Bridge
Date
Capacity
2005
2006
2007
2007
2009
2009
2009
2009
1,000 ton jacket/900 ton

1,800 ton deck/2000 ton
1,000 ton jacket/ 900 ton
1,000 ton jacket/ 900 ton
1,300 ton drill deck/2800 ton
1,800 ton deck
1,000 ton deck/2000ton
500 ton bridge/120 ton
Source: Adapted from MEEA 2011.
172
Total expenditure ($
million)
340.2
606.1
504
655.2
5,040
696
472.5
648.9
Local expenditure
(%)
40
39.30
25
25
21
30.90
20
55
References
Arthur Lok Jack Graduate School of Business. 2005. BP Trinidad and Tobago Ltd. Trinidad: Arthur Lok Jack
Graduate School of Business, The University of West Indies.
Central Bank. 2012. Labour Force Annual. http://www.central-bank.org.tt/content/labour-force-annual-0.
CIA (Central Intelligence Agency). 2012. The World Factbook. https://www.cia.gov/library/publications/theworld-factbook/fields/2221.html.
Deloitte
Global
Services
Limited.
2012.
Corporate
Tax
Rates
2008-2012.
Deutsche Bank. 2010. A Guide to the Oil and Gas Industry. London: Deutsche Bank.
DoS (Department of State). 2011. 2011 Investment Climate StatementTrinidad and Tobago. Washington, DC: DoS.
Energy Chamber. 2009. Assessment of the Energy Services Sector in the Caribbean. Port of Spain: The Energy
Chamber of Trinidad and Tobago.
Finance. 2010. The Heritage and Stabilization Fund. http://www.finance.gov.tt/legislation.php?mid=20.
House.
Governments of T&T and United States. 1994. Treaty Between the Government of the Republic of Trinidad and
Tobago and the Government of the United States of America Concerning the Encouragement and Reciprocal
Protection of Investment. http://www.wipo.int/wipolex/en/other_treaties/text.jsp?file_id=244815.
HSF (Heritage Stabilisation Fund). 2010. Annual Report 2010. Port of Spain: Heritage Stabilisation Fund.
IEA (International Energy Agency). 2011. 2009 Energy Balance. Paris: IEA.
ILO
(International Labor Organization). 2012. Total Employment,

http://data.un.org/Data.aspx?d=LABORSTA&f=tableCode%3a2B.
by
Economic
Activity.
Inland Revenue Division. 2012. Petroleum Companies. http://www.ird.gov.tt/load_page.asp?ID=92.

IPIECA, the global oil and gas industry association for environmental and social issues. 2011. Local Content
Strategy: A Guidance Document for the Oil and Gas Industry. London: IPIECA.
Kaufmann, D., A. Kraay, and M. Mastruzzi. 2011. The Worldwide Governance Indicators (WGI) Project.
Marajh, P. 2012. Maximising Local Content. Guardian Media: http://m.guardian.co.tt/business-guardian/201205-30/maximising-local-content.
Mcguire, G. 2009. Heritage and Stabilisation Fund: Did We Get It Right? The Trinidad and Tobago Sustainable
Development Network. Trinidad and Tobago.
McGuire, G., D. Pantin, D. James, and N. Seeterram. 2009. A Guide for Monitoring the Management of Oil and Gas
Resources in Trinidad and Tobago. The Trinidad and Tobago Sustainable Development Network.
Trinidad and Tobago.
MEEA (Ministry of Energy and Energy Affairs). 2006. Local Content and Local Participation Policy and Framework.
Port of Spain: MEEA.
. 2009. http://www.energy.gov.tt/divisions.php?mid=89.
173
. 2010. National Energy Policy Consultations. Local Content and Participation. Port of Spain: MEEA.
. 2011. Sustainable Development Issues: Local Content and Participation. Port of Spain: MEEA.
. 2012. Production Sharing Contract. Port of Spain: MEEA.
MENAS.
2008.
Trinidad.
MENAS
Local
http://www.menas.co.uk/localcontent/home.aspx?country=74.
Content
Online.
Comptetitveness.
MGI.
hs_about_trade.
Moya, R., A.-M. Mohammed, and S. Sookram. 2010. Productive Development Policies in Trinidad and Tobago.
Washington, DC: Inter-American Development Bank.
Technical Vocational Education and Training and Lifelong Learning in Trinidad and Tobago that Was
Laid in Parliament on January 12th 2011. http://www.stte.gov.tt/.
Muclshansingh, V. C. 1971. The Oil Industry in the Economy of Trinidad. Caribbean Studies Vol. 11, No. 1, pp.
73-100
National
Committee.
2005.
Vision
2020
Draft
http://www.meetmanning.com/home/pdf/national_plan.pdf.
National
Strategic
Plan.
Petrotrin. 2012. http://www.petrotrin.com/Petrotrin2007/OurHistory.htm.

The World Bank Group. 2012. Doing Business: http://www.doingbusiness.org/.
United Nations. 2010a. Department of Economic and Social Affairs. Population Division, Population
Estimates, and Projections Section: http://esa.un.org/unpd/wpp/unpp/p2k0data.asp
. 2010b. Department of Economic and Social Affairs. Population Division, Population Estimates and
Projections Section. http://esa.un.org/unpd/wpp/unpp/panel_indicators.htm.
UNDP
(United Nations Development

http://hdr.undp.org/en/statistics/.
Programme).
2010.
Human
Development
Index.
UNDP.
UNIDO (United Nations Industrial Development Organization). 2012. Statistical Country Briefs.
http://www.unido.org/index.php?id=1002110.
United Nations Statistics. 2010. National Accounts Main Aggregates Database. New York: United Nations.
WEF (World Economic Forum). 2011. The Global Competitiveness Index 2011-2012 rankings.
World Bank. 2008. Trinidad and Tobago Country Brief. Washington, DC: World Bank.
.
2011a.
World
Bank
Development
Indicators.
. 2011b. Doing BusinessMeasuring Business Regulations. International Finance Corporation:

http://www.doingbusiness.org/rankings.
. 2012. World Development Indicators and Global Development Finance. Washington, DC: World Bank
WTO
(World
Trade
Organization).
2012a.
Statistics
. 2012b. Trade Policy Review. World Trade Organization.
174
Database.

Local Content Policies in The Oil and Gas Sector PDF

Transféré par

Informations du document

Description originale:

Titre original

Copyright

Formats disponibles

Partager ce document

Partager ou intégrer le document

Options de partage

Avez-vous trouvé ce document utile ?

Ce contenu est-il inapproprié ?

Droits d'auteur :

Formats disponibles

Local Content Policies in The Oil and Gas Sector PDF

Transféré par

Droits d'auteur :

Formats disponibles

W O R L D

Local Content in the Oil and Gas

Kazakhstan ............................................................................................................................................... 101

Sector Institutional Framework ............................................................................................... 111

Malaysia .................................................................................................................................................. 131

Trinidad and Tobago................................................................................................................................ 156

Figure 1.1 Angolas Exports by Commodity, 19802010 ($ billion) ............................................................ 15

Figure 2.7 Brazil: Breakdown of Value-added by Economic Activity, 2010 ($ billion).............................. 48

Figure 3.15 Number of Indonesians Engaged in Capability Development Programs, 200811............... 97

Abbreviations and Acronyms

Association of Southeast Asian Nations

compound annual growth rate

exploration and production

enhanced oil recovery

foreign direct investment

General Agreement on Trade in Services

General Agreement on Tariffs and Trade

gross domestic product

goods, works, and services

health, safety, and the environment

Human Rights Watch

International Monetary Fund

international oil company

key performance indicator

local content policy

liquefied natural gas

North American Free Trade Agreement

national oil company

Organisation for Economic Co-operation and Development

oil field services and equipment

Organization of the Petroleum Exporting Countries

production sharing agreement or similar contractual arrangement

research and development

Southern African Development Community

small- and medium-sized enterprises

Trade-Related Investment Measures

World Economic Forum

World Trade Organization

1.1 Structural Context

Real interest rate (%)

Source: World Bank 2012.

Inflation, CPI (%)

Corporate Tax Rate, 2010

Trinidad and Tobago

Trinidad and Tobago

Source: Adapted from UN 2010.

School enrollment (%)

Table 1.4 Indicators for Doing Business in Angola, 2011

Extent of disclosure index (0-10)

2. Dealing with Construction Permits

Payments (number per year)

Documents to export (#)

8. Trading across borders

10. Resolving Insolvency

Source: World Bank 2012.

Figure 1.4 Governanced Indicators in Angola Compared to the OECD Average

Source: Adapted from Kaufmann, Kraay, and Mastruzzi 2011.

1.2 The Petroleum Sector

Source: UN Statistics 2010.

Figure 1.6 Breakdown of Value-Added in Angola by Economic Activity, 2010 ($ billion)

Canada Kazakhstan Malaysia

Transport, storage and communication