Life After Oil: How Can Gulf Countries Localize Jobs & Broaden Their Economies?

By -Bruno Sousa, Volker Weber, Saji Sam, and Bernhard Hartmann*

South Korea’s role in helping the UAE launch its nuclear industry is symbolic. A relative newcomer compared to the US, Japan, or France, Korea grew its own industry from the ground up in order to cut energy costs, create jobs, and boost growth.

Today, a consortium led by state power utility Kepco, is working with the UAE to do the same thing. The joint Korean-UAE team is building four facilities in Abu Dhabi with the help of local labor and companies, part of the UAE’s own localization efforts. The first reactor in Barakah is scheduled to be completed in 2017; the other three for 2020.

The need has never been greater for Gulf countries to lessen dependence on oil. With the decline in crude prices over the last two years, GCC countries are experiencing deficits and unemployment for the first time in decades. This has increased the pressure to expand their manufacturing sectors, create more good-paying jobs, and increase local content across their oil and gas value chain.

But it’s not easy. In the past, well-intentioned efforts to increase local content were often fraught with problems amid attempts to score rapid results whilst failing to take into account the skill level and readiness of their workforce and local supply chain. Mideast governments have built massive state-of-the-art manufacturing facilities, only to find they had to import workers — undermining both their security and the goal of providing jobs to their own citizens.

NORWEGIAN MODEL

Even ‘successful’ localization projects, such as Norway’s offshore oil discovery in 1969, can take decades to achieve their goals. Norway’s effort, which took more than 15 years, is not even typical, as that nation’s economy was already relatively prosperous. Most oil-producing economies are more dependent on oil and gas revenue than Norway ever has been.

Still, Norway serves as a model for helping nations ensure that development of oil and gas leads to the expansion of local industry and employment. In Norway’s case, the focus was on working with IOCs to develop the oil and gas value chain and guarantee the transfer of knowledge and technology through agreements. The Norwegians achieved import substitution by requiring IOCs to use 50% local content and conduct R&D locally.

Norway’s approach was also based on developing local companies in fields that supported the oil and gas industry such as the manufacture of offshore drilling equipment. Eventually, the nation became a major export center for these upstream capabilities.

ARAMCO: INCENTIVIZE SUPPLIERS

Aramco is following the Norwegian example in using its massive clout as a purchaser of oil and gas equipment and support services. It is incentivizing suppliers to increase local content by making it one of the procurement criteria in assessing bids and paying a 10% premium for local content.

Aramco has set clear objectives and targets for major projects, even providing potential suppliers with its per-category five-year spending plans to help them justify investment localized production and services. Norway was eventually able to increase local content in oil and gas to 80% — a goal the Saudis hope to replicate. The Kingdom aims to double local content to 70%, create 500,000 jobs and raise the export contribution from the initiative to 30%.

Saudi Arabia is working to tighten connections between training and job creation and develop key performance indicators to measure success through a program called the In-Kingdom Total Value Add (IKTVA). This is designed to measure and monitor “added-value” to the Kingdom from a supplier, reviewing such items as the value of local goods and services used, salaries paid to local citizens, and the amount spent on training and development.

As with Norway, using procurement as a lever is producing immediate and sustainable results for Saudi Arabia. Siemens recently completed the first “Made in KSA” gas turbine at the company’s Dammam Energy Hub, the first gas turbine plant in the Kingdom and the largest in the GCC. Siemens also committed to help develop vocational education and training with the Saudi Colleges of Excellence.

Currently, the agreement with Siemens focuses on the development of technicians and MBAs. These types of positions are likely to be attractive to locals. Riyadh may eventually want to consider extending this agreement or establishing another to develop blue-collar manufacturing skills such as welding – jobs which are more plentiful than managerial positions – further aligning talent development initiatives with employers’ needs.

Saudi and Siemens also negotiated joint R&D agreements on renewable energy and the oil and gas industry digitization. The first also helps the Saudi ‘Vision 2030’ goal diversifying beyond fossil fuels, whilst the latter will allow its dominant industry to compete more effectively by bringing in cloud technology and advanced analytics.

Aramco’s efforts are backed by the larger Saudi localization campaign as part of the Vision 2030 economic initiative. Broader goals include $2 trillion investment fund to finance economic diversification; transforming Aramco into a global industrial conglomerate (MEES, 24 March); and establishing the Kingdom as a trade hub connecting Asia, Europe, and Africa.

Another pledge is to expand the country’s military industrial complex, so that half of future defense purchases will be sourced locally. Similar to Aramco targets, Saudi’s overall goal is to increase oil and gas sector localization from 40% to 75% by 2030.

WHAT WILL SUCCESS LOOK LIKE?

So what are the characteristics of successful localization? While every country has its own initiatives, some key attributes distinguish the ones most likely to succeed. Key is that localization plans are centralized and coordinated at the level of both country and operator. They also must be staggered over time to ensure successful technology transfer and adequate preparedness of the workforce and local supply chain.

Localization must be sustainable and reflect the current state of national industry and the economy. Initiatives are not ‘free’; they usually require large investment by government or foreign investors in such items as the purchase of technology rights. Embedding localization mandates into procurement and human resources provides implementation mechanisms. But success requires strong government commitment, and the ability to standardize and replicate programs.

Finally, everything must be measurable: governments and companies must be able to demonstrate progress to citizens and customers. Reducing an addiction to a resource once considered a limitless source of wealth and growth is not an easy task. But countries in and beyond the Gulf are gradually developing best practices that will enable them to realize localization goals.

*Bernhard Hartmann leads Oliver Wyman’s Middle East energy and manufacturing practice. Volker Weber is a partner in the firm’s Middle East office. Saji Sam is a partner in the firm’s global energy practice. Bruno Sousa is a principal in the energy practice. All four are based in Dubai.