5. Local content and procurement processes
In the extractives sector, supply chain procurement processes entail several entry points for national suppliers. Each oil, gas, and mining company has its own process of pre-qualification, screening, selecting and awarding contracts. The figure below illustrates the typical contractor/supplier selection process, which represents the entry points for optimisation of the local content in a project.
The procurement process is therefore a relatively complex yet structured process. For the extractives sector, the main considerations for procurement relate to quality, price, delivery schedule and, more recently, the right location for sourcing. Many procurement managers prefer to source goods or contract services close to their operations. This approach can offer management more flexibility than contracting with companies from abroad, which can add delivery delays, incur additional costs for transport/logistics, administration, customs, and even increase project uncertainty. One of the key stages for introducing local content requirements is in the invitation to tender formulation. When the targets are adapted to the local context and are attainable for domestic suppliers, tender requirements can lead to a substantial growth of the local supplier industries, such as in the case of Brazil.
Companies consider several criteria in awarding contracts to suppliers. Some can be perceived as barriers to entering the supply chain of oil and gas and mining projects. In fact, given the often rigid procedures in procurement of goods and services, selection criteria used to guarantee the quality level and delivery schedules may sometimes be too stringent and deter participation by local suppliers. Furthermore, if these criteria do not take into account the national business context, it can prevent exploration and production companies from optimising local sourcing of goods and services.
The procurement process thus remains crucial when seeking to address issues in local sourcing and utilisation of goods and services.