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Alliance Classification in the Nigerian Oil & Gas Industry

Inter-firm alliances can have a variety of cooperative arrangements, including direct investment, joint ventures, supplier relationships, technology licensing, technology exchange, research and development, and so on. Various typologies have been proposed to classify these structures. Many have devoted considerable discussion to critical issues on what is needed in an alliance, such as organizational culture, collaborative processes, configuration and coordination. Emphasis on compatibility of partners and levels of collaboration have been raised as being significant. However, some theorists have differentiated the governance structures into two categories: equity and non-equity alliances. Equity alliances involve the transfer or creation of equity ownership, and they take two forms: direct investment and joint ventures. Direct investment occurs when one of the partners acquires partial ownership of the other partner or partners. In joint ventures, partners invest in a new, jointly owned entity. Non-equity alliances on the other hand, do not involve any equity transfer, but they include all kinds of contractual arrangements. The choice between equity and non-equity alliances is one of the most important decisions that prospective partners are required to make. The decision has crucial implications on several aspects of the alliance: organization structure, operational process, control mechanism, and so on.

A number of studies have sought to reveal the underlying rationale for determining the choice between equity and non-equity alliances, many from a transaction cost economics standpoint. Adopting the neoclassical economics of oligopoly, transaction cost theorists have assumed that the partners of an inter-firm alliance tend to behave opportunistically, maximizing their own benefits, while plunging the collective efforts into difficulties. The opportunistic behaviour of partners is therefore a major source of transaction costs in inter-firm alliances. Opportunism results in expensive negotiating ex-ante and monitoring costs ex-post. However, if partners share ownership of an entity, or are ‘mutual hostages’, their incentive to behave opportunistically is likely to decrease. Thus, equity alliances are used to control opportunistic behaviour, and therefore transaction costs of inter-firm alliances. The general finding is that when the available chances and costs of opportunistic behaviour are high, equity alliances will be the preferred format. Non-equity alliances, by contrast, lack such a mechanism for curbing opportunistic behaviour, and rely heavily on the goodwill and voluntary cooperation from independent firms. However, non-equity alliances are much more flexible, with no transfer of equity, limited level of commitment and better control of risks relating to performance of the alliance. Against this backdrop, what types of alliances are prominent/required in the Nigerian oil & gas industry?

At the heart of the Nigerian Oil and Gas Industry Content Development (NOGICD) Act which was signed into law in April 2010 is the need to compel oil and gas multinationals to utilize the indigenous material and human resources with the aim of building local capacity, increasing local participation, dissuade capital flight, and increase contribution of oil and gas to Gross Domestic Product (GDP). But to utilize indigenous materials and human resources, such must be available in the first instance and where not available, should be developed over time. It is my proposition that the desired development in local capacity cannot be fully achieved without the right strategic alliances between local and foreign firms with the primary aim of achieving knowledge and technology transfer. Such will require long-term commitment (including financial) by both parties. Yet equity alliances are prominent only between the Nigerian National Petroleum Corporation (NNPC) and the International Oil Companies (IOCs). Very few joint ventures exist between local and foreign firms (although more have emerged post-NOGICD Act), while equity partnerships between local firms are almost non-existent. Equity in this regard, refers to the mutual ownership of assets among parties in a venture, or a firm’s partial ownership in another firm. Prior to changes in regulation in the Nigerian oil & gas industry, there was very little incentive for both local and foreign firms to go into partnerships, with many local firms preferring to opt for a principal-agent relationship and happy to receive commissions.

In general, loose arrangements are still very prominent in form of instruments like a Memorandum of Understanding/Agreement (MOU/MOA) and representation or agency agreements in the Nigerian oil industry. This is typical between foreign companies/Original Equipment Manufacturers (OEMs) and local firms. Project-specific alliances are also commonplace, and exist purely for the bidding and execution of particular projects, after which both parties go their separate ways. Findings show that these loose arrangements are easier to form, require no long-term commitment, are cheaper and less risky due to limited financial commitment. Whilst these loose alliances are sometimes the only feasible or viable option for many local companies for a host of reasons beyond the scope of this article, such cannot lead to sustainable capacity development.

On one hand, I conclude that only long-term alliances via equity participation will lead to an increase in local capacity development in the Nigerian oil & gas industry. Yet on the other, I postulate that the avalanche of challenges within the oil & gas industry (largely internal but again outside the scope of this write-up)) continue to hamper the type of long-term alliances required to achieve desired capacity building objectives.

Kayode Thomas – 28th January, 2021

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