A number of countries have recently discovered and are developing oil and gas reserves. Policy makers in such countries are anxious to obtain the greatest benefits for their economies from the extraction of these exhaustible resources by designing appropriate policies to achieve desired goals. One important theme of such policies is the so-called local content created by the sector—the extent to which the output of the extractive industry sector generates further benefits to the economy beyond the direct contribution of its value-added, through its links to other sectors. The use of industrial policy in the petroleum sector to support broad-based economic growth is hardly a new trend in the oil and gas sector. Local content policies (LCPs) were first introduced in the North Sea in the early 1970s and ranged from restrictions on imports to direct state intervention in the oil sector. Over time the aim of LCPs has evolved from creating backward links (that is, supplying input to the local economy through transfer of technology, the generation of value-added in domestic supply sectors, the creation of local employment opportunities, and increasing local ownership and control) to creating forward links link (that is, processing the sector’s output prior to export through, for example, the establishment of refineries, petrochemical industry, and the production of fertilizers).
While LCPs have the potential to stimulate broad-based economic development, which is necessary to alleviate poverty and achieve the United Nation’s Millennium Development Goals (MDGs), their application in petroleum-rich countries has achieved mixed results. The use of specialized inputs and the technological complexity of the petroleum sector often limit the possibility of developing backward and forward links into the local economy. An economy that is very limited can hardly be expected to quickly supply services (let alone build forward links). A fast-growing petroleum sector coupled with too ambitious local content targets may exacerbate supply bottlenecks arising from increased aggregate final demand. This would ultimately affect employment and output trends in other sectors of the economy, create distortions and inefficiencies, and in some cases even promote corruption. Furthermore, the size and location of petroleum projects also affect the type of potential links, and the speed at which they can efficiently develop.