The oil and gas industry plays a significant role in the development of the economy of Nigeria, both in terms of revenue generation and commercial viability. Although, the industry contributes about 90% of the foreign exchange earnings and 60% of total income. Consequently, any adverse change in the industry will have a striking and long-term impact on government finances and commercial arrangements in the country. As a result of this, successive governments have remained focused on the sector amidst various discussions on economic diversification. For the past twenty (20) years, there have been various attempts at reforming the oil and gas industry. However, none of these efforts have yielded any tangible result until the introduction of the Petroleum Industry Act (PIA) (hereinafter referred to as the “Act”) in the Third Quarter of 2021. The new law offers a radical departure from past norms as it ultimately transforms the oil and gas industry in Nigeria.
Among other things, the Act provides for:
- The selling of shares in a reformed Nigeria National Petroleum Commission (NNPC)
- The replacement of regulatory bodies
- The reduction and streamlining of royalties
- Rules for environmental clean-ups
- Dispute-resolution mechanisms between government and oil companies,
- The establishment of a midstream government infrastructure fund.
- Despite the innovations in the new Act and all the major issues it seeks to address, there are several other issues that have been raised by the Act
New Act, New Issues
The underlying issues of this Act during its deliberation phase as a bill have, upon its passage into law, been fully developed.
Amongst others, the new issues from the PIA include;
- Deregulation: The argument for the school in support of total deregulation is that, according to the Government, 10 trillion Naira has been spent in the last ten (10) years to subsidize the price of petrol. This has had its negative effect as the price of crude oil in the international market increases, causing the government to pay more for importation since the country's refineries are ineffectual. The government has since raised its concerns and admitted to it as a factor inhibiting if from providing infrastructure for the people through subsidy regulation.
- The allocation to host communities and the Frontier Exploration Fund: The provision of 3% only for the host communities has raised more uproar because of the impact on the host communities (Delta) in view of environmental crises and pollution that the region has suffered and is still suffering as a result of the exploitation of oil. The Frontier exploration fund for the exploration of oil in the northern states is to be allocated 30% as in section 9(4) of the Petroleum Industry Act as opposed to the host community itself getting just 3%.
- The Incorporation and privatization of NNPC: According to the provision of the industry Act in Part V, section 53, the NNPC will be incorporated under the Companies Allied Matters Act (CAMA). This will simply make the situation worse as when the NNPC was alone, it had little or nothing to show forth as an achievement compared to other Countries National companies after independence.
- Importation of raw materials by companies: One of the reasons for deregulation was about importation of goods and yet the Act provides for this, despite the exorbitant amount used in transition and foreign currency due to our naira value compared to foreign currency. The country is blessed with crude oil and other resources and it will not make the country innovative if the country is yet again being dependent on foreign countries, which is a major clog in the wheel of development.
- Introduction of environmental and gas flare management with annual control: According to the Act, there was an exception for gas flaring in section 102(7) that if the minister assents to it, then it is legal. This flop will make a floodgate for more gas flaring than before because there are tons of cases with gas flaring and now that it can be legal, it will get worse. It is trite that the country doesn't enforce any of its laws on environmental degradation nor does it provide remedies except theoretically without force or power. Several Environmental laws in the country are witnesses of this.
- The creation of two different regulators for the industry: The Act provides for the creation of the Nigerian Upstream Regulatory Commission (NUPRC) with the specific mandate of regulating upstream oil and gas activities in the industry and also for the creation of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) as the national authority vested with the responsibility of regulating midstream and downstream oil and gas activities. It is expected that the delineation of these regulators would facilitate efficiency and reduce overlapping stakeholder interests in the industry.
First Controversial Issue: Host Community Allocation
The PIA unlike previous legislations on the regulation of the oil and gas industry in Nigeria created a host community development trust. This provision is a major controversial issue because the host community has disagreed with the 3% derivation in the trust to the communities. This issue was a major delay in the signing of the bill into law. The 3% is considered a fair percentage to the government and foreign oil companies; the host communities are however demanding for a larger percentage. Host communities were not expressly defined under the Act and this is a cause for concern because the standards for selecting a host community is not stated. So, there is a lacuna in the definition of a host community; is any community where midstream oil and gas operations are held a host community? This is a question the Act failed to address.
Another look at the 3% fund for host communities means each host community gets 3% of operating expenses of an oil company, and the fund is given by the operators and not the government. One major rationale to the disapproval of the 3% derivation is because of the federal revenue allocation which is not often time advantageous to host communities, section 43(3) of the Constitution vests all oil in Nigeria in the federation. In Nigeria the issue on revenue allocation was brought to light in the case of AG Federation V AG Abia and Others, where the littoral states contended that their territory extended offshore as far as the continental shelf. Therefore, they laid claim to natural resources derivable from their territorial waters (relying on Section 4 of the Allocation of Revenue (Federation Account) Act). Similarly In South Atlantic Petroleum Ltd v. Minister of Petroleum Resources the court held that petroleum resources in Nigeria are vested in the Federal Government.
Second Controversial Issue: Frontier Basins
The NUPRC is expected to promote and develop the exploration of frontier basins and according to Section 9(4) of the Act, a Frontier exploration Fund which shall be 30% of NNPC’s profit which will be maintained exclusively for the exploration of frontier basins. According to the NNPC, they said we have about six basins: Chad Basin, the Sokoto Basins, Benue Trough, the Bida Basins, Kolmani River II Well on the Upper Benue Trough, Gongola Basin in the North-Eastern part of the country, Anambra basin, Borno Chad basin, Dahomey basin. amongst others. Currently, crude oil is obtained from eight states in the Niger Delta region which include: Abia, Akwa Ibom, Bayelsa, Delta, Edo, Imo, Ondo and Rivers States. The Act does not exactly define what a frontier basin is or where it is located. Thus, it can be said that there is actually no exploration fund and thus the provision in the Act is suspected to be a means to an end for corruption.
Advantages of Frontier Basins
It is ascertained that this allocation comes with its benefits and some of them include:
- Additional investment in oil exploration
- Promotion of oil exploitation activities in the inland basins
- Creation of more funds for the NNPC to generate exploration data on the frontier basin, mature them for detailed exploration on behalf of government, multinational and indigenous operating companies.
- Ascertainment of the level of poverty in the states the basins are located in.
- Equal contribution by all states to oil reserves
- Promotion of efficient and sustainable exploration of hydrocarbon in the frontier basins of Nigeria
- Promotion of oil exploration activities in order to advert the challenges of finance in the economy
- Opening of the country to Foreign Investment Opportunities.
- Reduction of existing pressure on the Niger Delta.
Disadvantages of Frontier Basins
Whatever has benefits must also have disadvantages, thus the disadvantages of the allocation to frontier basins are highlighted below:
- There is no guarantee that after the bulk investment for the exploration the government would make money from the investment.
- The allocation is not explicit on an alternative for oil, in the event that oil is not found in commercial quantity after such investment
- The allocation might give unnecessary opportunity for some parties to take unchecked resources from the federation account.
- It is favourable to a particular set of people in the country and the oil producing states who deserve the allocation more would
- now continue to agitate for it, leaving the country in an uproar.
- There are insinuations that this is to take money from the oil producing states and take it to the north.
- Due to the major trend in energy transition, it seems quite unreasonable to invest such a huge percentage in the exploration of oil when the use of hydrocarbons would soon be a thing of the past.
How Host Communities Can Seek Redress
First, achieving environmental justice for pollution impacted communities goes beyond having a restoration fund known as “host communities development trust” under Section 235 of the PIA. A safe, healthy and good environment is a fundamental right of communities. Environmental disputes are inevitable due to the nature of oil exploration activities. It is sad that oil producing states are the ones that bear the brunt of most of the outcomes of these activities. Oil spill is a major basis for environmental disputes in the Nigerian oil and gas industry and they are quite predominant. A direct result of these oil spills and environmental problems is inflicted on the host communities. The host communities of the oil companies in Nigeria are faced with continued flaring of gas and its attendant consequences on the human habitat. There is in turn, inadequate compensation for the negative consequences of oil exploration activities, hence disputes continue to rise between host communities and oil companies in Nigeria.
It should be noted however, that environmental disputes often involve technical issues and multiple parties, thus making them quite difficult to tackle. The 3% allocated to the host communities by the Act is not enough considering the enormous environmental damage caused by oil exploration in the Niger Delta region. Sustainable local community development is beneficial to the profitability of the extractive industry and should be an important goal in the exploitation of extractive resources in Nigeria.
On this point, effective dispute resolution is deemed to be the most appropriate method through which host communities can seek redress for environmental disputes. Based on the premise that judgment obtained from the Nigerian courts rarely provide closure for host communities in oil and gas dispute, ADR is conceived as the most preferable dispute resolution mechanism, noteworthy because—as experts would note “ADR offers a resolution process that has a human face; that is not only concerned about the verdict but also pays greater attention to the feelings of both parties at the end of resolution.” In fact, key stakeholders in the industry affirm that the intervention of ADR will reduce the level of animosity that has existed as a result of past judgments by the courts.
The proposed means of alternative dispute resolution in this case is arbitration. There are three reasons why this is so peculiar for the Nigerian Oil and Gas industry.
- One is because of the technicalities involved in the industry. These technicalities would require an arbitrator with industry and expert knowledge as well as experts in determining impact assessments.
- Secondly, due to the international nature of the operations of these multinational oil and gas companies and cross border oil and gas fields, arbitration would be more appropriate for confidentiality.
- Finally, the third reason advocating for arbitration is the fact that commercial interests and long-term contractual relationships between oil and gas companies and host communities overlap.
Thus, this militates against litigation which is arguably often expensive, time consuming, adversarial and destructive of good relationships. It should be noted that the PIA advocates for arbitration in the absence of any agreement for dispute resolution by parties. A recent case to buttress this notion, is the international arbitration filed at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) against Shell regarding an oil spill that occurred five decades ago (during the Biafran civil war 1960-67) in the Ejama-Ebubu community. This arbitration took fifty (50) years of unsuccessful appeals until an arbitration award, which requires Shell to pay the aggrieved community $111 million was granted.
As stated earlier, the administration of the petroleum and energy sector in Nigeria has an integral role to play in providing adequate compensation and reliefs to host communities. Having identified, the two major controversial issues surrounding the decrease of allocation to host communities from 10% to 3% despite a proposed 5%, and the allocation of 30% to frontier basins, it is important to examine the practice in other jurisdictions, not only for the sake of comparison, but also as a starting point for proffering viable recommendations.
In the United States of America, there is a system of compensating oil producing states. This system is enforced by not only allocating funds to these oil producing states, but also imposing additional taxes on the properties and equipment used by companies in the process of exploration. It is observed from research that additional revenue has been generated via royalties paid based on the value of oil and gas produced from these regions which have led to a series of conflicts between the inhabitants of these regions, the exploration companies and the State. These monies generated are directed towards building schools, roads, and an overall improvement of infrastructure.
In North Dakota, USA, the State Government allocates a substantial amount of oil and gas revenue to trust funds to public education. In 2012 about $329 million was generated from leases granted by the state to oil and gas companies. Another set of countries including Argentina, Australia, Canada, China, India, and the United Arab Emirates collect substantial revenues directly from oil, gas or mining companies. Direct tax collection from the natural resource sector can constitute a significant proportion of local budgets. For example, from 2012 to 2014 more than 25 percent of all fiscal revenues collected in Alberta, Canada came from direct petroleum taxation. In the United States, severance taxes from the oil sector in 2014 constituted 72 percent of total fiscal revenues in Alaska, 54 percent in North Dakota, and 39 percent in Wyoming.
With the revamp of the petroleum sector in Nigeria via the newly enacted Act, one would expect that the new agencies and departments that are established would prioritize the advancement host communities by being specific and transparent about their flow of allocations, and the judicial and quasi-judicial penalties/liabilities should be stringent enough to upholding the standards of modern commercialization, environmental
impacts of petroleum exploration and the development of the oil producing regions, however, this is not the case as it seems the Act has killed the dreams of these host communities before their advancement can come into light.
In addition, and pertaining to oil and gas revenue, Angola, Bolivia, Brazil, Cameroon, Canada (some regions), Chad, China, Colombia, Ethiopia, Ghana, Guinea, India, Indonesia, Iraq, Italy, Malaysia, Mexico, the Philippines, South Sudan, Uganda, and Venezuela each have enacted a 'derivation- based’ intergovernmental transfer system for all or part of their mineral, oil or gas revenues. In a majority of these countries, revenues from the oil, gas and mineral sectors are collected by the national government and transferred back to their area of origin or adjacent areas. A few countries transfer some of their natural resource revenues to subnational governments using an ‘indicator-based’ formula. In these countries, the national government distributes natural resource revenues to subnational authorities based on a set of objective indicators such as population, revenue generation, poverty level or geographic characteristics, irrespective of where the natural resources are extracted. Ecuador, Mongolia, Mexico and Uganda are examples of countries which use indicator-based resource revenue sharing formulas.
Lessons For Nigeria
- From other jurisdictions, it can be seen that it is necessary that there is a clear understanding of exactly which natural resources are to be shared, and which mechanisms will be used to achieve this. According to a briefing paper by the Center for Humanitarian Dialogue, strict contained frameworks are particularly important for ensuring this, and should clearly assign revenue bases to each level of government. They should also detail any agreed formulae for revenue transfer systems.
- Also, it is important to make industry and finance experts available during the early stages of a negotiation process. It enables a move away from the politics of resource governance towards the technical aspects of revenue governance. Experts will be able to provide stakeholders with a realistic assessment of the issues involved and can deal with unrealistic expectations, especially regarding money. Similarly , creating information about the value and future prospects of natural resources ensures that all parties are equally well-informed.
- In addition, there is a need to build a degree of flexibility into the system. Since political circumstances and economic conditions change and in turn , it should also be possible to make small adjustments to any revenue sharing formula. Resource revenue should also be possible to make small adjustments to any revenue sharing formula. Therefore, some countries have built-in provisions to regularly reconsider resource revenue sharing agreements.
- More so, there should be a consensus on a revenue sharing formula which is extremely important for the stability of the formula and for meeting and the regime’s objectives, especially in politically contested and ethnically diverse environments. This is because in a situation where key stakeholders disagree on the formula and it is implemented nonetheless, the regime might be viewed as illegitimate and not addressing local concerns, leading to even greater conflict.
- Subsequent increase in the allocation to the host communities.
- Deregulation should stand so that the money can be inputted into lagging sectors of the country, for example; infrastructure, health, education. In addition to this, the government should create an independent, accountable and impartial commission, charged with the responsibility of overseeing that monies saved from subsidy be directed into desiring sectors
- Furthermore, as petroleum accounts for Nigeria's Foreign Exchange to the extent of 90% then it's imperative to look for more oil and gas to add to the oil reserves in order to maintain lead as the leader in producing oil and gas.
- Also, the Government should fund and spur technological competence and business capacity amongst local communities, this will ensure the creation of opportunities for such skills & capacity which will grow the indigenous technology.
- Finally, it is recommended that host communities’ resort to alternative dispute resolution, most especially arbitration so as to seek redress cost effectively. It is suggested that this is the most appropriate dispute resolution method for them, as litigation does not only come with its problem of the burden of proof in environmental cases but it also does not provide the financial closure required by host communities.
This paper has given an in-depth analysis on the newly enacted Petroleum Industry Act and the issues emanating from some of its provisions that have generated quite some controversies in the Nigerian oil and gas industry. The allocation of 3% to host communities that suffer the direct consequences of oil exploration activities is considered unfair as against the allocation of 30% to frontier basin states. It is observed that the intent of these provisions, whatever they may be, are indeed myopic in light of the trend of energy transition in the industry both locally and internationally. In addition, the paper benchmarks the provisions of the newly enacted PIA with other socio-legal practices of petroleum sectors in foreign jurisdiction in order to gain experience and lessons for the Nigerian oil and gas industry. Furthermore, this paper has given a succinct legal opinion on how host communities can seek redress for environmental matters via arbitration as a means of alternative dispute resolution. In its concluding section, this paper has provided viable recommendations and strategies that can be applied in solving the controversial issues raised.
Future Thought Leaders is a democratic space presenting the thoughts and opinions of rising Energy & Sustainability writers, their opinions do not necessarily represent those of illuminem.
Agribusiness and Applied Economics Report No. 766 May 2017: Petroleum Industry’s Economic Contribution to North Dakota in 2015.
Fiscal Federalism of Non-Renewable Natural Resources: Principles and Practices of Revenue Sharing and Equalization by Baoyun Qiao, Anwar Shah & Grant Bishop
Oluwafisayo Taiwo is a Final year Law student at the University of Lagos. She is passionate about International Law, Energy Law, Law of Taxation, Arbitration, and Sustainable Development Goals. She is also an Associate Member of the Institute of Chartered Mediators and Conciliators and an Intern at Uwana Energy.