Nigerian Petroleum Industry Bill (PIB): Balancing Stakeholders’ interests By Prof Chijioke Nwaozuzu

 Chijioke Nwaozuzu, PhD

There is a fundamental interdependence between host countries and the international oil companies (IOCs) in the development of natural resources. The interests of these two parties differ much but mainly converge on resource production-sharing. Two other major stakeholders are the National Oil Companies (NOCs) and the host communities, and traditionally these two stakeholders’ interests have been subsumed under the host country interests.

The fact that oil and gas resources are vested in the Federal Government of Nigeria does not exclude the host communities as major stakeholders. These communities bear the brunt of environmental degradation (acid rain, oil spillage, foul air and water) that usually attend resource extraction and refining processes. These call to question the urgent need for environmental remediation in host communities and environmental justice for those that bear the brunt! A successful negotiation of the PIB will take into account the contending interests of stakeholders, which I will briefly narrate here.

Let us commence with the host country’s interests. Nigeria is characterized by high population growth, excessive unemployment, low per capital income, a low level of economic development (reflected in a lack of social services and resources), a low quality of education, low electric power supply, poor infrastructure development and maintenance, and short life expectancies).

Given this setting, the critical concern of government should be economic growth. As a major oil exporter, oil E & P activities should secure a reasonable tax base for the government, revenue from the world oil market, capital for economic expansion, and employment and income for individual workers. There are other economic, social, and political factors of interest to the host country. These include acquisition of technology and expertise from foreign oil companies, increasing local content in supplies and other forms of contracting, access to foreign markets, infrastructure development in the course of E & P activities, such as roads, communications, port facilities, etc. Few developing countries have the capital, technology and trained personnel necessary to develop oil reserves, and so must rely to varying degrees on foreign investment by the IOCs.

The Foreign Direct Investment (FDI) offered by the IOCs provides the host country with technology, managerial and technical expertise, and a reduced vulnerability to downturns in the world’s economy, and with capital. FDI also provides the opportunity to shift the responsibility of building and maintaining the requisite support services and infrastructure facilities to the IOCs. Therefore, it is in the interest of host countries to maintain this historical interdependence with the IOCs.

The IOCs interests are principally driven by the characteristics of petroleum E & P operations. There is a considerable lag between an investment in a petroleum prospect and the realization of any profit from the enterprise. E & P operations are capital – intensive and frequently entail the creation of a robust infrastructure before actual extraction can take place. These operations are also high- risk in nature (the existence, extent and quality of oil reserves; production costs; and world crude oil prices are all difficult to determine well in advance). Therefore, profitability is never assured. Generally, most IOCs tend to improve their profitability by improving the crude oil which accounts for why they get involved in the entire value chain of the industry. Also hydrocarbon reserves are finite, so IOCs must continually acquire new reserves which again are capital – intensive. The fiscal incentives available in different oil producing countries tend to determine where the IOCs sink their oil rigs.

IOCs are compelled to be far more concerned about government policies and regulations than most other businesses. These companies have to deal directly with the government (through their agencies) being the custodian of national oil reserves, but also must deal with the political and legal hazards associated with extracting the reserves that in most cases is the host country’s major source of revenue. The primary interest of the IOCs as with any other business are maximization of profits and minimization of risks or at least ensuring that unavoidable risk are factored into the potential ‘upside’ of the enterprise.

For the IOCs the principal risks are geological, economic, and political. Political risks include a sudden increase in taxes, uncertain fiscal terms, unfavorable alteration of the production- sharing ratio, government instability, agency – in-fighting, outright confiscation of production, and nationalization of foreign oil assets.

These interests and risks have to be factored into the PIB debate and negotiations to ensure the IOCs are not discouraged from making further investments in the host country. Else, they would be encouraged to move away and invest in other countries with more stable and better fiscal regimes.

NOCs (e.g. NNPC) are created to develop petroleum resources within the host country and in most cases are typically multi – layered in structure, and organized into subsidiaries in accordance with function, such as E & P, refining, marketing, petrochemicals, retail etc. The corporate forms of NOCs mimics that of the IOCs, but the overall objectives of NOCs are less clear than the purely –for- profit IOCs. NOCs are basically government agencies, and as such are responsive to government pressures and policies. Examples are: capping prices to domestic purchasers, purchasing from local suppliers (i.e. increasing local content) whose materials may be inferior and costlier, paying high wages that are not co-related to profitability, adopting inefficient labor- intensive production methods to increase employment, making uneconomic investments to promote political goals, etc.

The NOCs can afford to carry-on in this manner, confident in the belief that when and where necessary, the government is likely to grant the company better tax treatment than private companies. Additional State Aid or bail-out measures may come in the forms of providing access to capital on favorable terms, including low-cost government loans, government loan guarantees, and direct capital infusions from the government coffers. In a situation where the NOC is economically threatened, the government will most likely step in as ‘savior of last resort’ and take remedial steps to prevent the NOC from collapse, or from defaulting on its domestic and foreign obligations.

The widespread dissatisfaction with the efficiency levels of NOCs has led many oil- producing countries to gravitate towards privatization. This trend is more evident in South America than in the Middle East, Asia and Africa. For example Argentina began to privatize its NOC, YPF (Yacimientos Petroliferos Fiscales) as early as 1989, and most other South American countries have at least partially privatized their NOCs. Some of these NOCs have broadened their role into international downstream activities, which includes building transnational pipelines to transport petroleum and natural gas to the marketplace, acquisition of refineries in the US & Western Europe, and also retailing directly to consumers in these foreign countries. For example, Petroleos de Venezuela S.A (PDVSA) owns CITGO Petroleum Corporation through which the NOC carries out extensive refining, marketing and transportation operations in the US.

Conversely, countries like Kuwait, Saudi Arabia, Libya, Nigeria, Angola, etc. have made no significant efforts toward privatizing their NOCs which still enjoy monopoly control. However, countries like México, Kuwait, Saudi Arabia have reorganized and restructured their NOCs and introduced diverse cost –cutting measures and audit controls to make them operate more efficiently and competitively in the global marketplace.

To arrive at this minimal point is part of what the PIB should seek to achieve. The suggested restructuring of NNPC in the PIB would ensure that the Nigerian petroleum industry at the least operates efficiently and an eventual privatization of NNPC assets would ensure competitiveness in the global marketplace.

Host communities are often disregarded but together they constitute a powerful interest and pressure group. It is a recognized fact that economic gains from petroleum reserves development outweigh the attendant social costs brought about by both upstream and downstream operations. The social costs include population displacement, cultural changes, and environmental effects.

The environmental effects are not limited to the immediate impact on land, water, and air around the host communities but include effects on traditional economic activities that are dependent on water, natural wildlife, and vegetation. Claims by, and on behalf of, indigenous host communities around the world to participate in the decision-making process on whether to incur such social and environmental costs, and if so, how to allocate them are advancing with increasing frequency.

Where such claims are suppressed, it has often led to emergence of militant groups with full intent on impeding or crippling oil operations and engaging in hostage takings as a means of raising funds for arms. In a mono-product economy such as Nigeria, successful militant activities in oil- producing locations spells disaster in terms of government revenues. Crude oil/fuel theft and pipeline vandalism are becoming regular features of the Nigerian petroleum sector. This is partly attributable to militancy activities, and nefarious criminals who ride on the back of the attendant confusion to achieve personal economic gains. The Federal Government can ill-afford such activities, particularly now that the price of crude oil has taken a downturn and the economy has headed ‘south’. Militancy in the oil-rich Niger Delta region in Nigeria remains a clear and present danger to oil operations.

The FGN has over a period of time made some concessions to the host communities who bear the social costs associated with oil production and refining, e.g. by setting up the Niger Delta Ministry, Niger Delta Development Commission (NDDC), the Amnesty Deal, extra- budgetary allocations to oil producing State governments. There have been some contributions too from the IOC’s under corporate social responsibilities.

Regardless of these palliatives, a visit to the Niger Delta Region still reveals insignificant human and infrastructural developments at the moment. Besides, who can tell how much of these benefits end up in individual possessions, and the proportion that in actually channeled towards real infrastructural development e.g. quality schools, markets, clean water plants, road and bridges, port facilities, etc. Nevertheless, more still needs to be done to ameliorate the social and environmental costs in host communities in Nigeria. The PIB should make additional concessions to host communities in the interest of environment equity and justice. Furthermore, the PIB should more importantly incorporate strategies into the Bill that ensure that the benefits incorporated in the Bill accrue in real terms to all peoples of the host communities.

In Nigeria, as previously stated, the ownership rights to oil and gas are vested in the Federal Government of Nigeria. However, it would be a mistake in the course of negotiations to subsume the interests of host communities and the NOC under those of the host country just because the latter holds the ownership rights.

The social costs of oil extraction and processing are not equally felt across the country. The concept of environmental justice is applicable here. My best advice is for the National Assembly to consider these contending interests in the course of reviewing the current version of the bill. Modifications can be made along the implementation route, as common sense would dictate that such changes may be necessary from time to time in the interest of all stakeholders. Alternatively, the bill can be passed in three or four tranches provided the aim is not to bye-pass critical stakeholder interests.

Prof Chijioke Nwaozuzu is an Ex-British Chevening Scholar, Ex-PTDF PhD Scholar and Director, Emerald Energy Institute for Petroleum & Economics, Policy, & Strategic Studies, University of Port Harcourt. Email: Tel: 070 6874 3617 (SMS Only)

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