The recently actualized Petroleum Industry Act (PIA) in Nigeria has been applauded both locally and internationally as a huge economic catalyst, not just for the federation or oil asset operating companies, but also for host communities that are known to endure decades of extremely harsh realities in the absence of a law that was good enough to protect their social and economic interests. However, emerging counterclaims from other quarters contend that the PIA has rather enslaved host communities and still offers much to be desired at the level of potential implementation, writes Valuechain’s Acting Editor, Yange Ikyaa
“We arne therefore positive and believe that this law is a game-changer for the industry…I think it’s for the whole industry, not just me; it is a big relief for the oil and gas industry globally, not just in this country.”
These were the words of Mallam Mele Kyari, the group managing director/chief executive officer of the Nigerian National Petroleum Company (NNPC), shortly after President Muhammadu Buhari appended his signature to bring into effect the PIA.
His position expressed above was against the backdrop that “our industry” got stagnated for lack of clarity around Nigeria’s fiscal environment, as well as regulatory framework and also due to the fact that the laws that were then executed within the industry domestically were very stale and archaic. In fact, the previous Petroleum Act itself was done since 1969 and there were never any significant changes to the provisions of the Petroleum Act before now.
It is actually true that there were few amendments made to the law that has now been repealed and replaced, but what had been put in place was simply inadequate to cause maximum attraction for enough investors to come in for the much-needed commercial participation in-country.
As the NNPC boss explained, “we got stagnated and investments got stalled from coming into our country and into our industry; so, ultimately, our partners and investors decided to practically quit our country, and that is simply because there was no clear fiscal environment, we were not very competitive, we hadn’t moved with time and society, as the petroleum industry changed and became a much modern industry and we got stuck.
“So, having the PIA in place today is simply a jump from what we knew, which was simply archaic, on to a very modern oil and gas industry; the world was waiting for this, the whole industry was waiting for this situation to come on board. So, definitely, for us as players in this industry, this is change that has eluded us for many, many years but has finally come, and I think it is a very good omen for our country and for our industry.”
However, in the views of Joe Abugu (SAN), who is a professor of commercial and industrial law at the University of Lagos, “the PIA itself has constituted host communities as slaves of the oil companies.” This, according to him, is notwithstanding the fact that even the Host Community Development Trust Fund that the PIA has established does not have any contribution coming into it from the government.
Prof. Abugu claims that the government has simply, under the PIA, abdicated responsibility for the development of the host communities and entrusted it to the oil companies; and that this should be addressed by the implementation committee, which should be able to reach out to companies that have existing oil prospecting and exploration licenses, including mining leases, and be able to harmonize structures for the implementation of the Host Community Development Trust Fund.
In his views, a situation where we are going to have more than 50 development funds set up by different companies is worrisome for the peace of the Niger Delta and the host communities in particular, as these multiple trust funds are going to be managed by the oil companies themselves, since the PIA did not explicitly make provision for host community representatives, NDDC representative, or oil-producing state representative in the boards of these trust funds.
His words: “With respect to implementation, I am a little bit worried by the provisions of the PIA concerning the development of the host communities. We must not lose sight of the fact that peace in the Niger Delta host communities has been a continuous challenge for the petroleum industry and it is expected that the PIA will substantially address the issue of stability in that region for continuous exploration and production of oil and gas.”
The professor’s worries may not be unconnected with the recent lamentations of the minister of Niger Delta affairs, Godswill Akpabio where he stated categorically that the oil companies were owing several billions of naira even to the NDDC Fund, a federal government agency, where they are statutorily charged to pay certain contributions.
“Now, if you look at that against the background of a trust fund that is being set up by the oil companies, which will determine what their operating cost for the previous years has been, that will be the basis for charging them with 3% contribution to this trust fund, and if they are owing the NDDC; what do you expect from a trust fund established by them, constituted by them for the benefit of the host communities, and with little or no community participation, at least statutorily?
“Maybe administratively, implementation committee will do something about that, but as it is, the development of the host communities under the PIA is left at the behest of the operating oil companies and that could pose a challenge to the peace and development of the oil industry, particularly at the host community level.”
A review conducted by Valuechain indicates that, while the PIA has set up the Host Community Development Trust Fund, Sections 240 and 242 of Act place the responsibility of constituting these development trust funds on the oil companies or the licensees. Therefore, from the provisions, it is possible that each license operating company will have to set up a community development trust fund.
But there is also a provision for two or more companies that are operating under the same license to be able to operate under one joint community development trust fund, and there are over 50 of such licenses, so it is likely that there is going to be a populated terrain of trust funds, with possible or potential challenges for effective management.
Another issue of concern raised by the professor of law from the University of Lagos is that the PIA also provides that host communities will not benefit from developmental projects to be sponsored under the trust fund if there has been damage to any oil facility within their enclave. This is particularly considering the fact that the Act does not say that such anticipated destruction or damage must have been proven to have been caused by members of that community, as this could otherwise be caused by anyone, especially with previously established cases of ill-maintained pipelines and other infrastructure that have occasioned great ecological devastation by way of oil and gas spills in the Niger Delta.
“Now, what framework is there to ensure that communities are not blamed for destructions in oil facilities that cannot be traced to them,?” Prof. Abugu demanded.
As a response to this question, Dr. Timothy Okon, who is the managing director of Teno Energy Resources, thinks that “first and foremost, we are having some suitability in the fiscal frame of things in the industry…it’s flexible, so it recognizes what existed in the past and what needs to exist in the future; so there is optionality and the optionality is simply that if you choose to remain with what you have, you are at liberty to do so, but if you choose to respond to the significant incentives that the fiscal system offers, then you will be under a new framework and you will better move forward with that.”
In the same vein, Kyari refuted the claims of abdication of responsibility made by Prof. Abugu, but rather contended that the whole concept of the Host Community Development Trust Fund in the first place was the creation of the executive.
In his opinion, “no law is perfect so there are things that we can do differently, meaning that there is still room for regulations and improvements to ensure that there is perfection.”
Therefore, the government, he said, decided that the PIA must have a provision in the law where the fate of the host communities is taken back to the host communities themselves. The NNPC helmsman also insisted that “the Host Community Development Trust Fund is completely within the control of the host communities, and that it is not a fund that is going to be managed by the oil companies, but is going to be funded by the operations of the oil companies, and that is the only place where the oil companies can come into this.”
It has been commonplace to find that when oil companies, including government agencies, go to host communities for corporate social responsibility, they build things such as community halls and, very often, the community is hardly consulted in making these decisions and at the end of the day, you end up with structures that have no meaningful use for them and, ultimately, the value is not there.
In the words of Kyari, “so what we have done to the PIA is to make sure that this power of choice and decision-making comes back to the host community; they are in control of what they do, the resources are available, what is provided for in the PIA is essentially matching and above the provision that is made in the NDDC Act.
“Overall, I think we have never had anything better than this in the industry because there are circumstances where you have villages or communities that may just be 200 meters away from a flow station and will not have potable water, no hospitals, no operational schools; but there is now massive provision that we have made in the PIA to ensure that this works. So, these communities will decide that they need water, hospital, school, and because the fund will be available, it will be done.
“On our part, it is our responsibility to ensure that these funds are set up. There may be participation from outside the body of the host community development funds but mostly at least 70% of this participation will be from the host communities and these are not entities that are going to be run by the oil and gas companies. Then, secondly, in terms of funding, let us not lose sight of the fact that the data around how much you are spending is no longer secret.”
Kyari’s confidence stems from the fact that the PIA has made it clear that energy companies must disclose their operations and by virtue of the provisions of the taxation process in the PIA, they must disclose all their spending for the purpose of taxation to the Federal Inland Revenue Service (FIRS) and also to the regulators. Therefore, the cost of operation is no longer secret.
Looking at the issue of concerns about whether there will be no allocation of resources or whenever oil facilities are attacked, once the facility is down, the company is not going to be spending money, maybe only for security during down times. Therefore this suggests there will be no resources to finance community development, but that also could be perfected and, of course, the community can have a stake in the continuous running of this asset.
According to Dr. Okon, “The PIA has now democratised decision-making for the sort of projects to be done, not in state capitals but in the communities. The PIA sets certain rules, such as 70% expenditure on capital projects, so that it is not wasted; and the host communities will participate fully in these trusts, so there is no case of having host communities excluded and the oil companies themselves deciding to run it for them; they need communities to take responsibility for their fate.”
Furthermore, the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) is provided for by the PIA to oversee an Infrastructure Fund to ensure that those flare penalties will now go into it so as to incentivize projects in the midstream. By so doing, these projects will be commercially guaranteed, which will now lead to employment and prosperity. The idea is to use innovation to drive commercially-sound projects in order to ensure sustainability and not just handouts. This is expected to result in employment and economic involvement and people won’t have time to go and damage energy facilities.
Specifically, the penalty will no longer go into the pool to be shared by all but to the community so as to incentivize behavior that will lead to commercial development and economic activity within the Niger Delta.
The law itself, Prof. Abugu agrees, is commendable but if the law provides that the boards of the trusts should be formed by the oil companies, then there is a problem there that needs to be addressed at the point of implementation.
However, it is clear in the law, he said, “that contribution to the fund, constitution of the trusts, and constitution of the members of the boards of the trusts are all provided by the law to be done by oil companies; the determination and time of payment of contribution to the fund is also at the behest and under the control of the oil companies, which is worrisome and even wrong.
“Therefore, for the law to be able to achieve its objective, at the point of implementation, since we can’t immediately change that law, we need to put in place a mechanism that will ensure that (1) mandatorily, every licensed oil prospecting company establishes that fund (2) that the trustees composing any of these trust funds have community representatives, since the law does not specifically mandate or refer to community trustees but simply mentions community representatives (3) we also need a mechanism to ensure that the oil companies do actually contribute what they ought to contribute to this fund, since we have just seen the case of the NDDC and if they can flagrantly be in default of contribution to the NDDC, what mechanism do we have by way of implementation to ensure that they will contribute?”