Host Community Trust Fund Can Secure Energy Assets — Aradel CEO

By Yange Ikyaa

Implementing Host Community Development Trust Fund has been recommended as a vital means of mitigating possible acts of energy assets vandalism while protecting the integrity of such installations in host communities around Nigeria. 

This was the position of the Managing Director/Chief Executive Officer of Aradel Holdings PLC, ‘Gbite Falade, who was addressing a cross section of delegates during the just concluded Valuechain Annual Lecture and Awards.

Figures from the Nigeria Extractive Industries Transparency Initiative (NEITI) show that Nigeria recorded 7,143 pipeline vandalism cases in 5 years, resulting in N471 billion expenditure on repairs, even as crude oil theft and product losses from these nefarious activities stood at 208.639 million barrels valued at $12.74 million or N4.325 trillion.

According to Falade, “if an operator, for example, is able to produce 100 thousand barrels, and his contribution to the Host Community Trust Fund is high, but then, when the operator goes down to 10,000 barrels and the community notices that all of a sudden, there is no contribution coming into their Host Community Trust Fund, then, the message begins to sink in for them to take full responsibility of watching over and protecting energy installations within their locality.

“So, part of the solution is also to appeal to our regulators, let us fast-track the implementation of the Host Community Trust Fund Initiative, let’s begin to see it as part of the re-orientation because the way it is now working, everybody thinks that whatever happens to it, our own share still remains the same.

“But once they begin to understand that if they don’t take interest in protecting energy infrastructure owned by producers located in their communities and anything that happens to it affects what comes to the community through the Host Community Trust Fund, maybe, there can now be a community focus on the facilities and they can begin to see that these facilities are part of what is bringing money to us and we need to protect them.

“So, whatever impediments we have, let’s get these Host Community Trust Funds off the ground, so that we can begin to see how we can harvest the behaviour of people in the communities towards preventing the vandalism of pipelines. We must look at this as something of a national service and we must work at it to ensure that it succeeds.”

Established by the Petroleum Industry Act (PIA) 2021; the provisions for the incorporation of Host Communities Development Trusts aimed at encouraging social and economic development and to promote mutual cooperation between the host communities and petroleum operators within the host communities.

By definition, host communities are localities that are situated in or near the area of operation of a “settlor” or operator and any other community as an operator may determine.

Under the terms of the PIA, the operator is required to incorporate a Host Community Development Trust in the community where they carry out petroleum operations, and is also required to appoint the Board of Trustees, as well as members of each Committee in the said Trust.

However, the inability, failure or refusal to abide by this provision can result in the revocation of a license or lease, even as operators of petroleum assets are mandated by the PIA to also carry out Needs Assessment that can pave way for the emergence of a Community Development Plan, and this plan will also determine the type of project to be executed by the Trust for the benefit of the community concerned.

While there are timelines provided within which these Trusts must be set up and activated, many operators still breach this provision. Aradel was the company that first championed the concept of Host Community Development Trust in Nigeria and remains at the forefront of ensuring its full implementation in all its operations.

The PIA demands that existing Oil Mining Leases, existing designated facilities and new designated facilities under construction should set up these Trusts 12 months from the effective date, while those with existing Oil Prospecting License are required to do so prior to the application for field development plan.

On their part, operators with Petroleum Prospecting License and Petroleum Mining must incorporate their Host Community Development Trusts prior to the application for any field development plan, while those who are licensees of designated facilities granted under the PIA must do so prior to the commencement of commercial operations.

With a Host Communities Development Trust in place, the ground is now established for the existence of a Host Community Development Trust Fund into which operators are demanded by the PIA to make annual contributions. The applicable amount required to be contributed to any Host Community Development Trust Fund is 3% of the operator’s actual operating expenditure in the preceding year in the Upstream Petroleum Operation affecting the community.

However, the PIA also protects petroleum assets operators and their business undertakings in host communities with the caveat that “where there is any incident of vandalism, sabotage or any civil unrest, which causes damage to any petroleum or designated facilities or disrupts petroleum activities in a host community, such community will forfeit its entitlement to the extent of the cause to repair the damage or the damage that occurred as a result of such disruption.”

It further provides that “this Fund is to be setup, maintained and managed by each Licensee and Lessee to be held by a financial institution that has no connection with the Licensee and Lessee or its affiliate. It is to be held in an escrow account, accessible to the Commission or Authority.”

With the reality of ecosystem preservation in view, the PIA states that the Fund is also to be used for the payment of decommissioning and abandonment costs.

“The amount to be contributed yearly into the Fund is to be based on the Decommissioning and Abandonment Plan set out by the licensee or lessee and approved by the Commission or Authority and the amount is to be reviewed every 10 years following the first submission.”

In order to ensure compliance and mitigate non-compliance, “a Licensee or Lessee is required to inform the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) or the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) (as the case may be) of the establishment of this Fund not more than three months from the date of commencing upstream petroleum operations or commissioning the facilities for midstream operations.

“They are also required to submit the Statement of Account of the said Fund to the Authority or Commission on an annual basis and a copy is to be provided to the FIRS. The residue amount in the Fund after the decommissioning and abandonment has been carried out and approved is to be taken as income for production sharing and tax purposes and the remaining amount shall be returned to the Licensee or Lessee after tax deductions.”

In its recent report, NEITI stated that crude oil theft in Nigeria is perpetrated mainly through pipeline clamping and four other ways, which are Illegal Connections (ICs) on major pipelines, exploitation of abandoned oil wellheads, pipeline breakages, and the vandalism of key national assets to illegally siphon crude into waiting vessels stationed in strategic terminals.

However, a sector of such vital importance to the nation’s economy deserves a greater level of sanity and sanctity to better benefit the citizenry.

According to NEITI’s recently released 2021 Oil and Gas Industry Report, the industry accounted for 72.26% of Nigeria’s total export and foreign exchange earnings, as well as 40.55% of government revenues, while providing 19,171 jobs.