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Original Post Date: 2010-09-22 Time: 15:00:03 Posted By: News Poster
By Bayo Adaralegbe
Lagos – Current reforms in Nigeria’s Petroleum Industry take their cue essentially from developments in the international industry. When oil took over from coal as the main source of primary energy in the middle of the last Century, its dynamics were not fully understood.
Today, the narrative is different and complicated. This basic arrangement could not have foreseen changes in the dynamics of oil exploration and the implications for the environment, the global economy, the host state, its economy, and even the host communities, among others. This has changed the international petroleum industry in many remarkable ways that have provoked reforms in many oil producing countries, including Nigeria.
Rewind: 1973 International Oil Price Crisis
Two significant developments in the industry may be attributed to the 1973 oil crisis. The first is the increased awareness for sustainable use of natural resources. The second is the fiscal regimes obtainable in many countries. It was not exactly clear then how long hydrocarbon resources would last and serve mankind. Geologists had warned from the onset that oil would run out in the foreseeable future, much to the irritation of economists who countered that, applying the law of demand and supply, there was nothing to worry about as long as the price of oil remained stable. While the debate about when oil will finally run out has not abated, the oil price crisis of 1973 helped to refocus attention on its depletable nature, in a way that has allowed the principle of sustainable development, once criticised to be utterly utopian, to be promoted. Put simply, this principle encourages humanity to use natural resources efficiently in a way that enough is left to meet the needs of future generations. This principle has provoked reforms in the international extractive industries.
It is instructive that the Nigerian Petroleum Industry Bill is replete with a refrain to use our oil and gas resources in a “sustainable way”, an expression absent from previous laws. The Intergenerational Fund increasingly adopted by countries, is another example. This Fund is like a savings account from proceeds of natural resources to be kept away for unborn generations. Whilst the Excess Crude Oil Account recently set up by Nigeria without any legal framework, is a poor imitation of this, the Sovereign Wealth Fund recently announced by the Federal Government is similar in nature to it.
The 1973 oil price crisis also provoked changes in fiscal regimes. Before this crisis many fiscal regimes were designed regressively in a way that it was oil producing companies and not oil producing countries that benefitted from oil windfalls. In some cases, especially in the Middle East, some of these countries terminated petroleum development agreements in frustration because of this. The crisis jolted the industry to the reality of oil price volatility resulting in progressive fiscal regimes that allowed the take of oil producing country’s to increase commensurate to windfalls. (See Johnston, D, “Changing Fiscal Landscape” Journal of World Energy and Business, 2008). In our own case, the Deep Offshore Act that imposed a threshold allowing Nigeria to increase its take once the price of oil crossed a particular price, and the progressive fiscal regime being introduced in the Petroleum Industry bill (but very controversial) are examples of how we are trying to respond to these trends.
Revenue Management and Transparency
Many developing countries have defied the theories of economists that natural resources are meant to assist economies to prosperity. The reverse has been the case except in a handful of cases, thanks to the phenomenon known as “resource curse” or “Dutch disease” or “paradox of plenty” leading to initiatives to address the problem by encouraging frameworks for proper revenue management and transparency. The Extractive Industries Transparency Initiative is the best known example of this. In Nigeria, the NEITI Act was enacted in 2007 further to this initiative. The Fiscal Responsibility Act and the Procurement Act that seek to promote fiscal discipline across the Nigerian economy, and the PIB, believed by international observers to be the most far reaching by any country, in terms of its revenue management and transparency provisions, follow these international developments.
National Oil Companies
NOCs were originally conceived as vehicles for state participation in oil. Not anymore. NOCs are now commercially minded and are being structured more like IOCs in order to be competitive. NOCs are now searching for business outside their jurisdictions, and compared to when they were exclusively owned by sovereign states, their ownership is now shared by the private sector. Presently, about 77% of world’s reserves are under the control of NOCs while about 13 of NOCs each has more reserves than ExxonMobil, the biggest of the IOCs. Examples of these NOCs are Brazil’s Petrobas; Malaysia’s Petronas; China’s CNOOC and Sinopec; Algeria’s Sonatrach; Norway’s Statoil; Russia’s Gazprom; Denmark’s DONG; India’s ONGC; Abu Dhabi’s ADNOC; Japan’s Nippon Oil; Saudi Arabia’s Aramco; Colombia’s Ecopetrol. This is where we have now arrived in Nigeria. From being a State Owned Enterprise under the NNPC Act, to reforms designed to make it more commercially viable under the Privatisation and Commercialisation and the Public Enterprises (Privatisation and Commercialisation) Acts of 1990 and 1999, the NNPC is now finally being contemplated for privatisation under the PIB.
Host Communities
In international law, the sovereign state, not the host community, or individual land owner, is deemed to own land and subsurface resources. This is reflected in virtually all domestic legal systems. As such, conventionally in nearly every jurisdiction where extractive activities are taking place, these activities were designed in a way that did not admit any direct role for the host community or the individual land owner, nor was there direct participation for them in proceeds from these activities. Implicit in this conventional model was an assumption that government was alive to its duties, especially as relates to peculiar challenges faced by these people. This model however does not accord with reality in many countries. The consequence is the principle of “public participation”, a new idea that is gradually gaining ground and that seeks greater role for host communities.
In Nigeria, the Niger Delta Development Basin Authority, the OMPADEC, the NDDC and the derivation principle in the Constitution (that goes to state governments, not host communities) have all been used at various times to deal with this problem. These are however all indirect approaches. So is the contractual framework for CSR in PSCs, and more recently in the PIB. Currently, government has promised to cede some percentage of oil proceeds to host communities under the PIB. This is consistent with emerging trends in other countries that are moving away from the traditional model. In Belize and Brazil for instance, governments share revenue from natural resources directly with host communities and individual land owners, in recognition of the problems that have resulted from a rigid application of the traditional model.
Gas and Industrialisation
Gas used to be treated as the poor cousin of oil. The world did not pay much attention to it because of complications in its production that made funding it difficult. In many developing countries the treatment of gas reserves has gone through phases. First from being a source of revenue through exports, and more recently as a basis for their own industrialisation. We find examples in Indonesia, Egypt and Algeria. Hence the stipulation of domestic gas supply imposed on gas producers in these countries. Once again Nigeria is playing catch up here. We have transitioned from an era where scant attention was paid to gas (for instance, the exploration rights in the present Petroleum Act were styled ‘Oil’ Exploration, or ‘Oil’ Production or ‘Oil’ Mining rights while there was no single provision dealing with gas exploration and production) to an era where the commercial value of gas was appreciated, (leading to amendments in our Act in the 1970s on gas ownership; the enactment of the Nigeria LNG Act in the 1990s and the amended Petroleum Profit Tax Act that incorporated the AGFA that both dealt with gas production, but for export). Today, the Domestic Gas Master Plan that makes domestic gas supply obligations mandatory for gas producers is being introduced as a catalyst for Nigeria’s industrialisation too.
Local Content Development
Developing countries that are rich in natural resources seek to use foreign direct investment (FDI) as a vehicle for economic development. According to the classical theory, reception of FDI into a developing country is tantamount to the transfer into that country of capital, technical and managerial know-how and technology, key indices of economic development. That has so far not been Nigeria’s experience, hence the Nigerian Content Act, which consciously aims to develop local content in expectation that this would lead to national economic development. While the legal methodology may vary from country to country – Nigeria being the first country with a comprehensive legal framework exclusively dedicated to promoting local content – developing countries are united in their aspiration to use their natural resources as a vehicle for economic development.
Conclusion
The PIB can be said to be a culmination of attempts to achieve these reforms. It is not a coincidence that the bill covers sustainable use of Nigeria’s petroleum resources, progressive fiscal regime, revenue management and transparency, Nigerian Content, NNPC’s privatisation, host community and environmental issues. The Bill also integrates the Domestic Gas Master Plan.
Original Source: 
Original date published: 20 September 2010
Source: http://allafrica.com/stories/201009220349.html?viewall=1