The Petroleum Host Community Fund: A disincentive?

Recently, the National Assembly resumed its debate on the controversial Petroleum Industry Bill (popularly referred to as the PIB). In its clause-by-clause review, the Lower Chamber (“The House”) reconsidered the percentage share allocated to the ‘host community’ from 10% now to 7.5% levy on oil & gas profit.

At Section 116 to 118 of the PIB, the Host Community Fund (“HCF”) is expected to cater for the mitigation of all negative environmental impacts on host communities arising from exploratory activities of oil companies. This invariably is seeking to create an independent fund separate from whatever interventionist funds already in existence; a salient point which has been further considered below.

With a few more weeks to left for the 7th Assembly, it is unlikely that this bill will become law. If that is the case, it is therefore important that the 8th Assembly set out to quickly appreciate the philosophy underpinning many of the provisions of the bill (the Host Community Fund being one) and their consequential effect(s) on the industry as a whole, if it ever becomes law in its present form.

The Ownership Theory:

Today (in Nigeria), it does appear that there is an advocacy that the ownership of crude oil  should be treated in the same way as it is in the United States of America. In the United States, rights to crude oil may be owned by private individuals, corporations, or by local, state, or federal government. That is not the case under the Nigerian Statutes. Section 44(3) of the Constitution of Federal Republic of Nigeria (as amended) vests the entire ownership and control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria or in, under or upon the territorial waters and the Exclusive Economic Zone in the Federal Government. In Malaysia, unlike Nigeria, the Petroliam Nasional Berhad (Petronas), holds exclusive ownership rights to all oil and gas exploration and production projects, and is only subject to the Prime Minister’s control. In Ghana, Angola and like Nigeria, the ownership and control of oil & gas is vested in the government.

Moreover, Sections 44(3) of the 1999 Constitution as well as Section 1 of the Petroleum Act, Cap C10 Laws of the Federation of Nigeria, 2004 (“The Act”) vests the entire ownership and control of all petroleum in, under or upon any lands to which Petroleum Act applies, in the State. The Act further extends its application to all land (including land covered by water) which is in Nigeria; is under the territorial waters of Nigeria; forms part of the continental shelf.

Furthermore, the use of the word “State” is defined by the Black’s Law Dictionary 6th Edition, page 1407 defines a State as either to body politic of a nation (e.g. United State). Similarly, the Interpretation Section of the Petroleum Act has defined the word State to mean ‘State, except in Section 1 of the Act means a state of the Federation’. Apart from Section 1 of the Act, the word ‘State’ was also used six times within the Act either as a verb or reference to the constituent part of the Federation. It is therefore no doubt that the reference to a State in both Section 44 (3) of the CFRN and 1 of the Petroleum Act vests the ownership and control of petroleum in the Federal Government.

The above notwithstanding, one must not trivialize the environmental damage oil & gas operation may have caused the Littoral region. Again, it must be argued that it was for that reason that each Littoral State gets additional 13% derivation over and above other non-producing States, individual GMOU’s entered with the host communities etc. To consider AT ALL the Host Community Fund, the 8th Assembly must seek answers to the following questions:

Has it been established that the 13% Derivation allocated to each Governor of a producing State is inadequate for economic and social infrastructure?

Have the Governor’s dutifully accounted for the disbursement of the Funds to specific infrastructural projects?

Does the government have an infrastructural development monitoring Group (such as the Good Governance Tour) to monitor projects in the States benefitting from the 13% Derivation?

Has it been proven that both the allocation of 13% as well as the individual GMOU’s are grossly inadequate to compensate for the damage caused by exploration and production activities?

Will the Host Community Funds not prevent accountability of each State as regards the way and manner its 13% Derivation had been expended?

How will the HCF be administered and are there check-mechanisms to monitor performance of development of social and economic infrastructure?

The above in no way undermines the rights to good life of the people living in Littoral States, however, the Buhari-led administration/8th Assembly must also guide itself properly to ensure that it is not misled to encouraging corruption, recklessness and wasteful spending; it, having not been satisfied that the provisions already made (for the compensation for these environmental damage) have proven inadequate such as would warrant the establishment of the HCF.

Digital Oilfield in Nigeria

The process of oil exploration by both Nigerian oil companies and International Oil Companies is saddled with a lot of challenges both infrastructural and otherwise. Before now, traditionally, accessing information from pumps, lifts, wellheads, and other equipment’s used in oil exploration was typically a labor-intensive process; workers were required to drive from platform to platform and physically gather data with one person stationed at each platform to monitor performance. Such a procedure not only puts workers at risk in the line of duty, it is also time-consuming, and data obtained thereof is usually marred with potential human error. Hence, the need for a better and more effective means of ascertaining the level of commercial viability in assets; less risk and high productivity becomes necessary.

The term “Digital Oilfield” has been used to describe a wide variety of activities. The term simply introduces the various uses of advanced software and data analysis techniques to improve the profitability of oil & gas production operations. In a more practical definition, a Digital Oilfield is defined by how a petroleum business deploys its technology, people and processes to enhance efficiency. The purpose of the digital oilfield is to maximize oilfield recovery, eliminate non-productive time, and increase profitability through the design and deployment of integrated workflows. It combines business process management with advanced information technology and engineering expertise to streamline and, in many cases, automate the execution of tasks performed by oil companies in exploration of oil. Through a digital oilfield, a company optimizes hydrocarbon production, improves operational safety, protects the environment, maximize and discover reserves in addition to maintaining a competitive edge.

Furthermore, this concept though new, presents an opportunity for oil companies to reach strategic business decisions that are tailored towards avoiding waste of time and resources in their operations. Oil companies can remotely access and monitor equipment which are typically miles apart, and data and oil/gas analytics by leveraging on Information Communication technologies platforms. This reduces business cost for companies as they need not expend human resources in oil operations that can be resolved through the use of mobile phone applications or perhaps others of electronic platforms.

In conclusion, digital oilfields provides oil firms with more accuracy in terms of monitoring assets with a view to rationalize exploration, effectively allocate resources, predict changes in well data, and make assumptions based on the continuous process data variables.

The Next Ten Years: OPEC’S Pessimistic Prediction for Oil Prices

Towards the end of 2014 and so far into 2015, the global oil market has suffered from a drastic decline in oil prices; the biggest losers being major oil producing countries such as Nigeria, Russia, Venezuela, Algeria etc whose economies and revenues are largely dependent on income from oil exports and are predominantly members of the Organization of the Petroleum Export Countries (OPEC),. However, oil producers are gradually experiencing what may be termed a “recovery phase” as global oil prices has gradually been risen above $60 a barrel in the last couple of days, which is above the $53 dollar benchmark in Nigeria’s 2015 budget. The recent upswing in prices is igniting fresh hopes of perhaps a brighter economic future for Nigeria; however it remains debatable whether it will ever return to its once boisterous level of over $100 per barrel. While Nigeria clings to the hope of a total recovery of oil prices, one cannot help but wonder if this global decline which has left a dent on the economy has come to stay. 

According to an article in the Wall Street Journal, a draft of OPEC’s latest strategy report,reveals that oil prices may stay below $100 per barrel for about a decade.  The Report’s predictions for oil prices range from around $76/bbl to below $40/bbl in 2025. In either case, a crossing of the $100 mark is not contemplated in those scenarios. Most OPEC countries need prices to be well above $100/bbl in order to achieve their respective Benchmarks, which at the moment have been significantly reduced.

One of the recommendations submitted by experts and stakeholders alike is that OPEC should seriously consider returning to a production quota system. It abandoned this system in 2011 due to conflicts as to the amount of oil each member nation would be allowed to produce. Understandably, members were reluctant to set limits on production as it would have a stifling effect on the acquisition of new business. Rather, some member nations (most notably Saudi Arabia) have done the direct opposite and instead flooded the market with more oil at cheaper prices in a bid to retain customer patronage. However, with a production quota system, there will be a reduced level of supply of oil in the market thus bumping up crude prices.

Earlier this year, OPEC had objected to the reduction of output despite constant pressure from different oil producers. However, it has been reported that the recently released draft strategy report makes recommendation to the effect that production quotas could be enacted if OPEC’s share of the global market drops below its current level of 32% (OPEC once produced more than half the world’s oil). This remedy is termed a “targeted remedy” in which the output quotas would permit the group’s poorest members to produce more, to the benefit of economies that have been particularly distressed by the price drop.

It has been further recommended that OPEC must necessarily become generally more organized and disciplined in order to enable it hold sway in the oil markets and sustain itself. This recommendation can well be justified against the background of the refusal of its own members to adhere to its directive in 2011 as regards the 30 million barrels a day group production cap to accommodate Libya’s return; this serves as a clear illustration of the gaps in its internal affairs.

Perhaps it is worthy of note to consider arguments that OPEC’s members in direct contravention of its directive may actually have the answer to the problem. Over-supply coupled with low prices could force oil that is more cost-intensive out of the market, such as that of the Americans, granting member nations a larger chunk of the market.

In any event, the release of this report will be highly anticipated by stakeholders in the industry as it will likely influence the steps to be taken in the near future.