Analytical Approaches To Resolving The Resource Control Impasse

By

Dr. Emmanuel Ojameruaye

Phoenix, Arizona State, USA

emmaojameruaye@yahoo.com

 

 

After several months of deliberations, the National Political Reform Conference (NPRC) ended in disarray on Monday, June 13, 2005 following a walk-out by delegates from the South-South zone after rejecting the 17% derivation fund for oil producing states recommended by majority members of the Leaders’ Committee set up by the NPRC to hasten up the conference. In spite of the walk-out, the Chairman of the conference (who ironically is from the South-South) allowed the remaining members to go ahead to adopt the recommendation the committee in clear negation of one of the pillars of the conference – national consensus building. To compound the problem, the delegates from the South-East and South-West latter staged their own walk-out following the insistence of conference Chairman to take a vote on the tenure of the President, another issue that the Leaders' Committee could not reach a consensus on.  Since the walk-outs, the conference had adjourned sine dine. There are now strong indications that the NPRC will not be reconvened because the Federal Government is not likely to waste more funds on it. Some observers estimate that the Federal Government had spent about a billion naira on the NPRC before the walk-outs.

 

It was clear from the beginning of the conference that the resource control issue was going make or break the conference.  This prediction has come to pass because of the unprofessional way the issue was handled. Two weeks after the stalemate, the delegates from the South-South are still insisting on their position “25% derivation now and 50% ultimately” while the delegates from the non-oil producing states, especially the North, are insisting on “17% derivation only” and hoping to get their way by use of their majority power or “divide-and-rule” tactics. But the South-South appears more united than ever and apparently prepared for a show-down. Efforts at reconvening the conference have remained deadlocked. No side appears willing to make concessions. It’s becoming an issue of ego with no side wanting to appear to be the “loser”.  It is therefore imperative to consider alternative “middle-ground” solutions that can save the conference and the future of this country.  More importantly, there is need to do more analytical work to guide the debate.

 

The purpose of this paper is to present two alternative analytical approaches to resolving the resource control impasse. These approaches are based on the following fundamental assumptions:

 

a)      That the demand for “25% derivation in the short term and 50% in the long term” is reasonable, given the fact that:  a) the 1963 constitution provided for 50% derivation which was in force till 1969 when the military regime scrapped it ; b) the current 13% is unacceptable given the relative neglect of the Niger Delta region over the past 50 years of oil exploration and production;  and c) the non-oil producing states will not accept anything less than 50% derivation if they were producing (or become producers of) a depleting mineral resource that generates about 80% of the federally-collected revenue and about 95% of foreign exchange earnings and which has significant negative environment impacts.

b)      A sudden increase from 13% to 25% derivation can cause a significant (and destabilizing) shortfall in revenue accruing to the Federal Government and the non-oil producing states. It may also create an “absorption” problem in the oil-producing states. Therefore there is need for a gradual adjustment process to a higher derivation.

 

Based on the above assumptions, I would like to propose two alternative approaches, namely the “incremental derivation” and “differential/incremental  derivation” approaches.

 

1.       Incremental Derivation Model

 

Under this approach, the derivation percentage will increase gradually over a period of time until the target (50%) is reached. For instance, we can start from 20% in 2006 and increase it by 2% points every year for 15 years until it reaches 50% in 2021. During this 15-year period, it is possible for federal government and the non-oil producing states to intensify efforts at increasing their internally generated revenue. It is also possible to discover oil/gas and other minerals in significant commercial quantities in the current non-oil producing states during this period. To ensure that the federal government and non-oil producing states do not suffer significant and destabilizing revenue loss during periods of low oil prices, the derivation percentage can be fixed at 15% whenever the average price of crude oil is below $20 per barrel in a given quarter.

This approach assumes that the current fiscal arrangement in the oil industry will continue to hold. To illustrate this approach, I’ll use the oil revenue in 2003 as baseline as shown in table 1 below:

 

Table 1: Incremental Derivation                           N’billion

1

Revenue Categories

2

 

2003

3

 

2003**

4

13%

2003

5

17%

2003

6

20%

2006

7

24%

2008

8

30%

2011

9

50%

2021

1. Total Revenue (TR)

2,575.1

NA

NA

NA

NA

NA

NA

NA

2. Gross Oil Revenue (GOR)

2,074.3

2,074.3

2,074.3

2,074.3

2,074.3

2,074.3

2,074.3

2,074.3

3. Deductions* (D)

563.5

563.5

563.5

563.5

563.5

563.5

563.5

563.5

4. Net Oil Revenue (NOR)

1,510.8

1,510.8

1,510.8

1,510.8

1,510.8

1,510.8

1,510.8

1,510.8

6. Min. Oil Derivation (MOD)

137.2

137.2

196.4

256.8

302.2

377.69

453.2

755.4

5. Amount Distributed (AD)

1821.0

1,373.6

1314.4

 1254.0

1208.6

1132.9

1057.6

755.4

7. Federal Govt. Share (FG)-56%

917.1

769.2

736.1

702.2

676.8

634.4

592.3

423.0

8. State Govt. Share (SG)-24%

419.8

329.7

315.5

301.0

290.1

271.9

253.8

181.3

9. Local Govt. Share (LG)-24%

346.9

274.7

262.9

250.8

241.7

226.6

211.5

151.1

*includes JVC cash calls (N420.5b), external debt service (N128.4b), NNPC priority projects, etc

** Oil Revenue Portion only;     NA=not applicable

 

The second (2) column in the above table shows the total revenue (TR), gross oil revenue (GOR), net oil revenue (NOR), mineral oil derivation fund (MOD) and the total revenue distributed to the three tiers of government in accordance with the subsisting revenue allocation formula in 2003 (56% FG, 24% SG and 20% LG).  Column 3 shows the amount of oil revenue distributed to the three tiers of government. Thus, while all the oil-producing states received N137.2b in oil revenue on account of derivation, the federal government retained N769.2b; all the 36 state governments divided N329.7b amongst themselves while the 774 local governments divided N274.7b. Note that the MOD represented only 6.6% of GOR and 9.1% of NOL in 2003, both a far cry from the statutory 13% derivation. In fact, what was paid to the oil producing states was about half of the GOR. A plausible explanation for this is that only on-shore oil production was used, since the onshore/offshore oil dichotomy issue was still unresolved in 2003.   Assuming the dichotomy has been abolished as widely reported (??), column 4 shows how the net oil revenue (NOL) would have distributed.   The oil producing states would have received additional N59.2b (i.e. N196.4b – N137.2b) at the expense of the other “claimants” (FG, SG and LG). Note however that we have not used NOR which is obtained by deducting Joint Venture cash calls (JVCC) and external debt service (EDS) from the GOR. As I have argued elsewhere, while one can accept the deduction of  JV cash calls, it is wrong to deduct EDS from GOR to get NOR since this short-changes the oil-producing states who should not be made to bear the brunt of the national external debt. The principle of “debtor pays” should apply, i.e. the FG should service its debt from its share of the federation account while state governments that have borrowed externally should do the same. If this were the case, the oil-producing states would have received additional N16.7billion dollars. Column 5 shows the distribution of the NOR based on the proposed 17% derivation. It shows that the oil-producing states would have received N256.8b, almost double the actual amount they received in 2003. In columns 6 to 9 we show the distribution of the NOR based on 20% to 50% derivation in 2006 through 2021 (15 year period), with the derivation percentage increasing at 2% point per annum. The oil derivation fund for oil-producing states increased gradually from N302.3b in 2006 to N755.4b in 2021. At the same time, the FG share in oil revenue decreased from N696.8b to N423.b, while that of the SG also fell from N290.1b to N181.3b and that of LG from N241.7b to N151.1b.  I submit that it is possible for all parties to adjust to these changes over the 15-year period. What is more, the FG, SG and LG can use the time to intensify alternative sources of revenue to make for the decline in their receipt of oil revenue. It is also possible that total oil revenue may in fact begin to decline during the period if oil production decreases due to decline in oil reserves – the oil wells in the Niger Delta and adjoining offshore may dry up within the next 30 years at the current rate of production in new reserves are not added. 

On the other hand, since the average price of Nigerian crude oil in 2003 was about $29 per barrel, the decline in oil revenue accruing to the FG, SG and LG between 2006 and 2015 will be far less than the figures given above if the average price exceeds $29 per barrel – a very strong possibility given that the average price in 2005 has been above $40. In fact, the FG, SG and LG may not suffer from a decline in oil revenue if the price remains high; they may even experience an increase in revenue if there is an increase in oil production within and outside the Niger Delta as a result of the significant investment in oil exploration activities in recent years. Therefore, the FG and the non-oil producing state governments should not be afraid of revenue decline if the derivation percentage is increased gradually as described above.      

 

2.       Differential/Incremental  Derivation Model

 

Under this approach, we look at the various components or sources of oil revenue – crude oil/gas exports (COGX), domestic crude oil sales (DCOS), petroleum profits tax (PPT), royalties (ROY) and “other” oil revenue (OOR) – and apply different derivation percentages to each component in accordance with reasonable economic principles and practices in other countries. For instance, since company income tax normally accrues to the federal government, the FG should get the bulk of PPT. Similarly, since the federal government (represented NAPIMS/NNPC) is the JV partner or equity holder in the JV E&P companies in Nigeria, it is reasonable to expect the FG to also get the bulk of COGX, DCOS and OOR. On the other hand, since the NPRC has accepted the “states” as the federating unit of the country, it is appropriate that the bulk of royalties (ROY) should accrue to the oil-producing state governments. Again, to ensure gradual adjustment we can introduce an incremental percentage to the differential derivation percentage. For instance, we can propose that a 5% derivation be applied to COGX, DCOS, PPT and OOR in 2006 and this be increased gradually by 1% point per annum until it reaches 20% by 2021. At the same time, a 50% derivation can be applied to ROY in 2006 and be increased gradually by 3.33% by annum until it reaches 100% by 2021. Table 2 shows the application of this differential/incremental derivation to the 2003 oil revenue figures.

 

 

 

Table 2: Differential Derivation

 

2003

2006

2011

2021

                                               

 

%DR

Amt

%DR

Amt

%DR

Amt

1. Gross Oil Revenue (GOR)

2074.3

 

2074.3

 

2074.3

 

2074.3

2. Deductions

563.5

 

563.5

 

563.5

 

563.5

3. Net Oil Revenue (NOL)

1510.8

 

1510.8

 

1510.8

 

1510.8

4. Crude Oil & Gas Exports (COGX)

998.4

5

49.9

10

99.8

20

199.7

5. Domestic Crude Oil Sales (DCOS)

432.6

5

21.6

10

43.3

20

86.5

6. Petroleum Profit Tax (PPT)

386.4

5

19.3

10

38.6

20

77.3

7. Royalties (ROY)

250.9

50

125.5

66.6

167.1

100

250.9

8. Other Oil Revenue (OOR)

6.0

5

0.3

10

0.6

20

1.2

9. Min. Oil Derivation (MOD2)

137.19

14.3

216.6

24.5

349.4

40.7

615.6

10. Amount Distributed (AD)

1373.6

85.7

1294.2

75.5

1161.4

49.3

895.2

 

Table 2 shows that the bulk of oil revenue comes from crude oil/gas exports (export of FG equity oil/gas), followed by domestic crude oil sales (sale to local refineries to produce petroleum products for the local market), then the PPT, royalties and “others”. Based on the assumptions above, the oil derivation revenue (MOD2) in 2006, 2011 and 2021 will amount to N216.6b, N349.4b and N615.6b, respectively compared to N302.2b, N453.2b and N755.4b, respectively, under the incremental derivation approach (model 1). In other words, the incremental derivation approach yields more derivation revenue for the oil-producing state governments than the differential/incremental derivation approach (model 2) under the sets of assumptions used. Of course, the results will change once the sets of assumptions are changed.

 

For ease of analysis and to enable us generate different scenarios based on changing assumptions and parameters, it is possible to represent both the incremental and differential derivation models described above in the following sets of equations:

 

  1. GOR = COGX + DCOS + PPT + ROY + OOR  = f(COGP, AP)

  2. D      = JVCC + EDS

  3. NOR = GOR - D

  4. MOD = {a  + b (t -2006)} NOR

  5. AD    =  NOR –MOD  (or NOR –MOD2 in case of model 2)

  6. FG    =  cAD

  7. SG   =   e AD

  8. LG   =   f AD

  9. MOD2 ={ g  + h (t – 2006) }(COGX + DCOS + PPT + OOR)  +

                     + {k + m (t-2006)}ROY

 

Where a, b, c, e, f, g, h, k, and m are the parameters that can be varied for the purpose of simulating the model, with a = the initial derivation percentage in 2006; b = the annual percentage point increase in derivation; c = the percentage share of FG in oil revenue; e = the percentage share of SG in oil revenue; f = percentage share of LG in oil revenue; g = the initial differential derivation percentage of the “non-royalty” sources of oil revenue (i.e. COGX + DCOS, PPT + OOR), h = percentage point increase of the differential derivation associated with g; k =  initial differential derivation percentage of royalty and m = percentage point increase in the differential derivation associated with k. The values of these parameters in the examples given above are: a = 0.2 (i.e. 20%), b = 0.02 (i.e. 2% points p.a.);  c = 0.56 (56%); e = 0.24 (24%), f = 0.20 (20%); g = 0.05 (5%); h = 0.01 (1%); k = 0.5 (50%) and m = 0.033 (3.3%).

 

The parameter t (year) can assume values from 2006 to 2021, and even beyond if necessary. The notation f  (function) simply means that GOR is a function of crude oil and gas production (COGP) and the average price (AP). This revenue function can easily be estimated using appropriate econometric methods. Alternatively, the components of the GOR can be estimated independently using more deterministic methods.

 

Thus both sides of the resource control debate can hire econometricians or mathematical economists to assist them in generating various scenarios that will help them in their “negotiations”. This will make the debate more analytical and enlightening than the current “motor park” or (at best) rule-of-the thumb approach. I think modern science has developed enough tools to assist the NPRC in this all important debate.

 

Some Concluding Remarks

 

I have tried in this paper to develop an analytical tool to assist in the ongoing resource control debate that has stalemated the NPRC. I believe it is possible to resolve the impasse if all parties adopt the spirit of give-and-take and are willing to be more analytical and creative in their thinking. It is foolhardy for the rest of Nigeria to think that they can use force the delegates from the South-South to “take or leave” the once-for-all 17% derivation. An important outcome of the NPRC is that it has galvanized the South-South more than before. It appears that some sections of the South-South are prepared to take up the gauntlet if it becomes necessary. But an armed struggle is an ill-wind that will not do any good to anyone. We will all be losers in the long run.  The cost of  such a struggle to the “rest of Nigeria” will far exceed whatever revenue they will give up as a result of the concession they are being called upon to make. This cost will include the direct cost of long-term pacification as well as the associated indirect cost of national insecurity, loss of foreign investment and capital flight. It is even doubtful if pacification is sustainable. The current situation in Iraq must be a lesson to those dreaming of a military solution to the resource control issue. What if the South-South militants decide to imitate the “terrorists” in the Middle East by imbibing the strategy of suicide bombing including the bombing of oil installations?  Those who have dealt with some of the militants will testify that death does not mean much to them just like the “terrorists”. A friend working for an NGO in the Niger Delta narrated to me how a youth dared a mobile policeman to shot him saying “I am not afraid to die because I am dead already – I have no reason for living”. This statement automatically disarmed the mobile policeman. What if there are thousands of such youths along the creeks of the Niger Delta – the nerve center of the Nigerian economy?  I do not think there is an alternative right now to reconvening the NPRC and I hope all delegates and the Federal Government will work toward reconvening the conference ASAP. I also hope common sense and justice will prevail as the delegates resume the debate. Above all, we should follow the golden rule of all religions – Do not do to others what you will not want them to do to you. May God Guide and Bless Nigeria

.

 

Dr. Emmanuel  Ojameruaye

Phoenix, Arizona, USA

July 28, 2005.