Some Challenges of Allocating 10% of Federal Government Equity Stakeholding in Oil Companies to Oil Producing Communities

By

Dr. Emmanuel Ojameruaye

emmaojameruaye@yahoo.com

Background

One of the most significant dividends of the Amnesty Deal is the reported plan by the Federal Government of Nigeria (FG) to allocate 10 per cent of its equity stakeholding in the oil joint venture (JV) companies to the oil-producing communities in the Niger Delta region.  This is a commendable initiative to bring about sustainable peace and development in the region that has been marked by the struggle for “resource control” and the attendant violence, especially over that past two decades. It must be pointed out however that this is not a “new initiative” in the political economy of Nigeria.  The concept of allocating equity (shares) in mining companies to “host” states, local governments and communities has been in practice since the days of the old Western Region of Nigeria under name “Igbeti Marble formula”.  According to A. Ikein (2004):

“As a catalyst to development process in community habitats we remember the Igbeti Marble formula in old western region which stipulated that the proceeds of all resources in a location should be shared to recognize the right of indigenous communities, the local government, the operating firms, the state government and the federal government. This formula enables the local community to go into partnership with the technological firms producing wealth in the environment and by participatory decision making in the process entails those concerned share the pride of progress together. This should be the mood of all good Nigerians today. We also remember the Oyo State benefit plan in 1990 which stated that to ensure the people of the state derive maximum benefit from the exploitation of natural resource the state adopted guidelines in which an allocation of 10% equity participation to the state government on mineral resource development ventures. The state stipulation required an undertaking by the mining companies to provide social and economic benefits for the areas to be affected by their operations. This should be made a national policy for sustainable development in all our resource producing areas.”[1]

Also, in a position paper title “The Niger Delta Region Youth Restiveness by the Rivers State Eminent Peoples Forum (RIVEREF) posted on the website of HRM King Dr. Frank Adele Eke Gbakagbaka Eze Oha Evo II in Rivers State (www.gbakagbaka.com), the forum recommended the Igbeti Formula as follows:

"There is need to harmonize mineral laws in the country. This is because solid minerals are treated differently from oil and gas minerals. In the Igbeti marble formula the community was allocated 15 percent, local government 15 percent, state government 35 percent, the prospecting company 25 percent and the federal government 10 percent. The skewness of the law is because the solid minerals are mainly found in the majority tribes of Nigeria whereas oil and gas minerals are from minorities in the south with little of no political voice and will in the governance of the country."

Furthermore, in an interview granted in 2008,  the former governor of Akwa Ibom State, Obong Victor Attah, stated that:

 "It is improper for the FG to retain 60% equity in every major oil company. By reducing its holding to 30% and redistributing the remainder to a resource bearing state (20%) and the immediate community (10%), the development of a new town can easily be funded through equitable contributions by the three tiers. In fact, when the state takes 20% revenue and the community takes 10%, it can be rightly argued that a derivation principle of 30% as opposed to the existing 13% is in effect ...For the right fiscal federalism, we may yet revisit the Igbeti marble formula".

The United Nations Development Programme (UNDP) also made similar recommendations in its 2006 Niger Delta Human Development Report. According to the report:

“Giving people equity in oil and gas production would reduce the feeling of alienation. Since they will share in the economic loss arising from the disruption of operations, communities will not likely engage in sabotage…A decentralized derivation principle and inclusive equity stake-holding are vital for equitable distribution on benefits….Therefore each state and local government and community should share in the wealth of the region through equity stake-holding…The FG should facilitate this by changing the rules of participation in oil and gas exploitation so that companies must assign a proportion of equity directly to states and communities. Benefits would no longer come indirectly through federal taxation and royalties…Accruals to state and local governments from this share of production should go into an oil and gas trust fund, 50% of which should be available for current infrastructure and other development. The rest should be capitalized for future use….Whatever proportion is paid to the state government under the derivation should equally be paid to the local governments where oil resources are being extracted, based on contributions. A similar principle should also apply to the communities from the respective LGAs”

I also made similar recommendations in papers I presented at both the 2008 Annual Boro Day in New Jersey and the Inauguration of the Niger Delta Congress in New York in July 2009 as well as in the position paper I submitted to the Niger Delta Technical Committee (NDTC) in September 2008. In my position paper to the NDTC, I proffered three options to the Federal Government as a way of addressing the resource control issue and agitation in the Niger Delta region. These options are:

1.  Replacement of derivation with equity holding – i.e. allocation of equity to oil-producing state and local governments.  Review the Joint Operating Agreements (JOA) arrangements and allocate “equity” in the oil joint venture companies to oil producing state and local governments as follows:

·        30% to the FG (or begin from 50% declining gradually to 30% over a period of say 10 years)

·         30% to oil companies (declining gradually from the current 43% to 30% over a 5 years)

·         20% to oil producing State Governments allocated by a weighted average of current and past hydrocarbon production, current reserves and value of oil producing assets (or begin from 5% increasing gradually to 20% over a period of a period of say 10 years)

·         20% to oil producing Local Governments allocated by a weighted average of current and past hydrocarbon production, current reserves and value of oil producing assets (or begin from 2% increasing gradually to 20% over a period of a period of say 10 years)

2.  Combination of Derivation and Equity Participation

·        Allocate equity to SGs and LGs as follows: FG: 40%; Oil Companies, 30%; SGs, 15%, LGs 10%

·         Apply 25% Derivation to Oil Revenue, i.e. allocate 25% of oil revenue to oil producing states and local governments

3. Increase percentage derivation progressively to 50% through either through: a) Incremental derivation; or b) Differential-incremental derivation. Under incremental derivation, oil derivation percentage should be increased from 13% to 20% in 2009, and subsequently on an incremental basis (5% point p.a.) to 50% by 2015.  On the other hand, under differential-incremental derivation, different derivation percentages will be applied to the various components of oil revenue - crude oil/gas exports (COGX), domestic crude oil sales (DCOS), petroleum profits tax (PPT), royalties (ROY) and “other” oil revenue (OOR). The FG should get the bulk of PPT, COGX, DCOS and OOR. On the other hand, the oil-producing state and local governments should get that the bulk of royalties (ROY). To ensure gradual adjustment, the percentages should be increased incrementally.

 I also advocated that if the FG decides to adopt the incremental derivation approach, for instance, it should:

1. Establish a Petroleum Heritage Trust Fund (PHTF) for Oil Producing Areas to which part of the derivation fund (2% increasing incrementally to 8%) should be paid. Fifty percent (50%) of the allocation to PHTF should be prudently invested in the stocks, bonds, other financial assets and real estate to yield income, while the other 50% (plus 50% of income from investment) should accrue to a Petroleum Dividend Fund which should be distributed (as direct cash payment) to all eligible resident (and registered) indigenes of oil-producing LGAs on an annual basis (similar Alaska Petroleum Dividend Fund).

2.      Establish Agency for Development of the Oil-Producing Area (ADOPA) to replace NDDC. Part of the derivation fund (starting at 3% increasing incrementally to 15%) should accrue to the ADOPA. The ADOPA should focus on job creation, sustainable livelihoods and limited physical development programs.

3.      Allocate the incremental oil derivation fund among the oil producing states and local governments as well as the PHTF and ADOPA as follows:

Now that it appears the FG has finally bought the idea of allocating equity (stakeholding) to oil producing communities, the next challenge is to work out the implementation modalities. Clearly, this will not be an easy task and it may result in initial tension and hiccups as the FG tries to define what constitutes an “oil community” and the parameters for the allocation of the 10% equity. Furthermore, while the 10% appears small, it is good beginning. Let us hope that it will be increased incrementally in the years ahead.

Challenges

What then are some of the likely challenges in implementing the allocation of the 10% equity stakeholding to oil producing communities and how can these challenges be addressed?

1.      Benefiting Entities

The first challenge is the definition of the entity or entities that will receive the 10% equity. In other words, who is the “community” to whom the 10% will be assigned? Is it the state governments, local governments, or oil producing communities or settlements? Those who have worked in the region know how difficult it is to define an “oil producing community”. Will the 10% equity be allocated to oil producing state governments in addition to the current 13% oil derivation? If this is the case, then it may not pose a major problem because it would simply be a matter of dividing the 10% equity in proportion to the oil production ratio and other parameters such as oil reserve and assets in the oil producing states.  However, given the high degree of misappropriation of funds that has characterized the spending of the 13% derivation, critics doubt if the poor people in oil producing communities will benefit much from the 10% equity if it is allocated to the state governments. It is an open secret that in spite of the creation of state “OMPADECs”, many oil producing communities are yet to receive any significant benefit from the 13% derivation. Should the 10% equity then be allocated to the local governments? There are currently 185 LGAs in the Niger Delta region. However, not all LGAs are oil producing. Let us assume that only 100 are oil producing. If the 10% equity is allocated among the 100 LGs, most will end up having less than 0.1% equity! Of what use is 0.1% equity? If you have 0.1% equity in a business, what level of “control” do you have in that business? Beside, it is common knowledge that the degree of corruption and lack of accountability is even worse at the LG level. There is therefore no guarantee that the LGs will use the benefits of their equity holding for the people of the LGAs. Unless there is a good system of accountability and transparency, the money will disappear into the private accounts of the LG chairmen and their councilors.

What about allocating the 10% to oil producing communities directly? According to the 2006 UNDP Human Development Report, there are 13,329 “settlements” or communities in the region. Of this number, 7,686 (or 58%) have populations of less than 1,000 people, while 4,781 (or 36%) have populations between 1,000 and 5,000 people. Only 98 settlements (0.7%) have populations of 20,000 people and above. In other words, very small settlements dominate the region, due largely to limited space, topography and drainage of the region. To be sure, not all these settlements qualify as “oil producing”. Assuming that only about 3,000 (about 22.5%) of these communities/settlement qualify as oil producing, how will the FG allocate the 10% equity among 3,000 communities? It means that on average, a community or settlement will have about 0.003% equity. Such a “parceling” or “dilution” of equities will create difficulties, especially in the allocation of the benefits or dividends among the communities.  One possible solution to the problem is to use social mapping to cluster the communities into groups of communities with close affinity that can work together. Some oil companies have adopted this approach in implementing their Global Memorandum of Understanding (GMOU) with oil producing communities in the region. Under this approach, it may be possible to cluster the communities into a manageable number of say 200 community clusters or groups. Each cluster can be incorporated as a “community development corporation” (CDC) or a “community development area or association” (CDA). The 10% equity can then be allocated among the 200 CDCs (or CDAs) in accordance with agreed parameters such as the ratio or share in current oil and gas production, reserves, past production, value of oil assets in the area, etc.

Whichever entity (entities) the FG decides to allocate the 10% to (SGs, LGs, Communities or CDA), a system of transparency and accountability must be put in place to insure that the benefits or dividends arising from the equity are shared equitably and are not captured by a few. According to the 2006 UNDP Report,

“there is a very strong belief that in the Niger Delta that state governors divert most of their fiscal allocations from the Federation Account and Derivation Fund for their own private use. The mismatch between allocations and the low level of infrastructural development and service delivery seems to lend credence to such a claim…Local governments are even more problematic…non-performance is even worse than at the state level…Local government chairpersons see themselves as executive overlords. They are not responsible to the local council or to the people because their revenues come directly from the Federal Government and not from the locality….No poverty alleviation programme can be implemented in an atmosphere of such gross and barefaced corruption”.

2.      The Price of the Equity

The second challenge is determining the price the receiving entities must pay for the allocated equity (shares). Company share are usually not free. Will the equities be allocated free or will the receiving entities be required to pay some money (make some investment), no matter how small, to acquire the shares or equities just as individual investors pay to own/buy shares in companies? In order to avoid the problem of pricing the equity, the FG may decide to allocate it free to the receiving entities. Alternatively, the FG may assign a nominal (“token”) price for the equity to place it on record that the entities paid something.

3.      Allocating Parameters

The third challenge is how to allocate the 10% equity among the receiving entities. In other words, what will be the parameters for allocating the 10% equity among the recipients? The standard allocation parameter has been the share of the recipient in total current oil production. However, it can be argued that using this parameter alone is not equitable. There is need to adopt a more robust weighted average of several parameters such current oil production, current gas production, past or cumulative oil and gas production (to compensate for past neglect), value of oil production assets (e.g. oil refineries, pipelines, flowstations, etc) in the area of the receiving entities. The weight that will be assigned to each of these parameters can be worked out. The FG will also have to contend with the issue of offshore oil and gas production. Which entity will receive the 10% state in offshore oil production and what parameters will be used?    

4.      Sense of Ownership and Control

The fourth challenge is how to translate the 10% equity stakeholding to a sense of some degree of ownership and control by the receiving entities? Will the entities and people of the region feel empowered and behave as “shareholders”? Will they have (or appoint) their representatives into the Boards of Directors of the JV companies, and participate in major decisions affecting the oil industry? Or will they remain passive shareholders who can only participate in the limited benefits that the 10% equity will provide?

5.      Production Sharing Contracts and other Contractual Arrangements

The fifth challenge is if and how to apply this concept of equity to production sharing contract and other contractual (non-JV) arrangements in the oil industry in Nigeria. Luckily, the JV companies[2] produce between 60% to 80% of total oil and gas production in the country. The FG owns an average of about 57% of the equity of the JV companies. However, there are other companies operating under a “production sharing contract” (PSC) arrangement, especially in the shallow and deep offshore and onshore marginal field concessions. Under the PSC agreement, FG does not have “equity” in the operating oil company. It is an agreement between an oil company and the FG regarding the percentage each party will receive after the company has recovered a specified amount of costs and expenses. The total oil produced by a PSC company is divided into “cost oil”, “equity oil”, “tax oil” and “profit oil”. The operating company makes all the investments (takes 100% risk) and after it starts producing oil/gas, it is allowed to recover its cost (through “cost oil”), after which the FG can start taking its “tax oil” and “profit oil”. If the FG does not have “equity” in the PSC companies, does it mean that the oil producing communities will also not have equity in them? Will the FG agree to allocate 10% of 57% (i.e. 17%) of its “tax oil” and “profit oil” of the PSC companies to the oil producing communities? Furthermore, what will happen to the 10% equity of oil producing communities if the current JV companies are transformed to “public companies” (as currently speculated) to enable them participate in the Nigerian capital market?  If the 10% equity allocation is not applied to all contractual arrangements or all oil companies, the “effective” degree of ownership and control of oil business activities by oil producing communities will be far less than 10% and will decline over time as JOAs are replaced by other contractual arrangements.            

6.      Carrying the Benefits to the People

Finally, there is the challenge of ensuring that the benefits of allocating the 10% equity to oil producing communities get to the “people”. It will make no sense if the bulk of dividends of the 10% are stolen by politicians and community leaders as in the case of the current 13% derivation. If the money and benefits do not get to the common people in the oil producing communities, they will continue to live in abject poverty in the midst of plenty and the ghost of restiveness and militancy will continue to haunt the region. There are various ways of “carrying” or “spreading” the benefits of the 10% equity stakeholding to the common people. These include the following

·        Rather than allocating the 10% equity stakeholding to one of the entities identified earlier (SGs, LGs, Communities or CDAs), a Niger Delta Petroleum Heritage Trust Fund (PHTF) should be created to hold the 10% equity on behalf of all the oil producing states, as I suggested in my submission to the NDTC. The dividends from the 10% equity will then be paid to PHTF. The fund will be well managed by a professional group of investors. 50% of dividends will be prudently invested in the stocks, bonds, other financial assets and real estate to yield income, while the other 50% (plus 50% of income from investment) will accrue to a Petroleum Dividend Fund which will be distributed (as direct cash payment) to all eligible resident (and registered) indigenes of oil-producing communities an annual basis (similar Alaska Petroleum Dividend Fund). To illustrate how this will work, let us assume that the average price of crude oil in a year is $50 per barrel (pb) and Nigeria produces 2 mbpd and the average exchange rate is N150 = $1. Going the current fiscal regime in the oil industry, the FG “take” will be about $44pb, JV partners take will be about $2pb while cost/invest will be about $4pb. Thus total FG revenue from oil in the year will be about $44 x 2m x 365 = $32.12billion = N4,818 billion = N4.818 trillion. This is the “dividend” accruing to the FG on account of its 57% shareholding. Thus if the FG decides to allocate 10% of the 57% (= 17.54%) to oil producing communities, the “dividend” that will accrue to the PHTF will be 17.54% of N4,818 billion = N845billion. Fifty percent (50%) of this amount (i.e.N423 billion) can then be invested to yield income, while the other 50% can be distributed as cash payment among eligible indigenes of oil producing communities. Assuming there are such 10million indigenes, it means that each indigenes will receive a cash payment of N42,300 and a family of 5 persons will receive N211,500 a year. At a conservative 5% rate of return, the N423 billion invested will yield additional N21 billion, part of which can be re-invested and part redistributed as cash payments.

• Rather than establish a pan-Niger Delta PHTF, the FG can work with each of the oil producing states to State Petroleum Heritage Trust Funds which will be managed in a similar manner like the Niger PHTF.

• Alternatively, Community Trust Funds (CTF) should be established for community clusters (i.e. Community Development Areas) and the 10% should be paid to the CTF of the CDAs to be managed by each CDA. Both 2006 UNDP Report and NDTC Report recommended the establishment of CTFs. According to 2006 UNDP Report “Transparent and accountable community development funds should be institutionalized…All affected communities should be encouraged to institutionalize a community development fund for priority projects. Fund management should be characterized by transparency and accountability. Establishing trust funds at the local government and community levels will signal to the youths of the region that their future is not being mortgaged by current exploitation of exhaustible resources. …The misuse of trust funds is a potential problem that must be dealt with if such a fund is set up in the Niger Delta”. On the other hand, the NDTC recommends that “In order to facilitate a situation in which communities willingly and voluntarily protect the assets of oil operators in their areas of influence, a framework that allows them to share in the wealth available to each community has to be established. The establishment of Community Trist Funds will pull together resources...Institutionalize by law, a Community Trust Fund scheme for oil bearing communities which will allow registered community associations and local groups the opportunity to participate in deciding how funds are established and be administered”

In conclusion, the plan by the FG to allocate 10% equity stakeholding to “oil producing communities” is a bold step towards resolving the lingering Niger Delta crisis caused largely by the struggle for “resource control”. However, there is need to carefully work out the implementation modalities to ensure that the benefits of the initiative reach the “common people” in the oil producing areas and help to alleviate the grinding poverty in the midst of plenty. The FG must move fast to implement this initiative. By delaying, it would appear that this is yet another ruse or, to use a Nigerian terminology, another “419”. Experience in the Niger Delta has shown that the FG promises most of the time but fails to deliver most of the time. Let this not be the case this time around.

Postscript:

As I was about to submit this article for publication on November 6, 2009, major newspapers in Nigeria) reported that the proposed 10% equity for oil producing communities will be implemented in 2010. According to Thisday of November 6, 2009 “the 10 per cent equity from oil interest proposed by the Federal Government for oil producing communities will be incorporated into the Petroleum Industry Bill (PIB) and passed into law by the National Assembly before its implementation”.  The paper stated that the Special Adviser to the President on Petroleum, Emmanuel Egbogha, “revealed this yesterday while fielding questions from State House Correspondents, expressed optimism that the National Assembly would pass the bill before the middle of next year, to give way for its smooth implementation …Egbogha, who said the 10 per cent oil equity will apply to all the oil assets and businesses in the country, added that  it was part of government's programmes to ensure the success of the amnesty programme… Egbogha said details of the equity participation is currently being worked out, including communities that will benefit from it, for onward passage to the National Assembly to ensure its quick passage into law “We are now working on the details to send to the National Assembly for approval, so that it will be duly incorporated into the Petroleum Industry Bill, which is still pending at the National Assembly” Let us hope and pray that this initiative will not be bogged down or thwarted by the legislative like the Freedom of Information (FOI) bill.