A Rebuttal of the Call for a Downward Review of the 13% Oil Revenue Derivation

By

Dr. Emmanuel Ojameruaye

emmaojameruaye@yahoo.com

 

In my previous article, I discussed the purported approval of the payment of 13% revenue derivation from solid minerals to the Northern states. The approval appears to be President Jonathan’s response to the call by the Northern Governors Forum (NGF) for a downward revision of the 13% oil revenue derivation paid to the nine oil producing Southern states. The call by NGF was made on their behalf by Dr. Babaginda Aliyu, the Governor of Niger State and Chairman of the NGF, at the inauguration of the Advisory Council of the Sir Ahmadu Bello Memorial Foundation in Abuja in February 2012.  According to the governor, “ some states are not doing well while others are doing extremely well…In Niger State, for instance, we receive N4.2 to N4.5 billion annually…This is unlike the situation where some states collect 20 times more than we collect with a small population. We are expecting that there would be a review of the federation allocation formula within this year, 2012”.  He went further to state that “Revenue from oil wells within 200 kilometres of the continental shelf ought to be for the whole country, but the revenue goes to some states. What is happening will not serve equity and therefore we will continue to discuss until there is equilibrium”.  The Governor’s call came in the wake of an interview by Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria, with the Financial Times of London in January 2012 in which he linked the Boko Haram insurgency with the revenue derivation formula. However, in the face of criticism from leaders of the Niger Delta states, Governor Aliyu has soft-pedaled by stating that he is not opposed to oil revenue derivation per se but to the application of the 13% derivation to offshore oil. According to Governor, “I am not fighting derivation. It has been there since independence. All we are calling for is a national plan to fight poverty in the north…We cannot have one part of the country rich and the other part poor”. Of course, this is another way of saying that derivation principle should be abolished. In essence, he and the Northern Governors Forum have not changed their position.

 

In this article, I will explain why the position of the NGF is untenable. My rebuttal will focus on both their call for a downward review of the 13% oil derivation and the abolition of the 13% derivation paid on offshore oil which amounts to a re-introduction of the onshore/offshore oil dichotomy.

 

The NGF attempt to blame the pervasive poverty and the growing insecurity in the North on the 13% oil derivation is disingenuous. Firstly, Governor Aliyu’s claim that his state received between N4.2 billion and N4.5 billion annually is incorrect. This is the amount the Niger State government alone receives monthly (not annually) from the federation account. For instance, data published by the FAAC at the Federal Ministry of Finance website show that the Niger State government received N4.26 billion for the month of January, 2012 while all the 25 Local Governments in the state received a total of N3.976 billion for the same month, making a total of N8.236 billion for January alone! Secondly, the claim that some oil producing states receive 20 times more revenue than Niger State or any other state is flat wrong. The FAAC data for January 2012 also show that Rivers State government received the highest allocation of N20.85 billion followed by Akwa Ibom (N19.06 billion), then Delta (N17.23 billion) and Bayelsa (N13.79 billion). Clearly, N20.85 billion is not 20 times N4.26 billion! Thirdly, what the Governor fails to recognize or admit is that the major reason why the allocation to state and local governments is “small” is the large amount funds withdrawn into the Excess Crude Account and the Fuel Subsidy Account (FSA) from the federation account before sharing among the three tiers. For instance, the FAAC data shows that the gross revenue paid into the federation account in the January 2012 was N673.9 million. Of this amount, a whooping N224.3 billion was paid into the ECA, N77.6 billion into the FSA and only N38.9 billion into the 13% Derivation Account. Thus only N333.1 billion was available for sharing amount the three tiers of government, with the Federal Government receiving N173.4 billion, the States Governments receiving N87.94 billion and the Local Governments receiving N67.83 billion. If there were no transfers to the ECA and FSA, each tier of government would have received almost double the amount it received for month!   Of course, I recognize the need to set aside some funds in the ECA for the “rainy” months and the fact the funds in the ECA are shared in some months. However, the constitutionality of the ECA has been challenged and there are concerns that the ECA is managed efficiently and transparently. Perhaps, the fund should be abolished and each tier of government should be made to take care of its “rainy months” requirements. I am also mindful of the need for the FSA, but again we are all aware of the massive corruption associated with the oil subsidy. It has been reported that of the N2,600 billion paid out as oil subsidy to importers in 2011, as much as N1,700 billion was “corruption” money for which no oil was imported. In other all the tiers of government lost as much as N1,700 billion to fraudulent importers! We must either clean up the management oil subsidy account or the federal government should pay for the oil subsidy from its share of the federation account. There are also equity and constitutional issues when funds are transferred from the federation account to the FSA before the application of the derivation and revenue (vertical) formulas. In the long-run, we have to eliminate oil subsidy in the country.  

 

Furthermore, if we assume that the estimated total net annual oil revenue is N5,600 billion  (for 2011) and if the 13% oil derivation is abolished, the Federal Government (FG) will get N2,950 billion (based on its statutory 52.68%) instead of N2,567 billion. All the 36 State Governments (SG) will get N1,496 billion (based on the statutory 26.72%) instead of N1,302 billion and the 774 Local Governments (LG) will get N1,154 billion (20.6%) instead of N1,004 billion. Thus, the increase in revenue for all 36 SG will be N194 billion or an average of N5.4 billion a year, which represents an increase of only 15% or about an additional month allocation. This increase will in no way solve the poverty problem and stem the growing security in the non-oil producing states. On the other hand, the abolition of the 13% oil derivation can lead to an unimaginable conflict in the oil- producing areas which can lead to an evaporation of at least 60% of total oil revenue and/or a civil war or secession of the Niger Delta region. Nigeria can simply not afford another escalation of conflicts in Niger Delta region or a civil war!  

 

The road to the 13% oil derivation has been long and tortuous, and has been paved with sweat and blood of many Niger Delta patriots including Isaac Boro and Saro Wiwa. In fact, to most Niger Deltans, the 13% derivation is the first quartile of the journey to social-economic and environmental equity and justice. The end of the road is either 50% derivation or “total resource” control! It should be noted that the Nigerian Independence (1960) and Republican (1963) constitutions provided for 50% derivation on mineral resources. It was reduced gradually by successive military regimes until it reached 0% in 1979. Then it was increased to 1.5% in 1982, 3% in 1992 and 13% in 1999 based on the recommendations of the 1994/5 National Constitutional Conference set up by Gen.  Abacha. At the National Political Reform Conference (NPRC) convened by President Obasanjo in early 2005, the Niger Delta delegates demanded for 60% derivation but they eventually settled for “25% now and 50% within 5 years”. However, the majority delegates from other part of the country, particularly from the North, insisted on 17% derivation which was eventually adopted by the NPRC. At the end of its deliberations in July 2005, the NPRC recommended that “ an expert commission should be appointed by the Federal Government to study … how the mineral resources concerned can best be controlled and managed to the benefit of the people of both the states where the resources are located and of the country as a whole”. It also affirmed “the inherent right of the people of the oil producing areas of the country not to remain mere spectators but to be actively involved in the management and control of the resources in their place” and recommended an “increase in the level of derivation from the present 13% to 17%, in the interim pending the report of the expert commission”. The reported also noted that “Delegates from the South-South and other oil producing states insisted on 50% as the irreducible minimum. Having regard to national unity, peace and stability, they agreed to accept, in the interim, 25% derivation with a gradual increase to attain the 50% over a period of five years”. Unfortunately, President Obasanjo refused to implement the recommendation of the NPRC, and so has his two successors, but Niger Deltans have not forgotten!

 

The causes of generalized poverty include extreme income inequality, grand corruption, poor governance, and the Dutch disease syndrome. The latter has made the North to abandon the production of groundnuts and hides and skin, the West to abandon cocoa production, and the East to abandon palm oil production, all because of the lure from oil revenue. Thus linking poverty in the North to the 13% oil derivation is also disingenuous. Furthermore, linking growing insecurity in the North to poverty (and to the 13% oil revenue derivation) is a subterfuge and amounts to “calling a dog a bad name in order to kill it”. As I indicated in my previous article, “whilst poverty could be an explanatory variable for conflict and insecurity, it is usually a weak explanatory variable in cross-country, cross-state and intra-state studies. There are other stronger explanatory variables such as religion, ethnicity, corruption, small arms proliferation, heavy-handed military response, emergence of vigilante groups, elections, high youth unemployment, boundaries, growing income inequality, impunity by leaders, human rights violations, and struggle over scarce resources such as land[i]. The above factors are present in virtually all the states in Nigeria. In fact, poverty is common to all the states, including the oil producing states. Clearly, the rising insecurity in the northern part of the country caused by the Boko Haram insurgency has more to do with religious extremism and intolerance than poverty.

 

Let us now consider offshore/onshore oil dichotomy issue.  The claim by Gov. Aliyu that “revenue from oil wells within 200 kilometres of the continental shelf ought to be for the whole country, but the revenue goes to some states” is also incorrect. What is correct is that 13% of the revenue from offshore oil wells goes to the littoral (coastal) states in accordance with the Offshore/Onshore Abolition Act of 2004 while the remaining 87% goes to the distributable revenue pool for sharing by the whole country in accordance with the existing vertical and horizontal allocation formulas. This means that the FG gets 52.68% of the amount while all the 36 SG share 26.72% of the amount in accordance with horizontal formula (based on equality, population, land mass, terrain, population density, and internal revenue generation effort). All the 774 LGs share 20.6% of the amount in accordance with the horizontal formula. It is clear that the Governor is calling for the abolition of the 13% derivation on offshore oil, because, in his imagination, the offshore belongs to the whole country equally. In order words, he is calling for a repeal of the 2004 Offshore/Onshore Abolition Act that was passed by the National Assembly and signed into law by President Obasanjo.

 

The Act was meant to correct the Supreme Court judgment of April 5, 2002 which re-established the Offshore/Onshore dichotomy.  It is important to stress that there was no such dichotomy under the 1960 and 1963 constitutions. In fact, section 146 (6) of 1963 constitution stated that “for the purposes of exploitation of minerals, including mineral oil, the continental shelf of a region was deemed to be a part of that region” This  meant that the 50% derivation on natural resources under both constitutions also applied to offshore natural resources. In other words, the 1960 and 1963 constitutions recognized the right of littoral regions/states to have a greater share of the revenue from offshore resources. This is because Nigeria is a federation of region/states and if a littoral region/state decides not to belong to the federation, the abutting offshore will be part of that region/state and can no longer be part of Nigeria. 

 

Unfortunately, the take-over of government by the military in 1966 led to the centralization of fiscal power and the erosion of the “federal nature” of governance in the country. The military replaced the four regions with 12 “vassal” states in 1967. The number of states has since grown to 36. The demolition of “federalism” by the military reached its climax when it promulgated the Petroleum Decree (No. 51) in 1969 which vested ownership and control of all petroleum resources in, under or upon any lands in the Federal Military Government. This was followed by the Offshore Oil Revenue Decree No. 9 of 1971 which abrogated the rights and entitlements of the littoral regions/states in the minerals (and revenue thereof) found offshore. The latter decree vested the territorial waters, continental shelf as well as royalties, rents and other revenues derived from or relating to the exploration, prospecting, or searching for, winning or working of petroleum from seaward appurtenances (offshore) in the Federal Government only. This decree found its way into the 1979 and 1999 constitutions promulgated by the military for in-coming civilian governments. Section 40(3) of the 1979 constitution (repeated as section 44(3) of the 1999 Constitution) stated that "Notwithstanding the foregoing provisions of this Section, the entire property in and control of all minerals, mineral oils and natural gas, under or upon the territorial waters and the exclusive economic zone of Nigeria shall vest in the Government of the Federation and shall be managed in such manner as may be prescribed by the National Assembly". However, given both the fact that section 2(2) of both constitutions stipulates that “Nigeria shall be a Federation consisting of States and a Federal Capital Territory” and the powers granted the National Assembly to prescribe how offshore resources (and revenue thereof) should be managed, an Act or a policy that allows for the application of the derivation principle to offshore resources is not inconsistent with section 44(3) of the constitution because the derivation principle does not impinge on the power or control vested in the Federal Government over offshore (and indeed onshore) resources. The application of the derivation principle to offshore resources only ensures that the littoral states that will be impacted negatively by offshore activities (e.g. oil spills, ocean surges, floods, quakes, etc) get more revenue from the offshore natural resources than non-littoral states. This is common sense and basic equity.

 

In fact, the under the 1992 Decree that established OMPADEC, 3% of all oil revenue (offshore and onshore) was payable to the Commission. In other words, the OMPADEC decree did not distinguish between offshore and onshore oil revenue. The same is true of the 2002 NDDC Act. The coastal regions/states in other countries such as the United States Indonesia, Brazil and Mexico enjoy more benefits from offshore oil revenue than non-littoral regions/states. If oil is found and produced in Lake Chad, will Niger state or Oyo state or any group of states kick against the allocation of 13% of revenue from the oil to Borno state? Simple as this logic is, when President Obasanjo came to power in 1999, he refused to apply the derivation principle to offshore oil revenue. Rather he went to the Supreme Court to decide whether the derivation principle is applicable to offshore oil revenue in accordance with the 1999 Constitution. In a debatable judgment delivered on April 5, 2002, the Court decided that the derivation principle should not be applied to offshore oil revenue. At the same time, the Court ruled that the deduction of some “first line items” (funding of judiciary, funding of oil joint venture operations and NNPC priority projects, servicing of external debt and allocation to the federal capital territory) from onshore oil revenue before the application of the derivation principle was illegal. In addition, the Court ordered that the 13% derivation should be applied to onshore gas production which had hitherto been excluded from derivation. Thus while the littoral states lost some revenue due to re-introduction of the offshore-onshore by the Court, they nonetheless gained some revenue due to the application of 13% derivation to onshore gas production and the exclusion of some “first line item” from the net onshore revenue before the application of the 13% derivation.

 

Some constitutional lawyers faulted the Supreme Court judgment. According to Prof. Itse Sagay, a leading expert on Nigeria’s constitutional law and resource control, “This (Supreme Court) judgment which totally negates established principles of international law, particularly the 1982 Convention of the Law of the Sea which states categorically that the continental shelf is the natural prolongation of the land mass of a Coastal State, also creates a problem for the Federal Government.  For if the continental shelf does not belong to the Coastal States it cannot belong to Nigeria”. Prof. Nwabueze, another authority on Nigerian constitution stated that “this judgment was devastating to both the Federal and state governments, it settled nothing, gave satisfaction to neither side and merely aggravated the controversy over the sharing of the money and may intensify the agitation for resource control among the oil producing states”. Prof. Sagay further noted that the “Section 2(2) and (3(1) of the Constitution provides that Nigeria shall consist of 36 named states and a Federal Capital Territory, not that it shall consist of 36 named states, a Federal Capital Territory and the territorial sea (with its bed and subsoil)…The territorial sea can only be part of the territory of Nigeria… if it is part of the territory of the littoral states …With the greatest respect, the Supreme Court should not have tried, as it did, to avoid the clear, inescapable effect of the international conventions, local statutes and decisions from the other common law jurisdictions mentioned above taken together with Sections 2(2) and 3(1) of the Constitution of Nigeria.  The territorial sea is and must be part of the territory of the eight littoral states for it to be part of Nigeria’s territory, as it certainly is by international law and by the statute law of Nigeria.”

 

Obviously, the littoral states were dissatisfied by the Supreme Court judgment and sought a legislative/political resolution of the issue which ultimately led to the enactment of the Offshore/Onshore Abolition Act. President Obasanjo and the National Assembly were quite aware of the “moral” case for applying the derivation principle to offshore oil and the international legal implication of the Supreme Court judgment. The Offshore/Onshore issue thus played an important role in the 2003 presidential election. In a pre-election statistical analysis of the possible impact of the offshore/onshore dichotomy imbroglio on the outcome of the April 2003 presidential election, I concluded that “the offshore/onshore oil dichotomy abolition bill will be the critical factor that will determine the outcome of the presidential election. Ironically, by initially refusing to sign the bill, President Obasanjo raised the profile of oil in Nigerian politics. The Northern Governors and Kano Elders Forum who were opposed to the abolition bill and who now support Buhari must now have a rethink if they want their new candidate to win the presidential election. Contrary to speculations, the loss of revenue to the North if Obasanjo signs the abolition as amended by the National Assembly is not likely to be disastrous”. (See chapter 7 of my book, Political Economy of Oil and other Topical Issues in Nigeria. Xlibris. 2006)

 

In a follow analysis of the post-election results, I noted that “When Buhari was asked about his stance on the bill during his campaign visit to Benin City he simply said that he endorsed Obasanjo’s refusal to sign it, much to the chagrin of most people from the SS. That single statement sealed the fate of ANPP/Buhari in the SS zone. It became clear that Buhari could not be trusted (by the SS) on the issue of the bill and that he may in fact pursue the perceived Northern agenda of not only killing the bill completely but also the NDDC. At that point, Obasanjo became the “devil the SS knows” as far as the bill was concerned as there were indications that he was willing to settle for a compromise. No other party raised the issue of the offshore/onshore bill. Therefore, most SS voters had no option than to assume that Obasanjo would sign the bill after the elections, even in an amended form”. What Buhari did not know was that Obasanjo had agreed (secretly) to sign an amended version of the bill into law after the election. He did so in February 2004, about 10 months after the election. The analysis of the election results showed that the votes from the South South zone for the PDP was the “single most decisive factor responsible for Obasanjo’s reelection” and I concluded that “the bill for the abolition of the offshore/onshore oil dichotomy played a major role in the victory of Obasanjo. Without the massive support of the South South, Obasanjo’s victory would have been impossible...The outcome of the election is also a lesson for future presidential hopefuls that they cannot take the South South zone for granted, especially when the issue of oil resource is current on the political agenda”.  (See chapters 8 and 9 of my book referenced above).  As we approach the 2015 election, I hope the North and the PDP will learn from the lesson of 2003 as they think of reintroducing the offshore/onshore dichotomy or reducing the 13% oil derivation.

  

From the above analysis, it is clear that the call for a review of the offshore/onshore oil dichotomy abolition act and for a downward revision of the derivation formula on both onshore and offshore oil revenue is unconscionable. It represents another symptom of what Deputy President of the Senate, Senator Ike Ekweremadu, recently called “feeding bottle” federalism in Nigeria which is a major hindrance to national development. It is also a retrogressive step in our match towards a more perfect federation. States that are too small or are not financially viable should merge! In fact, the National Assembly should amend the Constitution to allow states to be regrouped to form more viable regional governments which should be given more fiscal powers as enshrined in the 1960 and 1963 constitutions.