A Review of the Petroleum Host Community Fund in the Revised Petroleum Industry Bill

A Review of the Petroleum Host Community Fund in the Revised Petroleum Industry Bill

Dr. Emmanuel Ojameruaye

One of the highlights of the revised Petroleum Industry Bill (PIB) which President Goodluck Jonathan re-submitted on July 17, 2012 to the National Assembly is the inclusion of the establishment of a Petroleum Host Community Fund (PHCF). According section 116 the revised PIB, “There is established a fund to be known as the Petroleum Host Communities Fund”. Section 117 states that the “fund shall be utilized for the development of the economic and social infrastructure of the communities within the petroleum producing area”. While this attempt to establish a fund for petroleum producing communities is commendable, the design of the PHCF has left much to be desired. The bill should therefore be amended to ensure that the PHCF is effective, efficient and meets the expectations of the intended beneficiaries. In this write-up, I will point out some of the pitfalls of the PHCF and propose some necessary amendments.

A. Nomenclature: The term “petroleum host community” appears absurd and degrading to petroleum producing communities. Although it refers to “communities within the petroleum producing areas” as per section 117 of the bill, it would have been more appropriate to use the term “petroleum producing communities (PPC)”. The term “petroleum host communities” (PHC) implies that the communities are “hosting” petroleum. A community hosts something that is alien to it or brought to the area. For instance, Aladja community is hosting the Delta Steel Company and Bonny community is hosting the NLNG Company. A community does not host a mineral or agricultural product that is produced from its soil. How does it sound if we use the phrase “coal host community” or “gold host community” or “cocoa host community”? It sounds absurd! On the contrary, we can talk of gold producing community or area” and “cocoa producing community or area”. The fact that some oil companies erroneously use the phrase “host communities” instead of “petroleum producing communities” is no excuse to carry over this error into the PIB. As a former staff of an oil company, I have always questioned the use of the phrase “host community” in reference to petroleum because it implies an “alienation” of petroleum from the communities. Therefore, the term “petroleum host community fund” should be amended to read “petroleum producing communities’ fund” (PPCF).

B. Purpose: The purpose of the fund as stipulated in section 117 of the bill is restrictive. Why should the fund be used for “infrastructural development” only? In addition to infrastructure, there are other critical needs which must be addressed in order to reduce poverty and raise living standards in the PPC. Thus the fund should be used for both economic and physical infrastructure (the “hardware” of development) and other requirements of development (the “software” of development) such as microfinance for small-scale entrepreneurs, loan guarantees for local medium and large-scale entrepreneurs, agricultural support, educational supplies for school, health supplies for hospitals, human resource development and institutional capacity building. It is an open secret that the provision of infrastructure in Nigeria is laden with massive abuse and corruption. More that 50% of the funds used for infrastructure is consumed by the “corruption monster” and over 80% of the funds passes through the hands of contractors who are not from the areas where the projects are sited.

Furthermore, the funds invested in infrastructure do not create sustainable jobs in the area. The “multiplier” effect of investment in infrastructure has been very small. This is why the petroleum producing areas remain impoverished despite the several billions of naira that have been “invested” in social and economic infrastructure by OMPADEC, NDDC, oil companies and the federal and state governments in the region over the past 30 years. On the other hand, naira-for-naira, investment in the “software” of development has far greater multiplier and poverty-reducing effects. In addition to their high costs, there is also the problem of lumpiness or indivisibility of infrastructure which makes it difficult to allocate infrastructure equitably in accordance with the volume of oil production by the communities. The result is that while many high-producing communities have little or no infrastructure, some low-producing and non-producing communities have benefitted disproportionately from infrastructural projects provided with petroleum revenue.

C. Funding: The title of section 118 of the bill (“Beneficial entitlements to the communities”) is confusing and the contents of the sub-sections do not reflect the title. According to section 118 (1), “Every upstream petroleum producing company shall remit on monthly basis ten per cent of its net profit as follows: (a) for profit derived from operations in onshore areas and in the offshore and shallow water areas, all of such remittances shall be made directly into the PHCF, and (b) for profit derived from operations in deepwater areas, all of the remittance directly in to the Fund for the benefit of the petroleum producing littoral States”. This has nothing to do with “beneficial entitlements”. It has to do with the funding of the PHCF. The title of section 118 should be changed to “Contributions to the Fund” or “Funding of the PHCF”.

It is important to stress that requiring upstream companies to contribute 10% of their net profits to the PHCF will effectively raise the current petroleum profit tax (PPT) rate from 85% to 95% or increase the proposed Nigerian Hydrocarbon Tax (NHT), which will replace the PPT, from 50% to 60%. This is in to the proposed Companies Income Tax (CIT) which is set at 30%, the 10% withholding tax on dividends and the 2% education tax. Did the drafters of the bill overlook the implication of the increased tax rate for investment in the oil industry?

Furthermore, subsections 118.1(a) and (b) not only retained the controversial “onshore/offshore dichotomy”, but in fact expanded it to a “trichotomy” (onshore/shallow water/deepwater). Since term “offshore” covers both shallow water and deepwater, the inclusion of “offshore” in subsection (a) must be a mistake. Furthermore, given the geology of Nigeria’s offshore, it is usually difficult to distinguish between petroleum produced from shallow water offshore (less than 100 meters deep) from petroleum produced from deepwater offshore (above 100 meters deep). It is also not clear if the intention of the drafters of the bill is that 10% of the net profit from “onshore/shallow water” petroleum will be for the benefit of the communities (not the states) as indicated sub-section (a) above while the 10% of the net profit from deep water petroleum will be disbursed directly to the littoral state governments as implied in sub-section (b). I would therefore like to suggest that in order to avoid confusion, subsection (b) should be deleted and “shallow water” should be deleted from subsection (a). Furthermore, it will be more effective for companies to make their contributions quarterly rather than monthly. Thus section 118(1) should read “All upstream petroleum producing companies shall remit on quarterly basis ten per cent of its net profit derived from onshore and offshore operations directly into the PHCF”.

However, the definition of “net profit” is subsection 118 (2) appears clumsy and unnecessarily complicated. It is important to have simplified laws. Therefore, I would like to suggest that the “net profit” should be replaced by “petroleum profit” and the rate should be reduced from 10% to say 3%. This will effectively increase the current petroleum profit tax (PPT) from 85% to 88% or the proposed NHT from 50% to 53%. Alternatively, and preferably, the 10% surcharge should be imposed on the royalties paid by oil companies rather than on “net profit”. The will instill a greater sense of partial “ownership” of petroleum by the communities because royalty is “compensation or payment to an owner for use of property or natural resource”. Since royalty rate on onshore petroleum is higher than the rate on offshore petroleum and the rate decreases with depth, funding the PHCF from royalty payment will dampen the argument against the abolition of the onshore/offshore dichotomy. Furthermore, since the amount of royalties paid by oil companies has historically been between 20% and 40% of the PPT, a 10% surcharge on the amount of royalties will be almost equal to about 3% increase in the PPT. With this amendment, subsections 118 (3) and 118 (4) can be deleted.

Furthermore, subsection 118 (5) states that “Where an act of vandalism, sabotage or civil unrest occurs that causes damage to any petroleum facility with a host community, the cost of repair of such facility shall be paid from the PHCF entitlement unless it is established that no member of the community is responsible”. The rationale for this provision is to reduce the incidence of vandalism and sabotage of oil facilities. However, implementing this provision will be difficult because: (a) The bill does not state that funds will be allocated to communities based on oil production and/or value of petroleum facilities or assets (such pipelines, flow stations, gas plants, terminals, etc) located the communities. This means that communities will not know their “entitlements” from the PHCF. On what basis therefore will the “cost of repair” of damaged facilities be deducted from the “PHCF entitlements” of communities?; (b) In most cases, it is difficult to determine whether the person(s) responsible for an act of vandalism or sabotage is from the community where the facility is located because most communities do not have a record of their inhabitants. Even then, in most cases, the persons are never known or caught; (c) It offends natural justice to punish a whole community for the selfish act or crime of one or few members of the community.

The implication of subsection 118(5) is the federal government is outsourcing the policing and protection of oil facilities to “host communities”. What about the N6 billion contracts awarded to some former militants to do the same job? I think it is wrong to hold petroleum producing communities hostage or accountable for the protection of oil facilities through this PHCF. The federal government and oil companies should devise alternative ways of protecting and securing oil facilities through contracts to local security companies and use of modern security technology including CCTV and drones.

Allocation of Funds and Projects: The bill does not specify how and the criteria for the allocation of funds and projects funded under the PHCF among the petroleum producing communities. It is important to include a section titled “Allocation of Funds and Projects” in the bill which will clearly spell out how projects and funds will be allocated. Leaving this responsibility to the Minister of Petroleum Resources as provided in sub-section 118 (6) is an invitation to arbitrariness and corruption.

Given that there are over 3,000 petroleum producing communities and hundreds of other communities hosting oil facilities, the allocation of projects among the communities will be fraught with difficulties and controversies, especially as some boundaries are disputed and not well-defined defined. There are three ways of dealing with this challenge. The first approach is to group the communities into fairly homogenous community clusters (HCC) subject to a maximum of, say, 100 HCC. The second is to use the existing local government area (LGA) as community clusters. This will yield between 100 and 150 petroleum producing LGA community clusters (LGACC).

The third approach is to use to group the communities around each oil/gas field as a cluster. This will yield about 160 oil/gas field community clusters (OFCC). This is an attractive approach because NNPC publishes data on oil and gas production by oil fields regularly. However, some fields are very small while some are located offshore. In other to shield the PHCF from the control of local government councils and the state governments and to tie it to petroleum production, I would prefer the OFCC approach. The funds from the PHCF can then be allocated to each OFCC based on their share in current oil and gas production (for the last quarter), cumulative historical production (as of the penultimate quarter) and value of petroleum facilities/assets in the oil field. Current oil production (COP) can be given a weight of 30%, current gas production (CGP) a weight of 10%, historical/cumulative oil production (HOP) a weight of 30% also, historical gas production (HGP) a weight of 10% also, and the value of current petroleum assets (CPA) a weight of 20%. Thus, if an OFCC (say Bonny) accounts for 5% of COP, 10% of CGP, 2% of HGP, 8% of HGP and 15% of CPA, and if the total amount paid to the PHCF in a given quarter is N10 billion, then the Bonny OFCC will receive (5%x30% + 10%x10% + 2%x30% + 8%x10% + 15%x20%) xN10billion = N0.69 billion = N690 million for development projects for that quarter. Each OFCC should therefore be required to form an OFCC Petroleum Fund Management Committee (OFCCPFMC) to oversee the utilization of the OFCC Fund. The OFCCPFMC should be made up of 10 representatives from various communities in the OFCC and they should be elected by the communities they represent for a single term of 2 years with a possibility of re-election six years later.

Role of Minister: Sub-section 118(6) of the bill states that “The Minister (of Petroleum Resources) shall…make regulations on entitlements, governance and management structure with respect to the PHCF”. This means that the proposed PHCF will be an appendage of the Ministry of Petroleum Resources. Thus, the petroleum producing communities will have little or nothing to say about how the fund is managed. In fact, the PHCF as conceived in the PIB will turn out to be a duplicate of NDDC which is controlled by the Presidency. Worse still, unlike the NDDC that has a Board made up of representatives of petroleum producing the states, the PHCF will be under the sole control of the Minister. The PHCF cannot function effectively and efficiently if it is controlled from Abuja or by the State Governors. The funds of the PHCF should be allocated by the Federal Ministry of Finance directly to the OFCCPFMC to manage as they deem fit without any interference from the Federal or State Governments. For instance, some OFCCPFMC may decide to use part of their allocations to set up “community-managed trust funds” or “future generation’s savings funds” such as the Nunavut Trust Fund in Canada (www.tunngavik.com ). Alternatively, groups of OFCCPFMC within a state can set up “state” petroleum trust funds similar to the Alaska (Petroleum) Permanent Fund in the United States or the Alberta’s (Petroleum) Heritage Fund in Canada.

The PHCF and NDDC: The bill does not mention the Niger Delta Development Commission (NDDC) or how the PHCF relates to the NDDC as well as the various state oil producing areas development committees (Sate PADECS). Perhaps, it is the intention of the drafters that the PHCF will replace the NDDC but this is not clear. As indicated above, the PHCF as proposed in the PIB looks like a duplicate of the NDCC. However, if the PHCF is structured along the lines I have suggested above, it will be significantly different from and can operate pari passu with the NDDC and the State PADECS. However, there is need for the OFCCPMHC to coordinate their activities with the NDDC and State PADECs to avoid duplication of projects.

In conclusion, it is crystal clear from the above review that the PHCF as crafted in the PIB needs to be redesigned to ensure that it does not go the way of the largely unsuccessful NDDC (and its predecessor, OMPADEC) and the state PADEC. I have outlined the amendments that need to be made to ensure that the fund is effective, efficient and meet the aspirations of the intended beneficiaries. It is my hope and prayer that the National Assembly will use the ideas contained in this paper to amend the PHCF section of the PIB.