12 Steps - Energy: Reforming the Petroleum Industry

Petroleum is essential to many industries, and accounts for a large percentage of the world’s energy consumption, ranging from regional average of 32% for Europe and Asia, up to 53% for the Middle East. In Nigeria that figure is about 60%.

The petroleum industry includes the global processes of exploration, extraction, refining, transporting (often by oil tankers and pipelines), and marketing petroleum products. Taken as a whole, the processes represent the world's largest industry in terms of dollar value and accounted for close to 20% of Nigeria’s GDP in 2007.

The largest volume products of the industry are fuel oil and gasoline (petrol). Petroleum is also the raw material for many chemical products, including pharmaceuticals, solvents, fertilizers, pesticides, and plastics. The industry is usually divided into three major components: upstream, midstream and downstream. Midstream operations are usually included in the downstream category.

Oil was discovered in Nigeria by Shell-BP, at the time the sole concessionaire, in 1956 in the Niger Delta after half a century of exploration. Two years later, Nigeria joined the ranks of oil producers when its first oil field came on stream. After 1960, exploration rights in onshore and offshore areas adjoining the Niger Delta were extended to other foreign companies.

Following the Biafra war in 1970, the government under the leadership of General Gown, decided to secure and gain more control over the oil industry, and nationalised it by creating the Nigerian National Oil Corporation (NNOC) via a decree.

Nationalisation of the oil sector was also precipitated by Nigeria's desire to join OPEC, which required that member states acquire 51% stake and become increasingly involved in the oil sector. The creation of the NNOC, which later went on to be known as NNPC, made government participation in the industry legally binding. The federal government would continue to consolidate its oil involvement throughout the next several decades.

Petroleum production and export have since grown to play a dominant role in Nigeria's economy and account for about 90% of her gross earnings. This dominant role has pushed agriculture, the traditional mainstay of the economy, from the early fifties and sixties, to the background.

Nigeria's proven oil reserves are estimated by the United States Energy Information Administration (EIA) at between 16 and 22 billion barrels, but others believe it could be as much as 35.3 billion barrels. Its reserves makes Nigeria the tenth most petroleum-rich nation in the world, and by the far the most affluent in Africa.

The majority of the reserves are found along the country's Niger River Delta, in southern Nigeria and offshore in the Bight of Benin, Gulf of Guinea and Bight of Bonny. Nigeria has total production capacity (total potential production capacity if all oil currently shut-in came back online) of three million barrels per day (bbl/d) including two million bbl/d onshore and one million bbl/d offshore.

However, the Niger Delta has been engulfed by a conflict which arose in the early 1990s due to tensions between the foreign oil corporations, the Nigerian federal government, and a number of the Niger Delta's ethnic groups who felt they were being exploited, particularly minority groups.

All petroleum production and exploration in Nigeria are undertaken as joint ventures between foreign multi-national corporations and the Nigerian Federal Government, through the NNPC. The joint ventures account for approximately 95 percent of all crude oil output, with the remaining 5 percent produced by local independent companies operating in marginal fields.

The utilisation of oil in Nigeria is carried out with the backing of legislation, the most important ones being the Petroleum Act 1969, Oil pipelines Act 1956, Oil in Navigable Waters Act 1968, Federal Environmental Protection Agency Act 1988, and the Land Use Act 1978. The Petroleum Act (which really a continuation of an old colonial policy) vested the entire property in petroleum (mineral oils) to the state.

This gave the federal government the absolute right and control over oil resources in the country, which it exercising by farming out oil mining rights to oil companies and receives rents and royalties from them.

Until the promulgation of the Land Use Act (LUA) in 1978, while the ownership of oil belonged to the federal government, the land where the oil was found was vested in the communities and families that owned the land, with whom oil companies had to negotiate compensation for granting access to the oil and any damage to the land.

The passing of the LUA, which vested all the lands comprised in the territory of a state of the federation in the governor of the state in ‘trust' for all Nigerians, meant oil companies no longer had to deal with the local land owners and communities, instead paying the right to access the oil to the federal government.

It is the LUA that has been the source of much of the agitation in the Niger Delta Region, whose community leaders and activists are demanding that oil companies should pay rents and royalties for the use of the land directly to land owners and to local communities instead of to the central government.

In 2000, President Obasanjo established the Niger Delta Development Commission (NDDC) for the sole purpose of developing the oil-rich Niger-Delta region of southern Nigeria. Since its inauguration, the NDDC has focused on the development of social and physical infrastructures, ecological/environmental remediation and human development.

However the tensions continued to persist in the Niger Delta region, and a spike in the availability of small arms and other weapons, led increasingly to the militarization of the region. This has led to frequent clashes between government troops and paramilitary groups who have declared “all-out war” with the Nigerian state as well as the oil corporations and threatened to disrupt oil production activities through attacks on wells and pipelines.

During the 16 months preceding the 2007 presidential elections, militant activity in the Niger Delta (especially near Warri and Port Harcourt) has severely impacted Nigeria’s oil production potential by shutting-in an estimated 20 percent of total production.

Upon taking office in 2007, President Yar’Adua made reforming the oil sector and tackling the crisis in the Niger Delta his top priorities and has taken a number of steps towards fulfilling his pledge.

Petroleum Industry Reforms
The Federal Government has begun to implement some of the oil industry reforms that it promised to carry out. The reforms which have been drafted into the Petroleum Industry Bill, which is currently being reviewed by the House of Assembly before being passed into law, have begun with the appointment of the Executive Secretary of the new Nigeria Petroleum Directorate.

The Nigerian Petroleum Directorate (NPD), which will be headed by the Minister of Petroleum and have the executive secretary as the administrative head, is expected to replace the current Ministry of Petroleum and serve as the policy cum administrative secretariat of the oil and gas industry when the bill is passed.

Key proposals of the Petroleum Industry Bill include:

• Measures to ensure the government increases its take from a growing number of deep-water developments.
• Review of the royalties on gas production.
• Increasing the tax take from gas by creating a new fiscal regime separate from rules governing oil.
• Changes to the way tax breaks are applied for new developments.
• Oil companies will be encouraged to refine at least 50 per cent of their production in Nigeria by the end of the decade.
• New rules to boost employment of Nigerians in the oil industry.
• Incentives to encourage development of marginal fields.
• Improved community programmes in the Niger Delta.

The bill also aims to aims to see the restructuring of the NNPC from its opaque, octopus-like structure to discrete units to handle tasks such as exploration and production, regulation and research.

The restructured company, which will be known as the Nigeria National Petroleum Company Limited, will be free to raise private capital for its joint ventures with the major multinational oil companies, rather than rely on a notoriously unreliable annual injection of cash from Nigeria’s government. The restructuring will also allow the private sector to acquire equity in its subsidiaries like the refineries and data services among others.

The government anticipates the newly formed company to operate like Brazil's Petrobras, Malaysia's Petronas, Saudi Arabia's Aramco and other government-owned but commercially viable national oil companies that operate globally, without relying on their home government for funding.

The new bill will also set up the Nigerian Petroleum Inspectorate (NPI) to replace the current Department of Petroleum Resources (DPR) and will be responsible for the technical regulation of all upstream and downstream activities of the entire oil and gas industry.

Another provision of the new bill is the National Petroleum Assets Management Agency (NAPAM) to regulate the cost and commercial operations of the upstream sector.

While in the downstream sector, the bill seeks to create a Petroleum Products Regulatory Agency (PPRA) as the downstream commercial regulator. Some of the duties of the PPRA will include the issue, renewal, suspension or cancellation of permits or licences, as well as ensuring that quality service provided by the operators to the consumers is in keeping with the guidelines laid out by the Consumer Protection Council.

It is expected that the House of Assembly will pass new laws to overhaul the country’s oil and gas sector before the end of the year, ramping up the pace of reform in spite of fears among Western majors that the changes could cost billions in profits.

The new bill says the reform of the joint ventures will take effect a year after it is passed, although analysts said the complex task of re-engineering the businesses – which account for the bulk of Nigeria’s oil production – could take much longer.

The Nigerian president, Umaru Yar’Adua, hopes the new law will form the foundation for a revival of an industry where attacks on pipelines and constraints on investment have fuelled a growing sense of crisis among energy companies. Though many of the multinational have expressed concerns about the new proposed terms being so stringent that they risked deterring investment rather than encouraging it.

The ongoing global financial crisis has also raised a question mark over the kinds of terms for financing multi-billion dollar oil ventures that Nigeria may ultimately attract and falling oil prices may also weaken the government’s leverage in its push to enact the reforms.

However there are few who doubt that the reforms are much needed in an industry that has been beleaguered by corruption and government red tape, and has yet to reach its full potential despite the huge untapped reserves the country possesses.

It is hoped that the new bill will also address Nigeria’s rather underdeveloped downstream sector, which deals with the refining of crude oil, and the selling and distribution of natural gas and products derived from crude oil. For all its oil wealth, Nigeria still has to import petroleum products as its local refineries are unable to meet local demands.

Oil Refineries
According to Oil and Gas Journal (OGJ), Nigeria's state-held refineries (Port Harcourt I and II, Warri, and Kaduna) have a combined capacity of 438,750 bbl/d, but problems including sabotage, fire, poor management and a lack of regular maintenance have reduced the operating capacity to around 214,000 bbl/d.

To increase refining capacity, the Nigerian government is granting permits to build several independently-owned refineries. Oando, a leading petroleum-marketing company in Nigeria, is considering building a refinery in Lagos. The refinery would be built in two phases, with each phase providing 180,000 bbl/d of refining capacity.

Under President Obasanjo the government began plans to privatise state entities by selling NNPC's four oil refineries, petrochemicals plants, and its Pipelines and Products Marketing Company (PPMC). 51 percent equities in both Kaduna and Port Harcourt refineries were sold in 2007 by the administration to Bluestar Consortium. But the sale was reversed by the present administration of Yar’Adua after calls by the Nigerian Labour Congress that the refineries were undersold, amongst other things.

The ownership was passed back to the NNPC, who have so far failed to fix the problems with the refineries. This has led to speculation that the present government is reconsidering selling the Kaduna and Port Harcourt refineries.

However, while the privatisation process would be a welcome step, more work will still be needed to do to meet the local demand for petroleum products. Analysts have put current local demand at close to 2 million bbl/d, with 90 percent of that being imported at a premium with the government subsidising the costs.

Even if the all the refineries were operating at 100% efficiency, they would only be able to meet 25% of the needs of the local market. Privatising of the refineries was one of the methods that the Obasanjo government looked to improve local production.

However, even though they did manage to privatise the Kaduna and Port Harcourt refineries, very little interest was actually shown in the process by independent oil companies (IOCs) with many viewing investments in refineries as providing poor financial returns. It is also one of the reason why there has not be a new refinery built in the US or Europe in over 25 years.

The BBC also discovered some evidence that shows that IOCs are purposely not building new refineries so reduce the global supply of petrol, which in turn pushes up its price, so as to make oil refinery a more profitable business. The investment outlay in oil refineries is huge, and many IOCs struggle with making returns on their investments due to the thin profit margins involved. They instead prefer to focus on the more profitable upstream oil sector.

In many countries around the world, onus now falls on the state owned oil companies balance the commercial objectives with the building of refineries along with strategic drivers which include maintaining the security of the country’s supply of petroleum products.

There have been regular announcements in the past that both China and India would build new refineries in Nigeria. One of the commitments of ONGC Mittal Energy Ltd (OMEL), a joint venture of Indian state owned Oil and Natural Gas Corporation (ONGC) and Mittal Investment, in return for oil blocs was to build a Greenfield 180,000 bpd capacity refinery.

The project was to be funded by direct investment and done on a build, operate, manage and ownership basis. The downside however is that the project will not start until the oil blocs they had been awarded were in production. It can take 3-5 years of prospecting before an oil bloc starts producing. This has meant that work has yet to start on the refinery and the company recently had to come out to reiterate its commitment to the project.

While China had originally pledged to invest US$ 2bn in the ailing Kaduna refinery, which has yet to happen and it remains to be seen whether the Indian and Chinese promises to build new refineries are translated into reality.

While the building of new refineries requires a huge amount of financing, one of the ways the government can go about financing the building of new refineries in the country is through Build-Lease-Transfer contracts.

The type of financing arrangement typically involves a developer who designs and builds a complete facility, sells it to the government or a joint venture partner, while simultaneously leasing it back (usually for 10 to 30 years) to operate it as a business and, after the expiry of the lease, transfer it back to the government or partner.

This allows the government to pay facility over a long period of time, while allowing the developer to not only recoup its building costs but earn additional income by running the facility over a period of time.

Fuel Subsidy
The Federal Government recently announced that it had removed the controversial fuel subsidy and that the price for selling petroleum products in Nigeria will now be determined by the market. Though labour unions are planning to make their calls for the return of the subsidy should the price of crude oil begin to rise in the international market.

The government should however resist these calls are there is little evidence to show that fuel subsidies actually help the poor, instead it diverts much needed funds from vital projects and perpetuates inefficiencies in an economy.

The government should take the opportunity to explain its stance in removing the fuel subsidy and demonstrate how it plans to use the savings it makes from not paying fuel subsidies to fund infrastructure projects which are going to have a long term impact on improving the Nigerian economy.

Niger Delta
The Niger Delta situation has presented the government with a three fold problem; firstly is the breakdown of law and order in the region as a spate of kidnappings, and gun battles between the government security forces and militants are now commonplace.

Secondly the conflict in the region has led to 25% reduction in the production of oil through the destruction of property and the abduction of foreign oil workers in the region. As a result of the continued hostilities in the region, thousands of foreign workers and their families have left the Niger Delta. At least three companies, including a private drilling company and pipeline laying company have also left.

Thirdly, it has discouraged oil companies from making further investments in the region, with the companies unwilling to commit to new projects until the unrest has been finally resolved. On its part the administration of President Yar Adua has created the new Ministry of Niger Delta, which would serve as the primary vehicle for the delivery of his administration's agenda for the rapid socio-economic development of the restive region.

This announcement was also followed with that of converting the Niger Delta Development Commission (NDDC) to a government parastatal. Some observers believe that this was prompted by the revelations of corruption at the commission with the disclosure that one of the directors used about N800 million on juju.

While some have welcomed the creation of the new ministry, others have been more sceptical citing the marginal impact that the NDDC and increase monetary allocations from to federal government to the state governments of the Niger Delta have had.

Critics also argue that introducing another government organisation will not only lead to duplication of effort but also increase what they see an already bureaucratic process. Additionally the NDDC was routinely deprived of funding amounting to millions of dollars by the Obansanjo administration.

They are also unhappy about the amount allocated to both the Niger Delta Ministry and NDDC in the 2009 budget, which totalling at 74 billion naira is 5 billion less than the maximal allocation the NDDC had received in the past.

We however believe that the community development of the Niger Delta could be better served by restructuring the NDDC into a company called the Niger Delta Infrastructure Development Company Limited, which will be limited by guarantee, devoid of undue political influence and given the social agenda of developing the Niger Delta region, more or less a social enterprise, which will receive its funding from a trust fund created from proceeds from the sale of drilling and mining rights in the region.

Niger Delta Development Fund (NDDF)
The Niger Delta Development Fund is a trust fund set up primarily to provide financial assistance in the development of the Niger Delta region. NDDF will be registered as a company limited by guarantee and operate independently of the federal and state governments. NDDF will managed by a board of trustees who all have considerable experience in the financial sector.

The Fund will be required to release quarterly reports on the how much of its funds are being spent and how is being spent on any of the operations is it financing.

NDDF will be used to provide financing for:
• The Niger Delta Infrastructure Development Company Limited and its activities.
• Infrastructural development in the Niger Delta region such as the building of roads, bridges and clinics by other meaningful foundations and non-government organisations..
• Social and business development programmes in the Niger Delta region.

NDDF will be financed by:
• A 50% derivation from the sale of drilling and mining rights in the Niger Delta region.
• A 3% percent tax in the profits of oil and mining companies operating primarily the Niger Delta region.
• Returns on investments made by the management board in the global capital and money market.
• Grants from governments, organised private sector and international donors.

Oil and mining companies will be required to make their payments directly into the funds account rather than to the treasury, as to reduce the red tape involved in getting acquiring the money from the government. However all parties will be required to notify the federal government all of such payments.

Niger Delta Infrastructure Development Company Limited (NDIDCL)
The Niger Delta Development Commission will be restructured into a legal company called the Niger Delta Infrastructure Development Company Limited (NDIDCL). The main purpose of restructuring the NNDC is to turn it into an independent company tasked with developing infrastructure central to economic development in the Niger Delta region, similar to the National Infrastructure Development Company in Trinidad and Tobago.

The new company, which will be wholly owned by the federal government and state governments in the Niger Delta region, will be run by a Managing Director who has a background in financial and infrastructure development and who will report to a board of directors. The board of directors made of professionals with expertise in community development, rural and urban planning, project management, and business and financial management.

International companies with expertise in community and infrastructure development will be invited to sign up as technical partners. The company will be primarily charged with executing the Master Plan already drawn up by the current NDDC. The NDIDCL and its activities will be funded by the Niger Delta Development Fund (NDDF).

The company should be given the independence it requires to develop infrastructure and provide services that are targeted at improving the economic fortunes of people of the Niger Delta by following a people-centric approach rather than having the projects determined by politicians, which more often than at aimed improving their profile.

For instance people are more likely to benefit from several primary health centres that caters for young children and pregnant women scattered across a local government area than a 200 bed hospital which is hardly accessible because it is located at a distance to far for many them to get to. In this case both projects will probably cost about the same price to deliver, but the building of a hospital is more newsworthy and has more a higher profile because it is large structure that stands out.

Quality performance of the NDIDCL will only be achieved if appointments to the company are done from a commercial aspect, bringing on board people that will add to the growth of the people, rather than political appointees who are more likely to less motivated to achieved results and are more likely to be less qualified for the post they were appointed to.

Reforming the Land Use Act
The Land Use Act (LUA), which was promulgated in 1978, and controversially incorporated into the 1979 Constitution and retained in the 1999 Constitution, is on the list of laws soon to be reformed by the administration of President Yar’Adua.

The opinion at the time was that all forms of customary land tenure systems were not intuitive enough to deal with the fast changing landscape in the Nigerian society, especially in areas that had to deal with agriculture and government infrastructure development. The act was introduced to vest all land in the state through the office of the governor of each state. The land, which is held in trust, is administered through the government’s authority to the use and benefit of all Nigerians.

LUA was introduced to primarily address the following;

• To remove bitter controversies resulting at times in loss of lives which land is known to be generating.
• To streamline and simplify the management and ownership of land in the country.
• To assist the citizenry, irrespective of his social status, to realize his ambition and aspiration of owning a house.
• To enable government to bring in control the use to which land can be put in all parts of the country and facilitate planning and zoning programmes for a particular use.

The act was intended to shore up security in the acquisition and possession of land, but 30 years after its passing, it has done the exact opposite. Many have called LUA to be repealed but others like the present governor of Lagos State, Babatunde Fashola have called for a measured approached, stating that though the law does need tinkering, the major fundamental problem with LUA has been its application.

This was also the view of Justice Augustine Nnamani who as Attorney – General was responsible for drafting of the act and its incorporation into constitution. He said “in the course of these years, it has become clear that due to its implementation not its structure or intendment, the objectives for which the land use act was promulgated have largely remained unfulfilled; indeed, they have been distorted, abused and seriously undermined.”

One of the areas in which the LUA has been indeed had a major impact has been the Niger Delta region. After the passing of the act, the Niger Delta residents literally woke up to find oil companies drilling in the backyards. The oil companies were absolved from dealing the local communities after acquiring drilling rights from the Federal Government. This also meant that the owners of the land or communities in which the land was located were no longer entitled to any direct compensation from the oil companies who were drilling their lands for oil.

This has unfortunately led to several years of exploitation of oil which has not only devastated the local environment, depriving the people of Niger Delta, of the optimum use of their land and water; it has also led to loss of life by many in the region who have protested over the application of Land Use Act and damage to their environment in clashes between the protesters and government security agencies.

It is clear that any kind reform of the Land Use Act will have take into account compensation to the communities and land owners who have to deal with the damage to their environment and their livelihood by the activities of the oil and mining companies.

Environmental Protection
The Niger Delta's environment is an incredibly well-endowed ecosystem, which contains one of the highest concentrations of biodiversity on the planet, as well as supporting abundant flora and fauna, arable terrain that can sustain a wide variety of crops, lumber or agricultural trees, and more species of freshwater fish than any ecosystem in West Africa.

However this ecosystem is being threatened by the careless activities of oil companies in the region. Nigeria has one of the one of the highest rates of oil spills in the world and flares more natural gas associated with oil extraction than any other country on the planet. Apparently the amount of gas wasted this way is equivalent to the 25% of the annual gas consumption of the United Kingdom.

The inhabitants are amongst some of the poorest in the country and rely on small scale farming, hunting and fishing off the land to survive. However, oil spills in the region, which amounted to a total of 1,260 incidents over a two and half year period from 2006, has impacted negatively on the ecosystem and is causing untold hardship to the inhabitants as their only source of livelihood has been destroyed.

Old, improperly maintained equipment causes many of the leaks (corrosion of pipelines and tankers account for 50% of all spills), but oil operators blame sabotage and theft, speculating that disaffected community members deliberately cause oil spills to collect compensation money.

Gas flaring is a very common sight in the Niger Delta region, practice that began simultaneously with oil extraction in the 1960s by Shell-BP. Although, the flaring of gas has been banned in many European countries, the international oil companies from that part of the world still continue the practice in the Niger Delta region without any real efforts to change infrastructure and prevent the waste of the gas.

Gas flaring contributes greatly to climate change, which ironically can display its most devastating effects in developing countries like Nigeria and the Niger Delta's low-lying plains are also quite vulnerable as they lie only a few meters above sea-level.

Despite the formation of the National Oil Spill Detection and Response Agency (NOSDRA), the legacy of oil spills, lax environmental regulations, and government complicity has allowed the oil companies to continue to pose a serious threat to the people of the Niger Delta region through their activities and basically resisting all calls to

The irresponsible behaviour of the oil companies in Nigeria has begun to draw a huge outcry from the international community, but it is unlikely that it would have any effect as oil companies have a long history of getting their way in Nigeria. This was aptly demonstrated who again failed to stop gas flaring despite a 1st of January 2009 deadline, which also happened to be one of the several deadlines that government has issued on that particular issue.

Oil companies know they have a position of strength in the Nigerian economy as oil accounts for huge slice of the revenue the government makes, and until the government either takes a strong stance with them, and damn the consequences, or diversifies its economy as to reduce Nigeria’s dependence of oil revenues, the environmental degradation and loss of billions of dollars through the activities of oil companies is likely to continue.