There is a fundamental interdependence between host countries and multinational oil companies (MNOCs) in development of the mineral resources. The interests of these two parties differ much, but mainly converge on resource production-sharing. Two other major stakeholders are the national oil companies and the host communities. The fact that oil and gas resources are vested in the Federal Government of Nigeria does not exclude host communities as major stakeholders. These communities bear the brunt of environmental degradation (acid rain, oil spillage, fouled air and water) that usually attend resource extraction and refining processes. These call to question the urgent need for environmental remediation in the host communities and environmental justice for those that bear the brunt! A successful negotiation of the Petroleum Industry Bill (PIB) will take into account the contending interests of stakeholders, which I will briefly narrate here.

Let us commence with the host country’s interests. Nigeria is characterised by high population growth, excessive unemployment, low per capita income, low-level of economic development (reflected in a lack of social services and resources), low quality of education, low electric power supply, poor infrastructure development and maintenance, and short life expectancies.

Given this setting, the critical concern of government should be economic growth. As a major oil exporter, crude oil exploration and production (E&P) activities should secure a reasonable tax base for the government, revenue from the world oil market, capital for economic expansion, and employment and income for individual workers. There are other economic, social, and political factors of interest to the host country. These include acquisition of technology and expertise from foreign oil companies, increasing local content in supplies and other forms of contracting, access to foreign markets, infrastructure development in the course of E & P activities, such as roads, communications, port facilities, etc. Few developing countries have the capital, technology and trained personnel necessary to develop oil reserves. As a result, they must rely to varying degrees on foreign investment by the MNOCs.

The foreign direct investment (FDI) offered by MNOCs provide the host country with technology, managerial and technical expertise, and reduced vulnerability to downturns in the world’s economy, and with capital. FDI also provides the opportunity to shift the responsibility of building and maintaining the requisite support services and infrastructure facilities to the MNOCs. Therefore, it is in the interest of host countries to maintain the historical interdependence with MNOCs.

The MNOCs interests are principally driven by characteristics of petroleum E & P operations. There is a considerable lag between an investment in a petroleum prospect and the realisation of any profit from the enterprise. E & P operations are capital-intensive and frequently entail the creation of a robust infrastructure before actual extraction can take place. These operations are also high-risk in nature (the existence, extent and quality of oil reserves, production costs, and world crude oil prices are all difficult to determine well in advance). Therefore, profitability is never assured. Generally, most MNOCs tend to improve their profitability by improving the crude oil which accounts for why they get involved in the entire value chain of the industry. Besides, hydrocarbon reserves are finite, so MNOCs must continually acquire new reserves which, again, are capital-intensive. The fiscal incentives available in different oil-producing countries tend to determine where the MNOCs sink their oil rigs.

MNOCs are compelled to be far more concerned about government policies and regulations than most other businesses. These companies have to deal directly with the government (through their agencies) being the custodian of national oil reserves. They must also deal with the political and legal hazards associated with extracting the reserves that in most cases is the host country’s major source of revenue. The primary interest of the MNOCs, as with any other businesses, are maximisation of profits and minimisation of risks or, at least, ensuring that unavoidable risk are factored into the potential ‘up-side’ of the enterprise. For the MNOCs, the principal risks are geological, economic, and political. Political risks include a sudden increase in taxes, unfavourable alteration of the production-sharing ratio, government instability, in-fighting in government agency, outright confiscation of production, and nationalisation of MNOCs’ assets. These interests and risks have to be factored into the PIB debate and negotiations to ensure the MNOCs are not discouraged from making further investments in the host country. Else, they would be encouraged to move away and invest in other countries with more stable and better fiscal regimes.

NOCs (for example, the Nigerian National Oil Corporation, NNPC) are created to develop petroleum resources within the home (host) country. But in most cases, they are typically multi-layered in structure and split into subsidiaries, in accordance with diverse functions such as E & P, Refining, Marketing, Petrochemicals, Retail, etc. The corporate forms of NOCs follow that of MNOCs, but the overall objectives of NOCs are less transparent than the purely-for-profit MNOCs. NOCs are basically government agencies and, as a result, are responsive to government pressures and policies. Examples are: capping prices to domestic purchasers, purchasing from local suppliers (i.e. increasing local content) whose materials may be inferior and costlier; paying high wages that are not co-related to profitability, adopting inefficient labour-intensive production methods to increase employment, making uneconomic investments to promote political goals, etc.

The NOCs can afford to carry on in this manner, because they confidently believe that when and where necessary, the government is likely to grant the company better tax incentives than private companies. Additional state aid or bail-out measures may come in the forms of providing access to capital on favourable terms, including low-cost government loans, government loan guarantees, and direct capital infusions from government coffers. In a situation where the NOC is economically threatened, the government will most likely step in as ‘saviour of last resort’ and take remedial steps to prevent the NOC from collapse, or from defaulting on its obligations.

The widespread dissatisfaction with the efficiency levels of NOCs has led many oil- producing countries to gravitate towards privatisation. This trend is more evident in South America than in the Middle East, Asia and Africa.

For example, Argentina began to privatise its NOC, YPF (Yacimientos Petroliferos Fiscales) as early as 1989. And most other South American countries have, at least, partially privatised theirs. Some of these NOCs have broadened their role into international downstream activities, which includes building transnational pipelines to transport petroleum and natural gas to the marketplace, acquisition of refineries in the US & Western Europe, and also retailing directly to consumers in these foreign countries. For example, Petroleos de Venezuela S.A (PDVSA) owns CITGO Petroleum Corporation through which it carries out extensive refining, marketing and transportation operations in the US. Conversely, countries like Kuwait, Saudi Arabia, Libya, Nigeria, Angola, etc. have made no significant efforts toward privatising their NOCs, which still enjoy monopoly control. However, countries like México, Kuwait, Saudi Arabia have reorganised and restructured their NOCs and introduced diverse cost-cutting measures and audit controls to make them operate more efficiently and competitively in the global marketplace.

To arrive at this minimal point is part of what the PIB seeks to achieve. The suggested restructuring of NNPC in the PIB would ensure that the Nigerian petroleum industry, at the least, operates efficiently. Besides, an eventual privatisation of NNPC assets would ensure competitiveness in the global marketplace.

Host communities are often disregarded, but together they constitute a powerful interest and pressure group. It is a recognised fact that economic gains from petroleum reserves development outweigh the attendant social costs brought about by both upstream and downstream operations. The social costs include population displacement, cultural changes, and environmental effects.

The environmental effects are not limited to the immediate impact on land, water, and air around the host communities but include effects on traditional economic activities that are dependent on water, natural wildlife, and vegetation. Claims by, and on behalf of, indigenous host communities to participate in the decision-making process on whether to incur such social and environmental costs, and if so, how to allocate them are advancing with increasing frequency.

Where such claims are suppressed, it has often led to emergence of militant groups with full intent on impeding or crippling oil operations and engaging in hostage-takings as a means of raising funds for arms. In a mono-product economy such as Nigeria, successful militant activities in oil-producing locations spell disaster in terms of government revenues. Crude oil/fuel theft and pipeline vandalism are becoming regular features of the Nigerian petroleum sector. This is partly attributable to militant activities, and nefarious criminals who ride on the back of the attendant confusion to achieve personal economic gains. The Federal Government can ill-afford such activities, particularly now that the price of crude oil has taken a downturn and the economy has headed ‘south’.

The Federal Government has over a period of time made some concessions to host communities who bear the social costs associated with oil production and refining, for example, by setting up the Niger Delta Ministry, Niger Delta Development Commission (NDDC), the Amnesty Deal, extra-budgetary allocations to oil-producing state governments. There have also been some contributions from MNOCs’ corporate social responsibility programmes Regardless of these palliatives, a visit to the Niger Delta region still reveals insignificant human and infrastructural developments at the moment. Besides, who can tell how much of these benefits end up in individual possessions, and the proportion that is actually channelled towards real infrastructural development, such as quality schools, markets, clean water plants, road and bridges, port facilities, etc. Nevertheless, more still needs to be done to ameliorate the social and environmental costs in host communities in Nigeria. The PIB should make additional concessions to host communities in the interest of environment equity and justice. Furthermore, the PIB should more importantly incorporate strategies into the bill that ensure that the benefits incorporated therein accrue in real terms to all peoples of the host communities.

In Nigeria, as previously stated, the ownership rights to oil and gas are vested in the Federal Government of Nigeria. However, it would be a mistake in the course of negotiations to subsume the interests of host communities under those of the host country just because the latter holds the ownership rights. The social costs of oil extraction and processing are not equally felt across the country. The concept of environmental justice is applicable here. My best advice is for the National Assembly to consider these contending interests in the course of reviewing the 2012 versions of the bill. Modifications can be made along the implementation route, as common sense would dictate that such changes may be necessary in the interest of all stakeholders. Alternatively, the bill can be passed in three or four tranches, provided the aim is not to bye-pass critical stakeholders’ interests.

•Prof Nwaozuzu, a Downstream Petroleum Economics & Policy Expert whose photo appears alongside this essay, is Deputy-Director, Emerald Energy Institute for Energy & Petroleum Economics, Policy, & Strategic Studies, University of Port Harcourt; e-mail: cnwaozuzu@gmail.com. Tel: 070 6874 3617 (SMS only).

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