Volume 4-10 Article

Nigeria´s Oil Revenues and the Oil Producing Areas

by Ike Oguine

Introduction

One of the most important issues facing the Nigerian nation today is how to ensure that communities in the areas in which upstream petroleum activities take place receive an equitable share of the nation's revenues from such activities. Though the 1995 hanging of the activist and writer, Ken Saro-Wiwa and eight other Ogoni activists, which caused outrage all over the world, was ostensibly on a murder charge, the root cause of that tragedy was the collision between Saro-Wiwa's Movement for the Survival of Ogoni People (MOSOP) and the Nigerian federal government over government policies on the rights of oil producing areas. Since then the struggle by oil producing areas has continued to grow, and these days the activities of oil companies operating in the Niger Delta in joint venture with NNPC, the national oil company, are very frequently disrupted by activists from these communities seeking redress for a host of grievances against the Nigerian state.

So deep are these grievances that some activists now argue that the only permanent solution is a reconfiguration of the constitutional arrangements in Nigeria's federal state to give the oil producing areas greater control over their (political and economic) affairs. The situation has been complicated even further by bitter internecine disputes between various ethnic groups in the area. These ethnic disputes have very ancient roots but are often aggravated by contemporary struggles for bigger slices of political power and economic resources.

Over the years the Nigerian government and its upstream joint venture partners have provided development assistance such as schools, scholarships, hospitals, jetties, etc. to oil producing areas, but representatives of these areas have often contended that these projects do not match the wealth extracted from their land. In an attempt to channel more resources into developing the oil producing areas, the federal government in 1992/93 established the Oil Mineral Producing Areas Development Commission (OMPADEC). OMPADEC's primary mandate was to undertake development projects in oil producing areas with a percentage of the revenue derived from upstream activities. Mired from birth in controversy, regularly accused of corruption and incompetence, OMPADEC has, if anything, increased the level of frustration and anger in the Niger Delta. The present regime of General Abubakar is engaged in trying to make OMPADEC more effective, but this article will argue that the philosophy behind establishing a government body to undertake the development of oil producing areas (as opposed to the communities being responsible for their own development, with government support) is questionable.

The article will first outline Nigeria's sources of revenue from upstream operations. It will go on to discuss how these revenues are allocated and the role of OMPADEC. The article will then make suggestions on how the oil producing areas can be equitably compensated.

Nigeria's Revenues from Upstream Activities

The Nigerian Constitution, as amended, vests "the entire property in and control of all minerals, mineral oils and natural gas" in Nigeria or in its territorial waters or exclusive economic zone in the federal government. Similarly, the Petroleum Act vests the country's petroleum resources in "the State." The (federal) Ministry of Petroleum Resources grants exploration licences (OELs), prospecting licences (OPLs), mining leases (OMLs) and other rights to exploit the country's petroleum. The ministry also prescribes and collects fees and rents in respect of such licences and leases, and royalties for any petroleum won. Of these payments, royalties on crude oil, currently at 20% for onshore production, 18.5% for up to 100 metres water depth and 16.5% for up to 200 metres water depth, of "chargeable value" is by far the most significant.

Through NNPC, the Nigerian federal government currently holds on the average about 57% participating interest in the various joint ventures. NNPC funds joint venture operations to the extent of its participating interest, by means of monthly cash calls, and is entitled to a share of the joint ventures' production which it separately disposes of.

Under the Petroleum Profits Tax Act, there is an 85% profits tax (PPT) on upstream activities (but as part of the incentives for gas utilization, income from gas is now taxable at the general companies income tax rate, currently 35%). The Federal Inland Revenue Service (FIRS) is responsible for collecting this tax. FIRS also collects a 5% VAT on most supplies of goods and services to oil companies and a 2% education tax levied on the profits of oil companies by the Education Trust Fund Decree. There are, in addition, a host of levies and charges which oil companies pay to various agencies of the federal government such as levies imposed by the Nigerian Ports Authority (NPA) and the Nigerian Maritime Authority (NMA).

Individuals, communities and other entities whose land is affected by the operations of the upstream companies are entitled to compensation for surface rights. There was considerable debate over the effect of the Land Use Act, which provided that land in Nigeria would henceforth be held by state and local governments "in trust" for the people of Nigeria, on the compensation rights of owners or occupiers of land affected by upstream activities. Over time the practice that has emerged is that compensation is paid to owners and occupiers for improvements on the land and loss of use of land. That is the only form of compensation which upstream companies are obligated to pay directly to oil producing communities under their licences and leases and the various laws. Though rates of compensation for surface rights have continued to increase, as a result of inflation and also because of increasingly militant negotiating tactics, such compensation remains very tiny in comparison to Nigeria's revenues from joint venture participation, royalties, PPT and other taxes and levies payable to the federal government.

The Politics of Revenue Allocation and OMPADEC

The formula for distributing Nigeria's revenues among its federal, state and local governments has always been a highly vexed issue. Since the establishment of the Phillipson Commission in 1946 by the British Colonial Administration to recommend principles for revenue allocation, more than eight other commissions on revenue allocation have been constituted by successive governments. In addition, every constitutional drafting committee or constitutional conference set up since independence in 1960 has had to grapple with the problems of revenue allocation.

The major tension has been between the principle of derivation, i.e. allocating revenue on the basis of how much of it is derived from a particular part of the country, and the principle of need, i.e. allocating on the basis of the responsibilities of each tier of government and the financial expenditures and obligations of the various governments. In determining need, such factors as population, level of development in particular areas and equality of states have at various times been considered. Derivation had remained the most important factor until the Binns Commission of 1964. That Commission tilted the scales sharply in favour of need on the basis that "- weight must be given to the necessity to preserve continuity, including the provisions of funds necessary to meet the minimum responsibilities of government," and that it was " - equally important that the revenues available to a less developed region shall in part, at least, help to redress the inherent balance in the Federation as a whole." In 1968 the Dina Commission restored derivation as a factor in revenue allocation but gave it lower significance than need, the maintenance of national standards and balanced national development. From then on derivation continued to lose ground to other revenue allocation factors.

As a result, the consideration given to the areas where Nigeria earned its oil revenues continued to decrease. Conversely, other areas of the country, because they had greater population or had larger areas of land to develop, received an ever increasing share of the nation's revenues. In 1972, the federal government took over all royalties from the country's offshore oil fields (previously a 50% share of those royalties had gone to states adjacent to the offshore fields). Subsequently, the portion of royalties payable to oil producing states for onshore fields was reduced to 20% from 50%. By the early nineties, the share of the nation's oil revenues (i.e. revenue from royalties plus PPT plus government equity share crude oil sales) allocated to the oil producing areas on the basis of derivation was 1.5%. Some commentators have argued that this skewing of revenue distribution against the oil producing areas occurred because these areas are mostly inhabited by minority groups who are disadvantaged in the power struggles between Nigeria's ethnic groups, and who (at least until recently) were unable to pose a danger to the stability of the nation. Evidence in support of this claim is provided by the fact that when Nigeria's revenues came largely from commodities like cocoa, groundnuts and palm oil, in the production of which the major ethnic groups were involved, derivation had been generally accepted as the basis for revenue allocation. But as oil revenues derived from areas dominated by minority groups began to displace revenues from commodities, so did the bias in revenue allocation shift from derivation towards factors that benefited the states inhabited by the major ethnic groups, like population and the need for even development.

It wasn't until agitation in the oil producing areas began to threaten oil production, until it became clear that those areas were not as powerless as they had seemed, that the Nigerian leadership was forced to take another look at the weight to be accorded derivation in revenue allocation. In direct response to agitation in the oil producing areas, the Federal Government in 1992 increased to 3% the special share of oil revenues allocated to oil producing states and enacted the OMPADEC Decree. OMPADEC's key functions are:

a. to receive and administer the monthly sums from the allocation of the Federation Account in accordance with confirmed ratio of oil production in each State –

i.for the rehabilitation and development of oil mineral producing areas;

ii.for tackling ecological problems that have arisen from the exploration of oil minerals;

b. to determine and identify, through the Commission and the respective oil mineral producing States, the actual oil mineral producing areas and embark on the development of projects properly agreed upon with the local communities of the oil mineral producing areas."

OMPADEC was also to obtain from NNPC the proper contribution of each state and local government to the nation's oil production and to use this as a basis for the equitable distribution of projects and services and for the employment of personnel.

These developments marked a turning point; the increase of the special allocation to oil producing states to 3% was the first policy acknowledgement in many years of how unjustly the oil producing areas had been treated in revenue allocation. However, it soon became apparent that 3% of oil revenues was still grossly inadequate compensation. Years of neglect meant that there was an almost complete absence of basic infrastructure in the areas where the nation produced most of its wealth. Because most of these areas consist of small towns and villages often at a great distance from one another, separated by swamps, creeks and rivers, establishing any kind of infrastructure has always been a huge challenge. Immediately OMPADEC was created it was overwhelmed with demands for roads, bridges, jetties, water supply, etc., demands greater than its expected allocation for several years. This clamour for development projects was so great that OMPADEC's other major function of tackling ecological problems was all but forgotten.

Prior to the establishment of OMPADEC, the special allocations to the oil producing areas had been channelled through the state governments with jurisdiction over these areas. In many of the states, upstream activities are undertaken in only a few communities, and there had been complaints from oil producing communities that the state governments had not actually spent these special allocations in developing the areas where oil production took place. By requiring the Commission to ascertain the level of actual production from each community and distribute development projects accordingly, the OMPADEC Decree sought to address this. Like all of Nigeria's military governments, the regime in power at the time had a centralizing mentality; where states and local governments appeared unable to perform their functions, such functions were quickly taken over by the federal government. Since military decrees override constitutional provisions, there were no issues of constitutionality to worry about. So the special funds for oil producing areas were taken from the states and put under the control of this new federal agency. OMPADEC, however, soon came under criticism for being as remote from the oil producing areas as the state governments had been, probably even moreso. In addition, the Commission, because it is a federal institution, with employees from many parts of the country, became a new arena for the ethnic struggles of the nation at large, with people from the oil producing areas struggling among themselves and with other Nigerians for contracts and jobs. OMPADEC was accused of corruption and incompetence, of nurturing a bloated bureaucracy with funds meant for the development of the oil producing areas. Its activities are currently under investigation; its affairs were run by caretaker administrators for many years.

Each of the oil producing states had a member on the Commission, but these representatives were selected, not by the producing areas, but by the President, and there wasn't even a requirement in the Decree that such representatives had to be selected from an oil producing community. There was therefore no question of OMPADEC ever being perceived as representative of the producing areas. It was merely another arm of the federal bureaucracy, associated in the minds of people in the oil producing areas with the years of injustice they had experienced in a federation in which they had always been seriously disadvantaged. Instead of reducing discontent in the oil producing areas OMPADEC took this discontent to new heights.

Giving Oil Producing Areas a Stake in Upstream Activities

With ever-increasing agitation in the oil producing areas and better media coverage of the living conditions there, a national consensus has emerged on the need to substantially increase compensation payable to these areas. The 1995 Constitutional Conference recommended that the special allocation to oil producing areas be increased to 13% of oil revenues. After a long delay, the 1995 Constitution is now expected to come into force in May 1999, following a national debate on its provisions, but there are indications that the current military government will implement the 13% increase even before the constitution as a whole is promulgated. There are also indications that the dual exchange rate system will soon be abolished. If 13% of oil revenues converted to the naira at market determined exchange rates is in fact allocated to the oil producing areas and properly managed, there can be little doubt that over time appreciable improvements in quality of life will occur.

However, it is far from clear that the management of funds meant for the oil producing areas will improve. The current military government's solution to the problems of OMPADEC is to decentralize its operations by establishing zonal offices closer to the producing areas. This is a good idea in theory, but the Nigerian experience of similar efforts in other federal institutions suggests that the only tangible outcome of decentralization will be the creation of new layers of bureaucracy which will translate to new opportunities for corruption and waste and new theatres of conflict over contracts and jobs.

The thinking that only a government agency can undertake the development of the oil producing areas is patronizing. In their dealings with the government, the oil companies, and the international community, the leaders of the oil producing areas have displayed a sophisticated understanding of the challenges of development in their area. There is no reason why they shouldn't be entrusted with the management of the funds meant to develop their own areas. Also, distrust in the oil producing areas for government institutions has reached such a level that even a restructured, better managed OMPADEC is unlikely to ever gain the confidence of those it is supposed to serve. It is suggested that 50% of the special allocation to oil producing areas be distributed to communities in the area on the basis of their contribution to production and the other 50% be managed by committees with representatives drawn from all the oil producing areas in a state and applied to development projects which are best coordinated among many communities, like roads and power supply. Government agencies and NGOs could provide expert advice, mechanisms for ensuring accountability and other forms of support, but the oil producing areas should control the funds.

Transferring control of special allocations to the communities themselves will give them a real stake in the petroleum industry. Instead of perceiving upstream operations as activities that go on above their heads between government and the oil companies, producing communities will begin to see the industry as something that could directly contribute to their welfare. To make this stake even more direct, allocations should take the form of royalty payments made quarterly to the various communities and the committees suggested above. Since allocations will be linked directly to production from fields in an area in any quarter, it will be in the interest of oil producing communities that production continues to grow. In such circumstances the possibility that oil company operations will be disrupted every time there is a grievance against the state or an oil company will become very remote indeed.

One objection that could be made against the above suggestions is that there is so much conflict in the oil producing areas - between factions in many communities, between communities and between ethnic groups - that it is inadvisable to entrust control of such resources to the leadership in oil producing areas. It could further be argued that since many of these conflicts have to do with the control of resources, an inflow of new revenues might exacerbate the conflicts in the area. Better that the institutions of government, acting as impartial arbiters, determine who should get what.

Existing regulations and current practice provide guides as to how compensation can be handled in areas where there are ongoing disputes. The Petroleum (Drilling and Production) Regulations provide that where individuals or communities are engaged in a dispute over who is entitled to compensation, such compensation should be paid into a special account until the matter is resolved. This provision can be applied to payment of the royalties proposed above. In practice many communities, faced with the possibility of having compensation payments to them delayed indefinitely because there are disputes over entitlement to compensation, work out compromises on how compensation payments should be allocated. It is, therefore, even possible that increased compensation payments can be employed as a tool for encouraging peaceful resolution of disputes in the oil producing areas. Without a doubt, the struggle for scarce resources has exacerbated some of these internecine conflicts; if the proposed increases in compensation to oil producing areas materialize, there will be more resources to go round and, probably, fewer causes of conflict.

In any event, conflict resolution mechanisms in the oil producing areas (and in the nation at large) should be improved. Currently, most disputes end up in the law courts. Because the courts are congested, procedures cumbersome and morale of judges very low because of low pay and poor working facilities, some cases take more than a decade to conclude. Frustrated litigants often resort to extra-judicial measures or turn to violence. More serious disputes between communities, especially when there has been loss of life and property, have sometimes led to the establishment of commissions of inquiry by the state or federal government. These commissions of inquiry usually turn into battlegrounds where the various parties vent destructive allegations and extreme forms of verbal abuse at their adversaries. And sometimes a party that feels the inquiry may go against it resorts to legal action to block the release of the report of the commission. Prolonged litigation and commissions of inquiry have thus proved to be inappropriate vehicles for conflict resolution in the oil producing areas. The emphasis should be shifted to mediation. What is most lacking in those conflicts is a forum for dialogue between the parties. The retired senior judges who are often appointed to head commissions of inquiry would be better employed as mediators who would try to facilitate negotiations between parties engaged in a dispute, and suggest possible compromises. Where mediation fails, arbitration by a panel to which each of the parties appoints an arbitrator and the arbitrators jointly appoint an umpire is a better option than (endless) litigation.

Conclusion

The main argument of this article is, therefore, that it is not enough to increase revenue allocation to the oil producing areas; the Nigerian nation must also accept the principle that the oil producing areas are better qualified than anyone else to determine how to develop themselves and to control the resources meant for that purpose. OMPADEC's failures are not attributable merely to the fact that it was too centralized. An unrepresentative arm of the federal bureaucracy, and a hostage to the relentless struggles for personal and ethnic advantage which bedevil Nigerian governmental institutions, OMPADEC will never be able to win the confidence of the people in the oil producing areas and is unlikely to ever deliver meaningful development.

For the Nigerian leadership elite to accept that resources for the oil producing areas should be brought under the direct control of the communities there, instead of being channelled through agencies over which the leadership exercises control, will require enormous political will. The control of economic resources is often both the most important reason for seeking political power in Nigeria and the most effective way of exercising that power. To surrender this control will require a level of selflessness not common in political leaders anywhere in the world.

However, the alternative is even less palatable. Restiveness in the oil producing areas will continue to grow and probably find more dangerous forms of expression. The production of oil, on which the nation heavily depends, will become increasingly precarious, and the stability of the nation and its very existence will increasingly come under threat.

In other areas of government policy, there is already some acceptance that the state will need to give up some of its massive powers of patronage if the country is ever to develop. The liberalization of the economy, including the privatization of government companies, is ongoing, albeit at a very sluggish pace and with constant threats of reversal. The accumulation of power by the federal government is under challenge and greater decentralization to the states and local governments is probably inevitable. Making oil producing communities stakeholders in the upstream industry is interconnected with these currents of economic liberalization and political decentralization; the common aim is to transform the role of government from that of an omni-present conflict-ridden, obstacle to national development to that of a facilitator and enabler.