A Critical Analysis of Institutional Reforms in Nigeria’s Oil and Gas Industry

A Critical Analysis of Institutional Reforms in Nigeria’s Oil and Gas Industry

This article first appeared in “Legal Energy” a column in the Nigeria Energy Intelligence on the 9th of June, 2008.

Last year, President Yaradua announced a broad framework for the reform of the institutional framework of the Nigerian oil and gas industry. This framework is based on the National Oil and Gas Policy, which was put in place by the Oil and Gas Sector Reform Implementation Committee. As this new institutional framework would provide the foundation for the success or otherwise of the oil and gas industry, it is fitting that it should be the first topic of discussion in Legal Energy. Evidently such a topic cannot be analysed comprehensively in one article, therefore, over the next few episodes, Legal Energy would discuss and analyse this subject. Indeed it should be noted generally that the editorial constraints imposed would mean that the thoughts and ideas expressed here would be a significant condensation of the views of the author, therefore, some background familiarity with the subject is expected.

The discussion of this topic in particular comes with a caveat – whilst the Federal Government has outlined the broad initiatives, the detailed reform plans have not yet been issued, therefore the discussions here would be based on the broadly announced policy positions, which may be altered or amended when the detailed plans are announced. To provide a background, this first paper discusses the current institutional structure, highlighting some of its weaknesses and thus outlining the motivations for reform.

Nigeria’s Institutional Framework: A Brief Historical Perspective

The institutional framework governing Nigeria’s oil and gas industry has gone through several significant transitions over the years. For several years after petroleum was discovered, the government’s role in the oil industry was passive, with its role limited to minor regulatory responsibilities. This changed significantly in the early 70s after Nigeria joined the Organisation of Petroleum Exporting Countries (“OPEC”). The organization was set up in 1960 and one of its main aims was to “gain complete control of the hydrocarbon industry in its sovereign territories”. With membership of OPEC, Nigeria took a more pro-active stance in the development of its oil and gas industry, by the establishment of a Ministry of Petroleum charged with its supervision as well as the establishment of the Nigerian National Oil Company (“NNOC”), the country’s wholly owned state oil company, created to hold Nigeria’s interest in oil production. In 1977, in order to harness the petroleum expertise in the country, the Nigerian National Petroleum Corporation (“NNPC”) was created. The new state oil company merged the rights and responsibilities of the former NNOC and Ministry of Petroleum. Thus as well as carrying out the commercial functions of the government in the industry in terms of holding its interests in joint venture operations as well as being the holder of the OPL/OML upon which production sharing contracts are derived, this new body also held within it the regulatory and policy functions.

In the eighties, a ministry in charge of petroleum affairs was re-established to take charge of policy functions and the new Department of Petroleum Resources (“DPR”) was also created to carry out the regulatory/inspectorate functions previously carried out by NNPC. It should be noted that the responsibilities conveyed upon NNPC, which were now transferred to DPR were not legally transferred. The legislation which granted those powers and functions were not amended to reflect this functional transfer. It can thus be argued that DPR has no legitimate power to carry out those functions validly granted to NNPC’s Inspectorate Arm by legislation. This however is a discussion for another day.

Current Institutional Structure of the Nigerian Oil & Gas Industry

A Critique of the Current Structure

Whilst the institutional structure detailed above suggests clear functional separation in the government’s various activities in the oil and gas industry, the reality is a bit removed from this picture. The relationships between these entities are not at arms-length. Indeed, the relationship between NNPC & DPR may be characterised as one which suggests regulatory capture. Structurally, NNPC and its supposed regulator, share facilities and the employees of both institutions are often sent on secondment from one to the other. NNPC has also directly funded the operations of DPR, including the payment of staff salaries and the funding of DPR’s monitoring functions. The closeness between the entities compromises the ability of DPR to effectively and independently police NNPC activities.

Additionally, the relative institutional strength of NNPC in terms of human and financial resources, amongst others, as compared with the other entities, has seen the corporation extending its scope of powers well beyond what would be considered valid commercial functions. Through its National Petroleum Investment Management Services (NAPIMS) arm, NNPC carries out what would be traditionally classified as regulatory functions.

Furthermore, as an entity which enjoys a monopoly of a de-facto nature, whereby exploration and production rights are granted mainly to it or to private companies, which are associated with it, NNPC enjoys a special position in the oil and gas industry allowing it to play a very significant role in influencing government policy. It has been opined that de-facto monopolies such as NNPC are incentivised to take decisions which are primarily in their own interests and not those necessarily in the interest of the government or the nation. Indeed it may be suggested, for example, that NNPC’s intransigent opposition to the privatisation of some of its subsidiaries (despite its repeated failures in reviving these entities over the years) may serve as evidence of this theoretical position.

In sum the failure to achieve functional separation has the effect of weakening the institutional governance of the industry and does not promote efficiency, effectiveness and transparency. In recognition of this, the foundation of the proposed institutional framework has been “the need to ensure the separation and clarity of roles between policy, regulation and commercial activities”.

Funding Issues

It should be noted however, that there are other significant systemic failures, and in particular the perennial problem of joint venture funding, which the proposed industry reforms seek to address. To describe this problem briefly – production from joint ventures constitute an estimated 90% of Nigeria’s current production. As the holder of majority interests in these joint ventures, NNPC is required to contribute significantly to the joint venture budget and funding. Under the current arrangements, NNPC’s interests in the joint ventures are funded directly from the Federal Government’s budget. This has served as a significant strain on the government as money is diverted away from other areas of infrastructural investment such as power, roads, schools and hospitals to fund joint venture activities. Aside from the opportunity costs associated with this diversion, the arrangement has proved to be thoroughly inefficient, significantly hampering investment in joint venture projects, with many being cancelled or postponed until government funding is arranged. It has also had the effect of stifling the growth of NNPC, due to its inability to fully and independently plan its growth and investment. This has led the government to consider alternative funding mechanisms for joint venture investment in its reform initiatives.

Concluding Remarks

The twin issues of functional separation and funding arrangements thus form the thrust of the reform agenda. They will also form the basis upon which the reform plans are critically analysed in the Legal Energy series. The next paper provides a broad overview of the government’s reform initiatives.

Adeoye Adefulu holds a Ph.D in oil and gas industry reform from the Centre for Energy, Petroleum and Mineral Law & Policy, University of Dundee. He is a partner in the law firm of Odujinrin & Adefuluest 1972.