The PIB And The Petroleum Host Communities Fund

Since our last publication  when we reviewed Part Two and Three of the Petroleum Industry Governance and Institutional Framework Bill 2015, there have been new developments in this area. First, the Bill (now tagged the Petroleum Industry Governance Bill 2016 “PIGB”) passed first reading after deliberations by the Senate. This new Bill largely retains the content of the version we have been reviewing, with a few amendments. Consequently, we amended our review of the previous publications namely the Powers of the Minister and the Establishment of the Nigerian Petroleum Regulatory Commission which can be found on http://www.petroleumindustrybill.com/.

In this edition, we would have continued with the analysis of Part Four of the new Bill: Establishment of Commercial Entities, but for a recent development in respect of the PIGB. It was reported that progress on the Bill is to be stalled as the Senate President, Bukola Saraki ordered the indefinite suspension of further consideration of the Bill as a result of mounting opposition from southern lawmakers on the removal of the 10 percent royalty proposed for host oil communities tagged the Petroleum Host Community Fund, (“PHCF”) as captured in the original PIB, from the PIGB which they posit is not in the best interest of their region.

Although we find it difficult to agree with the notion that the non-inclusion of the PHCF in the PIGB necessarily translates into its total removal from the PIB, taking into consideration the fact that the PIB has of necessity been split into manageable segments the PIGB being just the first of such segments, we think it worthwhile to revisit the PHCF as contained in previous versions of the PIB and provide a review of its provisions.

Evolution of PHCF in the PIB

As part of the Federal Government’s efforts to put an end to the Niger Delta crisis by fostering peaceful coexistence between the host communities in the Niger Delta region and the oil producing companies operating in this region and to ensure that the region obtains tangible benefits from the pervasive nature of the extractive industries, with maximum economic spin-offs to local communities situated near petroleum operations, latter versions of the PIB began to promote the notion of a Petroleum Host Communities Fund. It is interesting to note that this concept of a host communities fund did not materialize in the drafts of the PIB until 2010.

 Objectives of the Fund

According to section 117 of the July 16, 2012 PIB (c), the PHCF was created to be utilized for the development of the economic and social infrastructure of the communities within the petroleum producing area.

 Contribution to the Fund

All petroleum companies are required to pay on a monthly basis, 10% of net profit to the relevant PHCF which is to constitute an immediate credit to their total fiscal rent obligations and the contributions so made to the Fund are allowable deductions for the purpose of tax assessment.

Issues Surrounding the Fund

Unlike previous provisions, the Fund would be centralized and there would be no allowance for nonproducing but impacted communities. Repair costs for acts of vandalism within communities remain deductible from the Fund unless it is established that members of the community were not responsible for the vandalism.

The provisions of the PHCF under the PIB 2012, was significantly modified prior to its passage by the 7th Session of the House of Representatives of the National Assembly in the famous passage of a flurry of Bills before the wrap up of the old administration. This was probably in response to the various criticisms levied against the provisions of the PHCF as contained in the PIB 2012 including the fact that:

  • The Bill did not define the concept of “host community”, which is often a contentious issue in oil & gas producing areas but provides that the Fund shall be utilized for the development of the economic and social infrastructure of “the communities within the petroleum producing area”. Thus suggesting that there would be no allowance for non-producing but impacted communities;
  • The PHCF as structured in the Bill is a centralized institution, with no direct grass root/community level involvement in the administration of the Fund.

The Provisions of the House Bill

The House of Representatives’ version of the Bill, (the “House Bill’) captured companies involved in both upstream and downstream petroleum operations. Remittance into the Fund is to be on a monthly basis. Impact funding amounts is to be based on subsequent regulations determined per dollar per hectare of Petroleum Prospecting License (“PPL”) or Petroleum Mining Lease (“PML”) and per dollar per annum for onshore or offshore wells (excluding non- producing wells) and per dollar per inch diameter per meter length of each flowing gathering line, gas pipeline or oil product pipeline per annum and per dollar per inch diameter per meter length of each flowing crude oil pipeline per annum and per dollar per square meter area occupied by any operational tank farm, etc. per annum and per dollar per barrel of oil for operating field production or upstream facilities, refineries or other midstream facilities, gas conditioning plant, processing plant, etc.;

The House Bill clearly establishes the governance and management structure of the Fund. Composition of the Board of the PHCF is to include amongst others, representatives of the six geopolitical zones, and representatives of each upstream/ downstream companies. Payment to the Fund is to commence three months from the commencement of the Act and disbursement from the Fund is to commence within twelve months from the commencement of the Act.

The House Bill also provides for direct grass root/community level involvement in the administration of the Fund. The Fund is to transfer funds directly to incorporated trustees representing each community. Communities captured by the Fund include: those located in PPL and PML areas, pipeline corridors and other impact areas of onshore petroleum facilities and impact areas of shallow water petroleum wells, pipelines and facilities, based on allocation procedures and future regulations.

The impact funding amount remittances by the oil and gas companies shall be deductible for the purposes of Nigerian Hydrocarbon Tax (“NHT”), Companies Income Tax (“CIT”) and Education Tax.

What the House Bill, which is the last version of the PIB containing provisions regarding the PHCF has tried to achieve is to ensure as much as practicable, that the revenue from the Fund reach local communities impacted by oil and gas operations.

Possible Solutions

It is the view of this writer that the creation of the PHCF is not the solution to the Niger Delta crisis and indeed finds it incredulous that so much agitation has arisen in this regard. Prior to the proposal and subsequent inclusion of the PHCF in the PIB, various government intervention have been put in place in addition to the allocation of derivation, such as the Niger Delta Development Board, the Oil Mineral Producing Areas Development Commission (“OMPADEC”), the Niger Delta Development Commission (“NDDC”), and the Ministry of Niger Delta Affairs (“MNDA”). Rather than identify and address the root cause of why the various government interventions in the past have not yielded the desired result, there is a shift towards either placing an additional layer of responsibility on oil companies and/or creating another layer of institution which would likely be bogged down with the same problems plaguing the existing institutions.

Of course the underlining problem is not a mystery, aside from inadequate government funding, a pervasive culture of corruption has contributed largely to the intervention programs making little or no impact over the years (however, this is not a forum for this discuss). The establishment of the PHCF in itself is not untenable and indeed may be a welcome development to bring resource dividends to the oil producing region. However, the debate should not hinder the progress of the PIB and the creation of the Fund need not be included therein. Rather than creating a totally new avenue to further tax oil and gas companies, why not revamp the structure of the existing institutions particularly the NDDC and the MNDA? These institutions were established primarily to execute Federal Government’s projects for the development and environmental sustainability of the region and are funded mainly by the government and oil and gas companies. Restructuring of an institution like NDDC such that a large portion of the funds accruing to them can be channeled towards creating a PHCF or a Fund with similar characteristics should be considered.

It has been suggested that a good way to prevent mismanagement of such a Fund would be to involve international agencies such as the United Nations (“UN”) in its management and this writer applauds such a view. In this instance, administration of the PHCF would involve representation from relevant stakeholders such as the Federal Government, Governors from the oil producing States, traditional rulers, Oil Companies, reputable NGOs, the UN as suggested and more importantly, community level participation. Such direct grass root/community level involvement of the people would calm their agitations and ensure that the people have a strong voice in deciding what projects and interventions are required for each of their communities and be able to monitor the implementation process until execution.

Such partnership initiative would reduce the layer of corruption by ensuring that disbursements from the Fund is utilized for the specific community or regional development project it is earmarked for. The Federal Government also has a major role in ensuring that it meets its funding obligations as and when due. It was recently reported that the Senate approved a budget of about N240 billion for NDDC. It is hoped that the fund would be effectively utilized.

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