OrderPaperToday – Oil companies operating in Nigeria have kicked against the proposed contribution of 2.5% of annual Operating Expenditure (OPEX) to funding the Host Communities Development Trusts contained in the Petroleum Industry Bill (PIB).

This position by the companies on the 2.5% contribution could be put the passage of the bill at risk given that most host communities have called for upward review of the figure against the backdrop of mammoth development and environmental challenges they suffer from oil production activities.

The PIB is proposing that oil companies should contribute 2.5% of their annual operating expenditures to Host Community Development Trusts to be set up for the development of communities being affected by their operations.

Clause 240(1) of the bill proposes specifically: “Each settlor, where applicable through the operator, shall make an annual contribution to the applicable host community development trust fund an amount equal to 2.5% of its annual operating expenditure in immediately preceding calendar year in respect of all operations affecting the host communities for which applicable host community development trust was established.”

The bill further proposes that 75% of the fund of the trusts will go into capital projects expenditure for the host community, 20% will be invested on behalf of the community, and 5% for recurrent expenditures of the trusts.

In addition, the setting up of the trusts is a precondition for granting of oil licenses while violations could attract revocation of the licenses.

But in the memorandum submitted the companies at the hearing organized by the Senate and House of Representatives respectively, the companies rejected the proposal.

Speaking under the aegis of Oil Producers Trade Section (OPTS) –  a cluster of 30 indigenous and international oil companies – of the Lagos State Chamber of Commerce and Industry (LCCI), the companies raised other concerns on the Host Communities component of the PIB.

They, instead, asked that the fund should be deducted from the 3% contribution by oil companies to the Niger Delta Development Commission (NDDC).

Section 14 (2b) of the NDDC Act provides that “there shall be paid and credited to the fund…….3 percent of the total annual budget of any oil producing company operating, on shore and offshore, in the Niger-Delta Area; including gas processing companies.”

Also, OPTS members are concerned about the administrative burden of setting up the host communities trusts, and rather asked that the host governments should manage the contributions already being made by oil companies in the NDDC.

According to the companies, the bill does not provide clear guidelines for determining host and littoral communities for shallow water and deep offshore operations, thereby significantly exposing operators to disputes and litigations from various communities jostling for recognition.

They therefore recommended that the government set clear and reasonable rules/mechanisms for determining host communities or in the alternative, determine host communities that will be beneficiaries of the trust funds.

Furthermore, the companies posit that the punishment of revocation of license or lease in the event of infraction of host community provisions is severe and should be reconsidered.

According to OPTS, these provisions are counter to the desired objectives of the bill to grow the Nigerian oil and gas industry.

“Revocation of a license or lease is a severe penalty for infraction of the obligations under Part C of the Bill. Moreover, this provision will be counter to the desired objectives of the Bill to grow the Nigerian oil and gas industry, which may not be achieved,” they stated.

They are also concerned about transfer of host communities’ obligations in the event of transfer of license of lease.

Section 237 of the bill reads: “Transfer of settlor’s interest and obligations subject to host communities’ development trust obligation

“(2) Where part of a license or lease governed by this Act is surrendered pursuant to the provisions of this Act, the holder or holder nominee will continue to discharge its surviving obligations, notwithstanding that the area that is surrendered may be granted to a new lessee or licensee.

“(3) Where any license or lease governed by this Act is revoked, terminated or expired, the holder will continue to discharge its surviving obligations, notwithstanding that the area revoked, terminated or expired may be granted to a new lessee or licensee.”

For the oil companies, “the bill fails to recognize that once a license or lease has been relinquished for any reason, the obligations associated with that license or lease are terminated.”

Risks to the bill…

For the first time in about 4 assemblies, it appears there is political will to pass the PIB after over 20 years in the making. The host community component appears to be the most popular, if not contentious, aspects of the bill.

An analysis done by OrderPaper Nigeria from data contained in memos submitted and presented by stakeholders at the public hearing, showed that 31 out of 44 submissions raised issues on Host Community provisions. 21 of these dwelt solely on host community development issues.

Some representatives of host communities at the hearing argued that the 2.5% is too small and rather made a myriad of recommendations, including royalty payments and increment to 10% of OPEX, among others.

The national president of HOSTCOM, Dr. Benjamin Tamaranebi, at the Senate public hearing, called for 10% stakes in NNPC should be given to host communities.

The Minister of State for Petroleum Resources, Timipre Sylva, argued that the provision was fair. “If you have to look at it properly, you will see that 10 per cent of profit is different from 10 per cent of the OPEX (Operating Expenditure). Before now, you had the provision of 10 per cent of profit and profit means that if I don’t declare it, you don’t have anything. I can decide to say 100 per cent of profit and not declare any profit, so you don’t get anything,” he said.

Furthermore, the public brawl by different factions of the host communities on 28th of January at the House Ad hoc committee hearing makes it clear that the issue of host community must be handled with caution.

Although there could be a point of convergence between the oil companies and some host communities on the NDDC. Some stakeholders in the region are also of the view that NDDC should be scrapped.

Potential benefits to companies…

There is a caveat to the trust fund however. According to the PIB, the funding by companies is predicated on protection of oil assets in the host communities. In the event of vandalism, the oil company is allowed to deduct repairs from the 2.5% OPEX.

Clause 257 of the bill reads: “Where in any year, an act of vandalism, sabotage or other civil unrest occurs that causes damage to petroleum and designated facilities or disrupts  production activities within the host community, the community shall forfeit
its entitlement to the extent of the cost of repairs of the damage that
resulted from the activity with respect to the provisions of this Act within
that financial year.”


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