ENERGY LAW I
- The origin and occurrence of Oil and Natural Gas
- Theories of Ownership in Oil and Gas
- United Nations and Natural Resources
- Interest in Oil and Gas – Oil concession, effect of rights of concessionaries on natural gas.
- Oil and Gas Pipelines – nature, legal status, conditions for grants, rights and obligations of the license.
ENERGY LAW II
- Refining of Petroleum Oil
- Oil and Gas Revenue Legislation
- Administration of Petroleum Profits
- Nigerian National Petroleum Corporation (NNPC)
- State Participation in the Petroleum Industry
- Manpower Development
- Organisation of Petroleum Operations
- Consideration of other sources of energy including electricity, hard rock materials and nuclear energy.
- Nature of property rights in,
- State control of, and participation in, development of these sources,
- National regulation of foreign investment in the development of these
- The International Energy Agency
THE ORIGIN AND OCCURRENCE OF OIL AND NATURAL GAS
In this topic, we will discuss what oil and natural gas entails as a natural resource, it’s origin, a brief discourse on the role of exercising state sovereignty over natural resources, and a concise history of the exploration of oil and gas.
According to Black’s Law Dictionary, Natural Resources is defined as:
“Any material in its native state which when extracted has economic value.”
Natural resources refer to resources found on, over or under earth, created by natural processes. This means that they are not man made, and as such, they are not created, and cannot be renewed by man. These natural resources are necessary for the advancement of the human race; almost all forms of technology in the world today are created with them. They are a vital part of any state that has them, and this is for several reasons; their usefulness as raw material for technological development, they provide a sense of national pride, they generate revenue, among others. This makes the exerting of sovereignty over them, by these states important and necessary. It is among these natural resources, we find oil and natural gas. Oil and natural gas like any other natural resource, play a central role in the technologies that make our lives easier. It is used to fuel engines, from planes to cars, motorcycles, factories and even domestic needs like cooking among others. This means the demand and importance of these natural resources cannot be over-emphasized.
In relation to a state’s enforcement of sovereignty over it’s natural resources, this has been weaved into the fabric of international law in the world today. This is enshrined in the principle of state’s permanent sovereignty over its wealth and natural resources. It was first introduced by Chile in a United Nations Commission on Human Rights (UNCHR) meeting in 1952, and was first reduced to a resolution of the UN General Assembly in Resolution 626 (VII) on the 21st of December 1952. By 1958, tin line with the UN General Assembly Resolution 1314, the principle of permanent sovereignty of states over their resources was recognised as a foundational part of a state’s right to self determination.
However, it was until 1962 in the UN General Assembly Resolution 1803 (XVII) of 1962, that the principle was finally established as a widely recognized principle of international law. It also has been respected as customary international law attaining jus cogens status across several cases before the International Court of Justice; in the East Timor Case, in the Congo v. Uganda Case among others.
The principle of sovereignty is inalienable, and seeks to ensure the territorial integrity of every state. It also recognizes exclusive sovereign jurisdiction, and the equality among states. This principle is a necessary one for maintenance of peace among the comity of nations. Under the principle of sovereignty, there are several rights a state has. The right to exercise jurisdiction over issues that occur within it’s territory, the right to self actualization, especially the right to exercise sovereignty over it’s natural resources as concerns this course, among others. This principle of sovereignty applies to the operation of oil and gas. But what then is oil and natural gas?
WHAT IS PETROLEUM, OIL AND NATURAL GAS
Under the Nigerian Petroleum Act (2004), Petroleum means:
“mineral oil (or any other related hydrocarbon) or natural gas as it exists in its natural state in strata, and it does not include coal or bituminous shale or other stratified deposits from which oil can be extracted by destructive distillation.”
Furthermore, Crude Oil under Section 15 of the same Act, refers to:
“oil in its natural state before it has been refined or treated (excluding water and other foreign substances)”
Natural gas on the other hand, was defined under the petroleum act as:
“gas obtained from borehole and well consisting primarily of hydrocarbon.”
Petroleum essentially, is a flammable liquid made up of hydrocarbons under the Earth’s surface in gaseous, solid and liquid forms, found in rocks. It’s a fossil fuel, this means it is formed and created from centuries of decayed natural substances like trees, plants and the action of microorganisms on these decayed substances. This fossil fuel is created on the continental shelves and sedimentary basins close to the earth crust, Under millions of years of heated and pressured layers of decomposed natural substances.
The chemical compositions of oil and gas involve, hydrogen and carbon which makes hydrocarbons, oxygen as well as sulfur. According to Doscher in his text “Petroleum” (2008) there are about three types of crude oil petroleum. The asphaltic oil which is used to create naphthenes, which has twice as much hydrogen than carbon atoms, the paraffin oil which has two more hydrogen carbon than twice of the amount of carbon atoms existing within its composition, and lastly the mixed based oil which has a mixture of both asphaltic and paraffin oil compositions.
Doscher also argued in his work that oil is created from the decomposition of marine water organisms that had died millions of years ago. According to him parts of the organisms that did not transform into limestone or harder substances like shale became oil and natural gas.
The gaseous products of this fuel, is what is referred to as natural gas today. Petroleum however, refers to the liquid products of this fuel also known as Oils.
Petroleum is made or composed of hydrogen and carbons. In their solid forms, they create coal, the tar or bitumen, used to create roads among others. The most common product however is crude oil, which is similar in uses with natural gas, but doesn’t have the same component formations. Other more used byproducts of petroleum includes; petrol motor spirits at different grades, liquefied pressurized gas [LPG], kerosene, diesel and the likes
HISTORY OF THE EXPLORATION OF OIL AND GAS
The use of oil predates back to over five millennia ago, where it was used as burning oil, for lighting as in Ancient China for example. Was used for fire and later on, as a weapon such as fire cannons used to breakdown Castle walls in ancient times. In Ancient Persia, it was used for medicinal purposes and in some parts as a simple lubricant for water proofing. In Baghdad, it was used as tar for making the fine roads it was famous for in old times, in Azerbaijan it was used to produce naphtha. But predominantly, in the 19th and 20th Century, it was distilled for kerosene in lighting lamps and lanterns. It was extracted from the surface of the earth for the same purpose. According to records by the Organization of Petroleum Exporting Countries (OPEC), the first oil well to be dug was in Iran, The first set of drilling oil process, started arguably, in China around 300BC where they used bamboo tubes and bronze bits to get oil.
With the rise of the industrial revolution, the demand for oil and gas increased exponentially, and the first modern and commercial drilling is believed to have begun in the U.S in 1859. World War I would lead to the transformation of the predominant use of oil from kerosene to fuel for engines. In the 20th century it is also worthy of note, that Russia had the most advanced drilling procedures and provided about half of the world’s oil, until the U.S would take that position later. By the end of the Second World War, oil and natural gas had become the predominantly used oil for powering engines, electricity, and the likes. And the Middle East had become the highest producers of oil. More established oil drilling began after 1960, as the demand for crude oil increased as well. The first offshore oil exploration was done by Superior Oil Company in 1947. However the harnessing of natural gas had begun in Fredonia, New York a long time before that, in 1821 when procedures to trap it and use it were discovered.
HISTORY OF OIL AND GAS EXPLORATION IN NIGERIA
Nigeria is currently one of the biggest oil nations in the world, And largest in Africa. In Nigeria, the first oil exploration was done in present day Okitipupa Ondo state, By the German Bitumen Company. The amount of oil found was not up to commercial quantity and as such they ceased their operation by World War I. after the Second World war, the shell BP company tried severally to find commercial quantities of oil within the nation. However, it was from Olobiri in Bayelsa state that the first successful commercial drilling of oil happened. After that there was another discovery of commercial quantities of oil in Afam. On the 7th of February 1958, the first shipment of oil was sent to Europe and this began Nigeria’s exporting history. In the year 1962, concessionary rights of shell BP was shared and expanded so as to ensure increased exploration of oil as well as avoid over dependence on a singular company. In 1971 the Nigerian national oil company NNOC was established to represent Nigerian interest and her incursion into oil exploration within the country. By July 1977 the NNOC and the federal ministry of mines and power were merged together to form the Nigerian National Petroleum Corporation [NNPC]. By 2004, over 800,000,000 barrels across 100 fields were being produced within the country. The first indigenous oil company after the Nigerian government’s efforts to increase indigenous participation within the oil and gas sector was the consolidated oil company in 1991. The estimates of over 30 billion barrels of oil reserves within the country Nigeria is deemed the tenth oil richest nation in the world and definitely the richest in Africa.
It is, however, worthy of note now while the all reserves are over 30 billion the gas reserves within the country are over a whooping 250 trillion cubic feet. This is triple the amount of oil reserves that Nigeria currently has and is a more desirable form of exploration than oil as it will reduce the amount of oil spillage within the country, as well as its attendant consequences. Nigeria is currently the largest gas flaring country in the world. She can’t fully harness the amount of gas that she has wasting billions of NAIRA in revenue yearly. This gas is usually used for several things including power, fertilizers, feedstocks, industrial heating, aluminium smelting, as well as liquefied natural gas used in cooking. Liquefied pressurized gas is being produced across four refineries within Nigeria. The Nigerian gas company has entered into a 10 billion deal with the Shell BP Company to produce gas from one of our plants among other commercial plants in order to harness gas within the country.
LEGAL REGIME OF OIL AND GAS
The first petroleum act in Nigerian history was the Petroleum Oil Ordinance of 1889, and after that was the Minerals Regulation (Oil) Ordinance of 1904 this was created in order to provide a framework for development plans of oil exploration. This ordinance however allowed only British subject companies to operate in oil exploration within the country. The 1914 Mineral Oil Ordinance was passed and it was no different as it hindered the amount of translator had oil exploration as it restrained this exploration to only British subjects specifically within section 6(1) of the ordinance which stated that:
“No lease or license shall be granted except to a British subject or to a British Company registered in Great Britain or British Colony and having its principal, place of business within her majesty’s dominion, the Managing Director (if any) and the majority of the other director of which are British subjects.”
In 1934, The Royal Dutch and Shell English Consortium Company were allowed to create an English monopoly over oil exploration within Nigeria. The shell company was given concession rights to over 40,000 square miles of oil fields within Nigeria this was later reduced to 15,000 square miles of oil in 1962, reducing this monopoly and allowing the incursion of other companies like Chevron, Texaco into the Nigerian oil exploration space. Prior to this, the Mineral Oil Amendment  had allowed sale if submarine areas for oil exploration [offshore].
After independence there was the Petroleum Act Decree NO.51, (Now P10 LFN 2004). In 1969, the decree repealed all former ordinances and allowed a chance at true Nigerian interest relation to oil exploration. This act vested the ownership and control of oil in the Nigerian government in section one of the act as well as provided the government licenses system instructions to two sections four of the same act as well as overseeing punishment for failure to comply with the dictate of the minister, among other things. The act has about several regulations under it:
- Mineral oil safety regulations
- Petroleum regulations
- Petroleum drilling and production regulations
- Petroleum refinery regulations
- Crude oil transportation and shipment regulations
- Deep water local locations to companies regulations
- And the oil prospects licenses [conversion to oil mining leases] regulations
THEORIES OF OWNERSHIP IN OIL AND GAS
Under this topic, we discuss the various perspectives and schools of thought as to the ownership and control of oil and gas. From the time Col. Edwin Drake drilled the first oil reserve of commercial quantity, in 1859, there have been different postures as to who and how oil should be owned and controlled. These arguments vary as much as those who postulate them. Each of these different views are a testimony to the differences in how the control of natural resources are being viewed in the world today.
One of the major problems that made find a consensus of the system of ownership of oil and gas, is its fugacious nature. As put in the U.S case of .Hammonds v. Central Ky. Natural Gas Co., (1934) it is the “wild and migratory nature of oil and gas,.. they may be here today and gone tomorrow.” This fugacious nature has been a source of legal battle among oil landowners for years. In the case of Kelley v. Ohio Oil Co. (1897) where a landowner owner had drilled an oil well, few metres from the borders of a neighbouring land, so that he had began drilling oil from the neighbouring land. In an action for an injunction to stop the aforementioned well, the court held that the only remedy the plaintiff could get was self help. That is, drilling an oil well close to that of the defendant, in the plaintiff’s land to ensure equal access to the oil despite its fugacious nature. The court stated:
“While it is generally supposed that oil is drained in the wells for a distance of several hundred feet, the matter is somewhat uncertain, and no right of sufficient weight can be founded upon such uncertain supposition to overcome the well-known right which every man has to use his property as he pleases, so long as he does not interfere with the legal rights of others. Protection of lines of adjoining lands by drilling of wells on both sides of such lines affords an ample and sufficient remedy for the supposed grievances complained of in the petition and the supplemental petition, without resort to either an injunction or an accounting.”
There were even attempts to divide the rules of ownership and control of oil from those that would apply to natural gas. This was depicted in the early case of Wood County Petroleum Co. v. West Virginia Transp. Co (1886) where the assignee of a lease on a land to mine rocks or carbon oil (crude oil), found natural gas on the leased land and harnessed it. The lessor sought damages for the extraction of gas, which was argued was different from the carbon oil that was contained on the lease agreement and as such it amount to trespass of the land. The court however, held that the natural gas were a by product of oil mining and as a result, the extraction of natural gas would not amount to trespass. The fundamental rationale behind the Court’s decision though, was not just due to the by product argument, but more so because at the time, the court was unaware of the limited nature of natural gas, so that it was argued that after the expiration of the lease, the lessor could continue to benefit from the gas in their land, so that no real harm was done to the contemplation of the court.
These show how hard reaching a consensus on a theory of ownership and control of oil and gas has been in today’s world. However, it is worthy of note that the predominant practice, in the face of these varying views on ownership and control of oil and natural gas, is to pick the practice that fit the culture and prevailing practice of those residing where the oil is found. There have been various classifications of the different theories of ownership; however the major theories bore down to three; Absolute Ownership Theory, Qualified Interest Theory and Non-Ownership Theory. These will be discussed below.
QUALIFIED INTEREST THEORY
This theory states that ownership or autonomy over oil and gas, is not actionable or enforceable until the said oil and gas has been reduced into possession. This possession refers to the owner of the land under which the oil and gas is found, drilling the said oil or any other form of harnessing the oil. In the instance, where the oil is across various lands owned by different people, they all get equal rights to the oil and gas. This practice is done most predominantly, in the US. and was illustrated in the renowned case of Barnard v. MNG Co. (1906).
In this case, the court held that what the plaintiff could do as a remedy for the defendant’s extracting oil from the plaintiff’s land is that he reduced the oil to possession and drilled it from his land. However as far back as 1900 this theory was illustrated in the U.S case of .Manufacturers’ Gas & Oil Co. v. Indiana Natural Gas c& Oil Co. In that case the defendant had used pumps to increase the natural flow of gas from its wells more than was legal according to an Indiana statute. This practice was proven to be injurious to the state of the reservoir and so the court held in favour of the plaintiffs, who had ownership over other lands in the reservoir, that they were entitled to an injunction order to halt the practice. The court noted the differences between natural gas and underground water. In describing the property rights of the plaintiffs in the natural gas, as well as the mode of extracting oil being a means of exerting ownership of oil, the court said:
“Without the consent of the owner of the land, the public cannot appropriate it, use it, or enjoy any benefit whatever from it. This power of the owner of the land to exclude the public from its use and enjoyment plainly distinguishes it from all other things with which it has been compared, in the use, enjoyment and control of which the public has the right to participate, and tends to impress upon it, even when in the ground in its natural state, at least, in a qualified degree, one of the characteristics or attributes of private property.”
It is worthy of note, that in the areas where this theory is practiced in the U.S, the drilling or harnessing procedure of oil and gas, is allowed only where the procedure does not hurt the environment, to help sustainability. There have been counter arguments against this theory; first that oil is not like wild animals that cannot be owned until they are tamed, also there is the argument that ability to not extract oil from one’s land, maybe due to lack of capital should not preclude ability to exercise or benefits from the profit made from drilling.
ABSOLUTE OWNERSHIP THEORY
The fundamental belief of this theory was expressed in Stephens County v. Mid-Kansas Oil & Gas Co (1923) where the court held that:
“oil and gas in place are minerals and realty subject to ownership, severance and sale while embedded in the sands and rocks beneath the earth’s surface in like manner and to the same extent as is coal or any other solid mineral.”
In other words, ownership over oil and natural gas can be exercised like any other natural resource. This is the theory most commonly practiced by states across the world. It states that the owner of the land, where the oil is found, is the absolute owner of the oil and gas found there. This means that the said owner is able to exercise interest and all profit that comes from extracting the oil from the ground, whether he does it himself or not. In Nigeria, this is the kind of ownership over oil and gas practiced; state ownership. As provided in Section 44(3) of the Constitution of the Federal Republic of Nigeria 1999 (2011 as amended):
” the entire ownership and control of all petroleum in, under or upon any lands including and covered by water) which is: (a) is in Nigeria or (b) is under the territorial waters of Nigeria, (c) forms part of the continental shelf; or (d) forms part of the Exclusive Economic Zone of Nigeria.”
Under the Petroleum Act (2004):
“the entire ownership and control of all petroleum in, under or upon any lands including and covered by water) which is: (a) is in Nigeria or (b) is under the territorial waters of Nigeria, (c) forms part of the continental shelf; or (d) forms part of the Exclusive Economic Zone of Nigeria.”
As well as the Land Use Act among others. These sections provide that Nigeria has absolute control over all resources in the land, waters and economic zone within the territory of the country, this includes oil and gas.
However, there are counter arguments against this theory as well. That oil and gas are naturally fugacious and dynamic. What this means is that the oil could move from one land to another, making exertion of ownership at best tenuous, and impossible at worst.
This theory as the name implies, holds that no one can really own oil and gas, in the sense of ownership due to the fugacious nature of the resource; this is the theory that criticizes the absolute ownership theory. It is the least subscribed to school of thought among the various theories on ownership of oil and gas.
UNITED NATIONS AND NATURAL RESOURCES
The United Nations was established in 1945, by the UN Charter enacted the same year. The end goal of this body was to ensure peace and cooperation among states in the world and ultimately prevent another world war from occurring. It seems to create cooperation across nations, peaceful relations as well as a universal respect for human rights.
Efforts to create a global union of states for the maintenance of peace and good international relations had been long standing before the establishment of the United Nations. The First World War, a coalition of nations came together motivated by the just concluded war, to find a lasting peace. It was called the League of Nations. The league lasted from 1920-1946 with about 63 member states. However at the commencement of the Second World War, it was a general consensus that the spirit of the creation of the league had failed. However, the desire for a united body of nations did not die with it, so that by 1944, President Theodore Roosevelt of the U.S with the support of the United Kingdom, Soviet Union and China agreed to build an organization of nations. And by 1945, with about 51 member states the United Nations was established, the organization has a security council made up of five nations with veto power. The five nations are China, France, Russia (which took the place of the Soviet Union after it was dismantled in 1991) the United Kingdom and the U.S. The rationale behind this, was that these were the most powerful nation’s of the world at the time, and their coalition had to be guaranteed for any similitude of success, at international peace to be possible.
Under the United Nations (UN) Charter, there are six bodies of the UN: The Security Council, The General Assembly, The Secretariat, The International Court of Justice, The Trusteeship Council (which technically no longer exists, as its aim at ensuring all states are independent from their colonies has been achieved since 1994) and The Economic and Social Council. The Security Council contains the five states aforementioned; The General Assembly contains the coalition of nations in the world today, with over 192 members, which has an input in all other bodies of the UN, although it is not as powerful as the Security Council. For instance while the General Assembly votes in the Secretary General; it is the Security Council that nominates whoever is to become the UN Secretary General.
After the Second World War, many states rich in natural resources began to get independence from their colonial masters, and while political independence was guaranteed, there was a need to ensure economic independence over the natural resources in these states. This led to several resolutions created by the United Nations, to cater to this need. The most predominant of these resolutions, was the United Nations General Assembly Resolution 1803, known as the Declaration on Permanent Sovereignty Over Natural Resources, Resolution 1803 (XVII) made on the 14th of December, 1962.
“(1) “the right of peoples and nations to permanent sovereignty over their natural wealth and resources must be exercised in the interests of their national development and wellbeing of the people of the state concerned,”
(2)“The exploration, development and disposition of such resources as well as import of the foreign capital required for these purpose should be in conformity with the rules and conditions which the peoples and nations freely consider to be necessary and desirable with regards to the authorisations, prohibition of such activities;”
(3)“In case where authorization is granted, the capital imported and the earnings on that capital shall be governed by the terms thereof, by the national legislation in force, and by international law. The profit derived must be shared in the proportions freely agreed upon, in each case between the investors and the recipient State, due care being taken to ensure that there is no impairment, for any reason, of that State’s sovereignty over its natural wealth and resources”
It soon led to the enactment of the Charter of Economic Rights and Duties of States (CERDS), in Article 2 of the Statute it provided that:
“Every State has and shall freely exercise full permanent sovereignty, including .possession, use and disposal, over all its wealth, natural resources and economic activities”
And also, that:
“regulate and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and regulations and in conformity with its national objectives and priorities”
These provisions established the Principle of a State’s permanent Sovereignty over it’s Wealth and Natural Resources. This was enjoined with a caveat that this sovereignty was to be exercised for the benefit of the state and it’s people, barring mismanagement and subversive exploitation of a state’s natural resources.
In line with this principle, every state has the permanent sovereignty and right to:
(1) Freely dispose of her natural resources;
(2) The right to explore and exploit her natural resources freely;
(3) To use the natural resources available in the state for development;
(4) Right to regulate foreign investment in relation to these resources; and
(5) To settle disputes on the basis of the national law governing natural resources within the state.
The declaration on permanent sovereignty provided a balance between developing states exerting their sovereignty over their natural resources, and developing nations ensuring their access to foreign investments in developing countries. In the General Assembly Resolution 88 (XIII) created on the 19th of October 1972, the United Nations Conference on Trade and Development (UNCTAD) reiterated this right, one of the many resolutions that helped the principle of permanent sovereignty become an established international law.
The was however a question as to whether these resolutions, had any law binding effect on the International Court, in the American Independent Oil Company vs. The Government of Kuwait Case it was argued that:
“On the public international law plane it has been claimed that permanent sovereignty over Natural resources has become an imperative rule of jus cogens prohibiting states from affording by contract or by treaty, guarantees of any kind against the exercise of the public authority in regard to all matters relating to natural riches. This connection lacks all foundation. Even if assembly resolution 1803 (XVII) adopted in 1962, is to be regarded, by reason of the circumstances of its adoption, as reflecting the then state of international law, such is not the case with subsequent resolutions which have not had the same degree of authority…..”
Likewise in the Texaco Petroleum Development Company and California Asiatic Company vs. Libya case it was held that a resolution of the General Assembly, is not necessarily binding law on the International Court. Notwithstanding, it is expedient to know that this does not mean legal resolutions are without legal value, given that is provided by a principal body of the UN it is to be treated with some respect.
This principle of permanent sovereignty has been declared customary international law, across several international cases due to the widespread recognition of the principle. They include Congo v Uganda (2005), the East Timor case (1995) among others.
These rights also cover the exploration oil and gas, across oil states. There were arguments as to whether the autonomy of a state’s natural resources should be without respect for any political or economic regulations from anywhere else, including international law. However, it has been established across different cases that this sovereignty must be exercised in line with international rules, so as to avoid adverse effects that such exploitation may have on neighboring or related countries.
For instance, oil extraction causing oil spillage and affecting the waters of a neighbouring state. This was further established in the previously mentioned Congo v. Uganda case where through acts like illegal extraction, confiscation, monopoly and price-fixing perpetrated by other states and foreigners on the resources of the Congo, it soon exacerbated the war in the Democratic Republic of the Congo. It was held that however resources are harnessed by a state in enforcing their resources, it must be in line with international law principles.
INTEREST IN OIL AND GAS – OIL CONCESSION, EFFECT OF RIGHTS OF CONCESSIONARIES ON NATURAL GAS
In this topic, we will be discussing the procedures and operations of granting oil and natural gas concession rights, and how interest in oil and natural gas reserves are been divested to explorers and extractors of the oil.
First off, we discuss Concessions. Concessions, according the Black’s Law Dictionary, refers to “a government grant for specific privileges; the voluntary yielding to a demand for the sake of a settlement; a rebate or abatement.” Put simply, it is when a government gives a foreign or business enterprise the rights to perform on action with regards to a particular thing. E.g Mining, extraction of oil, gas etc. It is the transfer of interests in a property of the government to an Enterprise, to exercise the particular rights on the said property.
There are two major types of concessions that have occurred in the oil and gas business since it began. These are the Traditional and Modern concessions.
This form of concession was the primary and initial kind of concession that existed between international oil companies and governments. Here, the government would give the international oil companies (IOCs) the rights to a land, for these companies to mine oil and natural gas, refinery, sale and other acts of production on the said land, for levies and tax payments in return.
Some of the major characteristics of this form of concession was that it involved large expanse of land, long duration of concession, which helped the IOCs maximize profit of these lands. An example of this form of concession was the classic case of the Royal Dutch and Shell (Consortium) Company, (now Shell-BP Company) that received over 40,000 square miles of land in Nigeria, for oil exploration. The company would later reduce the said land to 15,000 square miles of the choice oil fields in the country. Likewise, the concession given to the Standard Oil Company in Saudi Arabia over the whole land, to extract and harness oil and natural gas in the country. With payments made to the King of Saudi Arabia, as the production rates of oil and gas increased, asides yearly payments and the likes.
This payments at its early stage were ridiculously cheap and exploitative, in correspondence to the value the foreign companies that received these concessions would make. For instance, the Getty Oil in its concession rights given by Saudi Arabia paid only 55 cents per barrel of oil produced! In some cases oil companies would pay a meagre sum of shillings with a bottle of rum for concession rights. It was until the 1950s that income tax began to be levied on the IOCs. In other words, this system of concession was one that allowed the IOCs make astounding profit off developing countries with oil reserves with little and insignificant contributions to these countries.
Modern forms of Concessions are not all that different from traditional concessions, they are however a form of licensing. Allowing an oil company, own oil extracted from the government’s land, after it has been extracted. Ownership is only from the moment of extraction, not before. The oil companies can produce market and even refine the oil after it has been extracted. However while it is still in the ground, the oil is still the property of the government. The terms for modern concessions are also different from traditional types. There are more financial investments made to get concessions, royalties, tax, levies, rent (constituting about 55 to 90 per cent of the economic rent for Nigeria) and the likes. The expanse of land is smaller; the duration is also reduced as well, usually a bit over fifteen years. In Nigeria for instance, the land conceded in modern concession agreement does not exceed 500 square miles.
In other words, under modern concessions, the government enters into a contractual agreement with oil companies, granting them license to extract, explore, produce and market oil as well as natural gas (where included in agreement) for a period. This is done in return for rent, taxes, loyalties and any other form of payment agreed to, in the contract.
These contracts may be flawed in that; they hardly accommodate the rife changes that occur in the oil industry. For instance, in the early nineties there was an increase in oil production, exploration and demand, this made it easy for oil companies to make exponential profit during the oil boom. During these times, high tax rates, levies and the likes for oil companies may not have been too much of a hindering factor to the industry. However, in current times the oil industry has experienced steep changes, from dips in oil price, to fluctuating oil demands, increased renewable energy investments leading to reduced investment in the sector and the likes, similar tax levies, and payments will be more severe especially for local oil companies.
EFFECT OF RIGHTS OF CONCESSIONARIES ON NATURAL GAS
Due to the fact that it was discovered (as a resource that could be harnessed) a lot later than crude oil, concession procedures as concerns natural gas is a bit different from those that oversee oil concessions.
The Petroleum Act and other acts like the Nigerian Liquified Natural Gas Act, cover the procedures for the concession of natural gas and has helped introduce clauses under modern concession systems that are able to ensure the harnessing of natural gas, separate from oil. The Nigerian Gas Company for instance has entered into agreement with crude oil exploration companies like SHELL, for the harnessing the natural gas that comes out from the exploration of crude oil, with the regulation of government in these procedures.
CATEGORIES OF OIL PRODUCTION CONTRACTS
PRODUCTION SHARING CONTRACT
Production sharing contracts also known as production split contracts, are oil exploration arrangements whereby oil companies take the risk for exploration of oil as well as its management and production. The company explores the land of the government to find commercial quantities of oil. When this is found, the exploring oil company then drills enough oil to cover the cost of its exploration. The percentages for the cost of this oil also known as cost oil, ranges from between around 20% to 50%. After this, the oil company and the government from which the oil was drilled from, or its national oil company then decides how the remaining profit made from the oil outside the cost oil, will be shared.
It is also important to note that unlike concessions, the title to the oil or the interest in the oil drilled by these oil companies in production contracts are not their property, bathroom invested in the government until the oil has reached a mutually agreed point.
Examples of countries that practice production contracts include Peru, Angola and even Nigeria among others. These countries also include clauses that allow changes in payments and taxes made over time, through the increase or decrease of the profit split percentages.
PRODUCT SHARING CONTRACTS IN NIGERIA
In a bid to increase her contractual status with oil companies, to ensure autonomy over oil and natural gas resources within the state, and avoid the exploitative use of these resources by oil companies, Nigeria has endeavoured to move from concession agreements to production sharing contracts (PSC). This is in line with the government’s directive issued n 1972 to evolve into a nation with predominantly production sharing contracts with the oil companies in her state.
The very first production sharing contract Nigeria entered into with an oil company was with Ashland Oil Company on the 12th of June 1973. This contract was for a duration of twenty years. This deal was subject to a lot of criticism on the terms of the agreement, as it allowed about over 50 percent of oil produced as cost oil, taxes were shared by Ashland and Nigeria’s oil company at the time, according to their participatory interests and then the left over oil, less than 25% was then shared on a 70/30 split when production was over 50 thousand barrels, and about 65/35 when less than that. This was viewed as exploitative and a failure of the whole purpose of moving from concession to production sharing contracts in the first place. This eventually led to the production sharing products being revised severally. Subsequent to the deal with Ashland several other production sharing contracts have been entered with other oil companies as well such as Shell Exploration and Production Company (SNEPCO), .Mobil, Ship, Ashland Exploration, Esso among others. With about 10 years of exploration time, given to these companies and 20 years for production before the lands are returned to the government of renewed. Each of these agreement created with clauses that allow the return of the land after the expiration of it’s duration among other things as well as provisions for tax oil payments to the NNPC. Usually this petroleum profit tax should be 50% in the terms and conditions of this contract. However, under the DEEP OFFSHORE AND INLAND BASIN PRODUCTION SHARING CONTRACTS DECREE OF 1999, it allows for percentages below 50% to be paid.
RISK SERVICE AGREEMENT
This is quite similar to the production sharing contract in that, it allows the oil company to bear the whole risk of searching and exploring lands for oil. Once a discovery is made, the oil company then pays the government in monetary forms or in crude oil. It is the allowance of payment in crude oil that really distinguishes risk service agreement from production sharing contracts. Most countries who practice risk service agreements (RSAs), operated from the conventional assumption and practice that the state still has the right to the lands explored in question, so the oil companies are only partners that help the country mine this oil and natural gas. Examples of countries that practice risk service agreements include predominantly South American states like Colombia, Brazil, Argentina and the likes.
JOINT VENTURE AGREEMENTS
A joint venture refers to a contract system that allows two or more companies pool in resources together to engage in a business venture. This means that the risk and investments involved in the creation of such business or venture is bore by all partners involved and not just a singular party. Likewise the profit and benefits are shared among the companies in proportion to their investments. In the case of oil contracts, joint ventures represent where two oil companies join resources together to explore and produce oil. From the 1970s with the rise of the interest of government in the production and revenue generated from oil, has led them into joint ventures with oil companies to explore, produce and profit from oil. Countries that practice this form of agreement are usually developed states like the United Kingdom, the United States among others.
PURE SERVICE AGREEMENT
The pure service agreement form of oil and natural gas contract is the opposite of the first two, in that unlike them, the oil company in question only explores the land for the oil or natural gas and then they are paid off by the government. Although, it may contain a separate contract for purchase of a considerate amount of the oil produced in the area where commercial quantity had been discovered. This is a prevalent form of oil contract in the Middle East especially in oil-rich states like Saudi Arabia, Qatar, Abu Dhabi and the likes.
TECHNICAL SERVICE AGREEMENT
Just like the name imply, it involves companies giving a state or government technical assistance or service for the exploration and production of oil. The companies in question will have no interest in the produced oil but will basically just be paid a fee for their technical assistance. It looks like a risk service agreement, without interest in oil. This is usually for countries seeking to build their own oil industry and manage the whole chain of production and revenue generation. These include states like Iran and Venezuela (known as one of the most nationalized oil production countries in the world). It is the newest form of oil service contract.
CATEGORIES OF PARTICIPATORY AGREEMENTS IN OIL EXPLORATION
Due to the need to not remain dependent on foreign companies and services in the production and operation of their oil industry, many states seek to create participation agreements. This allows the government and the state as a whole to oversee the growth of her oil revenue and increases her investment and resources into the sector. These participatory agreements are usually negotiated for separately, where a joint venture agreement exists between the government and an oil company. Their agents for these negotiations are usually, the state owned oil companies. Participatory agreements basically determine the rights of government and their interests in a joint venture. The interest they have in such ventures are known as participating agreement. These interests vary across the production, the mining lease, transportation, exploration, storage, moveable and immoveable assets the state may have in such ventures among other indicators.
They also exist in risk service agreement and production sharing contracts as well. So long as the government has interest in such agreements. It exists majorly in concessions as well, with Nigeria having about no less than 60% share on all concessions in her state. The first participation agreement which occurred after the oil boom in Nigeria was with Elf, on Oil Company in 1971. Where the government had about 35% participation interest in the company, and later on 35% participation interest would spread towards other companies like Gulf Oil, Shell-BP, Mobil and the likes. These interests would eventually increase to about 65% and then find a current balance of about 55% in these companies, in endeavours around oil and even natural gas.
This form of agreement prides itself in detail and clarity as to the role of both parties in an oil production venture. Usually between the oil company and the states where these oil are being explored and produced. It provides a full cover and description of the duties of both parties in oil exploration endeavours, and ensures responsibility of these parties in all the areas of the venture right from exploration to production and marketing. It operates in ventures that are jointly owned by the government and oil companies in question.
OIL AND GAS PIPELINES – NATURE, LEGAL STATUS, CONDITIONS FOR GRANTS, RIGHTS AND OBLIGATIONS OF THE LICENSE
NATURE OF OIL AND GAS PIPELINES
Before crude oil becomes its various finished products; petroleum spirit, natural gas, kerosene, diesel and the likes, it is transported and transferred through pipelines. These pipelines help it get to the locations where the crude oil is them refined and distilled to its various end products. These show the importance of pipelines in the oil and natural gas industry. Pipelines comprise fueling stations and pipes and as such the laws on pipelines cover these two sectors. According to the OIL PIPELINES ACT, CAP O7 LAWS OF THE FEDERATION OF NIGERIA, 2004, particularly at section 11(2) defines an oil pipeline as:
“for the purpose of the Act, a pipeline for the conveyance of mineral oils, natural gas and any other derivatives or components and also any substance (including steam and water) used or intended to be used in the production or refining or conveying of mineral oils, natural gas and any other derivatives or components.”
These pipelines are the primary means of transporting crude oil all over the world. In Nigeria, they run on land and some of them underwater from oil rigs offshore, to the refineries where they are being distilled. The first pipeline constructed was in 1956. The current longest pipeline in the country is the NNPC pipeline, built between 1977- 1980 linking the Kaduna refinery to Pet Harcourt, from where oil is been mined.
Some of these pipelines run into o pump stations in major cities within the country and tank farms where oil is been stored as well. There are procedures created by the government and the NNPC to determine how and where these pipelines are constructed. The reason for the widespread use of oil pipelines for transportation of oil, natural gas and the likes is not far fetched. It is due to the versatility, durability and sustainability of the system. It ensures faster transfer of oil across states lines without all the risk that come with the use of tankers for transport, such as accident, fatigue of drivers over long journeys, meaning the oil gets to its location slower among others. The operation of oil pipelines are overseen by various parties. For the Nigerian government, its pipelines are overseen by the Petroleum Pipelines and Marketing Company (PPMC) which is a subsidiary part of the NNPC, the Nigerian Liquefied Natural Gas Company oversees all gas pipelines within Nigeria, oil pipelines owned by international oil companies are overseen by themselves among others.
LEGAL STATUS OF OIL PIPELINES
The OIL PIPELINE ACT CAP O7 LFN 2004 provides an overview of the body of regulations that cover the operation of pipelines in Nigeria. Under the act, which was enacted in 1956 and has remained the same till now, one can only get two types of permits as relates to pipelines in the country. These are permit to license to construct, maintain and operate oil pipelines and permit to survey routes for oil pipelines. These shall be discussed further.
Before anyone can seek to construct pipelines underground, there must be a permit to survey the land. This is where the permit to survey routes for oil pipelines permits come in. It is provided under the oil pipeline act that where a pipeline is to be constructed, it must be made sure that:
- The pipeline has been surveyed; or
- In the case of a renewal, the pipeline has been re-surveyed.
These permits must have been gotten in tandem with the provisions of sections 4 and 5 of the Oil Pipeline Act which oversee the provision of permits. Section 4 specifically granted the Minister of Power the autonomy of deciding who would or would not be granted the right to construct pipelines. All applications are to be sent to the office of the power Minister and the plans of the routes in which the pipelines in question are to be built. It is worthy of note that the act provides the only requirement necessary for the minister to accept or refuse pipeline construction rights is his discretion. Emphasizing the autonomy and power of the Minister in this regard.
Section 5 requires that where the applicant has been granted the right to pipeline construction, the owner must inform all the owners of land where the route for the pipeline will be constructed to inform them of the purpose of constructing such pipeline. That it must be done no less than 14 days to the day the said pipeline will be constructed in that path. It also provides that these owners be given the compensation or payment necessary for the effect such construction may have on their land.
There is also the requirement of ten copies of the topography of the land where the said pipeline is to be created. It is to be drawn on a scale of:
- 1:50,000 for a pipeline that is not more than fifty kilometres long.
- 1:100,000 for a pipeline that is over fifty kilometers but not more than 100 kilometres long; and
- 1:250,000 for a pipeline that is over 100 kilometres long. See generally Regulations 1, 2 and 3 of the Oil Pipelines Regulations.
The effect of getting a permit to survey has already been shown by the act that it grants the owners of the permit:
“a. To survey and take levels of the land;
- To dig and bore into the soil and subsoil;
- To cut and remove such trees and other vegetation as may impede the purposes specified in this subsection and
- To do all other acts necessary to ascertain the suitability of the land for the establishments of an oil pipeline or ancillary installations;”
In other words it grants the right to be able to require that other land owners for instance, Grant permission that such pipeline be constructed across the land among others. It grants authority from the Minister for Power for that purpose. It is important to note that while the routes maybe accepted by the minister, it may also be varied. It is important to note that this variation does not render the grant or permission illegal neither does it do eat the rights of others as granted under the act. Where one with the permission to construct the pipeline, is being obstructed from constructing the said pipeline by particular individuals or bodies, he can sue the court for the ejecting of such people effecting the law.
On licenses to construct and maintain pipelines, Section 7 of the Act, provides that here an applicant has gotten permission to survey the routes for the pipeline and it has been granted, such person may then seek the grant of the minister to construct the said pipelines. They must be with the plan of the construction of the pipelines, any proposal of pump stations that may want to be created to connect the said pipelines too. The minister is then meant to set up a body to hear any objections that may exist against the creation of the said pipelines. In the absence of such the pipeline applicant may go construct. A notice to the public must be made so that such objections to the creation of the pipelines can reach the Minister’s team and they may then determine to validity of such license to construct pipelines. This public notice under section 8 of the act:
“By publication in the state Gazette of each state through which the route of the projected pipeline passes;
- By publication in the newspapers circulating in the areas through which the route of the projected pipeline passes as the Minister may require;
- By posting or delivering the same to the following persons entitled to be carrying on operations in the area which would be affected by the grant of a license:
- Holders of exclusive prospecting licenses, mining rights, oil exploration licenses and oil prospecting licenses;
- Lessees of mining leases, temporary mining leases or oil mining leases;
- By publication in areas likely to be affected by the license in such other manner as the minister may direct.”
GRANT CONDITIONS FOR OIL PIPELINES
There are rules that oversee the grant of the rights to the construction of pipelines. These include that the party applying for the grant to construct these pipelines, must have submitted:
“A statement indicating:
(i) The services to be rendered by the pipeline
(ii) The specification of the pipeline
(iii) The characteristics of the fluids to be conveyed through the pipeline; and
(iv) The total estimated cost of construction of the pipeline;”
Among other things, the application is then brought to the Minister of power who under his discretion decides whether such a grant will be made available to the applicant. This is after payment of the fee required by the provisions of Section 31 for the Act. It is worthy to be that where a party has been given the right to construct a pipeline, he cannot divest such rights to another party. It must be the party granted the right to construct the said pipeline that most do it. It is also worthy of note that the violation of any of the provisions of the Oil pipeline act can lead to terms of imprisonment and fine.
The Minister can also remove the conviction of any person who had violated the provision of the act. Emphasizing the strong power that a minister has. Although this power comes with a caveat that the minister must not be buying the pipeline or any part of it owned by the person whose conviction was removed.
In relation to notices, the act provides that where a party has been given their license to construct a pipeline, the said plan, including the route through which the pipeline would be created and other relevant details should be sent to the administrators in such area. Copies of this plan are to be sent to each land owner on the route, with seven notices for them to register their objection to the said construction of pipelines on their land. These complains will then be sent to the public officer who will see to the creation of a panel to hear the objections and decide whether they are justified to avoid been made in the said land or not. Upon the granting of the license to build pipelines by the Minister of Power even after the objections have been heard, he is to inform the president about the construction of pipeline. The president must assent to it, before the construction of the pipeline can begin. It is worthy of note that, as provided under Section 17 of the Oil Pipeline Act, the duration of a pipeline license is not to be less than that of the oil mining lease of the party who constructed it.
Before anyone else, asides those granted license over the pipeline by the minister of power after the assent of the president, can use a pipeline to transport their oil, they must first inform the Minister via an application on the prescribed form stipulated under the Act. When the Minister is convinced of the se of the pipeline and is satisfied that it won’t be used in a way outside the confines of the purpose and legality of the good to be transported, he may grant permission for the use of such pipeline, so long as it won’t harm the integrity of the said pipeline. This is provided for under section 8 of the Oil Pipeline Act.
There are three major conditions under which an oil pipeline license can be terminated. Asides where the party licensed in question, decides to terminate the license themselves. (This must be done with a three months prior notice to the Minister of Power about such decision and termination).
First by revocation with cause, this occurs where the licensee fails or neglects to perform his duties under the pipeline license agreement. Where they have failed in their obligations under the agreement, the said license may be revoked by the Minister. These acts that constitute a violation of the license agreement include not using the pipeline in an agreed manner or for the purpose for which the pipeline was created. These are in accordance with the provisions of section 27(1) and 27(2) of the Oil Pipeline Act.
Secondly, it can be by effluxion of time. What this means is that, when the time already agreed by the Minister and the party licensed, for the use of the pipeline has elapsed, then the Minister of Power can revoke and terminate the license that such a party may own.
Lastly, by cessation of operation. This means that where the party licensed, has stopped operation or use of the said pipeline any longer. Maybe due to the lack of crude oil to transport through the pipelines or bankruptcy of the licenses, so that the use of the pipeline is no longer feasible or useful any longer. Then such pipeline license may be terminated by the Minister. However it is important to note that, where what the licensee wants is not necessarily a termination of the license, but just a change in what the pipeline would be used to transport, they can under the provisions of Regulation 22 of the 1995 Oil and Gas Pipelines Regulations, apply to the DPR for such changes, and may continue with their license use where it is granted.
After three months of termination of the Oil Pipeline license, the former license after given the Minister a notice of three weeks may decide to remove the said pipeline away from the lands and routes through which it was created, where the Minister does not decide to buy the said pipeline. As provided under Section 28 of the Act.
RIGHTS AND OBLIGATIONS OF THE HOLDER OF A LICENCE
As provided under Sections 14, 15 and 16 of the Oil pipeline Act, a licensee of an oil pipeline has the right to construct and maintain and operate a pipeline, not beyond 200ft in width or as specified in the licensee agreement, across the route already confirmed by the minister. The licensee also would have the right to apply to the president that no one should be allowed to build anything the said pipeline or capable of obstruct the use of the said pipeline. He can also sue for an ejection order where someone does any of these things, to ensure they are ejected from tampering with the licensee’s interests in the said pipeline. Even when the government has to reroute the pipeline for the use of the lands along the strip where the pipeline was created the licensee is owed compensation for such rerouting a d any other damages done by such act of government. These are all covered for in Sections 25,26 and 28 of the Oil Pipeline Act.
However, with these rights come responsibilities. There are several obligations a licensed of an oil pipeline has to fulfill in such capacity. They include as provided in the Act:
“The holder of a license shall pay compensation to the following:
- any person whose land or interest in land is injuriously affected by the exercise of the right conferred by the license, for any such injurious affection not otherwise made good; and
- any person suffering damage by reason of any neglect on the part of the holder or his agents, servants or workmen to protect, maintain or repair any work, structure or thing executed under the license for any such damage not otherwise made good; and
- any person suffering damage (other than on account of his own default or on account of the malicious act of a third person) as a consequence of any breakage of or leakage from the pipeline or any ancillary installation, for any such damage not otherwise made good.”
Section 11 also provides other obligations that a licensed may have. They include paying damages for any done to the land of another, or property of someone in the course of constructing the pipeline. It is worthy of note, that the rights of an oil pipeline licensee is not absolute as they are subject to all the regulations in the Oil Pipeline Act and other relevant regulations as well.
Put together, the licensee if an oil pipeline indeed has rights and interests to exercise and enforce where necessary, when granted the said license. However he is not without responsibilities to the environment and communities where the pipeline is constructed across. Also the rights of a licensed are not absolute. They can be revoked where theirs is cause, they are regulated in how and what the pipeline is used for and the likes.
REFINING OF PETROLEUM OIL
Under this topic, we will be discussing the details that surround the refining of petroleum oil. That process that helps the production of the various variants of crude oil and natural gas; petrol motor spirit (PMS), Kerosene, Diesel among others. Especially as concerns the adverse effect of this process; pollution. We discuss the laws that prohibit pollution and provide punitive measures for offenders. The body of laws that determine oil revenue sharing in Nigeria is also handled under this rubric.
PROCEDURES OF REFINING PETROLEUM OIL
First off, refining of oil refers to those chemical processes that transmogrify crude oil to all the various derivative products we use it for. From the likes of petrol, jet fuel to diesel, kerosene, diesel, LPG among others. There are three stages of refining oil; Separation, Conversion and Treating.
The separation process of refining oil also known as topping, as the first contact in the crude oil refining process, involves placing the crude oil molecules at normal atmospheric conditions and then separating them in line with their molecular weight under regulated heat columns.
It is heated at a temperature of about 350-400° which allows vaporization in the distillation column, so that lighter molecules like natural gas, move upwards and the heavier molecules like those in diesel move lower, with heavier molecules that make resources like bitumen at the very bottom. This process has the distillation column with different trays at different temperature levels for the different gases that form at the various levels of heat.
The next step is conversion. After the different oils have been separated at different levels of temperature, there may still be some hydrocarbons that are too heavy and need breaking to make lighter oil products like gasoline, so in the conversion process this heavy hydrocarbons are broken into two or more molecules, this is usually done at about 500° temperature. It is this process that creates diesel from the majority of this heavy molecules converted.
Lastly, there is treating. This is done for the environmental sustainability and health in the production of crude oil. It involves the removal of harmful gases like sulfur from the crude oil distilled to ensure they don’t get into the atmosphere and cause all the adverse effects they have on the ozone later and the environment in general. In oils like kerosene, they are washed with caustic soda, via what is called sweetening to remove harmful components like mercaptans also known as thiols that may harm the environment. This helps improve the air quality, reduce air pollution among others. The regulations for treating oils are at different levels of stringency across various parts of the world. In the EU for example, it prescribes about 10mg of sulfur per 1 kg of diesel in the treating process.
ESTABLISHMENT OF OIL REFINERIES
Under the provisions of the Hydrocarbon Oil Refinery Act (HORA) no one can just decide to refine petroleum oil, as they seem fit. The Act regulates the refinery of petroleum oil by mandating the getting of a license to do so. This is called a refiner’s license.
Section 2 of the same act provides for how to apply for this refiner’s license. It is worthy of note that before the license is granted, in line with the provisions of the Environmental Impact Assessment Act LFN 2004, the applicant must get an environmental impact assessment report of the plan they want to use to create the refinery, to ensure there are sufficient procedures to remove harmful impact of the environment where these refineries will be situated.
Construction of the refinery after the grant of license is to be done in line with the Hydrocarbon Oil Refinery Regulations (1965), particularly section 3 of the regulations. The refiner’s license lasts till the next 31st December after it has been issued. With renewal available to licensees when it expires. This is regulated by the provisions of section 3, 4 and 6 of the HORA.
There are punitive provisions created for those who violate the provisions of HORA. For instance, section 7(1) which provides fine, imprisonment or both for violators of the Act. Sections 11 and 24 for instance, provide for punishment for the non full disclosure of oil entries and concealing of refineries oil from the requisite officers among others.
The adverse effects of pollution, especially those that occur from the spilling of oil is no news to Nigeria. Particularly in the Niger Delta where over 90% of Nigerian oil is produced from. Oil pollution affects the viability of the land for farming and the rivers for fishing. Affecting the livelihood of residents in this areas that have suffered oil spillage. This has led to several adverse consequences in the political and social relations between this affected areas and the government with acts like militancy, vandalism and other crimes becoming rampant, due to the neglect of these affected areas. It is for all this reasons and more that a legal framework for the regulation of pollution of all kinds is of vital importance. These are concisely discussed below.
Section 37 of the National Environmental Standards and Regulations Enforcement Agency (Establishment) Act 2007 (NESREA) provides a legal definition of an environment and pollution as:
“Environment includes water, air, land and all plants And human beings or animals living therein and the inter-relationships which exist among these or any of them.”
“Pollution means man-made or man aided alteration of chemical, physical or biological quality of the environment beyond acceptable limits and pollutants shall be construed accordingly.”
Section 20 of the Nigerian Constitution even recognizes the import of environmental preservation when it provided under chapter 2 that:
“ The State shall protect and improve the environment and safeguard the water, air and land and wildlife of Nigeria.”
It is worthy of note, that there are various types of pollution; Air, noise, water and land pollution majorly. The adverse effects of all these types of pollution have led to legislations to forestall them. For instance the adverse effects of land pollution led to the establishment of the Harmful Waste (Special Criminal Provisions) Act 1988 (HWA).
The NESREA is the major body of legislation created for the purpose of protecting and maintaining sustainable development of the environment in Nigeria. It is also in charge of ensuring compliance to it’s environmental regulations, with punitive measures for offenders in the Act. It governs all matters of environmental compliance asides from the Oil and Gas sector, which is regulated by the National Oil Spill Detection and Response Agency (NOSDRA).
In fulfilling it’s role, NESREA has within it, widespread provisions that help cover the various types of pollution. As well as subsections that provide jail terms and fines among others as punishment for the violation of these provisions. Section 20(1) provides for the maintenance of the quality of air resources present within the Nigerian territory with Section 20(3) providing punitive measures for those who violate or commit air pollution. Section 22 covers noise pollution and noise regulation within Nigerian societies, with subsections 2 and 3 providing punishment for those who contravene it’s provisions. Section 23(1) of the same Act provides for maintenance of the quality of water and health of the public that consumes these waters, with subsections 3 providing punitive measures. Section 26 (1) provides for the regulation of the use of land to avoid all forms of land pollution and subsections 3 and 4 providing punishment for it’s violation. Section 26 then further provides for the criminalization of the discharge of hazardous substances on air, land and water.
There are other acts to that seek to regulate pollution within the different aspects in which pollution especially oil pollution may occur. These include the Minerals and Mining Act in sections 99 and 65, the Oil in Navigable Waters Act in Sections 1,3 and 5, the Oil Pipeline Act in Section 14 , the Petroleum (Drilling and Production) Regulations paragraph 25, as well as the Petroleum Act Section 9 which places the regulation of matters of petroleum pollution on the Minister of Petroleum among several other legislations.
Internationally, the Kyoto Protocol of the United Nations which saw the major international convention on Climate Change, represented a global recognition of the poor effects of pollution of the earth and it’s devastating consequences like global warming and it’s symptoms.
OIL AND GAS REVENUE LEGISLATION
Asides legislation that regulates the operations and adverse effects of the oil and gas industry, there are also ample laws that regulate the revenue made from the sector. These laws provide clarity on the parents due to the government, the way such revenue is to be spent, where it should be sent to among others. Some of this acts will be highlighted here. They include the Federal Inland Revenue Service (FIRS). This Act oversee the tax requirements of all entities that make profit in Nigeria. These entities also include the oil and natural gas companies that exist in the country. It prescribed gains to be paid to the Nigerian government in terms of rents, royalties fees for gas flaring, fees for the granting of licenses such as the oil mining license, the oil prospecting license among others.
There is also the Nigerian Extractive Industries Transparency Initiative Act. This Act was created to create an increased sense of responsibility in the Nigerian oil and gas sector and to reduce the rampant corruption in the sector. It’s provisions include mandating the transparency of revenue made by oil and natural gas companies, as well as the payments and fees due to the government from such revenues among others. There is the Petroleum Profits Tax Act which oversees taxes, signature bonuses and royalties among others die to the government from the revenue made by oil companies. Across these different acts, the singular idea of ensuring efficient and transparent revenue generating models for the Nigerian state is seen, so as to ensure revenue for the government to perform it’s duties to citizens.
ADMINISTRATION OF PETROLEUM PROFITS
On the administration and allocation of Petroleum Products or revenue, this is chiefly regulated by the dictates of the Nigerian Constitution asides the provisions of other acts. Section 162(1) of the Constitution, provides for a singular account called the Federation Account where all revenue generated by the government across all it’s states is to be transferred to. It is from this account that allocation of revenue is them to her states. This allocation in line with the provisions of Section 162(2) of the Constitution is to be based on the population, internal generated revenue, land mass among others of each state, in deciding how much they get.
It is important also to note that, during the inception of the military in the Nigeria the sharing formula based on internal revenue generated by states, was 1% of the generated revenue allocated back to them, about 1.5% under Shehu Shagari, under Babangida, this quota rose to 3%, and from the presidency of Olusegun Obasanjo, it has remained at 13%. Although prior to these, under the regional government, the revenue allocation formula was 50% of state’s generated revenue. So for Oil rich state under the Constitution, they’d be entitled to 13% derivative, of the revenue that they made.
NIGERIAN NATIONAL PETROLEUM CORPORATION (NNPC)
First, it is vital to talk about the import of oil rich states having national oil companies. This venture like any other oil expedition is quite capital intensive, so that it requires careful decisions of the government of oil rich states, before they should decide to venture into such an endeavour. However, barring the capital intensive nature of venturing into oil exploration and production by states via national oil companies, it bears several advantages.
National oil companies, allow states the opportunity to participate in the oil exploration and production process of the oil in their territories. It grants freedom form over dependence on International oil Companies (IOCs) in the oil and gas industry. It also allows them access to more revenue than the taxes, rents, levies or royalties that they gain from IOCs, by being able to profit from exportation themselves. National Oil Companies also play the important role of regulating the oil and natural gas industry in their territory. In Nigeria, her national oil company is the Nigerian National Petroleum Company NNPC established in 1977.
The operation of the NNPC is regulated by the NNPC Act. The statutory duties of the NNPC are provided in the act in section 5 which provides them to include:
“(a) exploring and prospecting for, working, winning or otherwise acquiring, possessing and disposing of petroleum;
(b) refining, treating, processing and generally engaging in the handling of petroleum products and its derivatives;
(c) purchasing and marketing petroleum, its products and by-products;
(d) providing and operating pipelines, tanker-ships or other facilities for the carriage or conveyance of crude oil, natural gas or their products and derivatives, water and any other liquids or other commodities related to the corporation’s operations;
(e) constructing, equipping and maintaining tank farms and other facilities for the handling and treatment of petroleum and its products and derivatives;
(f) carrying out research in connection with petroleum or anything derived from it and promoting activities for the purpose of turning to account the results of such research;
(g) doing anything required for the purpose of giving effect to agreements entered into by the Federal Government with a view to securing participation by the Government or the corporation in activities connected with petroleum;
(h) generally engaging in activities that would enhance the petroleum industry in
The overall interest of Nigeria; and
- Undertaking such other activities as are necessary or expedient for giving full effect to the provisions of this Act.”
It’s statutory powers are also provided for the same act under section 6 which provides that:
“The Corporation shall have powers to do anything, which in its opinion is calculated to facilitate the carrying out of its duties under this Act including without limiting the generality of the following powers:
(a) to sue and be sued in its corporate name;
(b)to hold, manage and alienate movable and immovable property;
(c) to purchase or otherwise acquire of take over all or any of the assets, businesses, properties, privileges, contracts, rights, obligations and liabilities of any other company, firm or person in furtherance of any business engaged in by the corporation;
(d)to enter into contracts or partnerships with any company, firm or person which in the opinion of the Corporation will facilitate the discharge of the said duties under this Act;
(e) to establish and maintain subsidiaries for the discharge of such functions as
the Corporation may determine; and
(f) to train managerial, technical and such other staff for the purpose of the running of its operations and for the petroleum industry in general.”
As at 1977 to 1988 the organizational structure of the NNPC was under the rubric of two major divisions. The Commercial Division and the Petroleum Inspections Division. Although it also had the Services sector and the General Management sector, but the former two were the major operational divisions of the organization. The Commercial Division which had under it; the Commercial Division, the Exploration and Exploitation Division, the Marine Transport Division, Petrochemical Division, the Pipeline and Production Marketing Division and the Projects Engineering Division. It oversaw the business-like and operational activities of the corporation.
The Petroleum Inspection Division on the other hand, which had just two sub divisions; the Field Operations Division and the Conservation Division administrated the enforcement, regulatory and supervisory roles in the corporation.
By 1988 however, there was a restructuring of the corporation which saw the organization rearranged to a Corporate Head Office, having about three major divisions or sectors operating under it. The Corporation Services Sector, the Operations Sector and the National Petroleum Investment Management Services (NAPIMS).
Nevertheless as of the time of this note, it has about eleven subsectors or subsidiaries and six directorates. The subsectors which are all limited liability companies include; the Eleme Petrochemicals Company Ltd. (E.P.C.L.), Hyson (Nig) Limited in Affiliation with Calson Bermuda Limited, Integrated Data Services Limited (I.D.S.L.), Kaduna Refinery and Petrochemicals Company Ltd (K.R.P.C.), Nigerian Gas Company Limited (N.G.C.), Pipelines and Products Marketing Company (P.P.M.C.), Nigerian Petroleum Development Co. Ltd (N.P.D.C.) Nigerian Liquefied Natural Gas Company Ltd (N.L.N.G.), National Engineering and Technical company Ltd (N.E.T.C.O.), Port-Harcourt Refinery Company Limited (P.H.R.C.), Warri Refinery and Petrochemicals Company Ltd (W.R.P.C.) subsidiaries.
The Directorates on the other hand are; Commercial and Investments, Corporate Services, Engineering and Technical, Exploration and Production, Finance and Accounts, Refining and Petrochemicals directorates.
STATE PARTICIPATION IN THE PETROLEUM INDUSTRY
In this topic, we will interrogate more deeply the rationale and the details a state participating in it’s oil and natural gas industry, especially third world countries, whose markets are usually dominated by International Oil Companies. The balance sought is whether considering the capital intensive nature of oil exploration and production and with the limited resources that exist in these countries, it would be more prudent to invest in national participation in the industry or to settle for the rents, royalties and levies that third world countries already gain from the operation of IOCs in their territories.
State participation in the petroleum industry, refers to the participation of oil rich states in the exploration, production and full chain of operations of the oil and gas industry in their territories. It involves the state itself, becoming an actor in the dealings of the oil and gas industry in the said state.
The historical backdrop for the operation of oil and gas and the exploitative deals that were made between especially third world countries and IOCs, with the likes of traditional concessions that saw these IOCs, lay claim to excessive amounts of oil reserves to be harnessed in these states for a meagre sum in comparison. It was even recorded that at some point, that an oil concession was given for a few good coins and a bottle of rum in the middle East in the early times of traditional concessions.
These neo-colonialist tendencies and domination by foreign oil companies lay a solid foundation for the drive for state participation in it’s own oil and natural gas industry. Although it is important to note that even till date IOCs still dominate majority of the oil and gas sector of majority of their world states.
State participation in the oil and gas industry of their territories has come to occur in various ways, through joint ventures which allow the state government enter into a joint contract with an IOC to explore and produce oil within their states and business partners so that they have equal share in the investment and profitability of such ventures, however capital intensive it may be at the start. In Nigeria a quintessential example of a joint venture by the Nigerian government with an IOC, is the establishment of the Shell Petroleum Development Company Nig. LTD, among others where the state seeks to get more involved in the operations and business of it’s oil industry.
These input of state governments into their oil companies is for usually by it’s national oil company, known as NOC, and this participation has replete advantages including; increased revenue that states can gain leveraging on joint ventures, risk service contracts and production sharing contracts that allow them access to as much profit as the IOCs themselves may gain from the exploration of oil and as such increase state revenue from the sector.
Also it allows state actually exercise their sovereignty over their natural resources as was the end goal of the establishment of the UN resolution 1803 of 1962 which provided for permanent sovereignty of states over their natural resources as a wifely recognized international practice, that it has become today. Contracts such as traditional concessions had stolen this rights from third world countries, but with state participation in their oil and gas industry, they have the opportunity to regain this sovereignty. Regaining this sovereignty also means gaining control of the oil and gas market. In many oil rich third world countries, IOCs have the largest market share of oil and gas and as such have increased control on the state of the industry, with state participation there is the opportunity for states to gain that power back.
This also increases the investment opportunities in the field of oil and gas. Where the state begins to invest more in the oil and gas industry, it boost confidence in the sector and allows the growth of other ancillary business or sectors that support the industry thrive. For instance, transportation services for oil companies, technical support companies and the likes.
With the enactment of the National Oil and Gas Industry Content Development Act of 2010, the Nigerian government’s drive for increase in the amount of local content in the oil and gas industry, has become an established desire and goal. With the Act representing the congregation of legal efforts made towards the achievement of increased local companies and investment in the Nigerian oil and natural gas sector.
This Act seeks to ensure that Nigerians are able to gain the skill and technical know how of the full operation of the oil and gas industry, from it’s exploration process to production and expectation. This is so that technical know-how no longer becomes a barrier for ample participation of indigenes in the sector. This will also help increase the rate of employment that the sector can provide for the Nigerian state and the indirect economic benefits that the state is bound to enjoy from increased employment.
An example of indigenous incursion into the oil and natural gas industry as is the desire of the Act is the current development of what promises to be the largest oil refinery in Africa, that is currently been built by Dangote Plc, in the Lekki Free Zone area close to Lagos.
ORGANIZATION OF PETROLEUM OPERATIONS
As already stated before, with the increase of state participation in the oil and gas industry, she is able to exercise more control over the operations of the sector. Usually the National Oil Company of a state may also play the role of the regulator of the oil and gas market, to ensure that the public interest in being ascertained at all times. In Nigeria, that national oil company also playing it’s regulatory role is the NNPC established in 1977.
This corporation helps regulate the operations of other oil companies in the Nigerian industry including IOCs, from the tax and levies they would pay, to the regulation of the procedure for the exploration of oil in ensuring environmental sustainability and culpability for environmental pollution among others within the powers granted it under the NNPC Act on behalf of the Nigerian government. It is also involved in the training of personnel in the oil industry and maintenance of standards in the oil and gas sector. It’s duties and powers are enshrined in sections 5 and 6 of the Act
THE INTERNATIONAL ENERGY AGENCY
The major international oil agency for the international regulation of oil operations and prices, for oil rich states is the Organization of Petroleum Exporting Countries the OPEC. It’s creation was as a result of several circumstances that eventually necessitated it’s formulation. First off, with oil becoming the major source of energy around the world, and the increased demand for the products, IOCs soon became dominant in the oil rich countries. Where they entered into exploitative concession agreements with the oil states. So that in the year 1959 a group of IOCs could single-handedly bring down the production of oil it’s price. So that five countries Venezuela, Iran, Iraq (the host country), Kuwait and Saudi Arabia came to an agreement to form the Organization of Petroleum Exporting Countries, to form a community of states that could check the excessive dominance of the IOCs and Grant the power back to the oil states. It’s objectives are listed in Article 2 of the OPEC statute which provides that:
“The principal aim of the Organisation shall be the co-ordination and unification of the petroleum policies of Member Countries and the determination of the best means for safeguarding their interests, individually and collectively. The organisation shall devise ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations. Due regard shall be given at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; and efficient economic and regular supply of petroleum to consuming nations and a fair return on their capital to those investing in the petroleum industry”.
By 1975, the organization had had about 12 members (after Ecuador suspended it’s membership) and as of today, has about .. members.
The Organizational structure of the OPEC are essentially three major bodies that oversee the entirety of the operations of the organization from it’s general policies, to appointment of officials, to consensus on setting oil price among others.
The Primus organ of the OPEC, is the Conference. This is foremost authority in the organization, which meets every two years to determine the general policies of the organization, set the budget of the organization, price of oil, confirms the Board of directors, the amendment of the OPEC statute among others. The Conference is usually made of the Ministers of the Petroleum Resources in their states.
The Board of Directors on the other hand, operate under the discretion of the Conference. It seems to the management of the affairs of the organization as well as playing regulatory and supervisory role over the Secretariat. The Secretariat that plays the regular executive and administrative functions of the OPEC. Operating under the directive if the Board of directors, the Secretariat is involved in the day to day operations of the organization. The Secretariat is headed by the Secretary General who must be appointed by the Conference in a unanimous vote. There are however particular requirements a secretary general candidates must meet before they can be eligible for the position. First they must have no less than 15 years experience, and no less than 10 years in the oil and Gas Industry, they must be of no less than 35 years of age and must be a graduate of Business Administration, Economics, Engineering, Law or Science.
The OPEC has played several roles in the development of the position of it’s member states in the global oil ad gas industry, as well as their local industries as well, checking the imbalance of control IOCs had over such states. It has helped each and every of it’s members to create National Oil Companies, that act as the state’s agent in the oil and gas industry. Regulating their local market as well as having access to as much profit and revenue any other company from the oil and natural gas sector.
The organization has also been able to ensure increase in the price of oil as is one of its major duties, ensuring that it’s members benefit from the oil market. An example is the oil boom of the 1970s which was so pronounced in Nigeria that the Head of State at the time was reported to have said, “the problem now, is not money, it is how to spend it”. It has also helped member states enhance their positions and participation in the oil exploration and production sectors in their states. It has played roles in renegotiation of concession contracts of member states with IOCs that operate in this states among others.
In conclusion, the Organization of Petroleum Exporting Countries (OPEC) has become an internationally recognized political and economic body, with widespread effect in the oil and Gas market. Which was the goal set when it created among just five members. As a strong international body, it has created the kind of force needed to reduce the exploitation of IOCs in third world oil countries, create fair market benefits for it’s member states and a regulation of the global oil price among others.