This paper reviews the proposed institutional restructuring in Nigeria\'s petroleum industry.

1.
2008
A Critical Analysis of Institutional
Reforms in Nigeria’s Oil and Gas
Industry
Odujinrin &
Adefulu
Church House
st
1 Floor
29, Marina, Lagos

2. This article first appeared in “Legal Energy” a column in the Nigeria
Energy Intelligence on the 9 t h of June, 2008.
Last year, President Yaradua announced a broad framework for the reform of
the institutional framework of the Nigerian oil and gas industry. This
framework is based on the National Oil and Gas Policy, which was put in
place by the Oil and Gas Sector Reform Implementation Committee. As this
new institutional framework would provide the foundation for the success or
otherwise of the oil and gas industry, it is fitting that it should be the first
topic of discussion in Legal Energy. Evidently such a topic cannot be analysed
comprehensively in one article, therefore, over the next few episodes, Legal
Energy would discuss and analyse this subject. Indeed it should be noted
generally that the editorial constraints imposed would mean that the thoughts
and ideas expressed here would be a significant condensation of the views of
the author, therefore, some background familiarity with the subject is
expected.
The discussion of this topic in particular comes with a caveat – whilst the
Federal Government has outlined the broad initiatives, the detailed reform
plans have not yet been issued, therefore the discussions here would be
based on the broadly announced policy positions, which may be altered or
amended when the detailed plans are announced. To provide a background,
this first paper discusses the current institutional structure, highlighting some
of its weaknesses and thus outlining the motivations for reform.
1. NIGERIA’S INSTITUTIONAL FRAMEWORK: A BRIEF HISTORICAL
PERSPECTIVE
The institutional framework governing Nigeria’s oil and gas industry has gone
through several significant transitions over the years. For several years after
petroleum was discovered, the government’s role in the oil industry was
passive, with its role limited to minor regulatory responsibilities. This
changed significantly in the early 70s after Nigeria joined the Organisation of
Petroleum Exporting Countries (“OPEC”). The organization was set up in 1960
and one of its main aims was to “gain complete control of the hydrocarbon
industry in its sovereign territories”. With membership of OPEC, Nigeria took
a more pro-active stance in the development of its oil and gas industry, by
the establishment of a Ministry of Petroleum charged with its supervision as
well as the establishment of the Nigerian National Oil Company (“NNOC”), the
country’s wholly owned state oil company, created to hold Nigeria’s interest
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3. in oil production. In 1977, in order to harness the petroleum expertise in the
country, the Nigerian National Petroleum Corporation (“NNPC”) was created.
The new state oil company merged the rights and responsibilities of the
former NNOC and Ministry of Petroleum. Thus as well as carrying out the
commercial functions of the government in the industry in terms of holding
its interests in joint venture operations as well as being the holder of the
OPL/OML upon which production sharing contracts are derived, this new body
also held within it the regulatory and policy functions.
In the eighties, a ministry in charge of petroleum affairs was re-established
to take charge of policy functions and the new Department of Petroleum
Resources (“DPR”) was also created to carry out the regulatory/inspectorate
functions previously carried out by NNPC. It should be noted that the
responsibilities conveyed upon NNPC, which were now transferred to DPR
were not legally transferred. The legislation which granted those powers and
functions were not amended to reflect this functional transfer. It can thus be
argued that DPR has no legitimate power to carry out those functions validly
granted to NNPC’s Inspectorate Arm by legislation. This however is a
discussion for another day.
2. CURRENT INSTITUTIONAL STRUCTURE OF THE NIGERIAN OIL &
GAS INDUSTRY
Presidency
Contractual
Agreements with
other Operators in
MINISTRY OF NNPC
N ti l M k t
PETROLEUM
Regulatory & OIL COMPANY
Policy functions Dual Commercial
Monitoring
OIL COMPANY
DPR
Regulatory
OIL COMPANY
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4. 3. A CRITIQUE OF THE CURRENT STRUCTURE
Whilst the institutional structure detailed above suggests clear functional
separation in the government’s various activities in the oil and gas industry,
the reality is a bit removed from this picture. The relationships between
these entities are not at arms-length. Indeed, the relationship between NNPC
& DPR may be characterised as one which suggests regulatory capture.
Structurally, NNPC and its supposed regulator, share facilities and the
employees of both institutions are often sent on secondment from one to the
other. NNPC has also directly funded the operations of DPR, including the
payment of staff salaries and the funding of DPR’s monitoring functions. The
closeness between the entities compromises the ability of DPR to effectively
and independently police NNPC activities.
Additionally, the relative institutional strength of NNPC in terms of human
and financial resources, amongst others, as compared with the other entities,
has seen the corporation extending its scope of powers well beyond what
would be considered valid commercial functions. Through its National
Petroleum Investment Management Services (NAPIMS) arm, NNPC carries out
what would be traditionally classified as regulatory functions.
Furthermore, as an entity which enjoys a monopoly of a de-facto nature,
whereby exploration and production rights are granted mainly to it or to
private companies, which are associated with it, NNPC enjoys a special
position in the oil and gas industry allowing it to play a very significant role
in influencing government policy. It has been opined that de-facto
monopolies such as NNPC are incentivised to take decisions which are
primarily in their own interests and not those necessarily in the interest of
the government or the nation. Indeed it may be suggested, for example, that
NNPC’s intransigent opposition to the privatisation of some of its subsidiaries
(despite its repeated failures in reviving these entities over the years) may
serve as evidence of this theoretical position.
In sum the failure to achieve functional separation has the effect of
weakening the institutional governance of the industry and does not promote
efficiency, effectiveness and transparency. In recognition of this, the
foundation of the proposed institutional framework has been “the need to
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5. ensure the separation and clarity of roles between policy, regulation and
commercial activities”.
4. FUNDING ISSUES
It should be noted however, that there are other significant systemic failures,
and in particular the perennial problem of joint venture funding, which the
proposed industry reforms seek to address. To describe this problem briefly –
production from joint ventures constitute an estimated 90% of Nigeria’s
current production. As the holder of majority interests in these joint
ventures, NNPC is required to contribute significantly to the joint venture
budget and funding. Under the current arrangements, NNPC’s interests in the
joint ventures are funded directly from the Federal Government’s budget.
This has served as a significant strain on the government as money is
diverted away from other areas of infrastructural investment such as power,
roads, schools and hospitals to fund joint venture activities. Aside from the
opportunity costs associated with this diversion, the arrangement has proved
to be thoroughly inefficient, significantly hampering investment in joint
venture projects, with many being cancelled or postponed until government
funding is arranged. It has also had the effect of stifling the growth of NNPC,
due to its inability to fully and independently plan its growth and investment.
This has led the government to consider alternative funding mechanisms for
joint venture investment in its reform initiatives.
5. CONCLUDING REMARKS
The twin issues of functional separation and funding arrangements thus form
the thrust of the reform agenda. They will also form the basis upon which the
reform plans are critically analysed in the Legal Energy series. The next
paper provides a broad overview of the government’s reform initiatives.
Adeoye Adefulu holds a Ph.D in oil and gas industry reform from the Centre
for Energy, Petroleum and Mineral Law & Policy, University of Dundee. He is
a partner in the law firm of Odujinrin & Adefulu e s t 1 9 7 2 .
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