NNRC’s Report and Ill-practices in the Oil Sector

NNRC’s Report and Ill-practices in the Oil Sector

By Abubakar Jimoh

Nigerian Natural Resource Charter (NNRC), an initiative led by an esteem panel of experts on natural resources governance mandated to analyse governance issues relating to petroleum, recently launched ‘2014 Benchmarking Exercise Report’ exposing some ill-practices backpedalling transparency and accountability as well as effective utilization of natural resources revenue in the country.

While evaluating how best natural resource wealth has been managed for the benefits of the current and future generations of citizens, the 196 pages report takes critical assessment of the extractive sector using identified 12 broad ‘precepts’ such as ‘maximising benefits for all citizens’; ‘promoting transparency and accountability’; ‘better fiscal regimes and contacting’, ‘better sector governance’; ‘environment, society and local benefits’; ‘the role of national resource companies’; ‘investing the revenue’; ‘smoothing revenue volatility’; ‘better public spending’; ‘encouraging private investment’; ‘the role of international governments’; and ‘the role of international companies’.

It is worthy of note that NNRC observes among other things since 2012, no significant change in the development of comprehensive strategy for petroleum management by the government to maximise benefits for all citizens; inadequate audit and poor financial reporting standards for public entities like the NNPC which continues to undermine transparency and accountability; partial increase in government profitability, and extensive revenue losses due to weak cost regulation; persistent political influence and conflict of interest arising in the awarding of oil contracts; limited mechanisms for host communities to seek redress of the existing negative environmental impacts; frequent political interference in the commercial decisions of NNPC executive management and board, disputing commercial viability of the NNPC; increased recurrent spending whilst capital expenditure declines, suggesting lack of investment of reasonable proportion of revenues for growth by the government; underfunded Sovereign Wealth Fund; ineffectiveness of the Subsidy Reinvestment and Empowerment Programme; partially increased in local content investment by international oil companies and investment in a refinery, fertiliser and petrochemical complex; improved international transparency measures, which allow investors to properly assess risk and citizens to see the value of their oil; insufficient engagement of the host communities for a social license to operate with resultant significant tension between extractive companies and local communities.

More importantly, the report reveals several factors contributing to downfall in the oil sector such as ineffectiveness in the practical regulation of exploration activities resulting in reserves declined from 37.2 billion barrels in 2011 to 35 billion barrels at the end of 2012; continues decline in the capacity utilization of Nigeria’s four petroleum refineries; stalled Petroleum Industrial Bill (PIB) at the National Assembly; unclear consciousness of the government towards shift in the global oil market and new oil discoveries in neighbouring African countries leading to reduction in Nigeria oil exportation to American market; lack of update and review of the Vision 20:2020 to accommodate strategy components with the oil and gas sector such as gas development, revised economic growth, production cost computation and investment incentives.

According to the report, “Despite the significance of the sector as the lifeblood of Nigeria’s economy, the government is yet to articulate, publish and operationalise detailed and up-to-date legislation to govern the resource sector. …The legal framework regulating the exploration, production and transportation of crude oil and natural gas and the supply, distribution, storage and marketing of petroleum products.”

Reflecting on the level of exploration, development and production activities occurring in the oil and gas sector, the report explains that new information on Rig Count across Nigeria’s oil and gas industry landscape shows significant challenges facing the exploration process such as ‘in April 2014 there were 33 active rigs, 23 stashed rigs, and five rigs on stand-by whilst in August 2013, the number of active rigs in the country was put at 43’.

The report bemoaned lack of systematic approach by the government towards resolving decline reserves, drop in oil sales, increasing oil theft, agitated host communities, increase in poverty statistics around the exploration activity and other similar challenges. “Although the Vision 20:2020 document contains oil and gas provisions, it focuses mostly on an export-oriented, commercial view of exploring the resources with too much emphasis on Foreign Direct Investment. Most of the growth models proposed are public-private initiatives that do not operationally benefit the poor,” it explains.
Giving the numbness attitude of the National Planning Commission (NPC) in the last two decades towards coordinating response to strategic vision for natural resources to ensure the planning starts from the grassroots, the report reiterates that “… the agency continues to show signs of strain in terms of coordinating Nigeria’s national development plans. Plans are often published with severe delays and there have been periods with no plans published at all. When these plans have existed in the draft form, they have not been implemented.” It further attributes this challenge to conflict of interests on policy direction between NPC and Coordinating Minister for the Economy.

As related to transparency and accountability, the report noted inconsistency in information published by the government agencies; limited disclosure of information in natural resource sector; lack of regular audits for the NNPC within the government as well as poor financial reporting standards; lack of implementation of various recommendation contained in NEITI audits; and lack of priority for the passage of PIB; rarely up to date information by the government bon reserves, production volumes, prices, the value of resources exports and companies operating in the sector; and timely monthly reports on oil reserve generation published by the Central Bank of Nigeria.

Similarly, the report discloses limited quality and openness in terms of information on natural resources-related revenues available to the public; lack of regulatory authority for NEITI within natural resource sector, minimizing its role in ensuring accountability; inadequate legislative oversight on resource revenue reports; weakness in the metering mechanism and framework for measuring resource production rates at source; significant weakness in the capabilities of government agencies to provide independent, objective regulation and oversight of resource management, environmental management, occupational health and safety, revenue management or commercial roles; eroded public confidence towards transparency and accountability in the resource sector.

Moreover, the report notes lack of sanctions for erring agencies of government or individuals found culpable in the NEITI and legislative house committees’ reports. It points out inconsistent independent audits of the NNPC to the international standards; lack scrutiny, accountability and transparency or transparency for audits that are conducted; and poor enforcement of various administrative and judicial sanctions for failure to abide by sector.

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