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The development of the oil and gas sector in Nigeria; a dangerous exploitation

By Edited Jun 16, 2015 0 0

The importance of mineral resources to any nation, people or state in possession of it has been long-drawn.

Nigeria and indeed other nations in possession of this vital commodity or resource called petroleum which were hitherto peripheral to internal polities, have been catapulted to positions of great wealth and influence, creating a deep sense of inert crisis of confidence in industrial nations not in possess of this vital resource called petroleum.

The society today, as we can see today has become a hydrocarbon society and all of us “hydrocarbon men”. Oil supplemented by natural gas has become the basis of the great post war urbanization movement that transformed both the contemporary landscape and our modern way of life. Today, we are so dependent on oil, and oil is so embedded in our daily doings that we hardly stop to comprehend its pervasive significance. It is oil that makes possible where we live, how we commute to work and travel. It is the lifeblood of sub-urban communities.

The History of mineral resources in Nigeria is inextricably linked with colonialism. The search for mineral resources in Nigeria, begin in 1908 by the German Bitumen Corporation. It began to prospect for oil in the British protectorate at Lagos. They moved to the Araromi area between Ijebu-ode in the present Ogun state and Okitipupa in the present Ondo state. This pioneering effort was terminated on the outbreak of hostilities between Britain and Germany in the First World War in 1914 with Nigerian then being under the control of the United Kingdom and Germany losing the war, the German company’s operation were not resumed after the war. The British colonial administration enacted the mineral oil ordinance No. 17, of 1914 to regulate the right to search for, win and work of mineral oil. The 1914 ordinance and its amendment in 1925 conferred powers on the colonial administration to grant prospecting rights. Nigeria was constituted into one concession area (1924, 871 km2) and non-British companies were statutorily barred from acquiring mineral oil right in the area.

Section 6(1) of the 1914 mineral ordinance (as amended in 1925) provided that:

“No lease or license shall be granted except to a British subject or a British company registered in great British or in a British Colony, and having its principal place of business within Her majesty’s dominion, the chairman and the Managing Director (if any) and the majority of other directors of which are British subjects”.

This discriminatory legislation had very adverse effect on the development of the oil and gas sector as it discouraged competition from outside Britain, and British companies lacked the requisite capital and manpower for exploration of the vast reserves.

In 1937, oil prospecting was resumed in Nigeria when Shell D’Arcy, and Anglo-Dutch consortium a subsidiary of the Royal Dutch Shell group, obtained an oil exploration license covering the entire country. This initial monopoly gave Shell D’Arcy (the fore runner of the present Shell Petroleum Development Company of Nigeria) the leading position which the present day Shell maintains over the other oil majors in Nigeria. Shell thus remains the largest of oil companies operating in Nigeria today.


With the grant of one concession over the whole of Nigeria totalling 1924,871 km2, to Shell D’Arcy, and the subsequent operation of the above mentioned company under a concession operational for 30 and 40 years for on-shore and off-shore areas respectively (with an option for renewal for another thirty and forty years), shell’s position in relation to the oil and gas produces became that of an owner except the bare legal title which was vested in the crown by virtue of section 3 (1) of the mineral ordinance of 25th of February, 1946, which stipulated that:

“The entire property in and control of all minerals, and mineral oils in, under or upon any lands in Nigeria and of all rivers, streams and water courses throughout Nigeria is and shall be vested in the crown”.

The concession agreement entered into with Shell was a relatively simple document, the main provision of which were an outright right grant of the rights to exploit and market minerals recovered within the area of the concessions by sovereign in return for which the concessionaire provided the necessary capital and know how and bore the risk of exploration. (Italics mine).

All rights over the minerals in the ground were vested in Shell upon the payment of an agreed royalty to the government. The main features of the concession agreement entered into by the government with Shell have been outlined thus:

“It was a long-term agreement as forty years was not untypical. It created enclaves and gave rise to exception to the laws of general application. Management “prerogatives” were left to the operating company. There was no government participation in the basic decisions such as the rate of operation or marketing. The investor provided all capital typically and was entitled to all profits, originally paying the government a per ton royalty. Thus until the late 1950’s the main and only interest that the government sought to secure was financial returns. The main trust of government petroleum policy in the 1st decade after the 2nd world war was increased financial returns. This was done mainly through introducing a form of taxation from which the government could appropriate 50% of the profit. The 50/50 profit sharing formular thus marks the principal achievement of governments which sought to improve their relative position under the traditional concession agreement”.

The rights granted to Shell under the earlier concessions were quite enormous and various reactions by economist and other experts has been to describe such concessions in the following words:

“Never before in modern times have governments granted so much to so few, for so long, for so little”.

The concessionaire (Shell) as noted before acquired all the rights (title) to all the oil produced.Indeed, the concession involved a grant of exclusive license to exploit petroleum resources in a particular area. The company is thus given exclusive and extensive right to exploit these resource, which in effect assures of ownership at the point of extraction. Under the concession, ownership not only meant exclusive equity holding in the undertakings or mere assertion of rights, it involved:

a) Exclusive appropriation of the returns of the undertakings subject to the payment of royalties and taxes to the host states.

b) Unfettered control of the production of the resources and all related matters such as control of the production of oil and gas, pricing and further development.

c) Exclusive responsibilities for marketing, distribution and all downstream operations in the industries, such and nothing less could be the purport of a typical mining lease restring in the lease so many absolute rights.

Accordingly the traditional concession regime created enclaves status for the transnational corporation, fortified by the regime of economic and legal arrangements so formidable and pervasive that it overtly challenged the sovereignty of the host nations over her natural resources.

These concessions granted Shell and other multinationals later due to the discovery and expansion of the first exploratory well (Ihuo) in Eastern Nigeria in September, 1951, which led to the discovery of oil in commercial quantities at Oloibiri near Port Harcourt in present day Bayelsa state were overwhelmingly in favour of the transnational corporations. It was a clear exploitation of the developing country.

The companies that rushed into the scene after the discovery of oil by Shell in commercial quantities at Oloibiri included:

a) Gulf oil which got about 6,855 sq.ml

b) Esso and Safrap (Elf) -59,000 and 25,000 sq.ml respectively.

These companies took the remnants of what Shell left and were granted concession pursuant to the mineral oil ordinances No.17,1914. The duration of the concession was for 20 years, and the fiscal terms comprised payments of some yearly rents in respect of the whole duration plus royalties.

With regard to the yearly rent, paragraph 3(1) of the concession agreement granted to Shell B.P in 1949 stipulates:

“The licenses shall pay to the Accountant-general of the federation of Nigerian on behalf of the Governor-General during the term hereby granted or any renewal thereof for each square mile or part thereof comprised in the said lands a certain yearly rent as follows.

a) In respect of each year of the said term the certain rent of 5 shillings.

b) In respect of each year of a renewal of the said term the certain rent of ten shilling”.

Paragraph 5 of the agreement which addressed the royalty payment, states thus:

“The licenses shall pay to the Accountant-General of the federal of Nigeria on behalf of the Governor-General within two months after the end of the year of the term hereby granted or any renewal thereof the royalties here under specified.

1) A royalty of four shillings a ton of 2,440 lbs. of all crude oil won and saved and casing head petroleum spirit recovered by the licenses from the said lands within such year ascertained in the manner provided by clause 6(measurement of petroleum obtained from the said lands)”.This was clearly an exploitation and had nothing to do with the development of the Nigerian nation.

Certainly an arrangement in which the government is not involved in the exploitation, exploration and marketing of oil can not be regarded as being in public interest.

The apparent weakness in the traditional concession activated the concern by governments to secure control over petroleum operations. The step in that direction was the enactment of the petroleum Act, No.51, of 1969, which reduces the size and limits the duration of oil licenses and leases granted after the Act came into operation.

The assertion of the doctrine of permanent sovereignty over natural resources led to the development of new types of legal arrangement under which the MNO’s could still explore for and exploit petroleum without having the ownership rights over the petroleum they may discover. The legal framework whereby the government jointly owned the resources or retained ownership became an important objective in the new arrangements.

It was also stated that government participation was a sine qua non in order to maximize government take, control over operations, develop national capabilities in the field of petroleum operations with a view to ultimately take over the entire operations. In Nigeria, paragraph 34 of the 1st schedule to the 1969 Act subjects the operation of a license or lease to such special terms and conditions which the minister may in the public interest deem fit to impose. Participation by the Federal Government in the venture to which the license relates is one of such special conditions that has been imposed. The terms for such participation is to be negotiated between the minister and the applicant for the license or the lease.

The OPEC resolution xvi-90 of 1968 also known as the

“Declaratory statement of Petroleum policy in member countries” this resolution essentially advised member countries to acquire participation in and control over all aspects of oil operations, it include a participation clause allowing host government to acquire a reasonable level of participation in concessions. In 1971, the Nigerian National Oil Corporation (NNOc) was created as a public sector agency of intervention to enhance state participation.

The participation process began in 1971 when the government decided to exercise the option to participate in the equity of Nigeria Agip Oil Company by virtue of a term to that effect in the 1962 concession agreement. The government thus acquired 33.33% equity interest. At the same time, the government acquired 35% in Safrap (Elf). Participation was a matter of policy as well as national aspiration – a gradual and partial process of nationalism and this was implemented with respect to all the companies. In 1979, government nationalized BP’s assets in the Shell concession.

On acquiring participation interest up to the level recommended by OPEC, Nigeria decided not to grant any more concession in the traditional form and by Legal Notice No. 311 of 1972, all non-allocated and/or abandoned acreage became government property and was vested in the then (NNO).

As a result of the acquisition of participation interest in the operations of oil producing companies, a new government, company relationship called Joint venture emerged, which came with some other forms of arrangement: Joint Operative Agreement (JOA), Memorandum of Understanding (MOU), which defined the Joint Venture arrangement.

Another notable trend in petroleum investment policies adopted by host nations is the preference for production sharing contracts a good tool in asserting ownership and control. This new trend is fast replacing the almost obsolete joint venture agreement. In this production sharing contract, the contractor (operator) bears all the cost of exploration and production without such being reimbursable if no find is made in the acreage. Cost is recoverable with crude oil in the even of commercial find with provisions made for tax oil and cost oil. The balance (‘denoted profit oil’) is to be shared between NNPC and the contractor in agreed proportion.

Service contracts arrangement came on board, the gist of which is that the National Oil Company holds the oil prospecting license, while the operator designated as the service contractor provides all the funds required for exploration and production works. In the event of commercial fund, the contractor is recouped its cost in line with the procedures stipulated in the contract. The differences between the PSC and SC being the number of oil prospecting licenses covered by the duo, which is more than two and one respectively.

The 1969 Petroleum Act, was a saving grace and helped in the re-adjustment of human, capital and resource development.

Paragraph 34, to the 1st schedule of the petroleum 1969 subjects the operation of a license or lease to such special terms and conditions which the minister may in public interest deem fit to impose. Participation by the Federal government in the venture to which the license relates in one of such special conditions that has been imposed.

Although the government should not nationalize or expropriate the assets and investment of the MNO’s without fair and adequate compensation, the sovereignty of Nigeria, even as a contracting party to any arrangement, can in circumstances where such an arrangement does not tally with the national interest of the state expropriate or nationalize the investment of the MNO’s.

An obligation has been put on the holder of an any oil prospecting or oil mining lease to recruit and train Nigerian citizens in all phases of the industry, to conserve petroleum and to control pollution of land, water and air. In relation to recruitment and training of nationals, the petroleum Act prescribes for the personnel whom it should recruit and train as follows.

a) The number of citizens of Nigeria employed by him in connection with the lease in managerial, professional and supervisory grades shall reach at least seventy-five per cent of the total number of persons employed by him in those grades, and

b) The number of citizens of Nigeria in any one of such grade shall not be less than 60 per cent of the total and

c) All skilled semi-skilled and unskilled workers are citizens of Nigeria.

All these points us in the right directions, of what should be obtained in the oil and gas sector in Nigeria.



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