Host community, frontier exploration fund should be reviewed

Sunday Adebayo Babalola, an Engineer, is a Director of All Grace Energy, and a retired Deputy Director, Department of Petroleum Resources (DPR) as well as a former acting Managing Director, Belemaoil Nigeria Limited. In this interview with  Uzodinma Nwogu, he shares his opinion of some of the provisions of the newly passed Petroleum Industry Bill (PIB), especially the Host Communities and Frontier Explorations Fund, among other industry issues. Excerpts:  

What is your view of the Petroleum Industry Bill (PIB) in terms of good corporate governance?

Good corporate governance is not only in writing, either as a law or a regulation. It is rather in the people acting it and the people who will run the system. As long as we have the same people still running it, you may not get the desired change or result. Remember a saying that “it is madness to be doing the same thing the same way and expecting different results.”

The reality is this; as long as the same people are going to run the system, we will be in the same conundrum, there will be no difference. But if new people will run it, we may have good corporate governance. For example, the Nigerian National Petroleum Corporation will now be a company answerable to taxpayers. That is a good thing, because right now, the NNPC law does not make them accountable to anybody. Nobody has ever seen the NNPC’s annual report where the profit and losses are clearly stated and the dividend to the stakeholders, which is the Federal Government, is clearly stated. With the new arrangement that will not be the case. But it also depends on who is running it. Organisations eventually are reflections of their leaders. If the leadership of the organisations are good, and understand their duties, of course, the result will be tremendous even without this PIB documentation. As long as we have this level of documentation that I am seeing, and the people running the industry now, we will not have anything different.

Aside from the people that will execute it, in terms of provisions is the PIB good?

The PIB is good. It also has its own flaws though. But it is good because it gives some communities some percentage of the oil revenue. Oil companies should account for those percentages and not through another organisation that will be returning those percentages. If they allow another organisation, they will end up like the Niger Delta Development Commission (NDDC). So the organisation should be accountable to somebody. It all depends on accountability and corporate governance.

However, the way it is now, the whole country is an oil producing community because if the pipelines pass through any community, that community has become an oil producing community. Is that really good? My opinion is that it is not. Let the oil producing communities be the communities from whose locality the oil and gas are being produced, because they are the ones that are truly and sincerely impacted by oil and gas production activities.

There are some aspects of the Bill that are good, and there are some aspects that need to be reviewed.

With the PIB making almost the whole country host communities of oil production, don’t you think that this could reignite militancy in the Niger Delta, the real oil producing areas who may feel that they are being short-changed by this new Bill?

Anything can happen really, because the people that you think that do not know now may eventually wake up. We have seen it happen before. In the 1960s, nobody talked about oil being produced in my backyard; that I needed something or was impacted by it. In the 1970s, it was the same thing. In the 1980s, rumbling started with Ken Saro-Wiwa and co, and then militancy went haywire. Today, we are still battling with it.

What we can do is to encourage others to also develop the mineral resources in their areas, because if you do it for them like for solid minerals, you should also do it for others and make them host communities and make the same law, and make them enjoy the benefit of the host communities. Despite the abundant resources in Nigeria, it is sad that we are all focused only on one resource – oil.

Are there other aspects that need to be reviewed?

There are many of them but I may not go into details now. However, the provision of the Frontier Exploration Fund is very blurry, and as the paper puts, it is a “slush” fund. The fund is to be taken from 10% of concession rents and a hefty 30% of NNPC Limited’s profit oil and profit gas as in the production sharing, profit sharing and risk service contracts. In all this, if no E&P company is willing to work on these frontier basins, this is to be done by the NNPC Limited transferring 30% of profit oil and profit gas to the Frontier Exploration Fund escrow account dedicated for the development of frontier acreages only. This means that the shareholders of NNPC Limited will not get 30% of their profit. We shall simply be back in our old ways. How do they account for this? What will be the probability of success of these exploration activities? What happens after commercial discovery? Is the regulator going to be a producer? In a country where everyone seizes every small opportunity to be sleazy, will this work? What I think the government should do is simply incentivise exploration activities in these frontier areas and allow the IOCs to come there.

With the vacuum left in the Bill in the area of energy transition to cleaner fuels, what choices are open to operators vis- à-vis global trends?

The choices are simply efficient and cost effective oil and gas production operations; because the global trend in energy mix today is that you now have other possibly cheaper sources of energy. If you look at the chart in the sites of the organisations that update these things, you will discover that the main drivers for energy are two: one, cleaner environment, second, pricing of energy. To solve the issue of pricing, efficient and cost effective ways must be found to tackle the issue of whether oil will still remain relevant or not.

The other issue is the environment. The second thing is global warming. Whether it is there or not, it is a political issue. And some people will push it very hard. The best thing is for the oil and gas industries in Nigeria and in the world to start thinking of how to produce and monetise this oil efficiently so that it will be part of what they call clean energy. The emission level should be reduced. Whatever can be done to reduce such emissions should be done. If these are done, it will, sincerely speaking, be very difficult to do away with oil. The oil companies should continue to improve their production mechanisms such that they can become cleaner just as they say that gas is a cleaner source of energy; but there is emission in gas too. With more scientific research, this thing will be reduced. Oil may lose some portion of its percentage in the energy mix but it will continue to be a source of energy for the next 30 to 40 years. Let us use the money derived therefrom wisely. To compete favourably, they should work on ways they can make it utilisation cleaner.

Is the PIB strong enough to uphold strong corporate governance among the players seeing as there are now multiple regulators as opposed to the current status where DPR is the only regulator?

The Bill will help because even now, we say DPR is the only regulator but that technically is not true. Environment is also regulated by the Ministry of Environment. Weights and Measures go to petrol stations for checks too. And there are many people who are regulating. NAPIMS is also regulating one thing or the other. We really have multiple regulators, though unregistered to the public mind but the reality is they do exist. Ask some petrol station personnel how many people come there to check them on behalf of the government, and the petrol station personnel will count for you not less than five or seven groups. That is not helping the system. Bringing it to three and clearly delineating each one’s areas of reach is actually a good thing.

My position is that the bill, if it streamlines the activities of the three regulators, is a good thing, because currently we have multiple regulators, which are not registered. And what has happened is that it has not put responsibility or ownership on a particular party. What do they do? The same thing! So if properly delineated by saying: “you are in charge of downstream, this is your work,” the Ministry of Environment will not come again, Weights and Measures will not come again, and all those people will not come again.

The law should be strong enough to say nobody should come. When you are going to the upstream section; every regulator, from Navy to Armed Forces, immigration, Weights and Measures is involved, and it is not about providing security. We actually have multiple regulators, each claiming to be doing different things. Putting them into three and streamlining their activities, giving them their tasks and targets and/or schedule of duties which are clear would be the best, even if they are three. You do not need to have a single regulator; there will be too much weight on that regulator. This oil business is what everyone wants to regulate. The Federal Ministry of Environment is facing the oil business now for reasons best known to them. I do not think that the idea of having three regulators is a bad thing.

Determining whether the Bill is strong enough depends on determining how they streamline the activities of those regulators. To be clear, DPR is not the only regulator. It is the known regulator by law but the reality is that there are others. If the others will be coming in after PIB, then the PIB may be a useless exercise in this respect.

What were your environment, security, and governance experiences from a regulatory point of view when you were at DPR and now that you have crossed over to the operating side?

What I discovered is that they are two different worlds. As a regulator, you want something to be done in a certain way not minding the cost to the company. But as an operator, you want to reduce the cost of your work, so you also want to do it in a certain way. That is the major difference I see from being on the two sides. As a regulator, I used to insist not minding the cost; this is what is to be done. But as an operator, it is different. I am thinking of how much this will cost me. How safe is it, and how will it affect the environment? Those three things not in any particular order are my concerns. But I can assure you that cost becomes paramount because that will determine profitability. If you are an operator that is greedy, cost will take precedence over the remaining two and that could be dangerous.

What I think the government should do is simply incentivise exploration activities in these frontier areas and allow the IOCs to come there.

From my experience, I think it is much better to have the opportunity to taste the two sides because right now, I am able to advise them, cost or not, this is what we ought to do, even at a high cost. And I try to explain to them too that the high cost will eventually be beneficial down the road.

If you ask me: how should these things be done? My answer is that it is better for somebody to actually have experiences from both sides. When the PIB is effective, some of the staff of the operating companies should cross over and help to develop and fine tune those regulators because they have experience of operation. Let them use that experience of operation to work in the regulation, because it is helping me today to understand the thinking of both sides and be able to, as a consultant, advise very well, because I am looking at things from both the operator’s angle and also as an ex-regulator.

Whether energy transition or not, how can the industry mitigate environmental pollution since oil and gas account for about 84% of such degradation?

The regulators should also be up and doing while the companies should find means of becoming energy efficient. You have to remember that the 84 per cent environmental pollution is not because of the activities of the company. There could be errors and oil may spill due to the errors. I do not disagree with that. But mainly it is based on people interfering with the activities of the oil companies and breaking pipelines. There is unconfirmed insinuation or allegation that sometimes they break those pipelines to cause environmental degradation so that they can start talking to the companies and the companies start to negotiate. I can assure you that less than 20 per cent of the degradation is caused by operations. The remaining is caused by people or external parties tampering with the operations, breaking the pipelines to siphon some crude and other activities. So what can they do? They have to make their system more efficient like putting pipeline sensors so that once somebody tampers with it, it alerts instantly, and you shut down before much damage is caused. Those pipelines are actually pigged both to clean them and test their integrity. There are a lot of things they do that make them monitor the systems but sometimes when the pipeline is tampered with, it takes time for the pressure drop to be noticed and by that time a lot of spill has already taken place.

Also, gas flaring should be reduced. As a former regulator, I was in charge of monitoring gas flaring and ensuring its reduction. And we tried our best to reduce it from 2.4 billion standard cubic feet (bcf) per day when I took over to less than 1.2 bcf per day by the time I was leaving. It was a hard battle because we ensured that the companies that want to further develop their field have to have a gas utilisation plan in place. It was a lot of hard work. Gas flaring should be addressed.

That time I fought for the gas flaring penalty to be $3.50 per 1000 scf and now it is about $2 per 1000 scf. 1,000 standard cubic feet (scf) is equivalent to 1,000,000 British thermal units in terms of energy. By the time I took over, it was 50 kobo but that penalty for flaring became useless when the dollar/naira exchange rate went above the roof as 50k became less than a cent.

Now, what the companies can do is to improve their operations to be able to manage, and discover pollution before they occur or at the peak of when they occur and also to reduce their gas flare and utilise this gas.

Again, the Government is not helping the matter; they said they decided to monetised gas flare but when the marginal bid rounds came, they jettisoned that even though the process was almost finished before the bid round. That exemplifies that priorities are wrong. They should have finished something that was almost completed before they go to another thing. It is also a government fault.

What then do you see as the future of petroleum amid the transition?

I see a great future.

What kind of social programmes does your company have in place and are your activities in line with international best practices?

I do not have the permission of my company to speak on these things. Suffice it to say that we have GMoU with our communities. We do the agreed projects together. Our design is actually self-regulating and everyone is happy.

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