The trouble with onshore

The trouble with onshore/offshore dichotomy

A rather intriguing game of muscle flexing has been quietly going on between President Olusegun Obasanjo and the governors of the nine oil-producing states over the actual quantum of naira that the 13 per cent derivation translates to. While the governors claim entitlement to 13 per cent of proceeds from total crude oil and gas production, the President insists on applying the derivation formula based on onshore production only, which in his estimation amounts to 60 per cent of total production. The argument that is often thrown around to support this computation is that offshore oil belongs to the Federal Government and not the state. Therefore, the argument goes, oil-producing states cannot derive any extra income from this offshore production to which they have no title in the first place.

Three Federal statutes and the constitution of the Federal Republic of Nigeria (1999) all contain unambiguous provisions on the ownership, management and control of all minerals, oil and gas in place. Section 44 (3) of the constitution "as well as the Petroleum Act Cap 350, Exclusive Economic Zone Act Cap 116, Territorial Waters Act Cap 428 and The Territorial Waters (Amendment) Act of 1997 all expressly vest the ownership and control of "minerals, mineral oils and natural gas in, under or upon any land, territorial waters or Exclusive Economic Zone of Nigeria in the Government of the Federation. Therefore, unless a constitutional amendment is effected, there can be no contest as to who owns the oil and gas in Nigeria, be it onshore or offshore.

However, Section 162 (2) of the constitution states, inter alia, that in determining the revenue allocation formula of the Federation Account, "the principle of derivation shall be constantly reflected in any approved formula as being not less than 13 per cent of the revenue accruing to the Federation Account directly from any natural resources." Read in conjunction with Section 44 (3) and the Extant Statutes earlier referred to, what this Section 162 (2) simply provides for is to the effect that, even though all oil and gas wheresoever it is found belongs to the Federal Government, in distributing the revenue accruing therefrom, 13 per cent of it should be shared among the states from which this federal revenue accrues. When we recall the socio-political antecedents that gave rise to this thoroughly negotiated clause in the federal constitution, it is not surprising that a clear, unambiguous distinction between onshore and offshore resources was avoided. Thus the emphasis is on rewarding the states that host these revenue-generating oil and gas activities and not some complex legal definition of state and federal geographic boundaries. In the circumstance, ownership is irrelevant while the intent is to ensure equitable distribution.

The history of the derivation principle in revenue sharing in Nigeria is particularly interesting for its illustration of the political nature of the exercise. Between 1951 and 1970, five revenue allocation arrangements by colonial and post-colonial governments emphasised derivation. The Hicks-Phillipson Commission of 1961 and the Binn Commission of 1964 both recommended 50 per cent derivation proportion to the area generating the resource, 35 per cent to the Regions and 15 per cent to the Central Government. By contrast, the Chick Commission of 1953 had recommended 100 per cent derivation for resources-bearing areas. In 1958, the Raisman-Tree Commission recommended derivation (50 per cent) Regions 30 and the Central Government 20. At the end of the civil war the offshore revenues act of 1971 was enacted which reserved revenues from offshore oil exclusively for the Federal Government while pegging derivation at 45 per cent of onshore proceeds. This was the first time a clean distinction was made between onshore and offshore proceeds in our revenue allocation formula.

The Aboyade Technical Committee of 1977 and the Okigbo Commission of 1979, in fact, recommended that the derivation principle be abolished altogether. But following widespread discontent and protests from oil-producing communities during the Babangida regime, the derivation factor, which had fallen to 1.5 per cent from 45 per cent in 1970 was increased to 3 per cent. When OMPADEC was set up in 1992 and allocated two-thirds out of the 3 per cent derivation, Section 2 (2) (1) of the enabling decree provided that funds from the allocation received by OMPADEC are "to be used for the rehabilitation of the oil mineral producing areas on the basis of their production ratio and not on the basis of the dichotomy of offshore or onshore oil production." This provision was interpreted as conferring oil producing status on littoral states and effectively abolished the dichotomy introduced by the 1971 Act. Thus Akwa Ibom and Ondo states joined the club of oil producing states. Following further escalation of community crises in the Niger Delta, particularly the Ogoni crises and the Kaiama declaration, the constitutional conference in 1995 recommended further increase in the derivation factor from 3 to 13 per cent. This was adopted and engraved in the 1999 Constitution.

My suspicion, however, is that the actual computation of the full value of the 13 per cent derivation was only done for the first time by the present government who found the sum involved to be far beyond their wildest estimation. Every unconventional effort is therefore being made to reduce the sum due these states to a figure that is acceptable to the central government. Unfortunately, under the current dispensation, the only viable options open to the Federal Government is to pay what is constitutionally stipulated or seek a constitutional amendment.

The political implications of the offshore/onshore dichotomy make the legal arguments pale into insignificance. To expunge offshore production from the derivation calculation is to expel Akwa Ibom and Ondo states from the club of oil producers. Their membership of NNDC, including their stout representation at the board of NNDC, would have to be annulled. In the face of such an action, can Mobil continue to operate its offshore fields? Will their Qua Iboe Terminal continue to function? Will the Itsekiris and Ijaws of Delta State allow Chevron to operate their offshore fields from Escravos? How will you tell the restive Ijaws and Ilajes of Ondo State that their modest oil-producing privileges have been severed and still expect Chevron, Conoco, Consolidated oil and Cavendish to continue their western offshore operations? And in the face of all this, how will Obasanjos campaign train be welcomed in these states come 2003?

I believe the true spirit of revenue sharing, especially in the mold contemplated by the constitution is an astute balancing of political and economic considerations. If commercial quantities of crude oil were eventually discovered in Lake Chad, I don't know who would convince Borno State that they are not an oil-producing state. A littoral state that is bearing the full burden of hosting oil exploration and production activities cannot be said not to be resource bearing. To do so would be to open a Pandoras box of grave political and community crises that will make nonsense of the efforts of the past 10 years to bring stability to oil and gas operations. This would amount to the proverbial act of throwing the child away with the bath water.

Mr. Avuru is an oil specialist in Lagos.