The myth of restructured petroleum development contracts in Nigeria

Autor:Amana, Amade Roberts - Amana, Samuel Abu
Cargo:LL.B, BL, LL.M, PhD (Cand), Nnamdi Azikiwe University, Awka, Anambra State - B.Sc, MSc, PhD (Cand) Kogi State University, Anyigba, Lecturer, Department of Banking & Finance, Faculty of Management Sciences, Kogi State University, Anyigba

This paper reviews the assortment of themes, which influenced the transition from concessions to new forms of petroleum development contracts in Nigeria. It argues that the attempts to restructure the pre-existing contractual arrangements have so far been futile. No doubt, the intentions are good, but the realities are hard. The article therefore, projects the need to look beyond symbols and... (ver resumen completo)


The justification for allowing foreign investment and enterprises into the Nigerian extractive industry was for the exploitation and development of its plentiful but latent mineral resources. This necessitated the negotiation of petroleum development contracts with multinational oil corporations beginning from the early 20thcentury. The contract involved two parties: the Nigerian government and a foreign corporation. And it governed the exploitation of the natural resources of the country. The evolution of the country’s petroleum industry is closely associated with the colonial establishment, and the tensions, which accompanied the socio-political system. Imperialism has always been characterized by social injustice and radical action by the colonized who seeks to change the prevailing situation once the degree of awareness increases. Such sentiments distinguished the contractual relationships between host states and the multinational oil corporations, which had the backing of their home countries in the North. As Fanon clearly stated: in a very concrete way, Europe has stuffed herself inordinately with the gold and raw materials of the colonial countries (Jinadu, 1980, p46). 

Multinational corporations have invested in the petroleum industries of host states because they expect to earn a return on their investments. The traditional objective is to boost corporate profit and shareholder wealth (Nicandros, 1985), gain access to secure reserves and expand sources of supply. Such investments were not driven by generosity or concerns for the welfare of the receiving countries, but rather by the lure of lucre. The influx of foreign direct investment into Nigeria reflected the disproportionate nature of the international economy where resource rich Third World states have to source for capital from their Western counterparts typically under conditions unfavourable to the former. And the interest of the host communities was subordinated to the widely recognized corporate objective of profit maximization through property-like concessions. Several factors were responsible for the situation. The petroleum industry is capitalistic, capital intensive and requires investments in state-of-the-art technology; resources which are clearly beyond the reach of most evolving economies. Besides, at the stage at which the oil producing colonies found themselves thrust upon the international energy market, they were too unsophisticated and naïve to escape the manipulations of the multinational oil companies which had strengthened their grip on the industry through systems of oligopoly, vertical and horizontal integration. 

Usually, the parties to a contract are of an identical status. But this assumption fails to capture the cold hard facts surrounding the conclusion of petroleum exploration agreements with Third World countries. Such contracts were glaring instances of undue influence on the resource-owning state. Yet, they were validated both by the might of colonial domination and the pressing desire of the host party to encourage foreign exploration of her mineral resources. This viewpoint is illustrated by the Iranian incident of 1925 whereby the country was compelled to choose between the seizure of its oil rich Mosul region and the grant of exploration rights to the Turkish Petroleum Company (Al-Otaiba, 1980, p29). Obviously, law alone cannot determine the best way to balance the interest of a host state as it combines the virtues of political philosophy and economics. But the demise of colonialism was indeed, a turning point in global oil politics for the producing nations. And with the rise of OPEC in the 1970s, developing countries agitated for the institution of a New International Economic Order, to tilt the global economic system in their favour. 

No tradable commodity is as important in today’s international market as petroleum. Oil is the basis of modern industrialization, creating global networks of inter-dependence. Contributing over 95% of Nigeria’s foreign exchange earnings, especially since the transition from an agro-based economy to a petroleum-reliant economy, investments in the mineral industry have had a profound impact on national unity, environment, economy, and growth. Therefore, there is a need to prevent the premature depletion of the resource or to preserve a vanishing economic asset for future generations. The influx of most foreign direct investments into the petroleum industry appears to underscore the importance of the sector to the state and the international community. Against this milieu, the German-owned Nigerian Bitumen Corporation expressed the initial enthusiasm for profits in 1908, by prospecting for oil in the country’s virgin fields. As there are insufficient records of the outcome of the company’s prospecting efforts, existing accounts contain a great deal of guess work. Nevertheless, it is certain that the development of its fields was decisively terminated due to the outbreak of World War I. However, the choice of the investor for developing the country’s petroleum resources was ironical. Nigeria owes its emergence as a nation to British imperial whim (Adedeji, 1969, p22). The Mineral Regulation (Oil) Ordinance of 1907, passed by the colonial government, entitled only companies of English extraction or those controlled by British subjects to rights to explore for the country’s natural resources. But the vastitude of the country’s oil reserves belies the assumptions underlying such constrictive entry policy choices.     

The second cycle of concessions was granted to the Anglo-Dutch consortium Shell/D’Arcy in 1938. Subsequently renamed Shell/BP, the consortium enjoyed a nationwide monopoly status on account of exclusive public licensing and the creation of state barriers to new competition. Sheltered from competition, and with the absence of a penalty or relinquishment clause, it could afford to "sit on" large areas of its grant. At first glance, this might appear puzzling, but oil companies being transnational in character, desired a great deal of latitude in deciding the pace of exploration of their fields, and this took into consideration the global context of their grants and operations. At times, mining rights were acquired to keep the concessions off the market. This theory was substantiated by the Iraqi experience. Although the Iraq Petroleum Company was awarded concession rights over the whole of Iraq in March 1925, exploration activities were conducted in less than 1% of the area of its grant. Shell/BP’s license extended over the entire territory of Nigeria, although the consortium concentrated its operations in the Niger-Delta, making its first commercial discovery in 1956 in Bayelsa state. It was from its Oloibiri fields in Bayelsa state that Nigeria’s first crude oil exports were made in 1958.  

The dismantling of entry restrictions in 1958 by the repeal of the disqualification clause in the 1907 Ordinance fostered competition through the grant of exploration licenses to other multinationals. The open door policy which began in 1959 engendered a spirit of healthy rivalry from which the industry benefited tremendously (Ajomo, 1987, pp84-86). Between 1957 and 1962, Shell/BP had retained only 40 000 square miles of its acreage, haven freely surrendered the remainder to the Nigerian government (Pearson, 1970, pp 18, 20). The relinquishment facilitated the award of exploration licenses to other oil companies such as Gulf Oil, Texaco, Occidental, Sunray-Tenneco, Mobil Oil, and Agip. It is perhaps not surprising that the government had embarked upon an expansionary policy. Firstly, there was a strong desire to expedite the rate of exploration of the country’s oil fields using the best available technology, and secondly, Nigeria had attained a measure of political autonomy in 1959, with the power of formulating its development plan (Ajomo, 1987, p86). Today, Shell/BP enjoys a position of dominance in the industry haven chose the most productive fields as indicated by geological surveys:    

The opportunity of exercising an autonomous strategy throughout two decades in the realm of concession politics brought about the result that this company today possesses the optimal concession site in the country.

Its monopolistic position in the past with respect to license selection affords Shell/BP both now and in the future a position of dominance in the development of the Nigerian mineral industry (Schatzl, 1969, p1)  

The issue of how government exercises supervisory and regulatory controls over the industry has been tackled in several distinct ways. The basic approach consists of a legal framework; the Petroleum Act of 1969, its subsidiary legislations, and the bureaucracy. The competence of the government to impose taxes on oil exploration activities can be interpreted as a direct incidence of its proprietary interests. Through petroleum tax liabilities, the state can assert its ownership rights, raise revenue, regulate corporate behaviour and improve market outcomes. Although, no reason has been advanced for the existence of a separate taxational system for the industry, it however appears that the differential is vindicated by the higher turnover margins of oil businesses. Thus, unlike other corporations which incur their tax obligations under the Companies...

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