PRESS RELEASE: How the Petroleum Industry Act could backfire for host communities

SDN today releases research that highlights how the provisions of the Petroleum Industry Act (PIA) targeted toward host community development create both opportunities and challenges. We are encouraged by the vast increase in spending that is expected, but concerned that without amendments, the regulations will create tensions across the Niger Delta.

Under the PIA, there are regulations for Host Community Development Trusts (HCDTs), which will channel huge amounts of resources towards community development, and effectively replace corporate social responsibility (CSR) projects for oil and gas companies.

The Federal Government of Nigeria (FGN) estimates that the total contribution to HCDTs will be US$500-800 million per year (NGN200-330 billion), around ten times the average annual CSR spending by oil and gas companies (US$72 million or NGN19 billion). The estimated total allocation to HCDTs is almost as much as the Niger Delta Development Commission’s (NDDC) average annual budget (US$806 million or NGN206 billion), which will continue to be spent in parallel. This creates a huge opportunity for coordinated community development spending.

More funding for community development is welcome, but historically, the main challenge has not been the lack of funds, but the failure to manage this properly, to ensure it benefits communities. The HCDTs mean that these funds are flowing directly to communities, rather than through government institutions, where inefficiencies historically stemmed from. HCDT governance structures are rapidly being established to manage these finances. However, the structure prescribed by the regulator places too much power in the hands of oil and gas companies to determine the projects to be delivered, and the people who will oversee these decisions (the Board of Trustees). This could lead to disputes and increased tensions between communities and companies. Moreover, there will be no transparency in how company contributions are calculated, so communities will not be able to verify if they are receiving what they are due. Contributions should be equal to 3% of operating expenses, but companies do not currently publish this figure.

Most worryingly, the HCDTs seek to incentivise communities to protect the industry’s infrastructure from sabotage, oil theft, and artisanal refining, but do not provide any support to help them achieve this. Instead, they will be penalised under a provision in the PIA which states that deductions can be made to HCDTs for the cost of damage from ‘third-party’ incidents. The regulations expanded the definition to include the cost of products lost and operational costs during the period of downtime. If implemented, these deductions could cost HCDTs up to US$1 billion per year (NGN458 billion) – theoretically wiping out all contributions. This is unjust. Protecting the integrity of infrastructure should be the responsibility of companies and the government. Communities are important stakeholders in these efforts, but would need extensive support to tackle organised criminal networks, which are often armed and working in complicity with the security agencies and some government officials. Lumping this responsibility on communities – then punishing them for the actions of a few – will likely increase hostilities.

Our view is that the current regulations provide basic guidance, but to avoid future disputes, the regulator needs to specify uniform, transparent, and accountable approaches for: calculating operating expenses, clustering communities, distributing allocations among HCDTs, and establishing mechanisms to manage projects. In addition, the 10th National Assembly should amend the provision in the regulations that deducts funds for third-party damage, as is out of step with the PIA. More broadly, SDN maintains that this provision should be removed entirely, as it will not achieve what it intends to, and will lead to tensions across communities.

Commenting on the report, SDN’s Country Director, Florence Ibok-Abasi said:

Effective resource governance is a panacea for community development. Paying lip service to this will only sustain the cycle of deprivation in host communities and further weaken the relationship between citizens and the state which has often led to conflicts in the Niger Delta.

Note to the Editor

About SDN: Stakeholder Democracy Network (SDN) supports the efforts of those affected by the extractives industry and weak governance. We work with governments, companies, communities and other stakeholders to ensure the promotion and protection of human rights. Our work currently focuses on the Niger Delta, where SDN is an established voice with a presence spanning 19 years.

About the Report

One section of the Petroleum Industry Act (2021) focuses on community development and provides for the establishment of Host Community Development Trusts (HCDTs) to increase social spending by oil and gas companies (OGCs) in host communities. Our close reading highlights that this lays the foundation for managing these funds, but there are many opportunities to build on this to ensure best practice is followed in finance and governance mechanisms.

Our report outlines key concerns under these two areas – finance and governance – and provides specific recommendations for the legislature and regulator to consider, in their efforts to improve implementation of the HCDTs, and wider PIA. This is a major, complex new policy initiative, with many potential risks and benefits for communities. From our discussions with OGCs, the FGN, communities, and wider civil society, it is clear that work is being done to try to navigate this. However, the speed at which this is happening, and the focus on the business side of reforms, may gloss over several critical issues related to host communities, which this report seeks to highlight.

Media contact: Solace Ojotule Okeyi: Communications Officer, SDN +44 (0)7565374462t

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