Issues for host communities under the Petroleum Industry Act (PIA)
The Petroleum Industry Act (PIA) establishes the Host Community Development Trusts (HCDTs), which will guide oil and gas company (OGC) investments into community development. While the law and regulations are a good foundation, our close reading highlights several issues related to finance and governance mechanisms that need to be addressed. Urgent changes are needed to make the most of the huge investments, reduce future risks for the oil and gas industry, and avoid tensions across the Niger Delta.
What is happening?
The HCDTs will channel huge amounts of resources towards community development, effectively replacing corporate social responsibility (CSR) projects. The Federal Government of Nigeria (FGN) estimates the total contribution to HCDTs will be US$500-800 million per year (NGN200-330 billion), around ten times the average annual social spending by OGCs ($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 ($806 million or NGN206 billion), which will continue to be spent in parallel. This creates a huge opportunity for coordinated community development spending.
What does SDN’s research show?
In terms of finances, the audited accounts of OGCs are generally not published, so there is no way to independently verify that companies are contributing what is due to HCDTs. Several transparency initiatives have introduced positive measures for reporting payments to the government. But we are concerned that similar measures are not in place for payments to HCDTs. Moreover, the FGN has claimed compliance with existing mandatory payments is poor – for example, alleging OGCs owe the NDDC billions of dollars. It also appears there is no uniform way to calculate contributions or distributions among HCDTs.
In terms of governance, the structures place too much power in the hands of the settlors (i.e. oil and gas companies), instead of communities. The regulations allow settlors to use existing needs assessments to design the development plan for the HCDT, which may be outdated. It also lacks specific opportunities for consultation with communities on their current needs and favoured projects, has no provision for monitoring and evaluating the impact of projects, and only requires plans to be reviewed every five years.
In terms of regulations, 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, this could cost HCDTs up to US$1 billion per year (NGN458 billion) – theoretically wiping out all contributions.
Why is this important?
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. For example, Federal and State government funding for the Niger Delta was over NGN1.4 trillion (US$3.7 billion) in 2020. With more funding, it is in the interest of all parties that HCDT funds are calculated, collected, and utilised in a transparent and accountable way, which is applied consistently across all companies and communities. This is particularly important as the funds will flow directly to community structures, rather than passing through government institutions.
In terms of protecting the integrity of infrastructure, it should be the responsibility of OGCs and the FGN. 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 government. Lumping this responsibility on communities – then punishing them for the actions of a few – will likely increase hostilities.
What needs to be done?
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.
The National Assembly should look at the provision to deduct funds for third party damage, as is out of step with the law. More broadly, SDN maintains that this provision should be removed entirely. Private pipeline surveillance contracts were recently awarded to protect oil and gas infrastructure. By extension, their success could be integral to community development under HCDTs, so synergies should be explored.