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Environmental regulation: a key response to sustainability challenges in the Nigerian oil and gas industry

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Adeoluwa Omolola Oke
Awomolo & Associates, Abuja
omololaadekunle13@yahoo.co.uk
 

One of the challenges facing humanity today is the need to prepare for a sustainable future. Policymakers are beginning to appreciate the need to create a balance between harnessing economic potential and conserving natural resources for future generations.

Introduction

The oil and gas industry remains the mainstay of revenue for Nigeria’s economy. Since the discovery of oil in 1956 by Shell BP, the commercial production and exploitation of natural resources have steadily increased, resulting in a significant impact on the economy. Oil generation accounts for over 90 per cent of foreign export earnings and about 80 per cent of the government’s revenue, significantly increasing the gross domestic product (GDP) of Nigeria’s economy.[1]

However, over-reliance on the oil reserves has resulted in unsustainable economic growth. Oil prices from the year 2011 onwards have suffered a steady decline, leading to a corresponding fall of the country's economic growth.[2] Given the challenges of poverty, unemployment and insurgency, the dwindling oil reserves represent a governmental failure to translate its oil wealth into improved standards of living for the growing population and future generations. According to Martin Holdgate, to understand nationwide development is to appreciate the value of resources.[3] This suggests that the failure of the government to manage the country’s resources renders the concept of sustainable development useless.

Sustainable development, as defined by the Bruntland Commission, is ‘development that meets the need of the present without compromising the ability of the future to meet their own needs’.[4] This definition is taken to mean that a society should ensure the provision of adequate financial, social and economic resources to enable the next generation to live as productively as the present generation.[5] What, then, is sustainable management of oil resources? How can sustainability be achieved?

Sustainable management of oil wealth postulates efficiency in resource management and utilisation; it is a system of management that can satisfy present needs without depriving future generations.[6] Sustainable management of resources encompasses the concepts of equity, resilience and effectiveness.[7] Generational equity is achieved as the present generation creates balance and prosperity for the next generation. By judiciously managing resources, the ability of the government to adapt to disruptive forces is strengthened. Lastly, the efficient use of resources raises the standard of living, boosts investments, and attracts developmental and constructive policymaking.

To achieve and remain committed to sustainability among the Nigerian extractive industry, proper efficiency and utilisation of oil resources must be backed up by environmental regulation.

The need for state intervention

Regulations are usually born from market failures. It becomes imperative for a government to make a regulatory intervention because of several negative externalities, such as:

• the overuse of natural resources;

• an increase in environmental problems;

• maximisation of individual profit against social welfare; and

• the absence of corporate responsibility towards environmental pollution.[8]

Regulation refers to a body of rules designed to alter or correct societal behaviour. Environmental regulation in this context is ‘the general rules and specific actions enforced by administrative agencies to control pollution and manage natural resources to protect the environment and internalise externalities, including direct and indirect interventions’.[9]

Environmental regulation involves the use of several techniques, ranging from criminal law to economic mechanisms. A regulatory system is said to be effective when it portrays the principles of prevention, ‘polluter pays’, precautionary and sustainable development. The prevention and precautionary principles are invoked through the use of licences and permits; in other words, the regulation prohibits the intended activity unless a permit is given. The regulatory framework also lays down stringent requirements and requires certain tests to be carried out to determine the sustainability and outcomes of the proposed activity. The rationale for the tests is to assess the likely effects of a proposed activity to prepare for and prevent environmental harm. An example of this is the environmental impact assessment. A regulatory system should prescribe punishment, usually in the form of fines, removal of licences and even imprisonment for more serious offences. This ensures compliance with the law and sends a warning to other would-be offenders. Finally, the regulation should align itself with the principle of sustainable development.

Environmental regulation has been effective in curbing environmental pollution, stimulating economic development and minimising over-dependency on natural resources.[10] Environmental regulation promotes the use of clean energy sources, promotes technological innovation and attracts foreign investment and technology.[11] Regulation is a solution to the mounting pressure for extractive industries to seek better operational strategies that are energy-saving and environmentally friendly. Furthermore, environmental regulation makes corporations accountable for their actions. It is easier to monitor compliance and enforce regulations through the use of permits and licences.

Environmental regulation of the Nigerian oil and gas sector

This section reviews the existing policies and bodies regulating the oil and gas sector in Nigeria and assesses their effectiveness in encouraging sustainability.

The 1999 Constitution of Nigeria[12]

Section 20 of the constitution provides an underlying foundation for the protection of all wildlife, air, watercourses and environment in Nigeria.

The Petroleum Act[13]

This is the principal legislation governing the oil and gas sector in Nigeria. One interesting feature of the Act is that it vests sole regulatory power with the office of the Minister of Petroleum Resources. Even though the state has full ownership and control of all petroleum resources in Nigeria under section 1(1) of the Act, the minister (as shall be seen in later sections) administers regulatory powers and also does so at their discretion.

The minister is vested with the power to issue oil prospecting and oil mining licences, carry out supervisory functions and revoke licences.[14] The power to issue licences is subject to terms and conditions imposed by the minister. This discretionary power makes the minister susceptible to various influences such as political patronage or bribery. This power has been subjected to abuse.[15] The Act lacks specific guidelines on how the minister is to make provisions that guarantee environmental protection and sustainability; the provisions are vague and this has resulted in poor implementation. The Act makes mention of suspension of licences where petroleum operations are not being conducted with ‘good oil field practice’.[16] However, the act fails to show what constitutes good oil field practice.

Violations of the provisions of the Act attract a monetary fine of NGN 2,000 or two years’ imprisonment.[17] This meagre sum does not accord with the ‘polluter pays’ principle as the money is not sufficient to deter individuals who conduct petroleum operations illegally. In the same vein, the stiffest sanction for a polluter operating unlawfully is to have their licence revoked. However, the revocation is only a remedial action, coming after the environmental harm rather than preventing it.

Environmental Impact Assessment Act[18]

This is one of the laudable regulatory enactments for sustainable oil and gas exploration. The Environmental Impact Assessment Act (EIA) shifts focus from maximising profits and gains, to paying attention to environmental impacts of the oil operation. The objective of the Act is to take into account all possible environmental risks and impacts of a proposed project before commencement.[19]

The institutional body responsible for enforcing the EIA is the Federal Environmental Protection Agency (FEPA). The Act encourages the use of safety techniques, technological innovations, public participation and expert consultations, and also imposes a penalty for non-compliance. However, the Act fails to take into consideration that business operations are subject to change and so does not stipulate the need for periodic EIAs to be conducted during the lifetime of the said project. It only mentions making use of the previous screening report and amending it to the present circumstances in cases of renewal of the license, or continuance of a project.[20] This gap in the Act defeats the purpose of following the best available safety procedures. The Act should be reviewed and amended to include periodic screenings.

National Oil Spills Detection and Response Agency Act[21]

This Act provides statutory backing for the Federal Ministry of Environment in Nigeria to optimise oil pollution control. The regulatory body for the Act is the National Oil Spills Detection and Response Agency (NOSDRA), which is charged with the responsibility for preparedness, detection and response to all oil spillages in Nigeria.[22]

One praiseworthy feature of the Act is the ‘clean-up’ section. The Act places heavy sanctions on operators who fail to clean up a polluted site within a stipulated period and remediate the impacted area.[23] The penalty for facility operators to clean up and remediate the area attracts a fee of NGN 1m while the failure to report a spill attracts a fee of NGN 500,000 for each day.[24] The provisions of section 6(2) of the Act have been invoked in some cases.[25] In NOSDRA vs PPMC, the court upheld the Agency’s right to impose the sum of NGN 1m against PPMC for refusal to clean up the polluted site. It also held PPMC liable for damages accruing from impacts of the oil spill on lives and communities.

Associated Gas Re-Injection Act[26]

Gas flaring is one of the recurring environmental problems in Nigeria. The Act was first enacted in 1979 and has been subject to numerous amendments with little success on phasing out gas flaring in Nigeria. One of the reasons for the continuous environmental threat is the minimal penalties attached to the Act. Companies have found it more economically favourable to flare gas and then pay the fine as opposed to paying to switch to clean technologies.[27]

Petroleum Profits Tax Act[28]

This is the principal tax legislation for upstream petroleum operators in Nigeria. The Act provides a framework for the collection of taxes and royalties, as well as providing economic incentives to petroleum operators. On paper, the Act includes laudable provisions for penalising offenders,[29] assessing payable tax,[30] assessing deductibles,[31] providing incentives for using associated gas[32] and so on.

In practice, the Act has had to contend with several regulatory problems, corruption, tax evasion and ambiguities in its provisions. The gaps and ambiguities in the Act make room for tax evasion; the Act does not provide for monitoring systems to detect and check offenders; the fines payable are minimal and are ineffective deterrents;[33] and it is also subject to controversial sections.[34]

Recommendations and conclusion

It is clear that there are several governance challenges hindering successful sustainable oil and gas exploration in Nigeria. Some of the problems discovered from the existing framework include:

• inconclusive and vague legislative provisions;

• corruption;

• lack of political will;

• the duplication of responsibilities;

• inadequate penalties and sanctions; and

• weak monitoring and compliance systems.

These are clear indications of the need for policy and institutional reform in the oil and gas industry. The extant laws need to be amended to reflect accountability provisions, provide clear directives and guidelines, and stipulate monitoring and compliance mechanisms. 

One of the dilemmas faced during this research is in identifying the principal regulator in the oil industry. There is an overlap of responsibilities between the Department of Petroleum Resources and the Nigeria National Petroleum Corporation. The laws do not provide clear-cut roles between these bodies and this has led to instances where one agency has assumed the functions of the other. This has led to the absence of accountability and supervision of duties, as well as the absence of checks and balances in the system to curtail excesses. Existing institutional roles and policies involved in environmental administration in Nigeria should be streamlined and merged.

The current tax legislation lacks the capacity to harness revenues from petroleum resources, making it harder to achieve sustainable development. Other economic instruments that can be used to recoup gains from the industry are ineffective. This has to be reviewed and amended to reflect contemporary economic standards. Existing laws should be amended to take account of technological innovations. Times are changing and there are more advanced ways of extracting oil that have minimal damage to the environment.

Another issue is access to environmental justice and prosecution of offences. Environmental crime is yet to be taken seriously in Nigeria, but is another regulatory tool that has achieved great success in other developed countries. The existence of specialist environmental courts would:

• help interpret conflicting environmental law provisions;

• assist uniformity in decision making;

• hasten the development of environmental sustainability; and

• strengthen weak institutional structures.

At present, sustainability in the extractive industry is still an illusion, especially when one takes into account the weak and underdeveloped regulatory system. For sustainability to be achieved, concerted efforts from all stakeholders towards addressing regulatory problems (private individuals, corporate agencies and government) would go a long way.

Nigeria must carry out urgent and compelling regulatory reforms in the oil and gas industry as a panacea for achieving sustainable development.



[1] N P Nweze and G Edame, ‘An Empirical Investigation of Oil Revenue And Economic Growth In Nigeria’ (2016) European Scientific Journal, 271.

[2] BP Statistical Review of World Energy 2017 (www.bp.com) and the World

Bank Development Indicator (https://data.worldbank.org/indicator), accessed 11 September 2019.

[3] W Martin, A K Mehrotra and M Prasad, 'The Thunder of History: The Origins and Development of the New Fiscal Sociology' in I. W Martin, A K Mehrotra and M Prasad (eds), ‘The New Fiscal Sociology: Taxation in Comparative and Historical Perspective’ (Cambridge University Press 2009) cited in Solomon Ekokoi,'Sustainable Management of Nigeria's Oil Wealth: Legal Challenges and Future Directions' (2016) 7 J Sustainable Dev L & Pol'y 135.

[4] World Commission on Environment and Development (WCED), Our Common Future (Oxford University Press 1987).

[5] K G Mäler, ‘Sustainable development and Resilience in Ecosystems’, (2008) 39(17) Environmental and  Resource Economics, pp 17–24.

[6] SEkokoi, 'Sustainable Management of Nigeria's Oil Wealth: Legal Challenges and Future Directions' (2016) 7 J Sustainable Dev L & Pol'y 135.

[7] P Maitra, ‘Sustainable development, environmental regulation, and international trade', (2009) Volume II, International Economics, Finance and Trade235.

[8] S Stavropoulos, R Wall & Y Xu, ‘Environmental regulations and industrial competitiveness: evidence from China’ (2018) Applied Economics, 50(12), 1378–1394.

[9] Ibid at 1382.

[10] Ibid.

[11] B Yuan and Y Zhang, ‘Flexible Environmental Policy, Technological Innovation, And Sustainable Development of China’s Industry: The Moderating Effect Of Environmental Regulatory Enforcement’, (2019) 243 Journal of Cleaner Production, 118543.

[12] Constitution of The Federal Republic Of Nigeria [Nigeria], Act No. 24, LFN 1990.

[13] Petroleum Act (2004) Cap. (P10), LFN 1990.

[14] Section 2 Petroleum Act.

[15] E Osa, ‘Public Regulation of the Oil and Gas Industry in Nigeria: An Evaluation’ (2016) 1(6) Annual Survey of International & Comparative Law, 43.

[16] Section 8(1)(g) Petroleum Act.

[17] Section 4(6) Petroleum Act.

[18] Environmental Impact Assessment Act (2004) E 12 Laws of the Federation of Nigeria.

[19] Section 1 EIA Act.

[20] Section 20 EIA Act.

[21] National Oil Spill Detection and Response Agency (NOSDRA) (Establishment) Act, CAP 157 LFN 2006.

[22] Section 1 NOSDRA Act.

[23] Section 6(3) NOSDRA Act.

[24] Ibid.

[25] Nosdra v Chevron, Suit FHC/AK/CS/13/2013 UNREPORTED; Nosdra v PPMC Suit no FHC/ABB/18/105/110 UNREPORTED, cited in C Obilor ‘Review of the NOSDRA Act 2006’.

[26] Associated Gas Re-Injection Act (2004) Cap. (A25), LFN.

[27] I Ken and E Aniche, ‘The Nigerian National Petroleum Corporation (NNPC) and Enforcement of Zero Gas Flaring Regime in Nigeria’ (2015), 4(1) ANSU journal of Arts and Social Sciences, 48–74.

[28] Petroleum Profits Tax Act Cap 13, LFN 2004.

[29] Section 16 PPTA.

[30] Section 21 PPTA.

[31] Section 13 PPTA.

[32] Section 11 PPTA.

[33] Section 51 PPTA imposes an inadequate fine of NGN 10,000.

[34] E O Ekhator, ‘Public Regulation of The Oil And Gas Industry In Nigeria: An Evaluation’, (2016) 21(1) Annual Survey Of International And Comparative Law, 43.

 

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