business0521

Thursday 21 May 2015
34
BUSINESS DAY
PERSPECTIVE with Tolulope Aderemi
LegalBusiness
The Petroleum Host Community Fund: A disincentive?
Recently, the National Assembly resumed its debate
on the controversial Petroleum Industry Bill (popularly
referred to as the PIB). In its clause-by-clause review,
the Lower Chamber (“The House”) reconsidered the
percentage share allocated to the ‘host community’ from
10% now to 7.5% levy on oil & gas profit.
At Section 116 to 118 of the PIB, the Host Community
Fund (“HCF”) is expected to cater for the mitigation of
all negative environmental impacts on host communities
arising from exploratory activities of oil companies.
This invariably is seeking to create an independent fund
separate from whatever interventionist funds already
in existence; a salient point which has been further
considered below.
With a few more weeks to left for the 7th Assembly,
it is unlikely that this bill will become law. If that is the
case, it is therefore important that the 8th Assembly set
out to quickly appreciate the philosophy underpinning
many of the provisions of the bill (the Host Community
Fund being one) and their consequential effect(s) on
the industry as a whole, if it ever becomes law in its
present form.
The Ownership Theory:
Today (in Nigeria), it does appear that there is an
advocacy that the ownership of crude oil should be
treated in the same way as it is in the United States of
America. In the United States, rights to crude oil may be
owned by private individuals, corporations, or by local,
state, or federal government. That is not the case under
the Nigerian Statutes. Section 44(3) of the Constitution
of Federal Republic of Nigeria (as amended) vests the
entire ownership and control of all minerals, mineral
oils and natural gas in, under or upon any land in Nigeria
or in, under or upon the territorial waters and the
Exclusive Economic Zone in the Federal Government.
In Malaysia, unlike Nigeria, the Petroliam Nasional
Berhad (Petronas), holds exclusive ownership rights to
all oil and gas exploration and production projects, and
is only subject to the Prime Minister’s control. In Ghana,
Angola and like Nigeria, the ownership and control of
oil & gas is vested in the government.
Moreover, Sections 44(3) of the 1999 Constitution as
well as Section 1 of the Petroleum Act, Cap C10 Laws
of the Federation of Nigeria, 2004 (“The Act”) vests the
entire ownership and control of all petroleum in, under
or upon any lands to which Petroleum Act applies, in the
State. The Act further extends its application to all land
(including land covered by water) which is in Nigeria;
is under the territorial waters of Nigeria; forms part of
the continental shelf.
Furthermore, the use of the word “State” is defined
by the Black’s Law Dictionary 6th Edition, page 1407
defines a State as either to body politic of a nation (e.g.
United State). Similarly, the Interpretation Section of
the Petroleum Act has defined the word State to mean
‘State, except in Section 1 of the Act means a state of the
Federation’. Apart from Section 1 of the Act, the word
‘State’ was also used six times within the Act either as a
verb or reference to the constituent part of the Federation.
It is therefore no doubt that the reference to a State
in both Section 44 (3) of the CFRN and 1 of the Petroleum
Act vests the ownership and control of petroleum in the
Federal Government.
The above notwithstanding, one must not trivialize
the environmental damage oil & gas operation may
have caused the Littoral region. Again, it must be argued
that it was for that reason that each Littoral State gets
additional 13% derivation over and above other nonproducing
States, individual GMOU’s entered with the
host communities etc. To consider AT ALL the Host
Community Fund, the 8th Assembly must seek answers
to the following questions:
Has it been established that the 13% Derivation allocated
to each Governor of a producing State is inadequate
for economic and social infrastructure?
Have the Governor’s dutifully accounted for the
disbursement of the Funds to specific infrastructural
projects?
Does the government have an infrastructural development
monitoring Group (such as the Good Governance
Tour) to monitor projects in the States benefitting from
the 13% Derivation?
Has it been proven that both the allocation of 13% as
well as the individual GMOU’s are grossly inadequate
to compensate for the damage caused by exploration
and production activities?
Will the Host Community Funds not prevent accountability
of each State as regards the way and manner its
13% Derivation had been expended?
How will the HCF be administered and are there
check-mechanisms to monitor performance of development
of social and economic infrastructure?
The above in no way undermines the rights to good
life of the people living in Littoral States, however, the
Buhari-led administration/8th Assembly must also
guide itself properly to ensure that it is not misled to
encouraging corruption, recklessness and wasteful
spending; it, having not been satisfied that the provisions
already made (for the compensation for these
environmental damage) have proven inadequate such
as would warrant the establishment of the HCF.
Digital Oilfield in Nigeria
The process of oil exploration by both Nigerian oil
companies and International Oil Companies is saddled
with a lot of challenges both infrastructural and otherwise.
Before now, traditionally, accessing information
from pumps, lifts, wellheads, and other equipment’s
used in oil exploration was typically a labor-intensive
process; workers were required to drive from platform
to platform and physically gather data with one person
stationed at each platform to monitor performance.
Such a procedure not only puts workers at risk in the
line of duty, it is also time-consuming, and data obtained
thereof is usually marred with potential human error.
Hence, the need for a better and more effective means
of ascertaining the level of commercial viability in assets;
less risk and high productivity becomes necessary.
The term “Digital Oilfield” has been used to describe
a wide variety of activities. The term simply introduces
the various uses of advanced software and data analysis
techniques to improve the profitability of oil & gas
production operations. In a more practical definition,
a Digital Oilfield is defined by how a petroleum business
deploys its technology, people and processes to
enhance efficiency. The purpose of the digital oilfield is
to maximize oilfield recovery, eliminate non-productive
time, and increase profitability through the design and
deployment of integrated workflows. It combines business
process management with advanced information
technology and engineering expertise to streamline
and, in many cases, automate the execution of tasks performed
by oil companies in exploration of oil. Through
a digital oilfield, a company optimizes hydrocarbon
production, improves operational safety, protects the
environment, maximize and discover reserves in addition
to maintaining a competitive edge.
Furthermore, this concept though new, presents
an opportunity for oil companies to reach strategic
business decisions that are tailored towards avoiding
waste of time and resources in their operations. Oil
companies can remotely access and monitor equipment
which are typically miles apart, and data and oil/gas
analytics by leveraging on Information Communication
technologies platforms. This reduces business cost for
companies as they need not expend human resources
in oil operations that can be resolved through the use
of mobile phone applications or perhaps others of
electronic platforms.
In conclusion, digital oilfields provides oil firms with
more accuracy in terms of monitoring assets with a view
to rationalize exploration, effectively allocate resources,
predict changes in well data, and make assumptions
based on the continuous process data variables.
The Next Ten Years: OPEC’S Pessimistic Prediction
for Oil Prices
Towards the end of 2014 and so far into 2015, the
global oil market has suffered from a drastic decline in
oil prices; the biggest losers being major oil producing
countries such as Nigeria, Russia, Venezuela, Algeria etc
whose economies and revenues are largely dependent
on income from oil exports and are predominantly
members of the Organization of the Petroleum Export
Countries (OPEC),. However, oil producers are gradually
experiencing what may be termed a “recovery phase”
as global oil prices has gradually been risen above $60 a
barrel in the last couple of days, which is above the $53
dollar benchmark in Nigeria’s 2015 budget. The recent
upswing in prices is igniting fresh hopes of perhaps a
brighter economic future for Nigeria; however it remains
debatable whether it will ever return to its once boisterous
level of over $100 per barrel. While Nigeria clings to
the hope of a total recovery of oil prices, one cannot help
but wonder if this global decline which has left a dent
on the economy has come to stay.
According to an article in the Wall Street Journal,
a draft of OPEC’s latest strategy report,reveals that
oil prices may stay below $100 per barrel for about a
decade. The Report’s predictions for oil prices range
from around $76/bbl to below $40/bbl in 2025. In either
case, a crossing of the $100 mark is not contemplated
in those scenarios. Most OPEC countries need prices
to be well above $100/bbl in order to achieve their respective
Benchmarks, which at the moment have been
significantly reduced.
One of the recommendations submitted by experts
and stakeholders alike is that OPEC should seriously
consider returning to a production quota system. It
abandoned this system in 2011 due to conflicts as to the
amount of oil each member nation would be allowed
to produce. Understandably, members were reluctant
to set limits on production as it would have a stifling
effect on the acquisition of new business. Rather, some
member nations (most notably Saudi Arabia) have done
the direct opposite and instead flooded the market with
more oil at cheaper prices in a bid to retain customer
patronage. However, with a production quota system,
there will be a reduced level of supply of oil in the market
thus bumping up crude prices.
Earlier this year, OPEC had objected to the reduction
of output despite constant pressure from different
oil producers. However, it has been reported that the
recently released draft strategy report makes recommendation
to the effect that production quotas could
be enacted if OPEC’s share of the global market drops
below its current level of 32% (OPEC once produced
more than half the world’s oil). This remedy is termed
a “targeted remedy” in which the output quotas would
permit the group’s poorest members to produce more,
to the benefit of economies that have been particularly
distressed by the price drop.
It has been further recommended that OPEC must
necessarily become generally more organized and
disciplined in order to enable it hold sway in the oil
markets and sustain itself. This recommendation can
well be justified against the background of the refusal
of its own members to adhere to its directive in 2011 as
regards the 30 million barrels a day group production
cap to accommodate Libya’s return; this serves as a clear
illustration of the gaps in its internal affairs.
Perhaps it is worthy of note to consider arguments
that OPEC’s members in direct contravention of its
directive may actually have the answer to the problem.
Over-supply coupled with low prices could force oil that
is more cost-intensive out of the market, such as that
of the Americans, granting member nations a larger
chunk of the market.
In any event, the release of this report will be highly
anticipated by stakeholders in the industry as it will
likely influence the steps to be taken in the near future.
Naming and shaming bank debtors: An Ace deterrent to growing non-performing Loans?
UGOCHUKWU OBI
The apex bank, the Central Bank of Nigeria
(CBN) recently issued a directive to deposit
money banks to publish the list of customers
with non-performing loans in at least three
national daily newspapers from the end of
July this year. According to the CBN, it is expected that
this move would reduce the growing volume of nonperforming
loans (NPLs) and maintain the solvency and
health of Nigerian banks.
In light of the potential consequences of complying
with this directive especially with respect to the implied
duty of confidentiality owed by a bank to its customers
in respect of information that comes into its knowledge
by virtue of the banker-customer relationship, the questions
that readily beg answers would be, first, are the
apex bank’s regulatory powers that extensive? Second,
would the obligation to comply with this directive suffice
to absolve a bank from the liabilities that may arise as a
result of that implied duty of confidentiality?
Whilst on the one hand, there are no express provisions
in its enabling statute; the CBN Act for that purpose, on
the other hand, a cursory review of a few sections of the
CBN Act namely sections 2(d) and 42(1) (c) of the Act
might provide some answers. The former section identifies
promotion of a sound financial system as one of the
principal objects of the CBN and the latter empowers the
CBN to seek the co-operation of other banks in Nigeria
to, inter alia, further policies that it considers to be in the
national interest.
Indeed, a combined reading of both provisions may
permit an interpretation that the apex bank is authorized
to exercise its powers, in the national interest and
for the preservation of the solvency of Nigerian banks.
Consequently, to the extent that it can be argued that the
CBN can issue such directive, the question then remains,
what are the potential consequences of compliance with
same on any bank especially with respect to its duty of
confidentiality as identified above?
On the face of it, compliance with this directive exposes
such a bank to two potential risks: a claim in contract for
breach of the duty of confidentiality and a claim in tort
for libel by virtue of the publication in the newspapers.
In order to determine whether compliance will open
the flood gate of litigations on banks under any of these
heads of claim, it is perhaps appropriate at this juncture to
shed some light on one of the legal incidents of a bankercustomer
relationship.
The banker-customer relationship, like any other
contractual relationship, creates rights and obligations
between the parties. The relationship, amongst other
things, imposes a duty of confidentiality and secrecy
upon the bank in relation to the customer’s information
and data which comes to its knowledge in its capacity as
a banker. This duty was first clarified in the English case
of Tournier v National Provincial and Union Bank of
England [1924] 1 KB 461 and by virtue of that decision, it
is an implied term of the contract between a banker and a
customer, that the banker will keep the customer’s information
confidential. It is however important to note that
this duty is not absolute but subject to a number of exceptions.
Indeed, these exceptions were recently upheld by
the English Court of Appeal in Christofi v Barclays Bank
Plc [2000] 1 WLR 937 and they are as follows:
1. where the disclosure of the information is required
by law or by a court; or
2. where it is required in the public interest; or
3. where the disclosure is in the bank’s interest; or
4. where the disclosure is authorized by the customer.
These exceptions notwithstanding, the chances that
customers whose names and indebtedness are published
in compliance with this directive, will make claims in
contract and tort, are not in doubt. For instance, to successfully
maintain an action in libel, which is a form of
defamation, the claimant only has to prove the following:
a. that the imputation complained of is defamatory;
b.that the imputation refers to the claimant;
c.that the imputation was published i.e. communicated
at least to one person other than the claimant by the
defendant; and
d.that the claimant suffered some injury to his reputation
as a result of the publication.
In light of the foregoing and having regard to the nature
of publication contemplated under this directive, there
is no doubt that establishing a claim for libel may not
be difficult for any aggrieved customer. What should
ordinarily raise concern is the prospects/chances of the
defenses available to any bank in the event such an action
is instituted. Firstly, it is almost certain that banks would
seek protection within the 1st part of the 1st exception or
the 2nd exception to their general duty of confidentiality
identified above.
With the 1st exception, the bank may argue that
disclosing the customer’s information (indebtedness)
through the publication was required by law (albeit a
directive of its regulator) and hence not a breach of its duty
of confidentiality. In addition, a bank can also justify the
disclosure by arguing that, compliance with this directive
is in the public interest (prevention of systemic failure in
the financial sector) and thus falls within the exceptions
to its duty of confidentiality. In other words, disclosing
the customer’s indebtedness would assist the CBN to
cure the mischief underlying that directive, preventing a
repeat of the 2009 banking crisis.
Whilst the CBN may have the powers to issue the directive
and those exceptions remain available to the banks
as defenses against any claim, it is doubtful that naming
and shaming these defaulting bank customers through
the publication, would achieve the overall objective. This
is especially so because a similar move in the past was just
a flash in the pan and gave rise to protests by debtors who
claimed that their accounts were not properly reconciled
before the publication.
Consequently, banks will do well to consider preceding
any such publication with proper reconciliation of
the debtors’ accounts. Put differently, it is necessary for
banks to make certain that these debts are actually outstanding,
and remain unpaid by the debtors, before any
such publications are made. Finally, it is perhaps more
important for banks to address the existing lapses in the
creation of new loans and the management of existing
loans in order to eliminate the need to have to comply
with this kind of directive or resort to litigation to recover
their delinquent loans.
*Ugochukwu Obi is a Senior Associate in the commercial
law firm, Perchstone & Graeys