CHAPTER ONE
INTRODUCTION
1.1. Background to the Study
Oil is the mainstay of the Nigerian economy such that the national budget is benchmarked on the price of oil in the international market and quantity of oil to be produced and exported. The fact that Nigerian budget is based on the expected revenue from oil demonstrates the importance of oil to Nigerian economy. Currently, Nigeria with over 35 billion barrels of oil reserve is ranked the eleventh largest oil producing country in the whole world and second in Africa at an average of 2.3 million barrels of crude oil per day as well as the eighth largest exporter globally at an average of 2 million barrels per day (OPEC, 2012). Thus, oil sector alone constitutes nearly 90 percent of the total revenue and foreign exchange earnings in Nigeria since the 1970s. However, oil has not always been the mainstay of Nigerian economy. Prior to the discovering of oil in commercial quantity in 1956 in Oloibiri now in Bayelsa State, agriculture was the mainstay of Nigerian economy. Even with the production of oil in 1958 onwards Nigerian economy remained agrarian until 1970 when with the rising production and exportation, oil replaced agriculture as the mainstay of Nigerian economy (Ikejiani-Clark, 1995; Mahler, 2010).
Gas flared in association with the production of crude oil began in Nigeria under the British Colonial rule when Shell began oil production in 1958, and with the increasing production of oil, the volume of gas flared in the process of oil production increased. In Nigeria alone, gas flaring amounts to about 23 billion cubic metres per annum of the gas generated in association with crude oil production in over 100 flare sites, constituting over 13 percent of global gas flaring out of the over 150 billion cubic metres of natural gas flared and vented annually. This translates to greenhouse gas emission of 45 million tons of CO2 out of the global total of 400 million tons annually. Consequently, Nigeria lost about $72 billion in revenue between 1970 and 2006 due to gas flaring. Currently, Nigeria loses about $2.5 billion annually for flaring associated gas (Kaldany, 2006).
The oil joint venture partnerships which dominate crude oil production in Nigeria since 1973 contribute the largest in associated gas (AG) flaring. For example, the oil joint venture partnerships flared 514,799,616 standard cubic feet (scf) of associated gas amounting to 23.84 percent of total gas they produced and out of 619,032,858 scf of total gas flared in 2011. Whilst others including production sharing contracts (PSC), Service Contracts, Sole Risk/Independent and Marginal Fields flared 104,233,242 scf of associated gas out of 619,032,858 scf of total gas flared being 25.79 percent of total gas produced in 2011 (NNPC, 2011).
Flaring of associated gas emits a greenhouse gas (GHG) which contributes to global warming and climate change with flaring emissions currently estimated at about 400 million tons of carbon dioxide into the atmosphere each year. Globally, flaring and venting of gas in petroleum production, therefore, waste a valuable energy resource worth approximately 30.6 billion dollars each year, and harms the environment (GGFR, 2012). The paradox is that volume of gas flared annually in Nigeria can match the country’s energy need and resolve the energy crisis (Agboola, Nwulu, Egelioglu and Agboola, 2011).
Although the environmental effect of gas flaring is trans-boundary or global in terms of global warming and climate change, it has some negative effects on the immediate or local environment (Christansen and Haugland, 2001). For example, flares contains as many as 250 toxins and flares emit particulate matters including sulfur dioxide, nitrogen dioxide and carcinogenic substance as well as unburned fuel hydrogen sulfide several of which can cause aggravated asthma, cough, chronic bronchitis, decreased lung functions, difficult or painful breathing and premature death. Flares create acid rain corrosive to metal roof, acidifies lakes and streams and kills vegetation. Ibeanu (2008) also points out that flaring gas within the vicinity of human dwellings is conducive to acid rains, and causes devastation of farmland and fishing waters, deforestation and destruction of wildlife and as well threatens resource flows and livelihoods (Nwankwo and Ogagarue, 2011).
By late 1970s and mid-1980s, the Nigerian government in a bid to reduce gas flaring enacted various gas re-injection policies or laws that imposed fines on oil majors for the quantity of gas flared during oil production. Apart from placing fines on international oil companies (IOCs) for the quantity of gas flared during oil production, Nigerian government has set various deadlines for elimination of gas flaring but none of these zero-gas flaring deadlines has been achieved. Paradoxically, the revenue Nigerian government generates from oil is less than what it loses in gas flaring annually in terms of environmental degradation, waste of energy resource, agricultural and human resources. However, the government is preoccupied with maximizing oil revenue at the short term than in making long term commitments toward achieving gas flare-out regime. In other words, Nigerian government is not prepared to make short-term sacrifice of losing oil revenues necessary for achieving zero-gas flaring. Consequently, the Nigerian government is only concerned with the immediate gain than the future gain (Agboola, et al, 2011; Kingston, 2011).
The Nigerian government and its agency in oil sector, NNPC, are much more interested in increasing oil export revenue through increased oil production than to drastically peg oil production to the capacity of gas utilization facilities while oil multinationals are investing more in oil production to maximize profits through increased oil production than investing to increase the capacity of gas utilization facilities. As a result Nigeria has only been able to enforce marginal reduction of gas flaring. Thus, the joint venture partners are more interested in increasing oil production for more revenues or profits than increasing the capacity of gas utilization facilities.
NNPC represents the interest of the government in the joint ventures, whereas the respective multinational oil companies (MNOCs) operate different ventures with varying participatory interests. NNPC holds 60 percent equity in the six joint ventures and 55 percent in the joint venture operated by Shell (Ameh, 2012). Thus, joint venture partnerships between NNPC and oil multinationals are public-private partnerships (PPPs) in which NNPC is the leasor while one of the oil multinationals is the operator, though NNPC still reserves the right to be an operator. However, by entering into joint venture partnerships or joint operating agreements with oil multinationals in the upstream sub-sector through the NNPC, Nigerian government becomes investor, partner, regulator and violator with dire consequence for its ability to regulate, supervise and enforce the zero-gas flaring policy. Accordingly, the study investigates the effects of oil joint venture partnerships on the enforcement of zero-gas flaring policy in Nigeria between 2003 and 2011.
1.2. Statement of the Problem
Gas flaring began in Nigeria with the exploration and production of oil in 1958 under the British colonial rule. Currently, oil multinationals operating mostly in joint venture partnerships with NNPC flares about 23 billion cubic metres of associated gas annually in over 100 flare sites in Nigeria emitting over 45 million tons of carbon dioxide and other greenhouse gases. This volume of gas flaring in Nigeria constitutes 13 percent of the over 150 billion cubic metres of natural gas flared and vented globally. Most statistics place Nigeria second only to Russia in volume of gas flared and even some place it higher than Russia and number one in the world. Between 1970 and 2006 Nigerian lost about $72 billion in revenue due to gas flaring and currently loses about $2.5 billion annually for flaring associated gas (GGFR, 2012).
Gas flaring emits a greenhouse gas (GHG) which contributes to global warming and climate change with global flaring emissions currently estimated at about 400 million tons of carbon dioxide into the atmosphere yearly (GGFR, 2012). Thus, flaring and venting of gas during oil production waste available energy resources and harms the environment. The environmental negative effects of gas flaring are both trans-boundary and immediate with serious health hazards like asthma, cough, chronic bronchitis, among others. Ibeanu (2008) notes that gas flaring is conducive to acid rain, and causes devastation of farmland and fishing waters as well as deforestation and destruction of wildlife.
A number of efforts have been made by the Nigerian government towards reduction and elimination of gas flaring like gas re-injection policies, imposing gas flaring fines and setting zero-gas flaring deadlines for oil multinationals since 1984. The failure to achieve these zero-gas flaring deadlines or the shifting of deadlines due to inability of Nigerian government to enforce compliance on oil multinationals operating in joint venture with Nigerian National Petroleum Corporation (NNPC) has attracted the attention of writers. Bassey (2008) and Walker (2011) note that the politics of gas flaring has seen the dates of ending gas flares being shifted as it suits the international oil corporations (IOCs) and the government with shift of deadline announced in November 2007, about a month to the end of subsisting deadline of 2008. Subsequently, there have been shifts from 2008 to 2009 to 2011 to 2012.
Thus, Bassey (2008), Aghalino (2009), Ogbara (2009), Osuoka (2009), Babatunde (2010), Buzcu-Guven, Harriss and Hertzemark (2010), Farina (2011), Kingston (2011), Oluduro (2011) and Ukala (2011) anchored their studies on the insincerity on the part of the oil multinationals to comply with the zero-gas deadlines, inability of the NNPC to finance its own share of the joint venture partnerships with oil multinationals and incapacity of the Nigerian government to enforce the gas flare out regime. Particularly, Bassey (2008) argues that the shortfall in the finance of the joint ventures by the NNPC is responsible for non-enforcement of zero-gas flaring in Nigeria.
However, systematic examination of the relationship between equity arrangements of the oil joint venture partnerships and the implementation of zero-gas flaring in Nigeria; the import of the budgeting process of the oil joint venture operations on the adoption of gas flare elimination strategies in Nigeria; as well as the link between funding of NNPC’s participation in oil joint venture partnerships and financing of associated gas utilization facilities in Nigeria are yet to be adequately addressed by writers. In all, the effect of oil joint venture partnerships on the enforcement of zero-gas flaring policy in Nigeria is yet to be given adequate scholarly attention.
In the light of the above, this study investigates the following questions:
- Do equity arrangements of the oil joint operation agreements hinder the implementation of zero-gas flaring policy in Nigeria?
- Does the budgeting process of the oil joint venture operations impede the adoption of effective gas flare elimination strategies in Nigeria?
- Does funding of NNPC’s participation in oil joint venture partnerships constrain financing of associated gas utilization facilities in Nigeria?
- Objectives of the Study
This study has broad and specific objectives. The broad objective is to examine the effects of oil joint venture partnerships on the enforcement of zero-gas flaring in Nigeria. Whilst the specific objectives of this study were to:
- Determine whether equity arrangements of the oil joint operation agreements hindered the implementation of zero-gas flaring policy in Nigeria;
- ascertain whether the budgeting process of the oil joint venture operations impeded the adoption of effective gas flare elimination strategies in Nigeria; and
- establish whether funding of NNPC’s participation in oil joint venture partnerships constrained financing of associated gas utilization facilities in Nigeria.
1.4. Significance of the Study
This study has both theoretical and practical justifications. The theoretical relevance of the study is that it examines the effects of oil joint venture partnerships on the enforcement of zero-gas flaring in Nigeria between 2003 and 2011. By so doing, the study will enrich the existing stock of literature or expand the frontiers of knowledge through its findings, and therefore will serve as a source of materials or data for scholars whose interest would eventually be arisen by this study to undertake further studies in the area.
Practically, this study will be of immense benefits to Nigerian government, oil and gas multinationals, international organizations like World Bank, United Nations, Organization of Petroleum Exporting Countries, etc; regulatory agencies/bodies like NNPC, oil multinationals, Global Gas Flaring Reduction (GGFR) partners, oil producing countries, policy makers, industry watchers, stakeholders, and the Nigerian oil industry for a deeper understanding of oil joint ventures and gas flaring policy. Thus, this study is crucial because it will enable the Nigerian government to appreciate the challenges and dynamics of achieving significant reduction in gas flaring. Above all the study is timely especially at this point in time when the oil producing communities are protesting the harmful environmental effects of gas flaring and also in view of various international efforts directed to tackling climate change.
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