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Licensing the weakest link in Nigeria’s oil and gas sector-NRGI

Oil sector

A new report by the Natural Resource Governance Institute (NRGI) has noted that the weakest link in the nation’s oil and gas industry, especially in terms of value addition, is in the area of licensing.

NRGI’s report, titled “Resource Governance Index: From Legal Reform to Implementation in Sub-Saharan Africa” revealed in Nigeria’s oil and gas value realization component, licensing is the weakest link with a score of 17 of 100.

“This reflects opacity in key decisions including qualification of companies, process rules and disclosure of terms of extraction,” NRGI said.

The report from NRGI will be huge concern for Nigeria as Data from Department of Petroleum Resources (DPR) revealed a total of 35 Oil Mining Leases and 7 Oil Prospecting Licenses held by some international and indigenous operators will expire at different times this year, with most of them falling due for renewal in June.

“Value realization covers the transparency and accountability aspects related to awarding oil, gas and mining licenses, revenue mobilization, managing environmental and social impacts and state owned enterprises,” NRGI report said.

The renewal of the licenses is expected to boost government revenue and encourage more investment in the nation’s oil and gas industry.

As the first step in developing mineral resources, NRGI explained that the award of exploration and production licenses presents a critical opportunity to set the course of governance for the entire life cycle of a project.

“Seven countries in sub-Saharan Africa achieve satisfactory scores on value realization, with Burkina Faso and Mozambique leading, closely followed by Ghana and Tanzania (for oil and gas), Sierra Leone, Ghana for mining, and Côte d’Ivoire. Equatorial Guinea, Gabon, Sudan and Eritrea are in the failing category,” the NRGI report indicated.

The report recommended, among other things, that licensing authorities should run transparent license allocation processes to ensure qualified, legitimate companies are selected to develop resources.

NRGI’s report looked into the gap between the state of resource governance in relation to oil, gas and mining laws, and the practices on the ground. A total of 28 countries in the region were selected and assessed in different areas of resource governance.

“They should publish prequalification requirements and rules of allocation, and negotiable terms when licenses are awarded through competitive tender or auction,” NRGI, an independent non-profit organization reportedly dedicated to improving countries’ governance over their natural resources said.

In the report, the NRGI assessed the natural resource governance status of countries in Africa, and explained that reports from the NNPC could not be relied on by governments and citizens of Nigeria to hold the corporation to account.

“Several of these companies, including GePetrol and NNPC, do not produce systematic financial information that would enable strong oversight by citizens or even other government institutions. This risks public treasuries losing revenues and rendering monies unavailable for social and economic development,”NRGI said.

The report showed that Nigeria’s Excess Crude Account (ECA) ranked lowest among other sovereign wealth funds assessed by the NRGI, ranking last alongside Qatar’s Qatari Investment Authority.

The report said Nigeria has other sovereign wealth funds, some of which are more transparent. But as the largest fund by asset balance, the report revealed, “the potential revenue loss through ECA constitutes a critical challenge in the country where over 90 per cent of government revenues come from the oil sector.”

The management of the ECA has been a source of concern among Nigerians and other stakeholders in the oil and gas sector. While NRGI’s report put the balance in the ECA at $2.4 billion, however latest information from Nigeria’s Minister of finance revealed revenue accrued to the account had depleted to only $637 million.

The NRGI’S index assesses nine countries in sub-Saharan Africa that have set up sovereign wealth funds to save, invest and balance resource revenues. The Ghana Stabilization Fund achieved a score of 93, the report showed, making it the second-best governed fund in the index and the only one to sit in the good category in the region. On the same scale, Nigeria’s ECA recorded a score of 4.

“Ghana’s high ranking is a result of clear rules and advanced oversight mechanisms, including by the parliament,” the report said. “Botswana’s Pula Fund achieves a satisfactory score of 65, even though it does not have binding rules on how much is deposited into and withdrawn from the fund each year.”

For years, there have been controversies over the “illegality” of Nigerian government’s continued operation of the ECA without the requisite legal backing.

Similarly, it said the funds should publish annual reports containing information on assets, investments and returns, which help assess their feasibility of a fund as a revenue management tool.

The report noted that it is particularly important for government officials to disclose ownership in extractive companies to avoid conflicts of interest. While seventeen out of 28 countries require public officials to declare their financial assets, including investments in extractive companies, to a government entity, five (Burkina Faso, Ethiopia, Guinea, Niger and Uganda) require these disclosures to be made publicly, and two, Burkina Faso and Uganda, actually disclose this information.

The NRGI report explores resource challenges and governance in Sub-Saharan Africa, with judicious use of data set and evidence documents comprising over 10,000 legal texts, reports and other data sources.


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