15 Jun Who owns the crude oil in Nigeria?
Rather simple question, won’t you say?
To own a thing implies you derive utility from it. So let’s answer by examining who derives utility from crude oil in Nigeria. Utility of course means taxes. Who derives taxes from crude oil?
Well before the independence of Nigeria, as at 1958, this was how crude oil taxes were shared.
- Oil Producing States retained 67.4% of Mining Rents and Royalties
- Federal Government got 20% of Mining Rents and Royalties
- Non-oil States got 12.6%
So the crude oil and gas was owned by the Oil Producing States. That was how the British left it.
In 1970, General Yakubu Gowon passed Decree No. 13. Under the decree, this was how crude oil taxes were now to be shared.
1. Oil Producing States retained 45% of Mining Rents and Royalties
- Federal Government got 55% of Mining Rents and Royalties
- Non-oil States got 0%
So in the military’s wisdom, the non-oil states did not deserve to get any share of oil revenues. Oil was only for the oil producing States and the Federal Government.
Then 1975, General Murtala Muhammed introduced Decree 6. Under it, this is how crude oil taxes were shared
1. Oil Producing States retained 20% of Mining Rents and Royalties
- Federal Government got 80% of Mining Rents and Royalties
- Non-oil States got 0%
Again, the military decided the oil producing States should “manage” 20% of oil revenues while non-oil States got zero.
In 1976, Gen Obasanjo created a technical commission called the Aboyade Technical Commission. This was the result.
1. Oil Producing States got 0% of Mining Rents and Royalties
- Federal Government got 100% of Mining Rents and Royalties
- Non-oil States got 0%
Obasanjo, also introduced the Consolidated Revenue fund aka FAAC. Thus, the oil taxes were centrally pooled, then shared to all States.
This was the important juncture in Nigeria’s fiscal federalism. This was when crude oil was federalized, taken from the States, managed by the federal government then shared back to the States. In essence, crude oil was no longer based on derivation but on metrics like equality, fiscal efficiency and absorptive capacity.
In 1979, President Shehu Shagari set up the Okigbo Commission to review the sharing of oil revenues. The Commission agreed to retain the Obasanjo 0% allocation to oil producing States and continue with FAAC but they tweaked the sharing formula in FAAC. They came up with:
Equality of States 50%
Land mass 10%
So here we see population of States and land mass introduced in just 9 years, the oil producing States saw their share of crude oil taxes go from 67.4% to zero. It took until the year 2000 for the implementation of 13% back to the oil producing States.
So in summary, its 67% to 0% to 13%.
Oil revenues were in essence transferred from the States to the federal government by decree. Even today, if ExxonMobil pays VAT on operations in an oil producing State, that VAT is shared by the federal government to all States of the federation. Oil is a federal baby.
What is the effect? Well, massive inefficiency in the oil and gas sector. It’s fair to say the FGN has mismanaged the oil industry, NNPC is essentially broke…can’t manage its assets to return a profit.
We still flare gas, i.e. we legally “burn” money. The FGN has taken the oil wells but can’t pay Joint Venture cash calls. The FGN can’t clean the oil spills, they can’t even pass a PIB.
So why hold the oil if they can’t manage it? Well, because the FGN has built a massive bureaucracy funded by crude oil, the FGN pays for primary education and primary health care, then also funds religious pilgrimages and football.
These powers the FGN has given to itself outside the Constitution have been made possible because the FGN has grabbed a hold of the oil wealth of the nation. For instance, primary schools are the function of the Local Governments and the Constitution recognizes that and allocates money to them. But the revenues for the local governments are paid to the States via a “Joint” account.
Right now, we have a problem. There is no more oil and salaries must be paid, salaries that had been paid by crude oil.
The Federal Government enjoyed a monopoly on telecoms in Nigeria, the result was that a phone became a luxury, only for the rich (apologies to former Minister of Communications, General David Mark, now a fourth-term Senator). In 2001, the FGN left the business of communication, became a regulator and tax recipient. And today everyone has a phone, I mean everyone.
What is the fascination in crude oil that the FGN still wants to own it? If the Federal Government can hand over Telecoms, regulate and tax the telecoms companies…why not do the same for crude oil? Before 2001, the FGN funded NITEL, today the GSM companies fund the FGN.
Things have to change. Nigeria can’t say it is practicing a federal system of governance without fiscal federalism. That will be like driving a car without wheels.
So what should we do? It’s a no brainer. Give the oil back to the people. Tax the oil business….simple!
- The FGN has to get out of business and set itself as a regulator of business and recipient of business taxes. The gains are obvious. Its costs are reduced and its revenues go up.
- Give the oil and non-oil assets back to the States and local governments. Let States retain the proceeds of exports from their States. In essence, if cocoa is exported, the State or origin of that cocoa get a share of the Company income tax by derivation.
This is not just a call for resource control. It’s a call for allocation of responsibility. As long as the FGN is responsible for collecting 95% of taxes and Local Governments are paid their allocation via States, we can’t really expect and demand much.
“To whom little is given…little is expected”.