Nigeria: Can Host Community Development Trusts Resolve The Social Licence Issues In The Oil Producing Communities?

The oil and gas sector accounts for over 80% of Nigeria's foreign exchange earnings and over 30% of the Federal Government's budgetary revenues in 2022 with the significant portion of these earnings coming from the oil producing communities in the Niger-Delta region. However, these oil producing communities have suffered historical neglect in terms of the provision of socio-economic infrastructures for the enhancement of the living conditions of inhabitants of such communities.

In recent times, the Nigerian oil and gas industry has been plagued with significant crude oil theft and vandalization of critical oil and gas infrastructures, that have negatively impacted production levels and foreign exchange earnings from crude oil sales. To appreciate the extent of these challenges on the country's revenue profile, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) in July 2022, revealed that about 9 million barrels of oil with monetary value of approximately US $1 billion, was lost to oil theft and pipeline vandalization in the first quarter of 2022.

Some concerned industry operators and policy experts have opined that absence of social licence by the oil companies operating in the oil producing communities has created a hostile operating environment that encourages oil theft, frequent vandalization of oil installations and other criminal activities under the pretext of self-provision of needed socio-economic infrastructures.

Social licence, which can be defined as the broad social acceptance of an economic activity by the local community and other stakeholders, is required to build communal trust, credibility and social legitimacy for oil and gas operations in the Niger-Delta region. In many ways, the social licence reflects the evolving nature of the relationships between industries and their communities. The idea behind social licence is making the communities hosting oil and gas operations direct beneficiaries of exploration and production activities so that they will have a sense of ownership and take on the responsibility of protecting these infrastructure and platforms from possible vandalization.

The recently enacted Petroleum Industry Act (PIA) recognised the lack of social licence in the oil producing areas and also wanted to improve the socio-economic conditions of the host communities, by introducing the Host Community Development Trust (HCDT or Trust) initiative with the following objectives:

1. Fostering sustainable prosperity within host communities
2. Providing direct social and economic benefits from petroleum operations to host communities 
3. Enhancing peaceful and harmonious coexistence between licensees or lessees and host communities
4. Creating a framework to support the development of host communities

This article focuses on the purpose of the HCDT and its objectives and the proactive measures via the HCDT that oil companies can explore to gain social licence in the host communities, in order to minimize oil theft and pipeline vandalism.

Host Community Development Trust as a quest to gain Social Licence

To tackle the social licence problem in the oil producing communities, the PIA introduced the HCDT as a sustainable mechanism for making socioeconomic interventions that would improve the living standards of the inhabitants of host communities. The HCDT will establish a fund for the benefit of communities that are situated in or connected to the area of operation of petroleum companies or operators.

The PIA requires the holder of an interest in a petroleum prospecting licence (PPL) or petroleum mining lease (PML) whose area of operations is located in a community (known as a ‘'settlor'') or a group of settlors under a joint operating agreement, to incorporate a HCDT.

For this purpose, the settlor shall appoint and authorise a Board of Trustee (BoT), after consultation with the host communities, to be registered as a corporate body under the Companies and Allied Matters Act. Where the HCDT is incorporated by a group of settlors under a joint operation, the operator under the agreement will be responsible for the Trust on behalf of the other parties.

Settlors will be required to contribute to the fund set up by the Trust, an amount equal to 3% of their actual annual operating expenditure in the immediately preceding financial year, with respect to their petroleum operations affecting the host communities.

In terms of the allocation of the funds in the Trust, 75% of the funds will be allocated to a capital fund to be disbursed for projects in the host community, 20% will be allocated to the reserve fund for the utilisation of the HCDT whenever there is a cessation of operations by the settlor and 5% of the funds will be utilised solely for administrative cost of running the Trust.

In terms of the 75% capital fund, the BoT will set up a management committee, responsible for the general administration of the HCDT on an ad hoc basis, towards the achievement of the host community development projects. Although the PIA did not explicitly state the specific projects to be carried out in the host communities, the expectation is that such projects would improve the human development indices in the host communities, through economic empowerment programs, promoting a pollution free environment and making direct interventions in education, health and transportation facilities.

The NUPRC and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (‘NMDPRA' or ‘the Authority') are empowered under the PIA to regulate the activities of settlors concerning the development of host communities.

Can the HCDT achieve its objectives?

The PIA provides a pathway for the settlor to come up with its host community development projects that will resolve the immediate socio-economic challenges confronting the host communities, which is the Needs Assessment (NA).

The PIA makes it imperative for a settlor to carry out a host community NA from social, environmental, and economic perspectives. The PIA also recognises that for the NA to be able to address the needs of the host communities, it is important that the settlor must determine the specific needs of each affected host community, ascertain the effect that the proposed petroleum operations might have on the host communities and provide a strategy for addressing the needs and effects identified.

The host community NA becomes a basis for a host communities development plan (HCDP). As specified in the PIA, the settlor(s) would be required to develop HCDP that will identify the specific community development initiatives required to respond to the findings and strategy identified in the host communities NA, determine and specify the projects to be implemented, provide a detailed timeline for the projects and set out the reasons and objectives of each project as supported by the host communities NA.

For the HCDP to achieve its objective, the NA has to be encompassing, consultative, participatory and must touch all aspects of the critical development needs of the host communities.

Ambiguities in the PIA that may limit the Social Licence quest of the HCDT

The combined reading of the sections on HCDT in the PIA, suggest that companies with oil and gas operations in host communities, irrespective of their value-chain activity, have a responsibility to undertake host community development obligations.

However, the definition of who a settlor is under the PIA has narrowed down the responsibility to only upstream companies. Under Section 318 of the PIA, a settlor is defined as the holder of an interest in a PPL or PML whose area of operations is located in or appurtenant to any community or communities.

The PIA also presupposes that the NUPRC and NMDPRA will regulate the activities of settlors with regards to development of host communities. However, it appears that the reference to NMDPRA is redundant because settlors can only be holders of PPL and PML, which makes them outside the scope of the NMDPRA.

Therefore, there may be a need for the government to provide more clarity in terms of specific roles to be played by the operators in different streams, as it relates to HCDT.

Conclusion

It is important for companies and operators in the Nigerian oil and gas sector to have the social licence to operate in the host communities. The emphasis on social licence to operate cannot be obtained through administrative and legal means; rather it has to be earned, by supporting community development programs that will enhance the welfare of inhabitants of these host communities.

Where the social licence to operate is earned, the host communities are likely to become advocates and defenders of projects sited in their neighborhoods, since they now consider themselves as co-owners, who are duty-bound to protect the resident oil and gas facilities. This will lead to the reduction, if not elimination, of vandalism of oil installations.

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