The International oil companies: a critical appraisal of their rules and Operations.

The study relied on primary and secondary sources of information. The primary sources of information included Statutes, Conventions and Protocols. The secondary sources of information included Journals, Articles, Seminar papers and the Internet.

The study revealed the need for the various International Oil Companies to operate within the various rules and regulations guiding their exploration and mining activities. The incidents of the ills of oil exploration is more particularly felt by the so called under developed nations who are “unfortunate” to be blessed with vast reserves of the crude oil underneath their soil. 1.0GENERAL INTRODUCTION

BACKGROUND TO THE STUDYThere is no doubt chaos in the Oil Industry. The activities of the Oil Companies all over the world portend a great danger, particularly in developing economies that are endowed with the “Black Gold”, this God-given natural resource is now the source of an unending torment and tension in most endowed nations of the world.

The reason for this is a product of man’s own ingenuity called “Technology”,Man’s discovery of a resource which is supposed to be his advantage is now threatening his very existence.While it is true that the world at large has experienced unquantifiable progress since the discovery of oil many years back, but it is also true that the activities of the major oil companies, particularly their mining and prospecting activities is without mincing words a source of global concern.

2. STATEMENT OF THE PROBLEMThe Oil industry is bedeviled by a myriad of problems which are basically associated with the exploration activities of the Oil industries. This study appraised and evaluated the reasons responsible for the establishment of the set of rules and regulations and how in practical terms these rules are being followed.

3. AIMS AND OBJECTIVES OF THE STUDYThe current crisis engulfing most of the oil producing Nations of the world is traceable to the methods employed by the Oil Companies. These methods of prospecting, mining and even appropriating the oil mined is the focus of this dissertation.

The aim and objective of this research work is to appraise and evaluate the rules and regulations guiding the operations of the International Oil Companies and whether they comply with the best practice regime in the Oil and Gas industry.

This work highlighted the various steps that had been taken so far in ensuring a standard body of rules of operation for the Oil Companies, the level of compliance and the impact the rules are having on the communities where the Oil Companies are operating.

4.0SIGNIFICANCE OF THE STUDYOver the years, the menace posed by the major Oil Companies in the course of prospecting for oil could best be described as a menace to Global peace. Thus, efforts geared towards the evolvement of a body of codes for theregulation of the activities of this Oil Companies are positive steps in the right direction.

Various principles have been propounded by different writers both as text or as Journals towards reducing the negative impact that the exploration for oil has on the environment and more particularly on the immediate society in which such exploration is being done. But it has been observed that most, if not all the body of Codes and Regulation evolved so far are largely not strictly enforceable, the few Oil Companies (Major) that work within the ambits of these Regulations are only doing so based strictly on their own policy and not because of the fear of reprimand.

The essence of this work is to justify the need for the establishment of a central regulating body that can effectively monitor and oversee the activities of the Oil Companies.

5.0RESEARCH METHODOLOGYThe study relies basically on primary and secondary sources of information. The primary sources of information include Statutes, Conventions, and Protocols. The secondary sources of information include Journals, Articles, Seminar papers and Internet materials.

6.0PLAN OF STUDYThe work consists of Six Chapters, apart from the introduction and the conclusion. Chapter one focuses on the History of oil Exploration. Chapter two deals with the International Oil Companies and the Nigerian Petroleum Industry, Chapter three is about Environmental Management practices in the Oil and Gas Industry. While chapter four and five deals with Environmental and Social Reporting. Chapter six deals with the problems and challenges facing the implementation of all the standards raised in the preceding paragraphs. The work ends with the conclusion and recommendations.

The study also reveals the efforts that have been made so far in evolving a legal regime for the regulation of the Oil Industries. Also the lopsidedness in the enforcement of these rules and regulations in varying degrees amongthe oil producing Nations is also brought to fore.

It is noteworthy that a global self-regulatory scheme would provide certainty with respect to the standards expected of Oil Companies as “best practice” and allow periodic review through the establishment of an appropriate review mechanism, and this is an option that should be debated in the future. CHAPTER ONE

HISTORY OF OIL EXPLORATION IN GLOBAL PERSPECTIVESAll the major achievements of the 20th 1century would not have been possiblewithout petroleum energy resources”without petroleum energy, the wheels ofmost industries will not turn, neither wouldcars, Trucks, Trains, Ships or airplanes be built…

Undoubtedly, saying that the statement above is axiomatic would be like reiterating the obvious. No single commodity in the recorded history of the world has affected the way and manner of people and their lives and yet remained a major nucleus in the dialectics of political economics of the world than pertroleum or ‘black Gold” as it is popularly called. It is called black gold because it has singularly revolutionarized modern civilization and created vices more than any other single commodity. It is the world’s principal lubricant and the largest source of energy in industries.

For instance, it is used as fuel for all forms of transportation. It is an important source of energy in industries. For instance, it is used as fuel for all forms of transportation. It is as important source of energy for electricity generation and the basis for

1. Akintola Jimoh and Frances Ehizogie, A review of International Convention on Environmental Pollution Applicable to the Petroleum Industry, MPF Journal Vol 5. No 4

making such diverse products such as plastics, fertilizer, detergents, explosives, cosmetics, pharmaceuticals, insecticides or pesticides. Without gain saying, petroleum has become the main stead of political stability and economic survival of both producing and consuming countries, hence the survival of the entire world economy is hinged on petroleum. Besides, as could be observed right from the inception of the industry till date, indicators have shot that any instability in the supply or demand indices of the commodity leads to high or low prices which results in severe global economic recession or growth respectively.

Consequently, because of its importance in the world economy and the need to regulate its availability in the international market, it then became imperative that a global regulatory body would have to be in place to harmonize both producers, and the consumers of the products, hence the establishment of the Organization of Petroleum Exporting Countries (OPEC) in 1960.


The organization of the Petroleum Exporting Countries is a permanent inter-governmental organization created at the Baghdad conference on September 10-14, 1960 by Iraq, Kuwait, Saudi Arabia and Venezuela. The five founding members were later joined by eight other members. (Qatar (1961); Indonesia (1962); Socialist Peoples Libyan Arab Jarmahiriya (1962); United Arab Emirates (1967); Algeria (1969) Nigeria (1971); Ecuador (1973-1992) and Gabon (1975-1994). Ecuador withdrew its membership in 1992 and Gabon followed suit in 19952. OPEC had its headquarters in Geneva, Switzerland, in the first five years of its existence. This was moved to Vienna, Austria, on September 1, 1965.

Naturally, one cannot but tie the origin of OPEC to the history of Petroleum industry itself. Although oil had been used for centuries in Mesopotamia, Egypt and Persia, Colonel Edwin Drake’s oil well in Titusville, Pennsylvania 1859 was the first exploitation of oil in its liquid state3. Subsequent discoveries were made in other parts of the world soon thereafter. The scrabble for the word’s oil deposits did not however begin in earnest until 1890 oil of the Henri Deterding Chartered a small Indonesia Company to exploit the oil of the Dutch East indices.

This Company later amalgamated to form the Royal/Shell Company. Modern history of Petroleum agreements on the other hand began with the entry of the International Oil Companies into the Persian (Now Iranian) government to an Englishman, William Knox D’ Arcy to undertake on an exclusive basis, Petroleum exploration and exploitation activities throughout Persia for a sixty year period subject to the payment (to the government) of a major bonus and sixteen per cent of the Company’s annual profit. The subsequent flood gate of concessions to foreign Companies backed by home government support resulted in the domination of global petroleum operations in the first quarter of the 20th

2. Amid A; The Effect of Multiple Regulatory Regimes on the Petroleum Industry. Conference Paper delivered at the Death, Safety and Environmental Conference held in Port Harcourt (2002) 3. J.L. Williams, History and Analysis of Crude Oil Price, WRTG at [email protected]

century by a combination of American, British and Dutch-British companies-the so-called “Seven sisters” other wise called “Big Seven”, five of which were America, Exxon (formerly standard oil company of New Jersey) Mobil (Formerly Secony Vacuum Oil Company), Gulf oil Corporation, Texaco, Standard Oil Company of California and British Petroleum Company/Shell Transport Trading.

There was, in addition to the traditional seven, a French company called CEP (Company Hahaized des Petroles), making up what are often referred to as the “Eight Major” which though less important in international terms at that time, nevertheless owned a significant share in Middle East Oil production i.e. the US companies dominated South and Latin America, British companies dominated middle East and Asia, and Royal/Shell monopolized far East operations4.

These MNOC’s wielded absolute control over petroleum activities, virtually controlling the process of concessional system and was indeed an exploitative and imperialist system of economy exploitation. Prices of oil were dictated by the Multinational Companies under a basing point system centred in the US and Persian Gulf for the Western and Eastern hemisphere markets respectively. These points were exclusively used for price fixing in the oil market especially for the middle Eastern concessionary regime, there were no provisions for the payment of taxes, instead the host countries were paid a fixed royalty per barrel.

4. Oil and Gas Exploration and Production in Mangrove Area, ibid at p.l; Oil and Gas Exploration in Arctic and Sub arctic Onshore Regions ibid at p.l.

In the mid 1940’s, Venezuela led the path to re-negotiate in terms of its concessionary agreement with the Multinational oil Companies. The result was the profit sharing agreement, which provided for a “50/50” split in the profit shared between the government and the concessionaries5.

Taxation was levied on the profit up to this percentage (50%) based either on the posted price of the crude oil or on the sale of the crude oil. Thus, the oil producing countries were mostly at the mercy of the MNOC’s in term of revenue from oil resources. This together with the fact that the commodity was often the principal foreign exchange earner of those countries, these meant that the two concessionary systems constituted a major threat to the sovereignty, national security, pride and economic growth of the concerned governments.

The successes recorded by Venezuelan government in re-negotiating its contract terms with the MNOC’s promoted the Venezuelan government to act quickly to spread the message of a possible re-negotiation to the middle Eastern oil producing countries in order to forestall any shift of attention of MNOC’s to these areas and the competition it might bring6.

The very first contact occurred in 1947 between Venuzuelan and Iranian Diplomatic Missions in Washington. Thereafter, in 1949, an official Venezuelan delegation paid series of visits to the Middle East oil producing

5. Wagner J, Oil and Gas Operations and Environmental Law in Latin America (1998) 16 JERL at 179 6. Association of Oil and Natural Gas Companies in Latin America and the Carribean (ARPEL Code on Environmental Conduct, May 1997, ec html) governments to hold consultative meetingsto discuss the need for closer communications7.

Arab official were invited to note Venezuelan apprehension over the oil taxation disparity between their governments and the implication of this to achieving reasonable prices and revenue to their various governments. Other consultative fora and agreements were later put in place by Arab countries to spread the message of terms acquired by any one state to the other.

The above makeshift efforts necessitated by motive to realize a better pricing system certainly put some pressure on the MNOC’s and the entire petroleum producing and distribution system. However, other factors equally contributed to the rising oil-related tensions of that time, which formed the background and eventually culminated in the creation of OPEC in September, 1960.

One of such factors was the emergence of the concept of permanent Sovereignty of every country over its national resources. The United Nations General Assembly felt then that the wave of political independence being attained by developing countries from the Middle East, Africa and South America, would be meaningless unless foreign absolute control of their economic sectors is continued, more so that for most of those countries, their natural resources represented their only economic assets. Any action on this line on the other hand conflicted with

7. Ibidthe interest of the Multinational Companies in protecting their usually advantageous investment conditions

8. The Principle of permanent sovereignty was mooted in 1952 in the draft international Covenant on Human Rights pursuant to the United Nations General Assembly sought to include the Right to all Peoples And Nations To Self-Determination as part of the Human Rights covenants9. Later, other Resolutions and Declarations of the UN and its specialized agencies clarified and reinforced the concept as a fundamental principle of international law.

These Resolutions clearly motivated oil producing countries to begin to muster the courage to confront the MNOC’s with the ideas of re-negotiating more favorable terms of contract and with time a blue print was concluded by Middle Eastern countries in concert with Venezuela to wrestle the control of their resources away from the MNOC’s.

Other remote factors were equally responsible in the complexity that eventually informed the creation of OPEC. Firstly, in 1958, the Soviet Union oil export re-entered the world market with the consequence that Soviet oil was sold at the prevailing world market prices at the time. This constituted a challenge to the pricing system of the oil majors. Secondly, new competitors emerged in the oil market challenging the dominance of the Seven Sisters. These new forces were, as earlier mentioned, the” independent minors” or the “independents” as they were usually called.

8. Brow Weiss E, Environmental Change and International Law. New Challenges and Dimension (United Nations University Press, Tokyo, 1999) October 1999, 34-35 9. Ibid.

Most of these were incorporated in America while others were state owned oil companies and unlike the majors who possessed their own marketing outlets, the “minors” because they had more, were prepared to sell their crude at a much lower price than the prevailing price, to independent refineries in Western Europe and Japan. In addition, they were willing to assist the host countries with exploratory activities as contractors or in joint venture ship deals, with terms usually dictated by the far East.

Summarily speaking, in the development of OPEC, the 1960’s were the formative years of the organization. What had started life as a group of five oil-producing developing countries, seeking to assist its member countries legitimize rights in an international oil market which was dominated by the ‘Seven Sisters’ MNOC’s. Though activities were of a low profile nature then in the 70’s, OPEC however rose to international prominence.

This decade witnessed member countries taking control of their domestic petroleum industries and also acquiring a major say in the pricing of crude oil on world marketing. It also witnessed two major oil pricing crisis which were triggered by the Arab oil embargo in 1973 and the out break of Iranian Revolution in 1979, both resulted in oil prices rising steeply. The first summit of OPEC Sovereigns and Heads of State was held in Algeria in March 197510.

In the 1980’s, prices of oil peaked at the beginning of the decade, before beginning a dramatic decline, which resulted in a collapse in 1986, ______________10. Hepple B., A Race to the Top (1999) 20 Comp Labor Law and Policy p. 347 the third oil pricing crisis. Prices rallied in the final year of the decade without approaching the high levels of the early 1980’s11.

In the 1990’s a fourth pricing crisis was averted at the beginning of the decade on the out break of hostilities in the middle East when a sudden steep rise in prices on panic stricken market was moderated by output increases from OPEC members. Prices then remained relatively stable until 1998, when there was a collapse, in the wake of the economic downturn in South-East Asia. Collective action by OPEC and some leading non-OPEC producers brought about a recovery.

The arrival of the Year 2000 (The New Millennium) impressed consistent growth in the prices of oil. For instance, between April and October, three successive quota increase were recorded i.e. November 1, 2000 when Russia, a non-OPEC member increased its production. The September 11 Terrorist-attack on U.S. and the one caused by the military action on Iraq on March 19, 2003 leading to gross reduction in Oil production by Venezuela and Iraq. However, the loss of production capacity in Iraq and Venezuela combined with increased production to meet growing international demands led to the erosion of excess oil production capacity12.

In the year 2002 for instance, there was over 6 million barrels per day of excess production capacity, but by mid 2003, the excess was 11. Confederation of British Industry, Introducing Environmental Reporting:Guidelines for Business (CBI London 1994) cited in Deegan C p. 81 at 128 12. International Chamber of Commerce (ICC) The Business Charter for Sustainable Development: Principle for Environmental Management. www.iccboorg/home/environment/charter.asp

below 2 million. During much of 2004, 2005 and the first quarter of 2006, the spare capacity to produce oil has been under one million barrels per day. A million barrels per day is not enough spare capacity to cover an interruption of supply from almost any OPEC producer14.

14. Ibid



Most petroleum production and exploration is taken under the auspices of joint ventures between foreign multi-national corporations and the Nigerian Federal Government, although there are other forms of contracts e.g. Production Sharing Contract, Revenue Sharing Contract etc.

All companies operating in Nigeria obey government operational rules and naming conventions (companies operating in Nigeria must legally be sub-entities of the main corporation, often incorporating “Nigeria” into its name). Joint ventures account for approximately 95 percent of all crude oil output, while local independent companies operating in marginal fields account for the remaining 5 percent. Additionally, the Nigerian constitution states that all minerals, oil, and gas legally belong to the Federal Government1. Six companies are operating in Nigeria and are listed with their countries of origin. Shell Petroleum Development Company of Nigeria Limited

Shell Petroleum Development Company of Nigeria Limited (SPDC), (known simply as Shell Nigeria), a joint venture operated by Shell accounts for fifty percent of Nigerian’s total oil production (899,000 barrels per day (bpd) in 1997) from more than eighty oil fields. The joint venture iscomposed of NNPC (55%), Shell (30%), TotalFinaElf (10%) and Agip (5%) and operates largely onshore on dry land or in the _______________

1. The Constitution of the Federal Republic of Nigeria 1999 mangrove swamp in the Niger Delta2. “The company has more than 100 producing oil fields, and a network of more than 6,000 kilometres of pipelines, flowing through 87 flowstations. SPDC operates 2 coastal oil export terminals”. The Shell joint venture produces about 50 percent of Nigeria’s total crude.

Shell Nigeria owns concessions on four companies, they are: Shell Petroleum Development Company (SPDC), Shell Nigeria Exploration and Production Company (SNEPCO), Shell Nigeria Gas (SNG) and Shell Nigeria Oil Products (SNOP), as well as holding a major stake in Nigeria Liquified Natural Gas (NLNG). Shell formerly operated alongside British Petroleum as Shell-BP, but BP has since sold all of its Nigerian concessions. Most of Shell’s operations in Nigeria are conducted through the Shell Petroleum Development Company (SPDC)3.

Chevron Nigeria LimitedChevron Nigeria Limited (CNL) is a joint venture between NNPC (60%) and Chevron (40%) has in the past been the second largest producer (approximately 400,000 bpd), with fields located in the Warri region west of the Niger river and offshore in shallow water. It is reported to aim to increase production to 600,000 bpd4.

________________2. M.M. Gidado, Petroleum Development Contract with Multinational Oil Firms, The Nigeria Experience, Maiduguri,1990. 3. M.M. Gidado, Petroleum Development Contract with Multinational Oil Firms, The Nigeria Experience, Maiduguri,1990. 4. Ibid

Mobil Producing Nigeria UnlimitedMobil Producing Nigeria Unlimited (MPNU) is a joint venture between the NNPC (60%) and Exxon-Mobil (40%) operates in shallow water off Akwa Ibom state in the southeastern Delta and averaged production of 632,000 bpd in 19975, making it the second largest producer, as against 543,000 pbd in 1996. Mobil also holds a 50% interest in a Production Sharing Contract for a deep water block further offshore, and is reported to plan to increase output to 900,000 bpd.

Oil industry sources indicate that Mobil is likely to overtake Shell as the largest producer in Nigeria within the next five years, if current trends continue, mainly due to its offshore base allowing it refuge from the strife Shell has experienced onshore. It is headquartered in Eket and operates in Nigeria under the subsidiary of Mobil Producing Nigeria (MPN)6.

Nigerian Agip Oil Company LimitedNigerian Agip Oil Company Limited (NAOC) is a joint venture operated by Agip and owned by the NNPC (60%), Agip (20%) and ConocoPhillips (20%) produces 150,000 bpd mostly from small onshore fields7.

________________5. Ibid6. Atseugba: Oil and Gas Law in Nigeria: Theory and Practice 2nd Edition 7. Ibid

Total Petroleum Nigeria LimitedTotal Petroleum Nigeria Limited (TPNL) is a joint venture between NNPC (60%) and Elf (now Total) produced approximately 125,000 bpd, both on and offshore. Elf and Mobil are in dispute over operational control of an offshore field with a production capacity of 90,000 bpd.8

Texaco (now merged with Chevron)NNPC Texaco-Chevron Joint Venture (formerly Texaco Overseas Petroleum Company of Nigeria Unlimited): A joint venture operated by Texaco and owned by NNPC (60%), Texaco (20%) and Chevron (20%) currently produces about 60,000 bpd from five offshore fields.9