A Commentary on the $5 billion Fine Imposed on SNEPCO by NOSDRA

A Commentary on the $5 billion Fine Imposed on SNEPCO by NOSDRA

By Dr. Emmanuel Ojameruaye

On July 23, 2012, the Federal Government reportedly approved a fine of $5 billion imposed on the Shell Nigeria Exploration and Production Company (SNEPCO) by the National Oil Spill Detection and Remediation Agency (NOSDRA) for the December 20, 2011 oil spill in SNEPCO’s Bonga deepwater oil platform.  According to the Vanguard of  July 24, 2012), the Director General of NOSDRA affirmed that  that: “The recommendation we made that Shell should pay $5billion was approved by Mr. Presidentthe fine had nothing to do with third party shoreline contamination, as being speculated but on account of the impact of the spill on the sea and aquatic life. We agree that the sample tests show that the spill did not affect the shorelines… But looking into the sea, the 30,000 barrels oil spill impacted about 950 square kilometres beneath the sea bed … this administrative fine is different from compensation, because investigations are still ongoing, and Shell may also pay compensations if we determine more damages”.

The “approval” of the fine by the President came is less than two weeks after the  Director-General of NOSDRA first announced that his agency “would recommend an administrative fine of $5 billion to Government” at a hearing on the Bonga oil spill held by the House of Representatives Committee on Environment on July 16, 2012. The approval of the fine raises several fundamental questions, including the following: Does NOSDRA have the legal authority to impose or recommend an “administrative fine” on oil companies? Why should the imposition of the fine come before the compensation of the victims of the spill? Is the fine amount justified or appropriate?  What are the implications of the fine?

On the first question, an examination of the law establishing NOSDRA and other laws governing the oil industry in Nigeria –including the revised PIB now before the National Assembly- clearly shows that NOSDRA is not vested with the legal power to impose fines on oil companies for oil spills or to make recommendations on same to the Presidency for approval. Furthermore, there is nowhere in Nigerian laws where the President is required to approve “administrative” fines for oil spills or other forms of pollution.    

NOSDRA was established in 2006 by an Act of the National Assembly “with responsibility for preparedness, detection and response to all oil spillages in Nigeria” (Part I, section 1 of the Act.).  The objectives, functions and special functions of the Agency are clearly stated in Part III of the Act. There is no provision in the Act that empowers the Agency to impose or recommend fines for oil spills. The only power vested on NOSDRA is to impose “penalty” on oil companies for failure to report oil spills on a timely basis and clean up of the impacted area, as provided in Section III.6 (2) of the Act (Penalties), to wit: “An oil spiller is by this Act to report an oil spill to the Agency in writing not later than 24 hours after the occurrence of an oil spill, in default of which the failure to report shall attract a penalty in the sum of five hundred thousand naira (N5OO,OOO) for each day of failure to report the occurrence. The failure to clean up the impacted site, to all practical extent including remediation, shall attract a further fine of one million naira. Such notice in writing is deemed to have been made, if delivered at the nearest zonal office closer to the impacted site, and of the Agency, the National Control and Response Centre within the stipulated time”.

Therefore, in legal parlance, the action of NOSDRA in imposing an administrative (punitive) fine on SNEPCO is ultra vires ("beyond the powers"). In other words, the fine will amount to a nullity if challenged in the court of law. By recommending or imposing a punitive fine for the Bonga oil spill, NOSDRA has arrogated to itself a power it does not have. In fact, it has usurped the power vested on the Department of Petroleum Resources and the Courts. NOSDRA is not intended to be an “environmental protection agency” or a “regulator” of the oil industry. In the case of Nigeria, it is the Department of Petroleum Resources (DPR) – the regulator of the oil industry – or the Federal Environmental Protection Agency (FEPA) that can initiate legal action for administrative fine against SNEPCO over the Bonga oil spill. As per the Act establishing it, NOSDRA is “an oil spill emergency agency” established to “prepare for, respond to, and recover from oil spill disasters” as in other oil producing countries. In fact, vesting NOSDRA with the power to impose fines on oil companies will divert the Agency from its prime responsibility of responding to oil spills and turn it into a “policeman” that will intimidate and demand “settlements” from oil companies. Why did NOSDRA arrogate to itself the power of imposing the fine on SNEPCO? Why did it encroach on the powers of DPR and why did the Presidency approve the recommendation without a thorough analysis of the legality of the action and the implications? Where are the Minister of Petroleum Resources, the Director of DPR, and the legal advisers to the President, the NNPC, DPR and NOSDRA in this charade?

The second intriguing question is why NOSDRA and the Presidency rushed to impose a whopping $5 billion administrative fine on SNEPCO “on account of the impact of the spill on the sea and aquatic life” when the issue of compensation for the human victims has not been settled. According to NOSDRA, “investigations are still ongoing”. By “placing the cart before the horse”, NOSDRA has inadvertently shown that “sea and aquatic life” is more important than human life and livelihood affected by the spill. So far, NOSDRA, the Federal Government and SNEPCO seemed to have paid a deaf ear to the 55 coastal communities that have alleged that the Bonga oil spill affected their livelihoods. Elsewhere in the world, the initial focus of an “emergency response agency” is on clean up and compensation for human life and livelihood. It is only after the clean up and compensation issues have been resolved, and a detailed technical report of the incident is finalized that the authorized government regulatory agency and the justice ministry will proceed to initiate legal proceedings against the oil spiller company in accordance with existing pollution laws.

 For instance, in the United States, following the Gulf of Mexico (Deepwater Horizon) oil spill in April, 2010, the initial focus was on clean up and compensation of the victims of the incident. Within two months of the spill, following a meeting between President Obama and executives of British Petroleum (BP) on June 16, 2010, the company agreed to set up a $20 billion fund to pay compensation to persons directly affected by the spill - $3 billion in third quarter of 2010, $2 billion in fourth quarter, and $1.25 billion per subsequent quarter until it reaches $20 billion. As of July 2011, i.e. within a year after the fund was set up, a total of $4.7 billion had been disbursed to 198,475 claimants/victims, and the fund has continued processing payments since then. It was not until March 2012, that the US Department of Justice initiated legal action against BP (and the other responsible companies) under the US Clean Water Act and the Oil Pollution Act for “punitive damages” following the publication of the final investigative report on the accident in September 2011.The trail in the court is set to start in February 2013 and the case may drag on for years! For instance, the case of “punitive damage” against Exxon Mobil over the 1989 Exxon Valdez oil spill in Alaska was finally resolved by the US Supreme Court on February 27, 2008 after several appeals by Exxon Mobil, and long after Exxon Mobil had spent $2 billion on clean up and $1 billion on compensation for victims of the spill.

The third question is whether the amount of the fine is justified. Before answering this question, let me make it clear that I believe polluters should be held accountable for their actions by making them pay fines or penalty, especially for proven acts of negligence. Imposing fines on polluters will force companies to adhere to the highest standards of environmental management. Be that as it may, oil spills and other forms of environmental pollution are almost inevitable in the oil industry even with the best technology. Oil spills occur in every country or place where oil is explored, produced and transported throughout the world. It is also true that Nigeria, particularly, the Niger Delta region has suffered from the worst forms of oil-related pollution during the past 55 years. For instance, according to the UNDP, there were 6,800 oil spill incidents in the Niger Delta region between 1976 and 2001 and about 3 million barrels of crude oil was spilled into the environment as a result of these incidents. It is estimated that the cumulative volume of oil spilled in the region over the past 55 years is about 14 million barrels which is equivalent to about 51 times the volume of the Exxon Valdez oil spill in Alaska in 1989 (270,000 barrels) and about three times the 2010 Gulf of Mexico oil (4.76 million barrels).  Oil companies in Nigeria have been accused of applying double-standard in environmental management. There are however, indications that the companies have made significant improvement in containing and abating oil pollution during the past 15 years which has resulted in significant reduction in the number and volume of oil spills and other forms of pollution.  

Most oil experts agree that by international standards, the $5 billion administrative fine imposed on SNEPCO for the 30,000 barrels of oil spilled is arbitrary and excessive. It amounts to about $167,000 per barrel compared to the current crude oil price of about $100 per barrel. Even if we take the initial estimate of 40,000 barrels of oil spilled, it still amounts to $125,000 per barrel!  According to the Telegraph of London, “The fine would be the largest Shell has ever received in Nigeria and amount to about $125,000 for each barrel of oil split in the Bonga field. By contrast, BP is facing a maximum fine of $4,300 per barrel in the US following the Gulf of Mexico”.  To put the fine into perspective, SNEPCO produces about 200,000 barrels a day which amounts to about $7 billion a year.  In order words, the fine is almost equal to the market value of the total oil produced by SNEPCO in a year without removing the cost of production! The 30,000 Bonga  oil spill occurred some 120 kilometres offshore and it has probably  done minimal damage to the Nigerian environment and  people’s livelihood along the coast when compared to 4,761,905 barrels of the Gulf of Mexico spill or the 271,000 barrels of the Exxon Valdez spill or other (onshore) oil spills in Nigeria such as the 570,000 barrels of the Forcados terminal oil spill in 1979, the 400,000 barrels of the Funiwa No. 5 oil spill in 1980, the 40,000 barrels of the Idoho oil spill in 1998 and other spills for which the polluting companies were not fined.

There is simply no empirical basis to justify the $5 billion fine, especially as there is no law in Nigeria governing the rates for “punitive damages” for oil spills. In the United States, under the Clean Water Act (CWA), the base punitive fine is $1,100 per barrel of oil spilled but it can be increased to a maximum of $4,300 per barrel if the polluter is found guilty of gross negligence by the presiding judge. Thus, under US law, the maximum fine that can be imposed on SNEPCO for the 30,000 barrels oil spill is $129 million and the minimum if $33 million as against the $5 billion imposed by NOSDRA and approved by the President – almost 40 to 150 times more!   The expected punitive fine from the Gulf of Mexico oil spill is estimated at between $5 billion and $20 billion but there is no guarantee that Supreme Court will even approve $5 billion if BP decides to appeal to the Supreme after the lower court judgment. Case in point, after the Exxon Valdez incident, an Anchorage/Alaska jury imposed a punitive fine of $5 billion on Exxon. The company appealed to the 9th Circuit court which reduced the fine to $2.5 billion in 2006. Still not satisfied, the company appealed to the US Supreme Court which decided that the $2.5 billion was “excessive with respect to maritime common law” and reduced the fine further to $507.5 million.    

The fourth question is the long-term implication of the fine for the Nigerian oil industry. While it may put pressure on oil companies to improve environmental management, such an excessive and arbitrary fine will discourage investment in the oil industry, especially in offshore oil drilling which is highly technical. Given the dwindling onshore oil production and community interruptions of onshore oil production in Niger Delta region, the future Nigeria’s oil industry – the mainstay of the economy – lies in offshore oil production. The NNPC and Nigerian indigenous oil companies do not have the technology and resources required for safe and extensive offshore oil exploration and production. No foreign or even indigenous company will want to invest in oil exploration and production in Nigeria if it faces such excessive and arbitrary fines as recently imposed by NOSDRA. Such fines can cripple any company and amount to “killing the goose that lays the golden egg”.     

In conclusion, I think the SNEPCO spokesman had a point when he said We do not believe there is any basis in law for such a fine…Neither do we believe that Shell has committed any infraction of Nigerian law to warrant such a fine." NOSDRA and the Presidency must follow the existing law and due process in attempting to impose any punitive fine on SNEPCO or any company as a result of oil spills. This means that it is the regulating agency of government that should work with the justice ministry to take oil polluters to the court of law after a detailed investigative report has been published and the issues of clean up and compensation have been settled. The amount of fine imposed by the courts must be justified and based on existing laws that minimizes arbitrariness. The courts should also take into consideration other spills that have occurred and will continue to occur in the region as well as the long-term implications of imposing “excessive fines” not only on oil spillers but also on other oil and non-oil polluters of the Nigerian environment including the refineries that are owned by the federal government. In this regard, it is important to include in the revised PIB clear provisions (such as such as minimum and maximum rates for spilled oil) for the management of both onshore and offshore oil spills and other forms of environmental pollution including gas flaring and disposal/dumping of drilling wastes. The law should also state how the fines will be utilized. For instance, a minimum punitive fine of $200 per barrel and a maximum fine of $1,000 per barrel can be stipulated and at least 20% of the amount paid can be used for clean up, 30% for compensation to victims (in addition to the compensation fund to be established by the polluter), 30% to the affected state governments and 20% to the affected local governments to carry out development project s in the affected areas. For example, the US Senate has passed a bill which stipulates that 80% of the punitive fines that will be paid by BP and the other companies as a result of the Gulf of Mexico oil spill will be divided among the affected coastal states – Louisiana, Mississippi, Alabama, Florida and Texas- while the balance will be used for further clean up, coastal restoration and job creation in the area. It is my hope that NOSDRA, DPR, NNPC, the National Assembly and the Presidency will learn from best practices in oil spills management from other countries. 

Dr. Emmanuel Ojameruaye

Monday, August 20, 2012

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