Oil spill hazards at the upstream level

Energy Policy 1994 22 (5) 393-402

Oil spill hazards at the upstream level A risk management paradigm for a developing country Bright ErakpoweriOkogu The international pre-occupation in recent years with Greenhouse gas emissions and climate change has tended to overshadow another environmental problem, namely oil spills. The consequences of an oil spill are more certain, more urgent and, in a sense, more real, especially for developing countries with inadequate capacity to cope with the problem. This paper documents the experience of recent oil spills internationally and in Nigeria and then proposes an appropriate system o f risk management in this respect. In the best of circumstances, externality problems are difficult to handle; they are even worse in developing countries with weak sociopolitical institutions and where transnational companies tend to have lower operating standards. Typically, a company would invest in spill prevention up to the point where the marginal benefit just equals marginal costs. In a situation where spill detection and clean up enforcement are weak, as is the case in many developing countries, investment in prevention will tend to be low. Consequently, an insurance-type oil spill contingency fund, financed through an oil tax, is proposed. We also report briefly on the outcome of field interviews which reveal socioinstitutional difficulties relating to property rights, and which therefore reinforce the need for a spill contingency programme and some role for government.

The author is with the OPEC Secretariat in Vienna, Austria.

combustion and the greenhouse effect which is thought to be associated with it. Environmental damage arising from oil spills has received relatively minor attention. However, the recent spate of tanker accidents resulting in oil spills and ecological damage has drawn some attention to this aspect of petroleum industry operations. Even then, the focus has tended to be on spill incidents in industrial countries. In developing countries where most of the world's oil is produced, spills occur all the time at the upstream level, and these also deserve attention. The non-congruency of crude oil reserve locations and major consuming centres makes long-distance tanker haulage a central link in the international oil chain. The data indicate that in 1993, the total world consumption of oil was about 67 million barrels a day (mbbl/d). Of this total, roughly half was traded across national borders. A small part of this trade was through pipelines but most was through tanker shipment. This trend is likely to intensify in the future as indigenous oil reserves in the O E C D run out and the region becomes even more import dependent. Further, tankers are increasingly being used as floating warehouses in slow steaming carriers in order to take advantage of otherwise idle VLCCs. 1 In fact, available statistics indicate that there was an average surplus of 26.25% tanker capacity in 1992. The implication of all this is that there is a fairly heavy tanker traffic on the world's seas and oceans. The corollary is that the risk of tanker accidents (and consequent oil spillage) is high. Aside from tankerrelated oil spills, there are other serious sources of environmental damage related directly to day to day crude oil production and refining activities. Oil well blowouts, burst pipelines, environmental damage due to drilling activities and gas flaring, which is a

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Keywords:Oil spill; Risk management; Developing country Most discussions on the environmental question today centre on gas emissions arising from fossil fuel

Oil spill hazards at the upstream level

permanent feature in many oil producing communities, are other manifestations of the problem. Our discussion will refer generically to all the forms of environmental damage attributable to oil industry operations as spillage. This paper is concerned primarily with spills at the exploration and production level, although some references will also be made to aspects of spills during transportation. It is hardly necessary to dwell on the negative effects of an oil spillage: it pollutes the waters and beaches; destroys marine life thereby upsetting the delicate natural balance of the ecosystem; and threatens the livelihood of millions of people engaged in farming and fishing activities within the vicinity of oil exploration and production. Not surprisingly, governments all over the world have shown concern for the problem by introducing minimum operating standards and legislative measures aimed at minimizing the risk of oil spills and, should it happen, measures to deal with the problem. This paper looks at the problem of oil spills with special reference to Nigeria, although it should be emphasized that similar conditions apply in other oil producing developing countries. In the second section, we look at the management of the unavoidable risk and hazards of oil spills, including a sketch of the optimizing behaviour of an oil company facing such a challenge. We then discuss the operations of a risk pooling programme in the Nigerian oil industry, and a proposal for an insurance-type oil spill contingency fund. The fourth section briefly outlines some policy proposals while the last section concludes the paper.

Risk management of oil spillage The traditional cure legal concept of risk is built around the perceived judgement of a hypothetical 'reasonable person'. Thus, 'if a reasonable man would have judged an act to be risky [then] it was risky'. 2 On the other hand, the modern approach takes a probabilistic view of the concept. It views risk as the mathematically measurable possibility that an undesirable event will occur. The concept of risk management involves the optimum utilization of available resources - human and material - in order to minimize the risk of occurrence of an undesirable event. And should the event occur in spite of our best efforts, the same resources are optimally utilized to minimize any damage. It entails the identification of risk, its quantification, steps necessary to minimize it and to cope with it. Pomfret identifies a loss unit concept which may be defined as the aggregate loss which

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could result from a single occurence - including not only the direct cost to the company, but also of compensation to those who might suffer from the occurrence. 3 The company's risk managers must be aware of this and act accordingly. Risk management entails steps at risk avoidance, loss prevention/ reduction and insurance coverage. This would require that there are highly trained personnel to man all phases of the operation; that standard and adequate equipment are employed and always kept in good working condition and, more importantly, that there is in place an efficient and workable oil spill response plan for dealing with emergencies. We return to this again shortly, but first we look at some of the recent cases of oil spills. Some recent oil spills Operational accidents resulting in oil spills are an ever-present risk in the petroleum industry, whether at the crude oil production stage, transportation or refining stages. The numerous reported accidents historically, and especially in recent years, testify to this fact. The largest recorded oil spill in history, in volume terms, occurred in March 1978 when the A m o c o Cadiz ran aground and broke up in a storm off Portsal, France. 4 It spilled 1.6 million barrels (68 million gallons) of crude oil, damaging 120 miles of coast line. Litigation is still continuing, but the clean up and restoration charges so far stand at US$115 million. 5 In April 1988, there was an accident in a Shell refinery near San Francisco in which 500 000 gallons of crude oil escaped into an estuary. The settlement cost Shell US$28.3 million. In another major accident the Exxon Valdez in March 1989 spilled 11 million gallons (262 000 barrels) of crude oil at Prince William Sound, Alaska. This spill damaged a thousand miles of coastline and the total cost to Exxon so far stands at US$2.08 billion. The rest of 1989 witnessed at least 30 more internationally reported cases of accidents or near-accidents in areas ranging from the U S A , USSR, Western Europe and offshore Morocco. 6 In January 1993 a supertanker, Braer, carrying 620 000 barrels of oil ran into rocks in the Shetland Islands, spilling its cargo. The clamour for some kind of coordinated international policy on safety matters in the world petroleum industry has intensified since 1989 as a direct result of these accidents. Nigeria has had its share of oil spills over the years. Although they have not always made world headlines, they are just as serious, and probably even more so because of the relatively lower level of preparedness in terms of technical and material resources with which to cope with the problem.

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Oil spill hazards at the upstream level Nwankwo reports that there were 784 incidents of spills for the period 1976-80 involving 1.337 mbbl of oil. 7 Before that, there were other incidents such as the Ejamah-Ebubu oil spill in 1970, the effects of which are reported to be still felt today. 8 In a study, Amajor found that the Ejamah-Ebubu oil spill of 1970 polluted farmlands, streams and swamps rendering the area unfit for agriculture and fishing. 9 This was recently reconfirmed by The Guardian (11 August 1993) when it said that 'At Ebubu-Eleme, oil spilled across three square miles 23 years ago. The pipeline was repaired, but little effort has been made to remove the caked oil that continues to wash into the Muepene river.' Studying the after effects of the Funiwa 5 offshore well blowout in 1984, Palczynski found that the hydrocarbon concentration in the sea water in the area was 1000 times as high as the average for the world's oceans. Further, he found that well water in the area contained 40 times the permissible amount of petroleum; hydrocarbons penetrated 80 km inland to the Niger delta, and 100 miles of sand beach were affected. ,0 A United Nations E n v i r o n m e n t P r o g r a m m e (UNEP) study of the West African coastal states concluded that operational discharges from tankers were the greatest tanker-related source of marine pollution. Further, it states that production and refining operations will lead to at least one spill per year of greater than 40 000 gallons." All of these examples point to the near inevitability of oil industry accidents. It is this kind of realization that prompted Engelshoven to state that 'No matter how desirable it is to reach a zero-accident goal, we will never get there, even if we operate on the basis that every accident is preventable. Accidents will, unfortunately, still happen. '12 The efficient solution to this type of problem is by making the polluter pay for any damage. The purpose of such a charge is to force the offending company to reflect the pollution costs in its cost structure. Unless the use or abuse of the environment carries a cost, companies will treat it as a free good, and hence consume more of it than optimal. The 'polluter pays' principle forces the companies to bear the cost of any damage they may cause to the environment. The problem, of course, is that it is very difficult to quantify the environmental damage and determine the appropriate amount of tax. 13 This not withstanding, quantification procedures even in apparently impossible cases are common.14

An oil spill response plan (OSRP) An OSRP consists of all the elements necessary to

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meet an oil spill contingency. Specifically, it should contain the following features: • a good communication and monitoring system; • a stock of oil spill clean-up equipment strategically located and easily accessible - such storage must have a good system of inventory control; • well-trained manpower, with periodic surprise drills organized to keep them in an operation ready state; • a sound organizational structure clearly stating the ladder of authority and responsibility as well as job descriptions; the less cumbersome it is, the better; • notification and alert procedures; • spill scenarios with emphasis on degree of seriousness, weather conditions, environmental sensitivity, etc; • spill control and clean up procedures. In all cases, an OSRP must be flexible enough to be capable of responding under different conditions, and the designers must be honest and realistic about their aims, objectives and capability. One of the criticisms emerging from the Alaska Oil Spill Commission following the Exxon Valdez spillage was that the company knew they could not cope with a major spill but had assured the community that they were fully 'protected'. ,5 The rationale for each of the above features is clear and self-evident. For example, without a good system of communications, it will be difficult to report spill incidents promptly. In this regard, it should be borne in mind that every minute wasted could cost lives, avoidable damage and money. In a similar vein, unless the chain of command is well known and followed in an emergency, efforts could be duplicated or, worse, conflicting signals could be given to field operators. The chaos and delays that plagued the Exxon Valdez clean up effort in the first few days '6 points to the necessity for a sound contingency plan. The Oshika oil spill in Nigeria in 1983 witnessed protracted delays in the clean up operations. This delay worsened the impact of the spill, allowing even more crude oil to penetrate the sediments.'7

Optimizing behaviour of an oil company faced with risk of oil spills The typical oil company engaged in exploration and production activities must include, as an extra item, the cost of spill prevention and clean up equipment in its balance sheet. In other words, it carries a cost element not usually associated with, say, a company whose production activities do not expose it to the

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risk of accidental spillage which must be attended to. However, it is like any other business concern, in that it has the objective of profit maximization. The per barrel profit which the firm tries to maximize can be represented as Max rtt = Pt-Cot(Ko, Lo)rlct(Kc, Lc)t

(1)

where, in period t, rt = profits P = the world price of oil per barrel Co = normal operating costs, and depend on the quantity and quality of capital (Ko) and labour (Lo) employed in the oil sector, for any amount of reserves Ic = the cost of spill prevention, and it also depends on labour and capital deployed for this purpose

P, Cot are assumed to stay constant, or exogenously determined. The new element is the cost of spill prevention. In the event of a spill, the total cost to the company, K, can be represented as: K = P.q + S(q, Z) (2) q = quantity of oil spilled S = the cost of clean up, which depends on the amount of oil spilled, q, and other factors, Z, such as the nature of the terrain, weather condition, wind force and direction at the material time, etc The cost equation needs to be weighted by the probability of spillage ie

K = p{P.q + S(q, Z)) O
(3)

or

K = 9{P.q + S(q, Z)) + (l-p) {q + S(P.q, Z)}

(4) At any point in time, the company faces a probability weighted cost function on its oil spill account, as in Equation (4). The value of 9 is somewhat endogenous to the company's behaviour in the sense that the amount of investment in spill prevention (type and quality of equipment, training etc) is inversely related to the amount (probability) of spillage, ignoring those arising from pure bad luck or force majeure. Investment in prevention and spill clean up equipment, I, is expected to vary with the size of operations (proxied by total output of oil, Q) ie

I = I(Q) I' < 0 ; / " < 0

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(5)

The company would seek to maximize its profits by equating marginal costs to marginal benefits. In other words, it will invest in prevention systems until the last dollar invested for this purpose equals the benefits of the last unit of prevented spillage, that is, the value of the lost oil plus the cost of cleaning up the last unit of oil spill. This occurs when marginal values are equalized:

I ' = K'

(6)

This result, though relating specifically to an individual company's optimizing behaviour, coincides with the efficiency path for a whole economy and/or in a general equilibrium context. 18 The amount of spill prevention investment will be affected by the costs arising from a spill incident. Thus, if companies perceive that they can get away with a spill (eg non-detection) and/or that the government will not enforce a complete clean up requirement, then they will worry less about investing in prevention. Unfortunately, governments depend on the revenues generated by the activities of these companies to such a great extent that they are not always able to insist on high standards, for example, in cleaning up a spill. The existence of a spill fund, as proposed, will not only enable government to finance greater monitoring, it will also penalize spills through the level of applicable premium. Besides, the fund will finance part of any spill that may occur, and act as guarantee in case of those spills like that of EjamaEbubu, the remnants of which still remain 24 years later. The incidence of oil spills (and hence costs, K) will be affected by another, non-random, factor namely, sabotage. It would appear that this element has featured in the Nigerian experience, a9 Host communities that are aggrieved by the production activities of oil companies are said to have threatened, or actually attacked, company installations, including pipelines. If the sabotage scenario is correct, then it can be categorized into two elements: sabotage carried out to draw attention to the plight of the host community regarding the distribution of the proceeds of oil at the national level (which may involve disrupting work or damaging installations, such as rigs but without causing a spillage); and sabotage which is designed to cause an oil spill (pipeline hacking) and against which claims could be made. To some extent, both types of problem can be addressed by effective involvement in community development by the company and/or government in order to minimize the hostility and suspicion of community members, z° A consensus has recently

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Oil spill hazards at the upstream level emerged on this issue within the larger Nigerian society, perhaps as a result of the recent spate of clashes between oil companies and host communitiesfl1 Not surprisingly, industry operators argue that the provision of social amenities (roads, schools etc) is outside their domain and that communities single them out for attack because they cannot directly get at the government. Such argument is neither here nor there; the objective condition under which they operate dictates that they take some action to minimize operating costs, whether or not this is caused by sabotage. 22 Oil companies represent the visible face of the operational partnership between the industry and government. It is probably in recognition of this that companies have recently increased the award of post-secondary scholarships to students from oil producing areas in Nigeria. However, the oil companies will no doubt consider that the above approach to solving the problem could conceivably also introduce a different problem, namely, that of moral hazard. The institution of a compensation scheme to host communities for oil spills caused by sabotage may act as an incentive for even more sabotage from the same community. This aspect of the problem requires a sustained effort to bring about a long-term solution. Mutual trust cannot emerge overnight. In fact, it could be argued that some of the problems of today stem from the long history of neglect of host community needs stretching back to the 1950s when oil production and export in commercial quantity started in Nigeria.

Risk pooling for spill control in the Nigerian oil industry From the discussion so far, an oil spill risk management programme encompassing prevention and clean up activities can be quite expensive. As stated earlier, companies would need to take steps to prevent or minimize the risk of oil spills but may take an insurance policy to cover the unavoidable residual risk. This could be by way of self-insurance (in house spillage fund) or taking out a premium with a specialist insurance company. The Nigerian oil industry established the Clean Nigeria Associates (CNA) in 1981 as a cooperative for mutual assitance in the event of an oil spillfl3 It became fully operational in 1985 with the location of spill fighting equipment at Onne (Port Harcourt) and Warri. The CNA was formed by the 10 leading oil companies in Nigeria, including the state oil company, NNPC. The complete list of founding members is as follows: Ashland, Elf, Gulf, Mobil,

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Nigerian AGIP, NNPC, Pan Ocean, Phillips, Shell and Texaco; with ALBA as the group's current contractors. The participating companies contribute to the fund according to a weighted formula which ensures that each member's participation cost reflects, among other things, the size of its operations. Under the agreements, 12 drills are to be undertaken each year. In the event of a spill, the company concerned has the right, but is not obliged, to request the intervention of the group contractor. If it decides to use the contractor, this request must be approved by the chairman of CNA or, in his absence, the vicechairman; in his absence, the secretary or any two members of the executive committee if the secretary cannot be reached. For non-members of CNA, approval for them to use the group's services is at the sole discretion of the CNA executive committee and they will be charged higher fees than members. Although the modus operandi of the CNA appears straightforward, the procedure for activating group contractor services could be considerably simplified. The requirement for going through the chairman, vice-chairman, secretary etc is cumbersome at the best of times; it could be disastrous in the event of a major oil spill. There are indications, however, that the procedure is being simplified. National spill preparedness: an oil spill contingency fund The establishment of the CNA, though rather late in coming, was a major step towards meeting the hazards of environmental damage arising from oil industry operations. Its funding scheme, as discussed above, is based on an operational weighting system. As it is currently operated, the main link with the government appears to be through the NNPC. The extent of government involvement, if any, is unclear. From the evidence of oil spills and clean up costs in other parts of the world (some of which was documented earlier), it is clear that, in order to do a proper job, huge resources are needed. The fact that Exxon Corporation spent over US$2 billion cleaning up a single spill (not including possible fines and costs of civil suits) is indicative both of the huge sums that could be incurred, and the high environmental standards in the USA. It is important that developing countries do not adopt lower standards which are cheaper in the short term. Recent environmental disasters such as the Bhopal accident in India in 1984, and the legal aftermath have highlighted the need for uniform global standards both in operation and compensation. The reality today is that

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Oil spill hazards at the upstream level

companies tend to have lower operational standards in their affiliates based in developing countries, as they take advantage of the weaker legal and sociopolitical institutions in these societies. 24 In the light of the recognized difficulties relating to externalities and the possibility of lower safety standards, the problem has to be addressed using a different policy instrumentY We propose the introduction of an oil spill fund to augment the resources of the CNA. Under this proposal, a threshold per barrel levy of, say 5¢ per produced barrel could be introduced, with a similar dispensation being extended to marketers. At an average daily production of about 1.8 mbbl/d this would generate some US$32.85 million (or over N(Naira)720 million at current exchange rates) per annum. This levy is somewhat analogous to a Pigouvian tax. Some authors have proposed that such a tax should be based, not on volume of delivered oil, but on the expected rate of pollution. 26 This obviously has merit because the spill rate does not depend on volume alone, but also on how inputs (quality of ship, equipment, manpower etc) are combined. 27 The attraction of a flat, per barrel levy is its ease of operation. Besides, most (but by no means all) of the spills in Nigeria occur during the actual production process. A supplementary policy would be a standardization of industry equipment. The proposal envisages setting an upper limit on the size of the fund, so that it is topped up again only after some drawdowns. It is proposed that the fund be under the control of a national spill contingency committee constituted by the government with membership drawn from the oil industry, public health system, independent scientists and representatives of the host communities. In the event of a spill, funds may be drawn from the account, depending on the severity of the spill and the ease with which the company/CNA can handle it. In addition, the question of compensation to the affected communities would be guaranteed under this arrangement. This fund should be understood to be complementary to the existing industry-based CNA; a trust fund to guarantee basic standards for the environment. The question of moral hazard, this time concerning operating companies, could arise from the existence of such a fund. Companies may be tempted to be less careful in their operations on grounds that they already finance a spill fund. In order to avoid this possibility, the scheme is envisaged to operate like a car insurance policy. The above levy is like a premium. In the event of a spillage, the company would bear a stipulated share of the cost of cleaning

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up the pollution through its own efforts and/or in collaboration with CNA. Credits (bonus) are given for every spill free year of operation and conversely, a spill occurring in any year would entail raising the amount of the levy. The difference between this and a typical insurance policy is that the share of the clean up cost of any spillage should be fixed at a sufficiently high level to deter laxity arising from moral hazard considerations on the part of companies. The above idea can be summarized as in Equation (7) below. The outlay of the ith company, T, in a given year is determined by the threshold levy (premium), ki, its spill record in the previous year (yit-1), the current size of the spill fund, and the average industry spill rate (yn) for the past year: T~t = {ki(Dt, yit_~, ynt_l), yit_l} XoO s.t. D <_ Dc; y <_ q d T i / d D < 0; dTi/dyi > 0; dTi/dyn > 0

(7)

where in period t, D and Dc are the size of the fund and the prior stipulated maximum capacity of the fund respectively. The first item in Equation (7) (the threshold levy for the ith company) depends on the present size of the fund and how much spill occurred in its own operations in the previous year as well as in the operations of the whole industry; the second argument is the amount of spills it was responsible for in the previous period (through the company's share of the cost in cleaning up the spill), and enters the function as a separate item. The more your pollution in the previous period, the higher your basic premium in the present period. The average industry spill rate in the argument is important because it encourages intraindustry cooperation in spill prevention a la CNA. It enters the system through the fact that the fund is depleted (thus affecting basic contributions) and would need to be filled up again. A major advantage of this fund is that it can act as a cap on the oil spill liability of the individual company. For instance, in the absence of liability limits, a small operator could go bankrupt, leaving behind a polluted environment and an alienated host community if faced with the sort of clean up bill which Exxon was confronted with, following the Valdez accident. Besides, under tort liability, a company may escape with minimal fines if it is deemed to have taken reasonable precaution against a spill accident. In this regard, it is informative to recall the decision of Shell Corporation in mid-1990 to stop sending crude oil in company tankers to US ports (except the LOOP terminals). This move was

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Oil spill hazards at the upstream level

based on their perception that the risk exposure had become greater than the potential profits. More to the point, Shell said it could not get insurance cover in excess of US$1 billion for a single ship and cargo. This included cover from the company's mutual insurance market (somewhat equivalent to the CNA in Nigeria). The existence of a spill fund could obviate the need for such a move. The Exxon Valdez incident has led to widespread calls for an application of the polluter pays principle irrespective of fault, proof of negligence or availability of insurance cover. The operation of an oil spill fund in such circumstances would be a great help in protecting both the polluting company and the environment. In a situation where the market is unable to provide full insurance cover, it is likely that small operators with very limited asset base and risk loving in character would move in. By definition, such firms would risk everything they have (small asset value) in return for a chance to make huge profits. It is logical to expect oil companies like Shell International to increasingly rely on small tanker operators for oil transport to the USA. This has raised new concerns among environmental groups. Since such companies tend to have rather limited resource bases, they are not always able to invest the necessary funds to modernize their fleet and other equipment. This increases the risk of serious accidents.

Emergent technologies and oil spill control Tanker design. The recent spate of tanker accidents and oil spills has sparked new debates on tanker designs and standards. Although the technology is not new, double hull and double bottom tankers are increasingly gaining support to become the standard from early next century. 2s The USA, for example, is calling for single hull tankers to be phased out, depending on size and age, by 2010. The statistics show that tankers that are 10 000 dead weight tons (dwt) or more, number about 3000, out of which about 600 are equipped with double bottoms. Of this number, only 60 have complete double hulls. Based purely on these statistics, the ship building industry will have a lot of work to do in terms of building new ships and retrofitting. Since it is unlikely they can meet the schedule, there will be the temptation for companies to divert substandard vessels to countries with less stringent standards. An important consideration is that the world's tanker fleet is ageing. The older a tanker, the less reliable it becomes; operating costs become higher, and the risk of oil pollution becomes greater, ceteris paribus. As of 1990, the age structure of these tankers showed that over one-third of them (34.6%)

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were older than 15 years, and by 1993, 76.5% of them were expected to have passed the 15 years of age mark. Now, the common wisdom in the industry is that 15 years is the useful economic life of a tanker. Since business must go on, renovation will become the order of the day (usually referred to as life extension programmes). The point remains, however, that they are likely to be less efficient, and more prone to accidents. It is important that developing countries are not left out of the discussions and developments at the international level lest unsafe tankers become systematically diverted to their waters.

Bio-remediation. This refers to the use of microbes to fight spills. The organisms are bred specifically for the purpose of fighting oil spills. They were deployed experimentally in June 1990 in the clean up work following the Mega Borg tanker accident and oil spill off Galveston, Texas. These microbes feed on the toxic crude oil, turning it into harmless fatty acids. The reports emerging from the Mega Borg experiment indicate that the water surface oil was reduced by some 30% as a direct result of the deployment of microbes. A potential advantage of this is that oil companies, research institutions and universities can breed the microbes locally, and this is one way in which oil companies can get involved in the economic development of host communities. Equipment manufacture.

There are technologies for manufacturing clean up equipment like booms which utilize feathers and similar materials. 29 The advantage of this type is that it can be manufactured locally using local materials. If necessary, a patent could be obtained for this and similar equipment. Similarly, there are some new technological processes for converting oil-contaminated soil into valuable asphaltic material for road construction. Such a process would enable the country to convert environmentally dangerous material into a useful resource.

Compensations and the host communities Under the present revenue allocation formula in Nigeria, 1% of the federation account is set aside for dealing with ecological problems, defined to include desertification, erosion, as well as oil related environmental damage. All land in the country is vested, at least nominally, in the federal government. All royalties and other incomes arising from petroleum activities accrue, in the first instance to the federal government. Subsequently, the revenues are shared among the three tiers of government

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according to a predetermined formula. 3° The host communities do not enjoy any special financial considerations as such. 31 Even in the past when the derivation principle of revenue allocation was applicable, state government, rather than the host communities, obtained the relevant funds. Given the political economy of rural development in Nigeria, and the poor record in this respect, compounded by the severe budget constraints facing many state governments, few of these funds ever reach the host communities. Consequently, there is a disruption to the traditional economy without a compensatory alternative. More recently (1993), as a result of continuing outcry from oil producing communities, 32 the federal government set up a new agency, the Oil Minerals Producing Areas Development Commission (OMPADEC) to manage the funds. It is hoped that the commission would be able to address the complaints of the communities, including the widespread dissatisfaction with the calculation and size of compensation payments. 33 In the course of preparing this paper, we concluded a series of interviews among representatives of communities where oil is produced (host communities); oil companies; and NNPC/Ministry of Petroleum Resources. The findings are briefly summarized below.

Representatives of host communities. They argue that the traditional mode of life of their communities especially agriculture, fishing and even certain culturally significant shrine activities are being disrupted by the operations of oil companies. Sometimes, whole communities are displaced and have to be resettled elsewhere. They further claim that whatever compensations are paid tend to be small and sometimes do not even reach the affected families. In some cases, long and expensive litigation over these compensations made it not worthwhile.

Oil companies. They claim to be quite prompt with compensations in the case of spillage once the investigations and assessments are completed. They identify two problems, however. First, they claim that very often the host community is not united, and that different groups often emerge to stake their claims for the same spill incident. Sometimes, a new group emerges demanding compensation after they (the companies) had paid out damages, supposedly, to the wrong group. Second, in some cases, state governments demand that the compensations be paid to them, presumably on the understanding that they are in a better position to share such funds among host community groups. When such funds do 400

not flow promptly or adequately to the relevant communities (because of the state government's own cash problems), alienation sets in. In general, the companies claim to be providing social infrastructures and awarding scholarships to students in their areas of operations. They further claim that these are traditionally not their functions, and that they undertake these programmes in order to foster good relations with these communities.

NNPC/Ministry of Petroleum Resources. They were quite cautious, but generally agreed with the claims of the oil companies regarding compensation as well as their efforts at providing infrastructures. However, they stressed the need for a continuation of those efforts and for host communities to cooperate with oil companies. It was not possible to interview relevant state government officials. It is clear from the above that there are problems with the issue of spillage and compensations. For one thing, our research revealed that there are problems with property rights delineation among groups at the host community level - an obvious justification for active federal government intervention. Since petroleum operations are on going, and oil spillage tends to have long-term environmental effects, Nigeria needs to take a long view of the situation. We propose that there is a need for the government and oil companies to promote investment in projects that will form an alternative to the traditional ones which have now been disrupted. The payment for spill damages that is currently being made should be seen as a short-term palliative rather than as an adequate all in all compensation. In fact, using asset value theory, where the kinds of amounts being paid as compensation are discounted over the indefinite future using any reasonable rate of discount, it is clear that these cannot be seen as substitutes for a permanently damaged agricultural/ fishing sector.

Some policy issues Oil producing developing countries such as Nigeria need to take an integrated view of the economy with a view to protecting the environment and those activities that depend on it. Long after the oil has dried up, the society will continue to depend on a healthy environment for its continued survival. In order to achieve this, the following policy measures are suggested. An effective national oil spill contingency plan, complete with a spill fund along the lines proposed in this paper should be adopted. In order to ensure

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Oil spill hazards at the upstream level

its effectiveness, the government should step up its monitoring activities in order to ensure maximum spill detection. Indeed, Cohen has shown that the amount of investment in spill prevention by operating companies increases with government expenditures on spill detection. 34 Membership of the CNA should be made mandatory for every operator in the Nigerian oil industry whose activity could impact on the environment. The Nigerian government has, in the last few years, opened the upstream sector to local businessmen. They can now explore and produce crude oil in their own right. It is well known that they lack the technological sophistication of multinational oil companies, and so could be more prone to spill accidents. This makes it imperative that they are required by law to take up membership of the CNA. Any oil spills arising from normal international maritime traffic should be handled at the international level. This would require active participation in relevant international arrangements concerning oil spills, such as the International Oil Pollution Compensation Fund. In the event of a major spill, eg of the order of the Exxon Valdez incident, the CNA may not be able to handle it alone. 35 The CNA should be streamlined with a view to making it more effective. The present requirements to seek the use of the group contractor through the chairman, or in his absence, the vice-chairman, or the secretary in the absence of the vice-chairman, all the way down to two executive committee members is rather cumbersome, especially with the poor state of communications in the country. A system should be devised so that any member requiring the services of the CNA contractor can access him directly, and report to the committee later. Tankers operating in Nigerian waters should be required to have some minimal on board spill equipment. Routine inspection of such tanker equipment should be carried out. The same principle goes for other oil related facilities such as rigs, refineries, etc. One of the criticisms arising from the Exxon Valdez accident was that the on board spill equipment was inadequate. In the light of on-going discussions to phase out single-hull tankers, the government should ensure that such tankers (if judged to be unsafe) are not diverted to Nigerian waters, or to the extent that they are, there should be appropriate levies to reflect the implied risk level. The tanker standards allowed for Nigeria must match the best in the world, if only because the experience at handling oil spills in Nigeria is not as good as in some other parts of the world. Prevention, therefore, should be seen

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as infinitely better than cure. Attention should be paid to emergent spill clean up technologies with a view to deploying these in Nigeria. In those cases where the technology is relatively simple (eg feather based booms), 36 they could be manufactured locally, using local materials. Sabotage is commonly identified as a source of oil spills in Nigeria. 37 This could be guarded against by making the host communities feel that they are part of the process and are not just objects of exploitation. Relevant social facilities must be provided to affected communities, a process that could be greatly helped by effective OMPADEC involvement. This would be further aided by prompt and effective clean up of any spillage as well as compensation to those affected. Although cash payments for spill damages should continue, there is an urgent need for the government and oil companies to promote alternative industries in these areas to replace the traditional ones that are now in permanent decline as a result of oil industry activities. This is the most viable way to ensure economic continuity and longterm survival of these communities, thereby securing the loyalty of their people.

Conclusions The risk of environmental damage due to oil spillage is an ever-present feature of the petroleum industry. Petroleum activities generally create externalities for host communities, thereby having a negative impact on the farming/fishing, and leisure activities of these people. The economy deviates from the efficiency path in terms of resource allocation unless oil companies are forced to internalize their externalities (costs). This entails a deliberate policy intervention by government. For the oil industry, operating companies need a systematic risk management approach to the problem. This should encompass spill prevention and a comprehensive spill response plan, including the setting up of an oil spill fund to complement the existing arrangements under the Clean Nigeria Associates. It is also suggested that the industry should carefully follow the emergent oil spill related technology discussions and to seek to produce the simpler technologies locally, using local materials. Finally, a number of policy proposals relevant to an effective national spill contingency plan are offered, including the need for the development of an alternative economic infrastructure to replace traditional ones which have been adversely affected by petroleum operations.

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Oil spill hazards at the upstream level An earlier version of this paper was presented at the International symposium on oil spill contingency planning at ASCON, Badagry, Nigeria, 18--21 February 1991. f am grateful to the referees of this journal for useful suggestions; and to Gail Nowrouzian and Marie Kolb for their assistance in getting relevant materials. The views expressed here are mine alone, and not of my current employers. Any errors are my responsibility.

~A.M. Humadi, 'Prospects for the oil and tanker industries',

OPEC Review, Vol 14, No 2, 1990. 2P.B. Thompson, 'Risk subjectivism and objectivism: when are risks real? Risk: Issues in Health and Safety, Vol 1, 1990. 3B. Pomfret, 'Risk management', in the The Petroleum Industry

and the Nigerian Environment: Proceedings of the 1983 International Seminar, Lagos, Jeromelaiho and Associates, 1983. 4We ignore the recent oil spill related to the Gulf crisis. This spill was said to be larger than any previously experienced. 5The clean up cost figures for all the oil spills documented here come from Petroleum Outlook, February 1990. 6See International Petroleum Encyclopaedia, PennWell, Tulsa, OK, 1990. 7j.N. Nwankwo, 'Environmental aspects of heavy crude and tar sands exploration, production and transportation, with special reference to Nigeria', 3rd Unitar Heavy Crude Tar Sands International Conference, Proceedings, Long Beach, CA, 1985. 8This incident predates the establishment of the Clean Nigeria Associates, of course. However, this fact hardly exonerates the industry. If anything, it points to a flaw in earlier oil industry operations policy. 9L.C. Amajor, 'The Ejama-Ebubu oil spill of 1970: A case history of a 14 year old spill', in The Petroleum Industry and the Nigerian

Environment, Proceedings of the 1985 International Seminar, Obingoz, Lagos, 1985. ~°R.J. Palczynski, 'Hydrocarbon concentration in the Gulf of Guinea after major oil spill', Proceedings of the A ICHE Summer National Meeting, Philadelphia, 1984. UUnited Nations Environmental Programme, 'Tanker danger to African coasts', Maritime Pollution Bulletin, Vol 14, 1983. 12Mr Engelshoven is Managing Director of Royal Dutch/Shell, London. The quote was reported in Environment Matters, August 1990. 13P.M.O. Oppenheimer, 'The effects of environmental issues on the Middle East oil and gas sectors', Energy and Environment, Vol 1, No 2, 1990. 14p.-o. Johansson, 'Valuing environmental damage', Oxford Review of Economic Policy, Vol 6, No 1, 1990. 15Alaska Oil Spill Commission, Spill: The Wreck of the Exxon Valdez, State of Alaska, Anchorage, 1990, p 60.

161bid. IVC.B. Powell, B. Baranowska-Dutkiewicz, M. Isoun, D,D. Ibiebele, F.U. Ofoegbu and S.A. Whyte, 'Oshika oil spill environmental impact: effect on aquatic biology', in The Petroleum

Industry and the Nigerian Environment, Proceedings of the 1985 International Seminar, op cit, Ref 9. xsW.J. Baumol and W. Oates, The Theory of Environmental Policy, Prentice-Hall, Engelwood Cliffs, NJ, 1975. 19B.E. Idoniboye and A.J. Andy, 'Effects of oil pollution on aquatic environment', in the The Petroleum Industry and the

Nigerian Environment, Proceedings of the 1985 International Seminar, op eit, Ref 9. z°It is interesting to note that the current Nigerian oil minister is reported to have said that the government is considering giving new tax concessions to oil companies on the basis of their level of involvement in community development (see Nigerian Daily Times, 25 January 1994). 21In October, 1991, following civil unrest in the oil producing area

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bordering the Forcados fields, senior government officials such as Vice-President Augustus Aikhomu and Information Minister Alex Akinyele, as well as politicians such as Dele Cole, called on oil companies to be more responsive to the plight of host communities (see OPECNA News Summary, 28 October, 1991; and Daily Times, 25 October 1991). 22properly speaking, the state should be responsible for providing security for these companies, and it generally does so. The reality, however, is that this has not stopped unrest by aggrieved communities in these areas. In 1993 major oil companies were reported to have lost nearly US$27 million as a result of communal protests in their Delta and Edo areas of operation (Nigerian Daily Times, 7 February 1994). 23For some more details of the establishment and operation, see eg G.E. Omene, 'The Clean Nigeria Associates: the journey so far', The Petroleum Industry and the Nigerian Environment, Proceedings of the 1985 International Seminar, op cit, Ref 9. 24This is supported by the findings of the Guardian ( l l t h August 1993) in which it said that oil companies in Nigeria argue that they are conforming to Nigerian law. The report added appropriately that 'Nigerian standards can be judged by t h e . . , lingering smell [which] is a little like boiled broccoli. The oil sheen on the stream running through the town gives it a coating of rainbow colour'. 25We first made proposals in 1991. See B.E. Okogu, 'Does Nigeria need an oil spill contingency fund?', OPEC Bulletin, March 1991. 26R.E. Kohn, Pigouvian penalty for oil spills', Energy Economics, Vol 15, No 3, July 1993. 27See D. Spulber, 'Effluent regulation and long-run optimality', Journal of Environment Economics and Management, Vol 12, 1985; D.W. Carlton and G.C. Lowry, 'The limitations of Pigouvian taxes as a long-run remedy for externalities: an extension of results', Quarterly Journal of Economics, Vol 101, August 1986. 28Double-hull ship design does not guarantee accident free tanker operation, though. The feeling at the time of the single-hulled Braer accident was that the incident and spill could not have been avoided due to the harsh weather conditions. 29See C.D. Andrus, 'The use of feathers to contain and absorb oil spills', The Petroleum Industry and the Nigerian Environment, Proceedings of the 1985 International Seminar, op cit, Ref 9, for a description of details of this technology. 3~his has been changed several times over the years. Under the 1991 budget, it has been further modified so that the federal government gets 50%, states share 35% and local governments share the balance of 15%. 31The state governments of oil producing areas share a derivation allocation of 3.5%. However, it is important to distinguish between them and the host communities where actual oil production activities take place since the money may not actually reach the latter. 32In addition to on-site clashes between the communities and oil companies, the problem was internationalized when, in 1992-93, community leaders took their complaint to the United Nations and similar bodies. 33See A.O. Aduloju, 'The national oil spill contingency planning',

The Petroleum Industry and the Nigerian Environment, Proceedings of the 1985 International Seminar, op cit, Ref 9, for an indication of calculations for spill damage and compensation. 3aM.A. Cohen, 'The costs and benefits of oil spill prevention and enforcement, Journal of Environmental Economics and Management, Vol 13, 1986. 35On the guidelines for international co-operation see, for example, J. Nichols 'Guidelines for international marine oil spill contingency plan organization', The Petroleum Industry and the

Nigerian Environment, Proceedings of the 1983 International Seminar, op cit, Ref 3. 360p cit, Ref 9. 370p cit, Ref 15.

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