The global oil industry has begun to recover following the havoc caused by the corona virus pandemic which forced energy companies to rein in capital spending and cut costs. With the last commodities peak well over a decade ago (2011), the recent rise in oil prices is a turn of fortune for Nigeria’s mono dependent economy. However, the new outbreak of the corona virus in big oil consuming countries such as India and the deafening calls for a shift from fossil fuel development and use to investment in cleaner and more efficient energy sources makes this rebound an uncertain one for Nigeria.
The development of its vast gas reserves can serve as fuel source for clean energy projects to meet its climate change objectives and energy transition and also a means of diversifying its economy reducing its over dependence on oil revenues. This will no doubt require significant foreign direct investment for which investors will seek a clear and transparent legal and regulatory framework. The ongoing reforms to the legal and regulatory framework of the oil and gas industry therefore comes at an opportune time and we examine below some of its key provisions that relate to gas development.
GAS REVOLUTION UNDER THE PIB
The extant Petroleum Act which governs the oil and gas industry in Nigeria provides little or no guidance on gas development, with any such development subject largely to subsidiary legislations. The reform laws for the oil and gas sector in the form of the Petroleum Industry Bill (PIB) presently before the Nigerian legislature contains several provisions capable of promoting Nigeria’s gas development aspirations. The PIB specifically provides for the promotion of dedicated gas exploration and development, infrastructure development and fiscal separation of gas from oil as a standalone commodity. The proposed Nigerian Upstream Petroleum Regulatory Commission (“Commission”) an independent regulator to be established under the reform laws and charged with technical and commercial regulatory functions within the exploration and production value chain, also has a mandate to prescribe domestic gas allocation to a lessee and impose penalties on defaulters. This means that a lessee producing natural gas must allocate a mandated volume for the domestic market.
Another notable feature of the PIB are the provisions to prohibit gas flaring associated with upstream crude oil production. A licensee or lessee is expected to within 12 months from the effective date of the new law, provide the Commission with a gas flare elimination plan prepared in accordance with a regulation that will be issued by the Commission. Failure to adhere to the plan will attract strict penalties save for cases of emergency, where flaring would constitute a safe practice; or in consideration of an exemption granted by the Commission. The implementation and enforcement of these provisions will allow for midstream and downstream carbon capture projects that will assist Nigeria attain its treaty obligations under the Paris agreement.
- Established by section 4 of the Bill.
- Section 108 of the Bill
- The penalties are contained in the Flare Gas (Prevention of Waste and Pollution) Regulations
- A global framework agreed to by nations to avoid dangerous climate change by limiting global warming to well below 2°C and pursuing efforts to limit it to 1.5°C. This requires countries to transition from largely pollutive energy source to a cleaner and environmentally friendly energy.
The midstream and downstream oil and gas sector is to be regulated by a newly created independent agency the Midstream and Downstream Regulatory Authority (“Authority”). The Authority is to be saddled with providing oversight on technical, operational, and commercial activities of gas companies operating mid and downstream of the gas sub sector and ensure sustainable, safe, and efficient infrastructural development that guarantees gas availability for both domestic and export markets.
The Authority is expected to issue licenses for various gas operations ranging from processing and transportation, wholesale supply of gas, construction, operation of petrochemical or fertilizer plants, operation of a terminal, jetty, or other facilities for the export or importation, of natural gas and retail trading. Licensees under the PIB would also be required to install metering equipment to measure gas flared at a facility in accordance with the Regulation issued by either the Authority or the Commission. The Authority may also by regulation prescribe additional activities which may be carried out with a license and must ensure availability of gas for these operations. The proposed delineation of operations and the specific categorization of licenses and permits will provide the required guidance and clarifications for the operations in the sector.
The proposed law also provides for the establishment of the domestic gas aggregator which may be owned by a combination of licensees or lessees, wholesale customers and other interested parties who are to ensure implementation of natural gas management model as well as balancing mechanisms for equitable gas delivery. All of these proposed regulatory framework should enhance the domestic gas delivery obligation, tariff structure & methodology, and open access regimes.
The Authority is also required under the proposed law to create a Midstream Gas Infrastructure Fund (the “Fund”) to fund gas infrastructure projects by way of equity investments by the Government. With the judicious use of the Fund, the infrastructure deficit gap for the evacuation, treatment, transportation, and distribution of gas can be closed allowing for the creation of a commercially viable domestic gas market and increased exports for much needed foreign exchange. The PIB acknowledges the recently introduced Nigerian Gas Transportation Network Code (the “Code”) and charges the Authority to implement the Code in a manner that will enhance open access rules for the transportation of natural gas.
In line with the gas pricing policy for domestic supply, the proposed law empowers the Authority to determine the domestic base price for the power sector, commercial sector, and gas-based industries annually. The Authority is to continue to wield this power for as long as the control of natural gas prices for the strategic sector is required. A pricing formula has been provided in the PIB to guide this price regulation process. The floor price for gas-based industries will be $0.90 per MMBtu and the ceiling price shall be the domestic base price applicable for any particular year. The Authority may additionally regulate prices where it determines that a certain licensed service is a monopoly activity, existing competition is not at a level beneficial to consumers, and that a particular licensee is a dominant provider. It may also conduct periodic pricing methodology reviews.
The objective of price regulation is to ensure affordability of gas for all customers and establish a fully functioning free market for domestic supplies. At the same time, the Authority is expected to monitor gas prices in other major emerging countries to ensure that Nigeria continues to have a price level for natural gas that is less than the average of these emerging countries to promote the non-oil sectors.
As much as possible, market forces should be allowed to determine gas prices to guarantee the security of supply. The gas producers would welcome a robust and sustainable pricing mechanism that is reflective of prevailing market conditions. The codification of the transitional pricing arrangements is a disincentive given the timelines for the passage of legislations in Nigeria as can be evidenced with the over a decade long proposed reform law for the sector that is yet to become law.
Nigeria has paid a lip service to the development of its gas resources for far too long. Hopefully, the painful lessons learnt from the pandemic in terms of oil prices and the disruption to supply chains will ensure that the government’s declaration to rapidly develop its gas reserves is not mere rhetoric. Hopefully, the passage of the PIB and the implementation of various policies and execution of priority projects such as the National Gas Expansion Programme, National Gas Transportation Network Code, National Gas Flare Commercialization Programme and the construction of the Ajaokuta-Kaduna-Kano and OB/OB 3 Gas Pipeline and related infrastructure projects will provide the springboard towards actualizing the rapid development and utilization of gas.