Natural Gas in Nigeria: Legal and Policy Aspects

By Peter O. Okediya,  ACIArb (UK)

The State of Gas

Natural gas is odourless. Due to this, a sour-smelling odorant is added before it is put into distribution gas pipelines to give it a distinct smell for safe use by consumers.

The above fact is, certainly, analogous to Nigeria’s 206.53 trillion cubic feet (tcf) of proven natural gas reserves.[1] The reserves are located where it remains either uneconomic to produce gas or there is not sufficient infrastructure to transport gas to a processing plant. Consequently, in the course of extracting crude oil, gas is flared or injected back underground. Nigeria’s proven gas reserves are, thus, like an odourless natural gas – have little or no value and pose dangerous risks to the environment.

This is the unappealing situation in the gas sector although, recently, the Federal Government has begun to prioritize the utilization of gas through policies and regulations.

Natural gas was made light of by the Federal Government, compared to the attention given to crude oil – which is often described as over-regulated. It took decades before the government valued the potential of natural gas. It was at this stage that ‘gas to power’ became a common phrase in the energy sector.

Nigeria’s Policies

In 2021, Nigerian President, Mohammadu Buhari, took to Twitter to declare the “Decade of Gas” – running from January 1, 2021, till 2030.[4] Prior to this, 2020 was declared the “Year of Gas”. These declarations affirm the government’s goal to increase gas utility in all sectors.

The National Gas Master Plan 2008 (“the Plan”) was the terminus a quo that charted Nigeria’s path to becoming a major player in the international gas market as well as laying a framework for gas infrastructure expansion within the domestic market.[2] The overall aim of the Plan was to explicate steps that will assure long-term energy security in Nigeria through natural gas.

Nigeria’s gas policies recognize a plausible transitioning of the country from an oil-based economy to a gas-based economy. This was reiterated in the “7 Big Wins”, a reformation policy issued by the Ministry of Petroleum Resources aimed at situating gas as a stand-alone commodity and promoting private investments in gas development.[3] It accentuates a “Gas Revolution Plan”, to establish robust gas infrastructure and industries and to deploy a Liquefied Petroleum Gas (LPG) penetration program for both domestic and international markets.

The National Gas Policy (“the Policy”) was finally issued in 2017.[5] The Policy outlines Nigeria’s objectives to develop gas production infrastructure and supply chain and to establish wholesale gas markets domestically and internationally. The Policy outlines various strategies to create a conducive environment for natural gas investors. It also envisages a sophisticated framework for linking the gas sector with the electric power, agricultural and industrial sectors. Among the Policy’s mid and long-term roadmap for the upstream gas sector is the implementation of a gas resource management plan and bringing on new gas from dedicated gas fields from inland and offshore basins. A meticulous perusal will reveal that the National Gas Policy was staged to be a forerunner to the fulfilment of an old prophecy – the Petroleum Industry Act.

The Petroleum Industry Act 2021 (“PIA” or “the Act”), which scaled over a decade of legislative deliberations, portends a breakthrough for natural gas in Nigeria. The fiscal and governance aspects relating to natural gas are the most apposite to consider.

The Act allows for the bifurcation of the powers of the now-defunct Department of Petroleum Resources (DPR) into two new bodies – the Nigerian Upstream Regulatory Commission (“the Commission”) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“the Authority”). Within the spectrum of natural gas, the Commission regulates gas exploration and production whilst the Authority regulates midstream and downstream gas supply, processing, storage, transportation and distribution, inter alia.

Natural gas production is usually an incident of crude oil exploration which requires an Oil Mining Lease (now Petroleum Mining Lease (PML)) in Nigeria. Hence, the production of natural gas is largely from oil mining leases held by joint ventures between the NNPC (now NNPC Ltd) and upstream petroleum companies. Under the PIA, the oil mining lease is replaced with the Petroleum Mining Lease and the PIA provides a framework for the voluntary conversion of existing oil mining leases to the new regime (PML). In addition, the PIA introduces the incorporated joint venture for existing joint venture agreements to promote efficiency in the management of gas assets.

Likewise, gas processing had a couple of reforms under the PIA. The Authority is empowered to issue a gas processing license that would entitle an operator to construct and operate Liquefied Natural Gas facilities. Concomitantly, a gas transportation license issued by the Authority is required before the construction of pipelines and related infrastructure. The Federal Ministry of Environment (FMoE) regulates matters relating to activities that may adversely affect the environment such as the installation of gas transportation and storage facilities. Also, building and operating LNG facilities require an environmental impact assessment issued by the FMoE pursuant to the Environmental Impact Assessment Act 1992.

The Nigerian Gas Transportation Network Code sets out the terms and conditions for connection to, interconnection with, access and use of the gas transportation network. Access to facilities is granted without discrimination and based on the availability of capacity in the facility. All gas transportation agreements by operators are required to migrate to the Network Code.

In order to bolster the domestic supply of gas, the PIA introduces the Domestic Gas Delivery Obligation and empowers the Commission the allocate DGDOs to gas producers annually before 1st March and to establish the price at which gas is subject to the DGDO will be supplied. The DGDO ensures that gas under the gas supply obligation must be delivered by the producer to a location indicated by a gas purchase order issued by the domestic aggregator subject to the provisions of the PIA.

Further attention should be paid to policies on corporate structure and rearrangement. The PIA requires every petroleum company to establish separate corporate vehicles for their upstream, midstream and downstream operations respectively. Also, the Authority’s consent must be obtained before any midstream or downstream operator can validly merge with another operator.

Fiscal Perspectives

There is no doubt that the objectives of the National Gas Policy mentioned earlier are beginning to crystallize under the PIA. However, we cannot but emphasize the fiscal provisions and incentives relating to natural gas investments in Nigeria.

In order to promote investments in the gas sector, the PIA established the Midstream and Downstream Gas Infrastructure Funds (MDGIF) to promote equity investments in midstream and downstream gas infrastructure. In furtherance of this, 0.5% of the wholesale price of petroleum products and natural gas sold in Nigeria is used to fund the MDGIF. More so, monies from gas flaring penalties are remitted to this fund.

Additional incentives for gas operations include tax holidays (up to ten years) for investment in the gas pipeline by midstream and downstream operators. Profits from upstream gas operations (both associated and non-associated natural gas) are exempted from hydrocarbon tax and there is a reduced royalty rate of 2.5% for natural gas produced and utilized in Nigeria.

The PIA provisions on natural gas further extend to pricing mechanisms. The PIA establishes a progressive cost-reflective pricing framework with a structure for market intervention through domestic gas supply obligations and a wholesale natural gas market scheme. The establishment of the wholesale gas market was one of the long-term activities stipulated in the 2017 National Gas Policy.

NLNG’s Policy Shift

Despite possessing abundant natural gas reserves, Nigeria’s international gas exports have not been impressive. Hence, one of the fundamental policies of the Federal Government on natural gas is to grow and expand Nigeria’s gas export markets. The Nigerian Liquefied Natural Gas Limited (NLNG) is a joint venture company between the NNPC, Shell, Total and Eni responsible for the export of liquefied natural gas to international markets. However, as a result of the slow development of gas for domestic use, the NLNG in January this year announced plans to begin to supply 100 per cent of its LPG production (Propane and Butane) to the Nigerian market.

Gas Flaring and Policies

Nigeria is among the top ten flaring countries in the world, occupying the 7^th position. Reports state that the country has made significant progress in flare reduction attributed to improved processing of associated natural gas and commissioning of natural gas plants that ameliorate gas exports.[6] Without prejudice to the foregoing progress, it is evident that gas flaring is still a major challenge in the Nigerian oil and gas industry. In fact, any policy that excludes strategies to combat gas flaring will only go down like a lead balloon.

Creating commercial viability and generating revenue has been the thematic undertone for the government’s policies on gas. The Nigerian Gas Flare Commercialization Plan (“the Plan) became imperative because of the failure of various legislations prohibiting gas flaring.[7] In the Plan, the Federal Government takes associated gas at the flare site (Flare Gas) free of charge and bids it out to third parties in a series of auctions. The objective of this plan is to enhance the delivery of additional volumes of gas to the domestic market and contribute to mitigating greenhouse gas emissions occasioned by gas flaring.

Gas flaring is an offence under the Petroleum Industry Act and is penalized by fines as prescribed by the Commission. An operator may be allowed to flare or vent natural gas where it is required for a facility start-up or for strategic operational reasons. The PIA also requires a licensee producing natural gas to submit a natural gas flare elimination and monetization plan to the Commission which shall be prepared in accordance with regulations made by the Commission.

Concluding Remarks

Policy implementation is when sour-smelling odorant is added to natural gas to augment its utility. Over the years, Nigeria’s natural gas has been an instrument of doom due to gas flaring, however, today, it represents a catalyst for economic recovery. A careful analysis of the National Gas Policy will reveal the gradual accentuation of strategies proposed by the Policy. For instance, the Policy suggested turning away from gas re-injection to prioritize utilization – The Petroleum Industry Act has repealed the Associated Gas (Reinjection) Act and lays the foundation to develop gas infrastructure and incentivize investments. There would, without any iota of doubt, be much progress in the natural gas sector in the coming years. A robust implementation of the framework provided in the PIA will ensure sustainable development of Nigeria’s natural gas resources, improve energy access and guarantee the country’s energy security for future generations.

Concomitantly, in the face of the changing perspectives on the use of fossil fuels, natural gas has been identified to be more resilient because it is among the cleanest fossil fuels and will be significant in the global energy transition. Nigeria finally has the opportunity to leverage its natural gas reserves to survive the energy transition and prepare for the economic effects of decarbonization. Policies Natural gas might either be the catalyst for a turnaround of the Nigerian economy .

Peter is an Energy Law and Policy analyst. Catch up at Energy Brief With Peter

REFERENCES

[1] The Africa Report, “Nigeria’s New Petroleum Law is Forging a Trajectory for Natural Gas” (November 2021) <Nigeria’s New Petroleum Law – Africa Report> accessed June 27 2022.

[2] Ministry of Petroleum Resources, “National Gas Master Plan” <National Gas Master Plan> accessed 27 June 2022.

[3] Ministry of Petroleum Resources, “7 Big Wins”, <https://corelabs.com.ng/mpr/7-big-wins/> accessed 25 June 2022

[4] Simon Sunday, “As Nigerians pay N171bn in 6 Months for Gas Imports, “Decade of Gas” Policy May Suffer” <dataphyte.com> accessed 25 June 2022

[5] Ministry of Petroleum Resources, “National Gas Policy” <National Gas Policy – Nairametrics> accessed 27 June 2022

[6] World Bank Group, “2022 Global Gas Flaring Tracker Report” <Global Gas Flaring Tracker Report> accessed 2 June 2022.

[7] Ministry of Petroleum Resources, “Nigerian Gas Flare Commercialization Programme” https://ngfcp.dpr.gov.ng/media/1134/ngfcp-pim-rev1.pdf accessed June 27 2022 accessed 27 June 2022.