Domestic Gas Supply – A Pipe dream?
The perennial electricity system collapses is often attributed to gas supply shortages to the various thermal power plants in the country. This shortage is attributed to pipeline vandalism but given the differing and wide geographical locations of the power plants, it appears that vandalism may not be the sole cause, but rather, gas supply shortage.
For meaningful progress in either sector, there must be a new narrative on domestic gas supply – one which takes cognisance that lack of gas supply is a local issue which perhaps requires a local solution.
In setting the tone for anew narrative, an analysis and understanding of a number of issues in the gas sector including: ownership of gas resources, pricing of the resource and the security of supply of same is required.
Ownership
The vast number of laws governing the petroleum sector does not contemplate gas exploration and development. The primary focus of these laws has been, and continues to be, crude oil exploration and production with very little reference to gas.
For the purposes of determining the ownership of both gas in situ and associated gas produced as an incidence of crude oil production, the Constitution of the Federal Republic of Nigeria, 1999 provides under s.44(3) that “ the entire property and control of all minerals, mineral gas in and under or upon any land in Nigeria or in, under or upon the territorial waters and exclusive economic zone shall vest in the Government of the Federation and shall be managed in such manner as may be prescribed by the National Assembly”. Similarly s.1 (1) of the Petroleum Act vests the entire ownership and control of all petroleum resources in, under or upon any land in Nigeria (including lands under Nigeria’s Territorial waters, Continental Shelf and Exclusive Economic Zone) in the Federal Government of Nigeria. Petroleum is defined in the act to include gas.
Clearly, from the above, title and ownership of any gas in situ belongs to the Federal Government of Nigeria. The question then begs as to the ownership of gas produced with crude oil (associated gas)
For the purposes of crude oil exploration and production, s.2 (1) of the Petroleum Act (the Act) permits the Minister of Petroleum to grant licences and leases for the prospecting, searching, winning, working, carrying away and disposing of petroleum and for the purposes of ownership of these grants and the development of crude oil, the government enters into various contractual arrangements.
These arrangements are briefly described below:
Traditional joint ventures: The grantees of the licences/leases usually the Federal Government (FG) in the guise of NNPC and the International Oil Companies (“IOCs”) jointly own the interests in the entire real property for the duration of the licence. The supposition here is that the granteesjointly have title to any petroleum, including gas, prospected and won under the licence or lease.
Production Sharing Contract (PSC): TheFG, acting through the NNPC, enters into a contract with an exploration and production company under which such company acts as a contractor to NNPC for the development of crude oil. The contractor utilises its own funds for the development and is repaid its costs plus profits from the crude oil produced. Under this arrangement, all the contractor owns is an equitable interest in any petroleum found. It therefore suffices to say, that the ownership of any associated gas under PSC’s belongs to the Federal Government. This position is supported by the provisions in PSC contracts that require contractors to notify the FG of any significant gas discovery and submit proposals to NNPC for the development of same.
Risk Service Contracts: These are similar to Production Sharing Contracts to the extent only that the exploration and production company is a contractor to the Federal Government (NNPC) and provides all the funds and technical expertise required for the development of the asset. The contractor is repaid its investment either in cash or in kind as the NNPC under the arrangement, retains the title and rights to the petroleum produced. All natural gas discovered by the Contractor under this arrangement belongs to NNPC.Like with the PSC, where there is a commercial discovery of gas, the contractor is to submit a proposal for the commercial development of same further re-inforcing the notion that the gas found belongs to the state.
Marginal Fields: The marginal fields programme was introduced to stimulate indigenous participation in the upstream oil and gas segment of the chain. The original licencee and or Lessee (farmor) farmed out the fields within its licence and or lease area to an indigenous exploration and production company (farmee) and is paid a royalty on the production of oil and gas produced from the field. The ownership of any gas produced from such oil fields may reside in the farmee subject to any terms agreed under the governing farm in / farm out agreement.
From the above, save for arrangements under the PSC and Risk Service Contracts where any associated gas belongs solely to the Federal Government, the ownership of associated gas belongs either jointly as between the FG and its Joint venture partners or to the grantees of either discretionary awards and or marginal field holders.
Whilst the above appears conclusive, some provisions of our extant petroleum laws seem to circumscribe the ownership of associated gas. S.7 of the Act for instance, grants the Minister of Petroleum the right of pre-emption on all petroleum and petroleum products in the event of national emergency or war. Given the gas supply constraints and the resultant persistent collapse of the grid, can this be deemed a national emergency, and if so all gas from JV operations appropriated for domestic use.
Similarly, the Act also allows the Minister, in the interest of the public, to impose terms and conditions on a licencee or lessee as to special conditions applicable to any natural gas discovered, and such terms and conditions may include the right of the government to take associated gas produced free of cost at the flare or at an agreed cost and without the payment of royalty.
On the strength of this provision, and with the volume of gas flared (Nigeria is 2nd only to Russia ), can the government not set in motion a concessioning arrangement on a PPP basis to capture gas at the flare and treat same for use by local power producers and for other domestic uses?
Furthermore and perhaps stemming from the powers granted the Minister under the Act, the National Gas Supply and Pricing Regulation was introduced requiring every gas producer to allocate a portion of their gas production for the domestic gas market. Non-compliance was to attract penalties including prohibition of any gas export oriented project. No gas exporter to our knowledge has been sanctioned..
Pricing
It has also been posited that gas supply constraints be attributed to the reluctance of the oil and gas companies particularly the IOCs to invest in gas development and related infrastructure due to the uneconomic price of gas in the domestic gas market.
The Act places an obligation on a licensee or lessee producing gas to obtain the Federal Government’s approval as to which price the natural gas produced (not taken by government) is sold. It suffices to say that the price of gas in Nigeria is regulated from the wellhead. Most oil and gas companies see this as an impediment for to embarking on gas utilization projects as it would be uneconomical.
This argument that the price for domestic gas supply is uneconomical doesn’t quite hold firm given that some Nigerian Independents such as Seven Energy and Seplat who without access to cheap international funds have recorded successes in domestic gas supply and gas infrastructure projects.
Security of supply
The Federal Government intends to increase the electricity generation threshold to 10,000mw in three (3) years. In the absence of a concerted renewable energy programme and the overhaul of the national grid, it would be a near impossible feat given the lack of critical infrastructure to transport gas to the various power plants.
The insistence of IOCs on gas export projects might not be unconnected with securing supply for the mature gas markets such as Europe and North America. If this assertion is indeed correct, then perhaps the solution to this local problem lies with the local players such as Seplat, Pan Ocean, Oando and Seven Energy. The introduction of the Marginal Field model for the exploration and development of gas fields could help accelerate gas exploration and development of gas supply infrastructure ensuring a new narrative for domestic gas supply even as we continue to await the enablers to reform and unbundle the sector
A new narrative for the gas sector is a must and should be driven by the indigenous oil and gas companies to ensure adequate domestic gas supply does not remain a pipe dream.
OLA ALOKOLARO
OLA ALOKOLARO is of Advocaat Law Practice. E-mail: Ola.alokolaro@advocaat-law.com