Driving a new narrative for domestic gas supply

Within the past five months, Nigeria has witnessed no fewer than 11 total collapses of its electricity supply system, plunging the country into darkness. The perennial system collapses is often attributed to gas shortages to the various thermal power plants in the country.   The shortage of gas is said to be borne out of 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, the unavailability of gas supply.

It is bewildering, that with an estimated 187 TCF proven gas reserves (the 9th largest globally) the country’s industrial growth is still stifled by lack of domestic gas supply.  There must be a new narrative on the frame work for domestic gas supply –one which takes cognisance of the fact that the lack of gas supply is a local issue which perhaps requires a local solution.

Ownership

The vast number of laws passed at the advent ofand subsequent to the discovery of oil in Nigeria, did not, and still doesn’t, 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. Consequently, the title and ownership of gas found in situ and or that associated with crude oil production has rarely been an issue for debate. 

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 arises as to ownership of gas produced as an incidence of crude oil production.

For the purposes of crude oil exploration and production, the government enters into various contractual arrangements ranging from Joint Ventures to Production Sharing Contracts and Risk Service Contracts. These arrangements are briefly described below:

Traditional joint ventures

The grantees of the licences/leases usually the Federal Government 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 grantees –both NNPC and the IOC –jointly have title to any petroleum, including gas, prospected and won under the licence or lease.

Production Sharing Contract (PSC)

The Federal Government, 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 with the legal title retained by NNPC. 

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.

Marginal Fields

The marginal fields programme was introduced to stimulate indigenous participation in the upstream oil and gas industry through the award of oil fields which IOC’s found uneconomical to develop or left unattended for a period of 10 years or more and increase Nigeria’s production output. 

Concluding 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 ofassociated gas belongs either jointly as between the Federal Government and its Joint venture partners or to the grantees of either the discretionary awards of OPLs and or marginal field holders.

Whilst the above can be said to be conclusive, some provisions of extant petroleum laws and regulations appear to circumscribe the ownership of the gas. S.7 of the Petroleum Act for instance grants the Minister of Petroleum the right of pre-emption of all petroleum and petroleum products in the event of national emergency or war.  Given the persistent collapse of the electricity grid as a result of gas constraints, it would be an interesting notion if same was deemed a national emergency and this provision invoked so that gas from JV operations hitherto earmarked for export is dedicated to domestic use.

Similarly, Paragraph 34 of the first schedule to the Petroleum Act 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.

Pricing

It has also been posited that the unavailability of the resource can 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. For this reason the IOC’s prefer to invest in gas export oriented projects such as the NLNG as the export price of gas is seen as more attractive and guarantees return on their investment.

To attract investment to the power and gas sectors, the government introduced, in 2008, the National Gas Supply and Pricing Regulations.  The Regulation seeks to ensure the transition from a regulated gas pricing regime to a liberated free market system.  This transition is to introduce gradual gas price movements in strategic industries such as the power sector. In this regard, we have seen the regulated price of gas increase from $1.00per scmf in 2010 to $1.50 per scmf in 2011, $1.50 to $2.00 in 2013 and in 2014, the price was further increased from $2.00 to $2.50 with $0.80 for transportation.  When juxtaposed with the spot price of gas on Henry Hub, which presently stands at $1.97 per scf,  and the average price of gas for electricity in the US standing at $2.95 per scf, the arguments that the price for domestic gas supply is uneconomical does not quite hold firm. This is in addition to the fact that some Nigerian Independents such as Seven Energy and Seplat without access to cheap international funds have proved the uneconomic price theory wrong, given their recorded successes in domestic gas supply and gas infrastructure projects.

Security of supply

The Federal Government again restated its plan to increase the electricity generation threshold to 10,000MW within 3 years.  In the absence of a concerted renewable energy programme and an overhaul of the national grid, it would be a near impossible feat given the lack of critical infrastructure to transport gas (the cheapest and cleanest fossil fuel) to the various power plants.

The reasoning of IOC’s and their continued insistence on export oriented gas projects might not be unconnected with security of supply of the resource for their home nations.  If indeed this assertion is plausible, then perhaps the solution to this local problem lies with the local players such as Seplat, Pan Ocean and Seven Energy.  The introduction of the Marginal Field model for gas exploration and development could serve as a catalyst to ensuring security of gas supply for the domestic market as gas fields which have hitherto been left unattended or deemed uneconomical can be licenced to indigenous companies for development.  This would help accelerate gas exploration and development of gas supply infrastructure ensuring a new narrative for domestic gas supply.

A new narrative for the gas sector is most certainly required and must be driven by the indigenous oil and gas companies to ensure adequate domestic gas supply does not remain a pipeline dream.

OLA ALOKOLARO