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. It is apparent that the current framework for domestic gas supply is not working and is by extension affecting the electricity supply industry. For any meaningful progress in either sector, 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.
In setting the tone for this new narrative, there is need for 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, which might provide some perspective on how we move forward.
Ownership
The vast number of laws passed at the advent of and 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. Reference to gas in these legislations relates to “Associated Gas”, gas produced in association with crude oil production. 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. In light of the incessant blackouts however, questions as to the ownership of gas have come to the fore in determining the reasons for the lack of gas supply to the power plants.
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. Having determined the ownership of gas in situ and ascertained that there is no specific law for the exploration and production of same, 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, s. 2 (1) of the Petroleum Act permits the Minister of Petroleum to grant Oil Prospecting Licences (OPLs) and Oil Mining Leases (OMLs) 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 ranging from Joint Ventures to Production Sharing Contracts and Risk Service Contracts.
These arrangements are briefly described below:
1. 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.
2. 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. It therefore suffices to say, that the ownership of any associated gas under PSC’s belongs to the Federal Government. This position is amplified in the provisions of all PSC contracts entered into with contractors which require the contractors upon discovery of commercially viable quantities of gas, to submit proposals to NNPC for the commercial development of same and to enter into separate agreements for such development.
3. 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 any 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 though with the prior permission of NNPC, the contractor may use the associated gas produced as fuel in its crude oil production operations. Similar to 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-enforcing that the gas found belongs to the state.
4. 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. 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 would reside in the farmee subject to any terms agreed under the governing farm in / farm out agreement.
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 of associated 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.
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 for gas capturing at the flare and the treatment of the resource thereafter so that it is readily available to the power plants and other domestic uses?
Furthermore and perhaps stemming from the powers granted the Minister under paragraph 34 of the first schedule to the Petroleum Act, the National Gas Supply and Pricing Regulation was introduced which placed an obligation on every gas producer to allocate a portion of their gas production for the domestic gas market. Non-compliance with this obligation attracts penalties including prohibition of any gas meant for export. Whilst, to our knowledge, no gas exporter has been sanctioned, the enforcement of this provision may guarantee the much needed gas supply.
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.
Under paragraph 34 of the first schedule of the Petroleum Act, an obligation is placed 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 and for oil and gas companies to embark on any gas utilisation project, the price of the gas output must have been negotiated and agreed upon with the Federal Government. Given this regulated price of gas, most oil and gas companies are of the view that the price of gas in the domestic market is below cost for them to embark on gas utilization projects.
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 doesn’t 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 three (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 pipe dream.