BusinessDay

Nigeria Gas Flare Commercialisation Programme as panacea to developing gas reserves

With the continued procrastination in passing the Petroleum Industry Bill (PIB) and the consequent delay in bringing about the much vaunted reforms of the oil and gas sector in Nigeria, other African countries such as Angola are forging ahead by creating an enabling legal and regulatory environment that will attract additional investment to their oil and gas sector.

The Angolan government recently passed a gas specific legislation Presidential Decree No. 7/18, which sets out the rules for the exploration and production of natural gas. Hitherto the new law, the legal framework for gas development in Angola particularly associated gas, was similar to that of Nigeria.  Under Nigeria’s extant petroleum laws, paragraph 35 (b) (i) of the first schedule to the Petroleum Act allows the Federal Government to take natural gas produced with crude oil by a licencee or lessee, free of cost at the flare or at an agreed cost and without payment of royalty. In Angola, associated natural gas surplus for use by oil companies in their operations, was required to be made available to the state oil company (Sonangol) for free. This provision was however deemed too broad and devoid of the necessary features to incentivize investors to develop the gas subsector, hence the introduction of the new law.

Some of the salient provisions of the new law allows for: Sonangol and the oil companies to explore, appraise, develop, produce and sell natural gas both in the international and domestic markets; Oil companies to continue to have the right to use free of charge natural gas associated with their own operations and in the case they do not wish to use or sell the surplus gas, same should be made available free to Sonangol at a delivery point the latter is to designate; and Concession decrees and underlying agreements to set specific longer periods for natural gas exploration and production activities than the ones already set for crude oil. In particular the periods for exploration, production, declaration of commercial discovery, term to develop the general development and production plan and first production following the commercial discovery declaration, can all be extended to accommodate the features of a natural gas project

Nigeria on its part, has always treated the exploration and development of natural gas the same as crude oil and therefore lacks the legal and fiscal framework needed to attract investment for the development of natural gas. Excess non associated gas utilized for crude oil operations is often flared depriving the government of much needed additional revenue. Perhaps in realization of this, the government is proposing the Nigeria Gas Flare Commercialization Programme (NGFCP) designed to attract investment for the gas sector through a competitive procurement process of allocating gas flare sites to potential investors. The NGFCP is to be hinged on the proposed New Flare Gas (Prevention of Waste and Pollution) Regulations 2018 (Regulations) to be made pursuant to existing legislations – s.9 of the Petroleum Act and S. 5 of the Associated Gas Reinjection Act.

The Regulations as part of its objectives, seeks to curb the waste of natural resources, reduce the environmental and social impact caused by gas flaring and create social and economic benefits from gas flare capture. Similar to the provisions in the new Angolan gas law, associated gas not being utilized by a Licensee or Lessee of a Licenced or Leased Area inclusive of marginal fields in Nigeria is to be made available to third party licensees under the procurement process for commercialization. 

The proposed commercial framework to underpin the programme as depicted below, forsees an agreement between the Federal Government and the Flare Permit holder (Flare Licencee) for the sale of contracted Flare Gas volumes to the Flare Licencee – Gas Supply Agreement; an agreement in respect of the connection of the respective facilities of the Operator and the Flare Licencee- Connection Agreement; and an agreement between the Operator and the Flare Licencee under which the Operator guarantees to supply an agreed volume of flared gas to a Flare Licencee –  Deliver or Pay Agreement.

Key considerations in negotiating these commercial agreements

Gas supply agreement (GSA)

Take-Or-Pay (TOP): Take-or-pay provisions are designed to guarantee payment to the seller for a specified quantity of gas even where the buyer is unwilling or unable to take such quantities. It is also common for a buyer with a TOP obligation to seek a reciprocal right to Make-up gas by requesting later delivery as refund of the TOP payment later in the life of the contract.

Default Provisions: allows for suspension of delivery for non-payment of an invoice. To address this, advance payment for the gas flare volumes, posting of a stand-by letter of credit or arrangement of some other form of credit support that will ensure the continued payment for the gas flare volumes received.

Off specification gas. Remedies for delivery of off specification gas may range from rejection of same to price discounts or allowing TOP credit for any off-specification gas taken by the Flare Licencee.

Supply Interruption: Where gas supply is interrupted, an option may be included in favour of either the Flare Licencee or the Federal Government to make-up the shortfall in a subsequent period and with such later delivery sold at a reduced price (Shortfall gas price).

Title and Risk: The delivery point for the gas must be a precisely defined geographical location. This will assist in determining which party is to bear the risk of transportation of the flare gas volumes.

Force Majeure: It is important to ensure the duration of the contract performance can be extended for a period that is equivalent to the duration of Force Majeure.

Termination events: Termination events should be material and where applicable, reasonable cure periods should be provided for them.

Connection agreement

Regulatory and Antitrust: flare sites are likely to be in clusters with multiple licencees using common connection facilities. The Regulation does not presently address the issue of third party access to processing facilities and pipelines on a non-discriminatory and cost-reflective basis. These issues must be properly negotiated.

Commingling, Allocation and Attribution: With multiple users of common facilities, issues such as commingling of flare gas volumes will bring to the fore the principles of allocation and attribution as well as balancing which may necessitate additional contractual arrangements.

Other issues:  These are likely to be infrastructure related and will include pipeline crossing, abandonment and decommissioning.

Deliver or pay agreement      

Ship or Pay: It is important to ensure the ship-or-pay obligation of the Operator is sufficient to ensure certainty of payment from the Flare Licensee. Though the Regulation already provides for a guaranteed fee to be payable by the Flare Licencee to the Operator.

Force Majeure: It is important to determine if the ship-or-pay obligation of the Operator should survive the occurrence of an event of force majeure to the Operators pipeline and facilities.

Right of Set off: Given that the Regulation provides for a guaranteed payment by the Flare Licencee to Operator, consideration should be given as to whether it is still necessary for the Operator to have a right of set-off against any amount owed to it by the Flare Licencee.

Other Issues: aspects of the Operator’s delivery obligations that must be taken into consideration are the point-of-delivery, delivery pressure and minimum quality specifications. Also, consideration for third party access on a non-discriminatory basis to the Operators facilities.

KARIMAAT ALIYU-DAUDA & LINDA ASUQUO

Karimaat Aliyu-Dauda & Linda Asuquo writes from Advocaat Law firm in Lagos

Get real time updates directly on you device, subscribe now.