Gas flaring is a conversation as old as the Cinderella tale. Gas flaring occurs during production or industrial activities at oil rigs, refineries, etc. As a result of this flaring, not only are excess amounts of carbon dioxide and methane released into the air but also the country loses huge amounts of potential revenue that would have been got from the utilization of the gas.
Nigeria currently ranks as one of the top 10 countries in the world to flare the most gas, based on data from the World Bank. However, it is worthy of note that despite this infamousness, Nigeria’s gas flaring activities have considerably reduced over the years, with the volume of gas flared dropping from an equivalent of 53% of gas produced to 10% of gas produced between 2002 to 2018. This reduction is a result of certain policies, regulations, and programmes that the Federal Government of Nigeria has put in place to prohibit and penalize gas flaring activities by companies or entities engaged in petroleum exploration activities and to incentivize the reduction of flaring and the utilization of flared gas.
This article seeks to provide insight into these regulatory frameworks, policies, and programmes that have been put in place to aid gas flaring reduction and incentivize gas utilization in Nigeria.
The Petroleum Industry Act
The Petroleum Industry Act 2021 (PIA) is the primary and comprehensive framework that regulates the oil and gas industry in Nigeria. It was signed into law on August 16, 2021, after almost two decades of deliberations and negotiations. The Act creates a modern and regulatory framework for the industry, to attract investment, boost production and also increase government revenue.
As regards gas flaring, the PIA provides a framework to regulate and gradually eliminate gas flaring in the country. Section 104 of the PIA criminalizes the act of gas flaring by any licensee, lessee or marginal field operator, except in three instances which include cases of emergency, exemption from the Nigerian Upstream Petroleum Regulatory Commission and when it is considered acceptable as a safety practice under established regulation.
Furthermore, Section 105 of the PIA penalizes any person who is in default of Section 104. These penalties are prescribed in the Flare Gas (Prevention of Waste and Pollution) Regulations 2018 (The Regulation).
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The Flare Gas (Prevention of Waste and Pollution) Regulations 2018
This Regulation vests in the Federal Government the absolute right over all natural gas produced with crude oil at any exploration site, free of cost at the flare and without payment of royalty. One of the major objectives of The Regulation is to create social and economic benefits from gas flare capture. The implication of this is that where any petroleum exploration operator (Producer) intends to utilize the flare gas from the operation site for commercialization, such producer must apply to the Minister of Petroleum Resources. The producer, in this instance, is required to make this application on behalf of a subsidiary midstream company, whether existing or to be incorporated. This gives an opportunity to potential investors who are not producers to apply for a Permit to Access Flare Gas in order to have access to flare gas for utilization and commercialization purposes. This selection process for a qualified applicant to be issued the Permit To Access Flare Gas is by way of a competitive bid process conducted by the Federal Government.
Unlike the requirement for licensees and lessees to pay royalties from petroleum activities, Permit holders and Producers are exempted from any royalties to the Government or any person.
Of notable mention are the penalties imposed by the Regulation, described as a flare payment. By the Regulations, for every 10,000 barrels of petroleum produced per day, the producer shall be liable for a flare payment of $2 per 28.317 standard cubic meters (SCM) of gas flares (whether routine or non-routine). Where less than 10,000 barrels of petroleum are produced per day, the producer shall be liable for a flare payment of $0.50 for every 28.316SCM of gas flared (whether routine or non-routine).
Nigeria’s gas flaring activities have considerably reduced over the years, with the volume of gas flared dropping from an equivalent of 53% of gas produced to 10%
The National Gas Policy 2017
The National Gas Policy 2017 is one of the Federal Government initiatives to address Nigeria’s gas policy issues. The policy sets goals, strategies and an implementation plan for the introduction of an adequate institutional commercial regulatory and legal framework to resolve the impediments to investment in the industry. An important provision of the policy is to ensure that a codified legislation is enacted to regulate solely the gas industry in Nigeria. The policy aims to shift the focus of the Federal Government from oil production to gas utilization. However, since the emergence of the policy, Nigeria is yet to have a codified legislation that solely regulates the gas industry.
Programs and Incentivization initiatives
Despite the delay in implementing the gas policy in its entirety, there have been various programs and initiatives geared towards the regulation of the gas industry and the incentivization of gas utilization in Nigeria. These initiatives include;
a. The Nigerian Gas Flare Commercialization Programme introduced by the Federal Government to drive the attainment of zero routine gas flaring by 2025 and net zero emissions by 2060.
b. The National Gas Expansion Programme introduced by the Federal Government to further encourage the domestic utilization of gas in Nigeria for transportation, cooking, power and industrial complexes.
c. The Decade of Gas Development Initiative which is aimed at the development and utilization of Nigeria’s gas resources within a timeline running from 2021 to 2030.
Prospects for Investors
It is interesting to note that beyond these regulatory frameworks, initiatives, policies and programs by the Federal Government in a bid to encourage gas flare reduction and promote gas utilization in Nigeria, there are also notable fiscal incentives available that investors can take advantage of when carrying out gas utilization projects. These incentives include but are not limited to:
a. An initial tax-free period of three years which may be renewed for an additional two years
b. Tax-free dividends during the tax-free period.
c. Investment allowance: Companies in gas utilization (downstream operations) who do not claim the initial tax-free period are entitled to an investment allowance of thirty-five per cent. This means that a company which claims this incentive is precluded from claiming the tax-free dividend during the tax-free period.
d. Accelerated capital allowance: Companies engaged in gas utilization are eligible for accelerated capital allowance after the tax-free period as follows:
● Ninety per cent annual allowance with ten per cent retention for investment in plant and machinery.
● Fifteen per cent additional investment allowance.
The above-listed incentives are provided for in Section 39 of the Companies Income Tax Act (as amended by the Finance Act 2020). However, these incentives are not applicable to any company that has claimed an incentive for trade or business of gas utilization under any law in Nigeria in respect of the same qualifying capital expenditure.
Conclusion
In conclusion, the steps taken by the Federal Government towards encouraging gas flaring reduction and promoting gas utilization projects in Nigeria are commendable. While some of these frameworks deter petroleum operators from routine or non-routine gas flaring by penalising gas flaring activities, others remove the burden of the capital intensiveness to process and utilise gas from a petroleum exploration operator. However, there is no deterrence of petroleum operators to utilize every associated natural gas during petroleum activities. The regulatory framework, policies and programmes remove the burden of drilling and separating associated gas from crude oil from investors who want access to flare gas. This responsibility is already borne by the producer who has the opportunity to utilize the associated gas or reserve the flare gas for the federal government.
The writers are of the opinion that an absolute implementation of the National Gas Policy by enacting a codified legislation that solely regulates the gas industry, providing for penalties, incentives and directives as it relates to gas utilization amongst other things, would be an encouragement to investors and would aid the government to meet its zero-emission target within stipulated timelines. It is also worthy of note that most of the penalties currently prescribed by Regulations in Nigeria against gas flaring are absurd, as these penalties do not meet present economic realities and as such have lost their essence of deterring petroleum operators from gas flaring.
The above notwithstanding, there are inherent prospects for investors to thrive in this industry and seeking legal expertise will help investors navigate the legal and regulatory landscape, protect their business interests, mitigate risks and ensure compliance with regulations which are always subject to periodic reviews.
Amala Umeike is a Partner at Stren & Blan Partners and supervises the Firm’s Energy Sector. Chizitereihe Oti is an Associate in the Intellectual Property and Corporate Services Practice Groups of the Firm
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