The government of Nigeria is in the process of updating the regulatory regime for the gas sector in a bid to end the scourge of gas flares in Nigeria’s oil and gas industry. Operators currently flaring gas must brace-up for a tighter regulatory regime, highlights of which are discussed in this publication.
The existing regime under the Associated Gas Re-Injection Act, 1979 (AGRA) envisages a flare-down date and allows operators flare gas, provided they obtain written permission from the Minister of Petroleum Resources and pay a fee (as determined by the Minister from time to time) for every 28.317 Standard Cubic Metre of gas to be flared. Where an operator flares gas without the Minister’s permission, the operator is liable to forfeit the relevant Oil Mining Lease (OML) where the gas was flared.
The regulatory design described above has been unsuccessful in curbing gas flares and this may be attributed to several reasons:
- The FGN is heavily dependent on crude oil revenues to fund its annual budget such dependence impacts the will to prioritise enforcement of environmental laws to its financial detriment, by disrupting crude oil production in order to enforce gas flare down. In addition, its dual role in the oil and gas industry as both regulator and operator makes it susceptible to regulatory capture and weakens its capacity to rigorously enforce the regulatory regime;
- The regulatory regime does not truly dis-incentivise gas flaring, the payment made for a permit to flare gas is not a penalty for flaring as is widely believed but a tax deductible cost expended during petroleum operations, so in effect the operators can offset this amount from their tax liability as long they obtain the certificate of the Minister permitting the gas flare, the FGN bears the ultimate costs for gas flaring, so the result is that the FGN is negatively impacted by the enforcement of the AGRA’s requirement for payment for gas flaring;
- Absence of large scale mid-stream gas infrastructure to aggregate gas produced from proximate producing fields for processing and distribution, such that each project does not need to bear the heavy cost of duplicating standalone gas processing infrastructure. Therefore, in some cases where the gas deposits are insufficient (marginal) to commercially justify the required infrastructure, operators see flaring the gas as the only viable option;
- The AGRA regime does not provide a time limit for gas flaring, so the regime is not structured to achieve the ultimate objective of bringing an end to routine gas flares; and
- The AGRA regime does not punish operators for ‘adjusting’ the quantity of flare gas they self- report to the regulators so operators can get away with reducing the figures in order to reduce their liability to pay for gas flaring.
To close the gaps identified above, two simultaneous initiatives have been launched by the government, either of which if formalised will alter the regulatory regime for gas flaring. The first is the Gas Flaring Prohibition Bill introduced before the Senate of the National Assembly in 2017 and currently inching towards passage by the joint houses of the National Assembly. The other initiative is the National Gas Flare Commercialisation Programme (NGFCP) of the Ministry of Petroleum Resources and its soon to be issued regulations, which will significantly regulate gas flaring as well.
It is perhaps difficult to count on the successful passage of the Gas Flare Prohibition Bill (GFP Bill), if the travails still besetting the passage of the ill-famed Petroleum Industry Bill (PIB) is anything to go by, nonetheless the GFP Bill still commands the attention of industry stakeholders as the legislative arm of government appears set to push through the GFP Bill before the 8th Parliament ceases ahead of the general elections in February 2019. The GFP Bill will repeal the AGRA regime altogether and is proposing the following noteworthy changes:
- Introduces mandatory reporting of gas flare data and criminalises failure to fully disclose gas flare data;
- Specifies operational instances where gas flaring and venting can be permitted by the Minister and the end date for the respective instances;
- Fees for authorised flaring and venting are to be determined by the Minister from time to time like in the AGRA Regime but, where authorisations are extended by the Minister beyond the indicated end dates, the fee is escalated annually up to a maximum of 20%;
- A true gas flare penalty is introduced to punish the crime of unauthorised gas flaring – 200% of the flaring fee and forfeiture of concession for repeat offenders. This penalty will ordinarily not be tax deductible;
- A corporate tax exemption and free land are proposed as incentives for infrastructure projects undertaken to end gas flaring and produce gas for local consumption.
The executive arm of the government on its part has launched its National Gas Policy (NGP), which along with a host of other gas sector reform initiatives, will ensure the emergence of a more positive and proactive regulatory regime for gas. Utilisation of flared gas will be unbundled from gas producers and allocated to third party midstream operators. True to this policy thrust the government in Q4 2017 announced plans to flag off the National Gas Flare Commercialisation Programme (NGFCP), which is essentially a licensing round to award flare gas sites to capable midstream offtakers. The NGFCP leverages on the government’s existing right under the Petroleum Act to take flare gas free of cost. To facilitate the efficacy of the NGFCP the Minister has developed a new Regulation for Flare Gas (NGFCP Regulations) that will soon be introduced to flag off the implementation of the NGFCP. Though the Regulations have not been released to the public, we expect the Regulations to expand on the existing AGRA regime and address the following areas:
- Consolidate the award of the flare gas sites to 3rd party midstream companies, i.e., irreversibly allocating the flare gas volumes to the midstream operator through the NGFCP bid process;
- Enhanced reporting of flare gas data by operators and the framework for some form of aggregation of flare gas resources by the government to keep feeding the pool of flare gas licences; and
- Provide for the actual fee prescribed by the Minister as contemplated under the AGRA regime for flaring gas not transferred to a flare gas awardee. This fee is expected to be significant to encourage operators to include all flare volumes in the NGFCP pool.
These initiatives by the legislature and executive, the GFP Bill and the NGFCP Regulations respectively, may have adopted different approaches but the common objective is to end gas flares. The GFP Bill if eventually passed will be a substantive Act of parliament and will set the ground rules for the regulation of gas flares along the entire gas value chain, which is more emphatic than the Regulations that we expect will only address utilisation of associated gas. Depending on which provisions become law, the GFP Bill in its current form, bridges most of the gaps identified earlier on in this paper. The Regulations go beyond prohibiting gas flares and introduces an elaborate utilisation initiative that may perhaps be the most likely to succeed in ending gas flares in Nigeria.
In view of the above, Operators currently flaring gas must brace-up for a tighter regulatory regime that could
- significantly increase their liability for routine flaring of gas, either via increased permit fees or penalties for unauthorised gas flaring. The financial impact on Operators will be amplified by the fact that the penalties will not be tax deductible;
- Another expected impact on Operators is the increased mandatory self-reporting of gas flare data in respect of their day to day operations and criminal liability to penalise breach;
- A positive development may be the introduction of legitimate operational exceptions for flaring and venting gas along the gas value chain, rather than the blanket proscriptive nature of the of the AGRA; and
- Another positive development may be that Operators will be able to derive some value from the commercialisation of a hitherto non-value adding resource.
*Pacer Guobadia is a Senior Consultant at Advisory Legal Consultants.