Optimizing the Efficacy of the Impending Flare Gas Commercialisation Programme

gas_flaring offshore

Nigeria’s abundant gas resources are its cheapest source of energy and if fully exploited can power the country’s electricity, transportation and manufacturing sectors as well as rejuvenate the petrochemical and agricultural industry, with extra to spare for sub-regional and intercontinental exports that will improve the country’s foreign exchange earnings. Unfortunately, unlocking the value of this abundant resource has been difficult to achieve for several reasons. One of such reasons, is because Nigeria’s gas resource deposits naturally occur in relatively small-medium quantities, sparsely located across the Niger-Delta and are typically discovered and produced in association with crude oil (Associated Gas). Gas by nature evaporates into the atmosphere, so to transport it from where it is produced to where it is used, requires air-tight pipeline networks and sophisticated refining infrastructure. Consequently, harnessing the value of Nigeria’s gas resources requires significantly more investments in pipeline networks and gas processing infrastructure to deliver the gas to the end user market, when compared with other countries like Qatar, Iran, whose gigantic gas reserves naturally exist in one or two locations. Because of the sizeable investment required to harness Nigeria’s gas resources and the fact that its commercial value is significantly less compared to crude oil, most petroleum companies since the early decades of Nigeria’s oil and gas industry have prioritised exploitation of crude oil and flared any resulting Associated Gas. The impact of gas flaring on the environment includes the emission of greenhouse gases e.g., CO2 and methane that contribute to climate change that the world is currently battling against and acid rains that contaminate water bodies and vegetation in the immediate environment.

The government intends to flag off a flare gas commercialisation program – National Gas Flare Commercialisation Program (NGFCP) to drastically reduce Nigeria’s gas flares and increase gas supply to meet short to mid-term local gas demand. Under this programme oil and gas producing companies will be required to surrender any uncommitted Associated Gas to viable 3rd party gas utilisation projects, instead of resorting to flaring the gas. This policy if successfully implemented, may turn out to be the government’s most proactive gas flare reduction policy initiative to date.

Under the NGFCP, government will conduct bid rounds to select technically and financially capable flare down project promoters for the various gas flare sites and will eventually issue licences to the successful bidders (Flare Gas Licensees) to offtake gas from these flare sites. Petroleum companies that have already initiated their flare down projects i.e. are in advanced negotiations with viable offtakers, will be granted temporary waivers for their flare sites and will be under pressure to conclude their typically lengthy discussions with such offtakers or else their flare sites will be included in the pool of flare sites to be licensed.

This article sheds light on the basis and extent of the government’s legal right to take flare gas from a petroleum company who owns the gas under the OML, and what impact this will have on any existing domestic gas supply obligation the petroleum company may have. Where the flare gas is awarded to a Flare Gas Licensee, it will usually take some time before the project comes on stream and the petroleum company will be keen to note whether it will be liable to pay flare penalties for any gas flared in the interim. This article goes further to evaluate the commercial framework for the flare gas supply transaction, pinpointing the risks and suggesting mitigation strategies to ensure ultimate bankability of any resulting project from the programme.

Legal basis for the Programme

The Petroleum Act vests the Federal Government with the right to take flare gas free of cost at the flare stalk or at an agreed cost. Thus the government can elect to either take the gas free of charge or negotiate with the petroleum company to arrive at a nominal value for the flare gas. The fact that a petroleum company has an inherent right to utilise or reinject its Associated Gas, suggests that the government’s right to access flare gas is dependent on the continued flaring of such gas by the petroleum company. In a situation where the petroleum company needs to reinject the gas to optimize oil recovery, the volumes of flare gas available for the government to exercise its ‘right to take’ will reduce. The law does not expressly foreclose the petroleum company from subsequently deploying flare gas to other uses, even after the government has exercised its right to take the flare gas. This fact weakens the government’s ability to guarantee continued gas supply to a Flare Gas Licensee. On this premise the government’s election under the law should ideally lean towards agreeing a cost for the flare gas, in order to reinforce supply security to a Flare Gas Licensee under the NGFCP.

With respect to the actual process for implementation of the NGFCP, there is currently no law that provides details for its implementation, the expectation is that the implementation will be preceded by appropriate regulations or guidelines issued by the government.

Correlation with existing DGSOs and Flare Penalties

Petroleum companies that flare associated gas have existing domestic gas supply obligations (DGSOs) that require them to sell a certain amount of their gas resources to the domestic market. It is assumed that for gas volumes where gas purchase orders (GPOs) have been issued to domestic gas offtakers by the gas aggregator, the government will issue appropriate waivers from the NGFCP until the beneficiary of the GPO is ready to offtake the gas being flared.

Since the government would under the NGFCP effectively take title of the flare gas, it will be relevant to clearly ascertain whether a petroleum company, who has been paying penalties for flaring gas, will become absolved from further payment of such penalties when the government awards a flare gas licence to a flare down project promoter. From the point when the government exercises ownership right by licensing the flared gas to a third party any flaring thereafter ought to be deemed flared by the government or the gas flare licensee and as such no further penalties should accrue to the petroleum company.

Commercial Framework

The NGFCP contemplates that a Flare Gas Licensee will pay a signature bonus and an offtake tariff (akin to a gas price) to the government in addition to handling fees to be paid to the petroleum company for use of the petroleum company’s facilities. The government anticipates that the range of the offtake tariff will be similar to gas prices in the domestic gas market and the offtake tariff for each flare site, will be ascertained by the highest commercial bid.

The best case for every petroleum company currently flaring gas, will be to pre-empt the NGFCP and fast track any ongoing engagements with gas flare down project promoters, in order to recover maximum value from its gas resource. The premise is that prospective awardees of flare gas licences under the NGFCP are project promoters that have most likely previously engaged the Petroleum company to purchase the flare gas and in any case the NGFCP will not succeed in respect of any flare site where there is no feasible technical or commercial utilisation project. It is also conceivable that petroleum companies instead of losing out on the value of their gas production altogether, can as well share risk with prospective awardees and take up equity in the flare down projects.

Ordinarily the prospect of altogether avoiding gas flare penalties should incentivise petroleum companies to dutifully supply the flare gas to the flare gas licensee and receive a token for handling the gas, however petroleum companies will be more incentivised if the government shares the ‘upside’: offtake gas tariff, with them as the success of the gas supply is largely reliant on the petroleum company’s complicity. Although the government has the legal right to take gas free of charge, facilitating such ‘taking’ by leaving some value on the table for the petroleum company, will go a long way in achieving the real objective of the government, which is to reduce gas flares. As noted earlier, because the government’s right to take the flare gas is dependent on the availability of flare gas, where the petroleum company does not share in the offtake tariff, there will be a significant gas supply risk that any lender to the flare down project will be concerned about. Lenders will prefer to contractually commit the petroleum company to supply the gas volumes on a commercial basis, because this will assure continued gas supply to the project. Apart from instances where the petroleum company takes equity in the flare down project, the NGFCP structure may not produce bankable projects if the government does not consolidate with the petroleum companies and secure reliable gas supply. As noted earlier, the law contemplates, that the government may elect to take flare gas from a petroleum company at an agreed cost i.e. share the offtake tariff with the petroleum company.

Managing the Supply and Market Risks

The key risk management tool under the NGFCP will be the relevant contracts executed by the stakeholders, which ought to allocate risks to parties that are best placed to bear them. Gas supply risk as noted earlier will be a major concern as well as the typical gas market risks i.e. gas demand levels and gas price fluctuations in the end use market. The government contemplates that the petroleum company will execute a connection agreement with a flare gas licensee, but it is not clear whether this agreement will deal with any aspects beyond the handling of the gas i.e. secure gas supply to the project to make it bankable. I am of the view that a gas sales agreement is the more appropriate contract to be signed between the petroleum company and the flare gas licensee and where necessary should include a subsidiary of NNPC as a party to secure the government’s share of the offtake tariff.

To manage the gas supply risk, the gas sales agreement will commit the petroleum company to supply a minimum volume of gas every day at the right pressure, to the flare licensee and where the petroleum company defaults/shortfalls in supplying the agreed volumes except in case of force majeure, the Gas Flare Licensee will be entitled to shortfall gas remedies, which may include liquidated damages commensurate with the volume of gas not supplied. The petroleum company will look to extend force majeure events under the agreement to include crude oil tank tops and pipeline vandalism, which typically impact associated gas production.

In view of the fact that the flare gas has nowhere else to go, the petroleum company will be keen on securing a 100% take or pay commitment from the flare licensee so that the risk of gas offtake is fully borne by the flare licensee. Where the petroleum company is still exposed to gas flare penalties under the NGFCP, the petroleum company will also need to ensure that the Gas Flare Licensee’s make-up gas right under the agreement will be subject to a deduction of the value of any flare penalties paid for gas not off-taken by the Gas Flare Licensee. The petroleum companies will also need to ensure that a ‘market out’ situation (i.e., where the buyer cannot find a market for the gas) is not included as a force majeure event to suspend the Gas Flare Licensee’s obligation to take and pay for gas supplied.

The exposure to adverse gas price changes in the end user market is critical to the Flare Gas Licensee’s business and as such the flare gas licensee will seek to include appropriate price review clauses that allow for periodic/instantaneous reviews of the offtake tariff to re-stabilise its margin, where the prices in the end user market crashes. This is particularly relevant where Flare Gas Licensees develop LNG and CNG transportation-to-market solutions, which will have to compete in the same market with cheap pipeline gas.



The NGFCP is yet another laudable and dynamic initiative of the Ministry of Petroleum fashioned to reduce gas flares and increase gas supply to the domestic market. However, its success may rest largely on the government’s flexibility around electing in appropriate instances, to share or give up the offtake tariff received from Flare Gas Licensees to petroleum companies in order to adequately guarantee gas supply to the flare down projects and make them bankable. For the government, the ultimate objective should be reducing gas flares by midwifing a solid commercial arrangement between the petroleum companies and licensees, while also ensuring that petroleum companies who are the original investors are in no way disenfranchised, much like the aggregation process currently undertaken by the Gas aggregator. Petroleum companies and Flare Gas Licensees must be vigilant in ensuring that the agreements deployed to underpin the commercial arrangement take cognisance of the peculiarities of flare gas supply.


The opinions expressed in this article are the personal views of the author.

*Pacer Guobadia is an Energy Lawyer with Total E&P Nigeria Limited

Email – [email protected]



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