The PIB and the Gas Sector - Shaping a New Model

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Sunday, March 07 2021   /06:00 AM / By Proshare Research/ Header Image Credit: EcoGraphics


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The PIB has several proposals which could alter Nigeria's straggly oil and gas industry. A large part of the new regulation would be borne by the Midstream and Downstream Regulatory Authority which would be created by Section 52 of the Bill.

 

The responsibility of the new regulator would be to provide oversight over technical, operational, and commercial activities and ensure the safe, efficient, and sustainable infrastructural development of midstream and downstream businesses. The proposed body would also implement the Nigerian Gas Transportation Network Code by developing open-access rules for the transportation of petroleum liquids and natural gas. The Bill additionally authorizes the Authority to create a Midstream Gas Infrastructure Fund for making equity investments of Government-owned participating or shareholder interests in infrastructure related to midstream gas operations. Industry professionals hope that the activities of the Fund would not only increase private investment but also boost domestic consumption of natural gas in Nigeria in projects partly financed by private investments. Section 52 (16) goes further to shield the Fund from the reach of the Fiscal Responsibility Act, Infrastructure Concession Regulatory Commission Act, and the Public Procurement Act. It however would be subject to the Midstream Gas Infrastructure Fund procurement and fiscal regulations.

 

The bill creates the Nigerian National Petroleum Corporation Limited under Section 53 as a successor to the Nigerian National Petroleum Corporation (NNPC) and will commence operations within six months of the bill becoming law. Therefore, under subsection c, the NNPC will cease to exist once its assets, liabilities, and interests are transferred to NNPC Limited. Section 64 (d) gives the new company rights to natural gas under production sharing contracts which were entered into before the bill was passed into law.

 

Section 70 (c) of the proposed law specifies that the petroleum mining lease may be granted to qualified applicants, permitting them to 'win, work, carry away, and dispose of crude oil, condensates, and natural gas'. The Nigerian Upstream Petroleum Regulatory Commission would, under the new arrangement, have the responsibility to grant the relevant licenses

 

A notable feature of the Bill is the penalizing of gas flaring except in the case of an emergency, where doing so would constitute a safe practice under acceptable regulations, and where it was done in consideration of an exemption granted by the Commission.

 

In the meanwhile, natural gas licensees would be required to install metering equipment to measure the amount of gas being flared at a facility and by virtue of Section 108, submit a natural gas flare elimination and monetization plan within 12 months of the Bill's effective date. Following a regulation or guideline enacted under the Bill, the Commission would impose on a lessee (i.e., a holder of a petroleum mining lease) a domestic gas delivery obligation before the 1st of March of each year depending on the domestic gas requirements. Lessees may also choose to exercise the option of entering a contract with wholesale customers of the strategic sectors or wholesale gas suppliers which supply the sectors for delivery of marketable natural gas to the customers or suppliers.

 

Once this is done, they are required to notify the Commission. Where the volume of gas to be transacted is equal to or higher than its domestic gas delivery obligation, the lessee will be deemed to have satisfied its domestic gas delivery obligation. However, further amounts of natural gas may still be supplied to the domestic markets. Lessees may also be required upon the Bill's implementation, to implement works and operations geared at increasing production and channeling some to the domestic market. The requisite amount to be allocated to the domestic market shall be determined by the Commission in consonance with the Authority to support infrastructure availability.

 

 A fraction of the natural gas is also required to be allocated to a wholesale customer to be determined by the domestic gas aggregator. Failure to discharge these duties will incur a penalty under Section 110 (8). Lessees are additionally required to now submit a marketable natural gas production and supply plan which is consistent with the plans of the Authority.

 

By Section 110 (11), the Commission may discontinue imposing domestic gas delivery obligations where in its opinion, the natural gas market has obtained full market status. Lessees who however fail to comply with domestic gas delivery obligations will be held liable to pay a fine and also will not be entitled to supply natural gas to any midstream gas export operations. They are also required to obtain a license for several activities in the gas industry which include establishing, constructing, or operating a facility for either the processing or storage of natural gas, a gas transportation pipeline or a gas transportation network.

 

Other activities requiring licensing include engaging in bulk transportation of natural gas by rail, barge, or other transportation means, the wholesale supply of gas, construction, or operation of petrochemical or fertilizer plants, and lastly, establish, construct, or operate a terminal, jetty, or other facilities for the export or importation of natural gas. Licenses are also required for retail trading of natural gas, establishment, construction, or operation of a facility for a gas network, or the supply or trading of natural gas. The Authority may also via regulation prescribe additional activities which may be carried out with a license.

 

Under Section 125 (4), the Authority may penalize a party who does any of these activities without a license or permit by seizure of the premises where the activity is carried and/or seizure of the facilities by which the activities were undertaken, among others. Any subsisting holder of a license is also required to obtain a new license within 24 months of the Bill becoming effective. The Midstream and Downstream Regulatory Authority also are empowered under the Bill to issue new regulations on midstream and downstream gas operations.

 

Section 129 states the facilities which a licensee may operate and maintain. These include gas processing plants, gas conditioning plants, gas to liquids plants, liquefied natural gas plants, ethane extraction plants, and other plants requiring a license in the Authority's opinion. Section 132, 135, 138, 142, 148, 153 provide for the grant of licenses for bulk gas storage, gas transportation, gas transportation network operator, wholesale gas supply, retail gas supply, gas distribution, and gas aggregation.

 

Another provision of the Bill that would significantly affect gas pricing appears in Section 167 which empowers the Authority to determine the domestic base price for the power sector, commercial sector, and gas-based industries for each year. It would continue to wield this power for as long as in its opinion, the control of natural gas prices for the strategic sector is required. However, the price control and role of the domestic gas aggregator will not be required where willing buyers and sellers contract for free market-based natural gas dominate the domestic market and the transactions for producer and consumer clients represent less than 20% of total transactions. The domestic gas aggregator would also establish procedures based on the Authority-determined prices. This in turn would be the determiner for the aggregate price of gas for a month.

 

The marketable natural gas price applicable to the power sector will be the domestic base price at the marketable natural gas delivery point. Section 167 (7) also provides that gas retailers and distributors are not considered part of the strategic sectors and hence, shall negotiate the supply and pricing of their natural gas directly, insofar as the applicable price for gas distributors for the marketable natural gas at the delivery point is less than that of the commercial sector. Sub-section 7 on the other hand states that wholesale customers of those in the strategic sectors, gas retailers, and gas distributors will bear the transportation costs from the marketable natural gas delivery point to their facilities. These customers also have the option to either use existing transportation networks or obtain a license to transport their natural gas.

 

The Bill also lays down a new pricing formula in the Fourth Schedule which will regulate prices for gas-based industries. Section 168 further gives more provisions as regards pricing, namely: that the floor price for gas-based industries will be $0.90 per MMBtu and the ceiling price shall be the domestic base price applicable for any particular year. The Authority may additionally regulate prices where it determines that a certain licensed service is a monopoly activity, existing competition is not at a level beneficial to consumers,and that a particular licensee is a dominant provider. It may also conduct periodic pricing methodology reviews. Section 172 states that the body also has the power to impose a public service levy on consumers for the recovery of costs incurred in satisfying public service obligations if in its view, doing so is in the interest of the public. It also is charged with a responsibility to fix a domestic gas demand requirement which will be the total amount of marketable natural gas required for all wholesale customers of strategic sectors. For clarification, 'strategic sectors' are defined under Section 318 as the power sector, gas-based industries which consist of firms using gas as a feedstock or industrial raw material, and commercial sectors (consisting of industries which the Authority determines use gas as an energy source). Wholesale customers of this sector are permitted to negotiate with suppliers or lessees regarding their supply contracts. On the other hand, it may also choose to not do so where it thinks that the contracts are satisfactory for its requirements. Following this, it is duty-bound to inform the Authority that there is no need to be a customer client of the domestic gas aggregator. It is also required to furnish the Commission with information about the lessees from which the required marketable natural gas has been acquired. (See Illustration 3)

 

Illustration 3: Key Provisions in the Petroleum Industry Bill (PIB) 2020

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The PIB creates opportunities for public sector intrusion into the price determination process for the gas and may not have addressed the underlying problems of a price-deregulated O& G sector. The PIB appears to simply change nomenclature rather than changing the substance of the market framework. Setting the terms for the lower band of gas pricing creates downward stickiness for the pricing of gas and establishes a template that is subject to administrative whims and perhaps caprices.

 

 Taxes, levies, fees, and charges (see illustration below) are already disrupting market pricing and distorting product prices. The insertion of public policy charges into an O&G product pricing model serves to raise costs and burden consumers, the extent of the consumer burden depends on the sensitivity of consumers to changing prices, or put differently, it would depend on how consumer's buying preferences are influenced by what economists usually call a product or service's price elasticity of demand. It should, however, be noted that the pricing structure for gas that the petroleum bill refers to is liquified natural gas (LNG) and not liquified petroleum gas (LPG), but the reference to gas in the Bill sometimes leads to confusion over which particular gas type is being referenced.

 

Illustration 4: A Guide to Taxes, Fees, Levies, and Charges

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The struggle to keep gas and non-PMS oil prices uncomplicated is arguably a reason why associations such as the Nigerian Liquified Petroleum Gas Association have gone to court over the PPPRAs administrative charge. The courts are yet to determine the appropriateness or otherwise of the charge, but the economic impact assessment suggests a rise in deadweight loss and an upward adjustment in the consumer retail cost of gas (see illustrations 5 &6 below).

 

 

Illustration 5: Nigeria Liquefied Petroleum Gas Associate LTD/GTE V. Petroleum Products Pricing Regulatory Agency (PPPRA) at a Glance

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Illustration 6: Nigeria Liquefied Petroleum Gas Association LTD/GTE (Plaintiff) V Petroleum Products Pricing Regulatory Agency (PPPRA), Distilled

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Downloadable Version of Memo to the Market: PPPRA and the Nigerian Gas Market, Avoiding a Robinhood

1.   Full Report: Memo to the Market: PPPRA and the Nigerian Gas Market, Avoiding a Robinhood - Mar 02, 2021


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