Sunday, March 07 2021 /06:00 AM / By Proshare Research/ Header Image Credit: EcoGraphics
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
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
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
Illustration 6: Nigeria Liquefied Petroleum Gas Association LTD/GTE
(Plaintiff) V Petroleum Products Pricing Regulatory Agency (PPPRA), Distilled
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