An Overview of the Legal and Regulatory Framework of the Nigerian Gas Market

INTRODUCTION

Nigeria is one of the largest and oldest producers of oil and gas in Africa. In 2019, this sector accounted for about 5.8 per cent of Nigeria’s real Gross Domestic Product (GDP), and was responsible for 95 per cent of Nigeria’s foreign exchange earnings and 80 per cent of its budget revenues.[1] Globally, it ranks the ninth-largest in terms of gas reserves.

Gas has become and continues to be the fuel of choice in developed and developing countries, allowing Nigeria to become a solid regional as well as an international gas supplier. This industry, despite its many prospects, has faced a myriad of challenges. The new Petroleum Industry Act (PIA) 2021 has tackled some of the challenges and problems to reform the gas sector, however, some questions remain unanswered.

This essay seeks to evaluate the laws, regulatory framework and risks that inundate the Nigerian Gas Sector, as well as provide workable solutions to the controversies surrounding it.

LEGAL FRAMEWORK OF THE NIGERIAN GAS MARKET

Apart from the Constitution of the Federal Republic of Nigeria (CFRN) 1999 which is the grundnorm, there are a plethora of laws that control the Nigerian Gas Market, they are as follows;

  1. Petroleum Industry Act (PIA) 2021: This is the principal statute that regulates the gas industry and governs activities in the upstream, midstream and downstream sectors. Sections 125-173 of the Petroleum Industry Act have extensive provisions relating to the Administration of Midstream and Downstream gas Operations, its licensing regime, rights of way, regulation and review of prices. The Act also provides for the establishment of key regulators, incorporation of NNPC Limited and other matters.
  2. Petroleum Act 1969: This was the principal legislation prior to the enactment of the Petroleum Industry Act. However, the Petroleum Act will continue to exist alongside the Petroleum Industry Act, until the termination and expiration of all permits issued under the Petroleum Act.
  3. National Oil Spill Detection and Response Agency (Establishment) Act 2006: This Act establishes the National Oil Spill Detection and Response Agency (NOSDRA), which coordinates and implements the National Oil spill Contingency Plan (NOSCP) for Nigeria. It is the regulatory body with the responsibility of surveillance and monitoring oil spills in Nigeria.
  4. Nigerian Oil and Gas Industry Content Development Act (Local Content Act) 2010: This Act provides a framework for promoting the participation of Nigerians in the gas industry and laying down the minimum thresholds for local content utilized in the sector.
  5. The Niger Delta Development Commission (Establishment) Act 2000: This Act mandates the payment to the Commission by oil and gas companies of 3 per cent of their annual budgets, for the development of the Niger Delta areas where oil and gas are exploited.
  6. The Oil Pipelines Act 1956: This Act makes provision for the granting of licenses and permits for the laying and use of pipelines for the conveyance of petroleum.

REGULATORY FRAMEWORK OF THE NIGERIAN GAS MARKET

  1. Nigerian National Petroleum Corporation (NNPC): Nigerian National Petroleum Corporation (NNPC) was founded to harness Nigeria’s oil and gas reserves for sustainable national development. The scope of activities of the NNPC ranges from exploration, production, refining, transportation, distribution and supply of oil and gas products.

However, by Section 53(1) of the Petroleum Industry Act, the Nigerian National Petroleum Company Limited shall be incorporated within six months from commencement of the Act, that is, from 16th August 2021. By Section 53(2) of the PIA, the Government shall subscribe to the initial paid-up share capital of NNPC Limited. This implies that NNPC no longer exists as an entity existing to serve any form of public interest as it is now privatized.

  1. The Ministry of Petroleum Resources: The Ministry of Petroleum Resources has the overall duty to supervise and regulate the gas industry. The ministry also formulates, coordinate, and implement Federal Government policies for the gas sector.
  2. Nigerian Content Development & Monitoring Board (NCDMB): The primary duty of NCDMB is to promote local investment and participation in the gas sector. It registers and monitors companies participating in the upstream sector, to ensure that the company has the requisite indigenous participation under the Act.
  3. National Oil Spill Detection & Response Agency (NOSDRA): NOSDRA is the government agency responsible for monitoring and control of oil spills in Nigeria. The functions of the Agency include surveillance and ensuring compliance with all existing environmental legislation and the detection of oil spills in the petroleum sector. As part of its duties, the Agency receives reports of oil spillages and coordinates oil spill response activities.

With these frameworks in place and the country’s global position, the gas market is met with dire challenges. Between 2016 and 2020, Nigeria flared 1 252.26 trillion cubic feet of natural gas into the atmosphere, according to the Nigerian National Petroleum Corporation’s monthly oil and gas reports.[2] Gas flaring is the process by which natural gas that comes with extracting petroleum, is burned off in the atmosphere. Alternative means of gas flaring include confining the gas to storage tanks for resale, subterranean re-injection, etc. People residing in communities where gas flaring occurs in Nigeria have their health affected. Exposure to air pollutants released by gas flaring has been linked to diseases such as cancer, lung damage, and neurological and reproductive problems. Also, according to the World Bank, gas flaring costs the global economy US$20 billion in 2018. The Nigerian economy lost N233 billion (US$761.6 million) to gas flaring which translates to 3.8% of the global total cost in 2018.[3]

However, in section 104 of the Petroleum Industry Act 2021, a licensee, lessee, or marginal oil field operator can only flare or vent gas in the event of an emergency, where exemption has been granted by the Commission and where such flare is the acceptable safety practice under the regulation. The penalty is a fine as stipulated by the Commission. This penalty is not enough to curb this act. The ripple effect of this is the triggering of the locals in these communities where this gas extraction happens.

Over time, the Government has done its best in keeping the peace with the gas companies and the locals. The Government created the Host Community Development Trust Fund (HCDTF) whose purpose will be to, among others, foster sustainable prosperity, provide direct social and economic benefits from petroleum to host communities, and enhance peaceful and harmonious coexistence between licensees or lessees and host communities. However, if gas flaring continues and poses danger to the lives of the locals, it could lead to a revolt that would affect business and lives in these areas, which would invariably create an unattractive look to potential investors.

Also, the country has significant domestic demand for gas, mainly from the power sector. The gas-fired power plants in the country are consistently under-utilized due to the lack of an uninterrupted gas supply. Over time, gas producers have been cautious about investing in gas infrastructure in the country, as a result of low gas prices and lack of assurance or guarantee of payment from the power generating companies. Hence, the processes of the gas supply agreement have been fraught with challenges. For a producing country ranked seventeenth in the world, the government has a lot of legal framework overhauling to do.

Furthermore, political risks are not ideal for investors in emerging markets such as the gas market. Prior to investing, investors undertake extensive due diligence to ensure that such risks are adequately addressed or mitigated. Where the costs of mitigating or addressing outweigh the benefits, they simply move to another market.

Foreign Direct Investment in Nigeria continues to be led by the oil and gas sector. This means that any factor that affects foreign investment will disproportionately hit the gas sector, affecting players across the value chain and causing the country to lose out on potentially large energy deals.

A 2021 Marsh political risk index placed Nigeria’s political risk in the range of 6.1 to 8 out of 10, the same category as countries like Iran, Afghanistan, Pakistan, and North Korea. An Africa Risk-Reward index from 2017 pinpointed it to 7.3, a number which would have very likely risen to hit the top of the range indicated by Marsh, with an imminent possibility of crossing into the political risk red zone where we have countries like Syria.[4]

CONCLUSION

It is evident from the above discussion, that there is ample room for regulatory maneuvering or re-engineering to enhance investment and infrastructure in Nigeria’s gas industry. Thus, concerted efforts must be made to translate the gains of the industry into more enduring and sustainable projects. This perspective is important in light of the finite nature of oil resources, as well as the ever-constant factors of demand and supply, both of which are principally responsible for the volatility of gas prices in the international market.

Also, the penalty for gas flaring should go beyond the fines stipulated by the Commission. Other punitive sanctions should include temporal suspension of license and actual termination should the wrong persist.

In addition, the local gas industry is highly regulated, yet it has been bedevilled with notable infrastructure and systemic failures; costly structural and operational challenges; and numerous corporate social responsibility lapses. These are all strong pointers on the need to critically review the regulatory processes governing such outcomes, in order to mitigate losses in various respects.

Hence, this article has laid emphasis on some relevant regulations, and in doing so, by no means relegates the significance of other laws and policies that are of relevance to varying degrees.

Thus, the onus lies on all the stakeholders to consistently exhibit the unfolding issues that are either positively or negatively affecting their operations. The adoption of such an open-door policy approach will in effect, provide a good starting point to make necessary adjustments and where required, a complete paradigm shift. Such an outlook will in the long term, provide enduring benefits to the matrix of stakeholders that are dependent on the revenues attributable to Nigeria’s gas industry.

Finally, the government must exert more effort to guarantee the safety and security of both citizens and investors; only then, would we see the desired growth of the Nigerian gas market.

REFERENCE

  1. Kasirim Nwuke,’ Nigeria’s Petroleum Industry Act: Addressing old problems, creating new ones’ (2021) < https://www.brookings.edu/blog/africa-in-focus/2021/11/24/nigerias-petroleum-industry-act-addressing-old-problems-creating-new-ones/>
  2. Oluwole Ojewale, ‘Are Nigeria’s promises to end gas flaring merely hot air?’ (2021) https://bit.ly/3KRbWAf
  3. Pedro Omontuemhen, Akinyemi Akingbade, Omomia Omosomi, ‘Assessing the impact of Gas flaring on the Nigeria Economy’ https://www.pwc.com/ng/en/assets/pdf/gas-flaring-impact2.pdf
  4. Caleb Adebayo, ‘How Buhari’s high political risk regime could hurt Nigeria’s energy investments’ (2019) https://nairametrics.com/2021/06/09/how-buharis-high-political-risk-regime-could-hurt-nigerias-energy-investments/

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