Concession Agreements and Their Effect on the Exploration of Natural Gas (Energy Resources)

Concession agreements and their utility in the unfaltering undertaking of various activities within the oil and gas supply chain, cannot be overemphasized. This strategic deployment of private effort within the multifaceted continuum of energy production, allows for governmental supervision of the complex effort of extracting energy resources, and all intervening matters leading up to its end-use. A concise analysis of the legal structures that aid ethical operations within the myriad stages of exploration and production, would be remiss without a cursory look at the provisions that govern the configuration of duties and obligations.

Meaning and Modalities

In a bid to leverage the natural resources existing within its geography, a state may either establish government-controlled organizations of exploration, further development and refinement or choose to engage privately-owned companies, to carry out operations within the sector of Natural gas. A more astute venture according to multiple quarters is a hybrid system that harnesses the positives of both strategies, as the consolidation of these procedures effectively results in concessions and akin legal frameworks.

A Concession is a commission allotted by a government to authorize a company to speculate for and produce oil, gas or mineral resources within a rigidly defined geographic area, which has been commonly deposited in government-owned lands or lands, in which the government acquires the rights to produce oil, gas or minerals[1]. This profitable specie of rentiers may manifest in various forms, most commonly as stated rents, commissioned royalties and both Income and Tariff Taxes[2].

Various companies are enjoined to venture to outbid fellow organizations competing for these privileges, and routinely pair their ambitious quotes with signing bonuses to earn the licenses to these rights. This species of agreement are largely obtainable and employed in nation-states around the world, to improve the ecosystem of energy production from Asia to East Africa and South America[3]. However, we must note that in a Concession agreement, it is not all smiles and sunshine for the concessionaire, as, for exploration and production. Transnational companies assume the happenstance, that no energy resources may be produced, for that is routinely the case[4].

Effect of Concessions

Concession agreements predominantly elicit varying and poignant concerns from the grantor, and they are further discussed below. Primarily, the symbolism and pride many nations attach to their oil and gas resources, and the feelings of broad sentiments of nationalism may impede the concession of these rights to foreign companies, as such grants may be deemed tantamount to handing foreign nationals, the prized jewel of their statehood[5]. Furthermore, Concessions are predominantly long-term commitments, stretching over a fair period, and the consequences or resultant effects of these awards also subsist in that duration, and as such, all misguided alliances and the fruits of such coalitions have far-reaching consequences.

It is important at this point to state the less endearing nature of the exchange in a concessionary agreement, as parties in a prospective agreement usually operate with a healthy dose of caution in all the processes of valuation. Due to the scarcity of seismic research data, private companies are obligated to offer tame terms, as it is common for International Oil Companies (IOC) or investors to have only a cursory understanding of the prospect of a concession area. Concessions were used in the past, due to the covert nature of this type of transaction.

Indeed, the dichotomy between traditional and modern concessions also provides an important dynamic, in the analysis of the significance and efficacy of these agreements within the oil and gas sector. Traditional concessions are distinguished primarily by their perpetual nature and unconscionably vast geographic areas, within the scope of the agreement spans, among other things. The broad discretion bestowed on the recipients of these concessions, resulted in a state of overarching control over the natural resources found therein and, by extension, the surrounding polity[6]. This controlling and oppressive state of affairs propagated a culture of economic subjugation by the companies, granted these benefits and further led to an evolution of the concessions to reflect current best practices[7]. Modern concessions now allow for a shorter duration of exclusive production, better remittances to central governments and improved welfare of host communities. These new concessionary arrangements ushered in even more adept legal structures, to govern the relationships between government and transnational companies, as Joint Venture Agreements and Profit-Sharing Contracts are now at the fore of these transactions.

Current Realities of Exploration, Production and Post Production

An overview of the natural gas supply chain is important to this discourse, as it pertains to a holistic appreciation of the various components, deployed in the many stages of production of energy resources. The interactions within this system ultimately depict the upstream, midstream and downstream efforts that culminate in the domestic and commercial use of energy products.

From speculation to production, liquefaction, onward pipeline transmission and even to regasification for post-production matters, the natural gas supply chain witnesses an intersection of critical actors and the technological utility they provide. It is indeed a complex cacophony duly regulated by the government, with the contribution of private actors across the board[8].

Accordingly, various legislation and regulatory bodies exist to oversee the production of petroleum resources and all ancillary matters.

The most prevalent of them is The Petroleum Act[9] which vests in the Federal Government, the ownership of petroleum resources in Nigeria. It states thus:

“(1) The entire ownership and control of all petroleum in, under or upon any lands to which this section applies shall be vested in the State[10].”

Natural gas is included in the definition of petroleum in the Act, which states that speculating, exploration, production and distribution of petroleum (including natural gas), can only be done with the Minister’s permission and under the auspices of the Ministry of Petroleum. The Act empowers the Minister to issue essential guidelines, for the performance of the State’s obligations under the Act.[11] Various subsidiary legislation enacted under the Petroleum Act, to oversee various natural gas efforts within the natural gas supply chain, governs niche areas of interest within that sector as well.

Nigeria Liquified Natural Gas Limited is an important player in the Nigerian natural gas industry. They are a heavyweight in the global LNG supply order, with multiple Sale and Purchase Agreements accounting for approximately 7 per cent of global LNG trade. According to the website of Nigeria LNG;

“NLNG has a total production capacity of 22 Million Tons Per Annum (MTPA) of LNG and 5mtpa of Natural Gas Liquids (NGLs), from its six-train plant complex.[12].

The Nigerian Gas Company is a key subsidiary of the Nigerian National Petroleum Corporation, and is primarily responsible for gas transmission and other midstream concerns In Nigeria.

The National Gas Expansion Programme was introduced to make CNG the fuel of choice for transportation and LPG, the fuel of choice for domestic cooking and small industrial complexes.

The Central Bank of Nigeria has also introduced a 250 billion naira intervention facility, to promote investment in the gas value chain, in a nuanced move to bolster infrastructure and expand the domestic gas resources. It seeks to encourage the use of natural gas in energy generation and LPG for domestic cooking. These funds are set to grow the capacity of gas-based industries to benefit attendant industries. Cottage petrochemical plants and manufacturing installations as well as mid to downstream gas value chain related activity will be actively strengthened by this initiative. Selected processors and merchants (Wholesale and Retail ventures) are slated to receive monetary injections under the purview of this initiative.

Conclusion

The various legal structures that regulate the totality of activities in the Oil and Gas industry, ensure that this important sector in our polity is perpetually operating at maximum efficiency. An ultra-important aspect of this sphere is Natural Gas and the agreements, and legal framework that administers activities in that sector.

The relations of these organisations and the legislations that govern their operations, encompass the veritable order of the production and use of natural resources. Concessions of yore and newer, more suitable legal arrangements are nonetheless, a part of this system and will continue to aid the relations within this system. Modern concessions must be crafted to reflect the present realities of nationhood. Hence, act as a balancing apparatus, improving a lot of private investors with one hand and protecting differing national interests with the other.

  1. Schlumberger Limited: ‘Schlumberger Oilfield Glossary’ (2022) <https://glossary.oilfield.slb.com/en/terms/c/concession#:~:text=A%20grant%20extended%20by%20a,produce%20oil%2C%20gas%20or%20minerals> accessed 15 February 2022
  2. Microsource Group of Companies (2016) <http://www.microsource.co.uk/index.php/oil-gas/services-oil-gas/contracts-agreements/concession-agreement> accessed February 15 2022
  3. J. Radon, ‘The ABCs of Petroleum Contracts: License-concession Agreements, Joint

    Ventures, and Production-sharing Agreements, in Covering Oil: A Reporter’s Guide

    to Energy and Development New York’, [2005] 1(1) Open Society Institute< https://www.gmec-ee.com/wp-content/uploads/2013/08/The-ABCs-of-Petroleum-Contracts….pdf> accessed February 15 2022

  4. S. Philipsek, “Oil and Natural Gas: Constitutional Frameworks for the Arab States Region Centre for Constitutional Transitions, International IDEA and the United Nations Development Programme” [2014] 1(1) <https://constitutionnet.org/sites/default/files/oil_and_natural_gas_report.pdf> accessed February 15 2022
  5. Ibid (n4)
  6. H. O. Onyi-Ogelle, “Contractual Arrangements in Nigeria’s Oil Industry” [2016] Vol. 5(3) IJAH https://www.ajol.info/index.php/ijah/article/view/139846 accessed February 15 2022
  7. Ibid (n6)
  8. S. Lemieux, “Understanding our Energy Supply Chain, American Petroleum Institute, [2005] 1(1) Energy API <https://www.api.org/news-policy-and-issues/hurricane-information/oil-natural-gas-supply-chains> accessed February 16 2022
  9. Petroleum Act 1969 Laws of the Federation of Nigeria
  10. Section 1(1) Petroleum Act 1969
  11. A. Adeniji. S. Sipasi, “The International Comparative Legal Guide to Gas Regulation 2011: A Practical Cross-Border Insight into Gas Regulation”, [2011] 1(1) Global Legal Group https://www.aelex.com/wp-content/uploads/2017/12/Gas11_Chapter-25_Nigeria1.pdf accessed February 19 2022
  12. Nigeria Liquified Natural Gas Limited < https://www.nigerialng.com/the-company/Pages/Who-We-Are.aspx > Copyright © 2022 Nigeria LNG Limited

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