Nigerian Gas Flare Commercialization ‘ll drive sustainable development

UGO AMADI, BUSINESS EDITOR

All over the world, gas flaring is a major problem. It consumes useful natural resources and produces dangerous wastes, which have destructive impacts on the society.

Gas flaring is one of the most toxic energy and environmental problems currently facing the world. It is a multi-billion dollar waste and constitutes an environmental hazard.

Since the inception of commercial oil production in Nigeria, the flaring of associated gas has become commonplace because oil producers do not derive sufficient economic benefits from the utilization or production of gas.

Despite recent efforts by the Nigerian government to encourage the utilization of natural gas for power generation and industrialization, the World Global Gas Flaring Reduction Partnership has reported that Nigeria is the 6th highest gas flaring country in the world.

According to the 2017 Department of Petroleum Resources (DPR) Nigerian Oil and Gas Industry Annual Report, about 888 million standards cubic feet (Mmscf) of gas is flared every day from approximately 144 gas flare points across Nigeria.

The Nigeria National Petroleum Corporation (NNPC) stated in its Monthly Financial and Operations Report for November 2017, that oil companies operating in the country flared a total of 301.69 billion standard cubic feet of gas between November 2016 and November 2017. Using the exchange rate of N360 to a dollar and the Domestic Supply Obligation (DSO) price of $1.50 per 1,000 Standard Cubic Feet (SCF) of gas, this translates to a loss of about N162.912 billion.

The DPR report stated that , “The volume of gas produced comprised of 1.73trillion cubic feet associated gas, representing 58.74percent of the gas produced and 1/21trillion cubic feet non-associated gas, representing 41.26percent of the total gas. Also 2.59trillion cubic feet (88.13percent) of the produced gas was utilized while a total of 21.02 billion cubic feet representing 0.7 percent was attributed to gas shrinkage.”

According to the report, the year 2017 experienced a slight increase in gas flare volumes as a proportion of the total volume of gas produced. This increase was due to several factors which include: constant equipment upset/failures in aging facilities, sabotage, high gas/oil ratio in aging wells, funding challenges in executing gas handling projects and other operational challenges experienced by the operators.

Group Managing Director of Nigerian National Petroleum Corporation( NNPC) ,Dr. Makati Baru stated that in 2018, Nigeria achieved an average national daily gas production of 7.90bscf, translating to 3 per cent above the 2017 average daily gas production of 7.67bscf.He said out of the 7.90bscf produced in 2018, an average of 3.32bscfd (42%) was supplied to the Export market, 2.5bscfd (32%) for Reinjection/Fuel Gas, 1.3bscfd (16%) was supplied to the domestic market and about 783mmscfd (10%) was flared

A statement by the president of the Nigerian Senate, Dr. Bukola Saraki, quotes him as saying that Nigeria accounts for 40 percent of flared gas annually in Africa. This amounts to about $7 billion in wasted opportunities and calls for the urgent need for the government to expedite action on the Gas Flaring (Prohibition) Bill 2017.

Other statistics show that about 1.1 billion people in the world are without access to electricity and another 1 billion people struggle with unreliable supplies of electricity, more worrisome is the fact that 95 per cent of these people are resident in sub-Saharan Africa and developing Asia. Of that 1.1 billion, Africa has 588 million. West Africa accounts for about 175 million closely followed by Central Africa with 172 million.

In Nigeria, with a population of over 180 million people, only 12.5 per cent of the population has access to power supply and others with epileptic supply. It is believed that gas flared in the country can generate electricity for us and boost economic development.

Invariably, the flared gas is sufficient to light up Africa, or sub-Saharan Africa, generate 2.5 gigawatts (Gw) of power, produce 50 million barrels of oil equivalent (boe) or produce 600,000 metric tonnes of liquefied petroleum gas (LPG) per year, produce 22 million tonnes of carbon dioxide (CO2), feed two to three liquefied natural gas (LNG) trains, generate 300,000 jobs and add $350 million carbon credit value.”

Previous efforts by the Nigerian government to curb incidences of gas flaring have yielded little fruit. The gas-flaring charges imposed by the Associated Gas Reinjection Act (AGRA) on oil producing companies are comparably negligible. To compound this issue, the Tax Appeal Tribunal has held that levies paid for flaring gas under the AGRA are tax deductible. The implication is that oil producing companies can flare as much gas as they want to, and deduct the levies they pay for flaring this gas from their taxable income.

In an attempt to radically reduce gas flaring and convert flared gas to economic use and the attendant environmental damage, the Federal Government of Nigeria (FGN) introduced the Nigerian Gas Flare Commercialization Programme (NGFCP). Th e programme was launched by the Minister of State for Petroleum Resources ,Dr. Ibe Kachikwu on December 13, 2016.

Speaking on the policy position of the Federal Government of Nigeria (FGN), Justice Opelamina Derefaka, Program Manager of the Nigerian Gas Flare Commercialisation Programme (NGFCP) in the office of the Minister of State, Petroleum Resources said that gas flaring is harmful and the FGN has initiated a number of actions to reaffirm its commitment to ending the practice of gas flaring in our oil fields.

He affirmed that specifically, the FGN has ratified the Paris Climate Change Agreement, and is a signatory to the Global Gas Flaring Partnership (GGFR) principles for global flare-out by 2030 whilst committing to a national flare-out target by year 2020.

’It is expected that the NGFCP if efficiently implemented, could create a lot of opportunities for various players in Nigeria’s petroleum sector. Firstly, it could be another opportunity for investors to play an active role in Nigeria’s gas market by converting gas that would have been flared to commercial use’.

‘By introducing the NGFCP, investors will be able to enter into bankable gas supply arrangements. Secondly, it could ensure improved fuel supply to gas-powered generating companies. Gas is the primary source of power generation in Nigeria, and the power sector in the country has been affected by insufficient gas supplies’’, Derefaka noted.

An energy expert with Aelex Legal – Commercial and Litigation Law Firm, Ishaya Amaza, is of the view that the NGFCP could see the government attain its vision for zero gas flare by 2020 and live up to its environmental obligations under international agreements. An example of this is the goal to reduce carbon emissions by about 13 million tons of carbon dioxide (CO2) in furtherance of its undertaking under the Paris Agreement.

He noted that it could also ensure the fulfillment of the government’s domestic responsibilities to inhabitants of the Niger Delta region, who for years have decried the adverse environmental impacts of flared gas in the area.

However, industry watchers have raised some concerns regarding the successful implementation of the NGFCP.

According to pundits, the licensees will be required to enter ‘into -or-pay’ agreements with the flare producers who will be contractually required to guarantee the production of specific quantities of gas and will be liable to pay the offtaker a compensation where the contracted volume is not met. It is doubtful if Flare Gas Producers will be willing to undertake such an obligation. This is because the production of would-be flared gas is determined by the production of oil, which in turn is dictated by the operational and economic decisions of the oil-producing company.

A framework that compels flare producers to deliver a certain quantity of flare gas where production of oil has been scaled down would be unhealthy for the industry and could discourage investment in the sector.

The question also raises concern as to the rights of contractors under Production Sharing Contracts (PSCs) entered into with the NNPC. Most Nigerian PSCs provide that as a recompense for sourcing funds at interest and bearing the exploration, production and operational risks, contractors will be entitled to an economic interest in the development of oil and natural gas. This encumbrance could hamper government’s ability to license investors to take flare gas from a field that has been developed under a production sharing arrangement unless the contractor is given a participating right of any income due to the FGN under the programme.

Another concern is if flare producers will be enthusiastic about licensees generating income on gas produced as a result of the oil companies’ investment in the well. The lack of any pecuniary benefit accruing to them from the NGFCP may be a discouragement for oil companies who are critical stakeholders in the programme.

But Derefaka ,pointed that the Regulations provide the legal basis for the implementation of the NGFCP, introduces a new payment regime (penalties) for gas flaring which adopts the ‘polluter pays’ principle and mimics a carbon tax. And as a minimum, the objectives of these regulations are: the reduction of the environmental and social impact caused by the flaring of natural gas; protection of the environment; prevention of waste of natural resources; and creation of social and economic benefits from gas flare capture.

He said the thrust of the regulations is consistent with the Petroleum Act. Government takes all flare gas free of cost at the flare and without payment of royalty. The current meagre flare payments (penalties) of N10 per thousand standard cubic feet is increased, in the case of any one producing 10,000 barrels of oil or more, to $2.0 per thousand standard cubic feet of gas and, in the case of anyone producing less than 10,000 barrels of oil per day, to $0.50 per thousand standard cubic square feet of gas. ALSO that there are mandatory additional payments by the producer of $2.50 for failure to produce accurate flare data; failure to provide access to flares or flare sites; failure to sign a connection agreement; and in the event of continuous or egregious breaches, there is a possibility of suspension of operations, or a termination of the producer’s license.

Economic benefit and challenges

Nevertheless, harnessing Nigeria’s abundant gas assets 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.

The DPR Annual Report states that Nigeria would need about $3.5 billion investments to activate the new market-based initiative it had set up to achieve the gas flare commercialization target by 2020.

Derefaka explained that the $3.5 billion sought by Nigeria will be brought in by investors willing to participate in the NGFCP which he claimed has immense benefits and that the $3.5 billion investment would give annual returns worth $1 billion to the country.

“The NGFCP economic analysis also shows that with the US3.5 billion inward investments pumped in to implement the NGFCP, huge social and economic benefits would accrue to host communities in the Niger Delta, investors and the national economy as a whole. Benefits would include curbing pollution, climate change, global warming impacts in local communities and providing households with clean energy, particularly in unlocking LPG (cooking gas i.e. produce 600,000 MT of LPG per year),” Derefaka explained.

AMAZA said that the benefits also include the production of and access to gas for various industrial usage including power generation and transportation. Also expected is the drastic reduction of incidences of gas flaring which has been both an economic loss and environmental thorn for the industry.

He noted that at the moment, it is difficult to determine the challenging issues surrounding the programme as it is yet to be implemented. The Regulations and Guidelines issued by the DPR for the implementation of the programme provide sufficient information regarding the contractual framework and fiscal aspects of the programme.

He said “The only challenging issue I foresee might be suitable infrastructure to access and collect gas from flare points. It is expected nonetheless that the Bidders would propose the necessary technology to surmount this’’

Gas Flare: Extension Window for Market-based Scheme

Remarkably, the federal government has extended the cut-off date for prospective investors willing to participate in its ambitious market-based gas flare programme – the Nigerian Gas Flare Commercialisation Programme (NGFCP), industry pundits are of the opinion that the extension is not likely to affect the proposed targets of achieving the gas flare commercialization by 2020.

According to inside source from DPR, the extension of the cut-off date for the Nigerian Gas Flare Commercialisation Programme (NGFCP) in order to submit their Statement of Qualification (SOQ) is to allow more participants to the take part in the program.

Collaborating the same position, the Programme Manager of the NGFCP, Mr. Justice Derefaka, said that the window for the SOQ submission which was supposed to have closed January 20, 2018 has been extended and would now close by February 28, 2019.

“Each Applicant is required to complete and submit a SOQ and pay the SOQ submission fee by 17:00 hours West Africa time on or before the SOQ submission deadline of Thursday, 28th February, 2019 in order to qualify for consideration as a Qualified Applicant (QA) and not a day after. Each Applicant is responsible for preparing and delivering its SOQ in the required format,” said Derefaka.

Derefaka equally explained that the NGFCP would only consider parties who have registered on its web portal to participate in the bidding process, adding that the programme will only interface with interested parties through the web portal.

On whether the extension could affect the 2020 projection, Ishaya responded that the NGFCP programme is a 4-stage process from registration to Submission of Statement of Qualification to submission of bidding proposal and execution of the necessary contracts and obtaining the permit. If the current pace of activities is anything to go by, it is unlikely that the deadline will be met.

Prof Wunmi Iladare, a Professor of Petroleum Economics and Policy Research and the Director of Energy Information Division of the Center for Energy Studies said that the proposed target of 2020 to achieve the gas flare commercialization is still realistic considering the fact that the global target is 2030.

According to him the gas flared now can give us better electricity, if we are able to gather them. In terms of economic implication is very huge. The cost also to gather them is very huge. Investment required to stock the gas is a great challenge. Most of the gas when produced, there is no already market to it, so, one need to gather it, process it and move it to the market. That is a huge investment and the pricing also is an issue.

He noted that the exchange rate instability is another challenge and prays that the gas policy will help out ; Because one need to balance revenue with cost, to guarantee investors.

In a statement by DPR, shortlist of qualified application and request for proposal (RFP) will be available in the second quarter of this year; submission of proposal will be in third quarter while selection of preferred bidders will be in the fourth quarter this year. The implication is that all things being equal, preferred bidders are likely start off their project in first quarter 2020.

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 licenses to the successful bidders (Flare Gas Licensees) to off-take gas from these flare sites. Petroleum companies that have already initiated their flare down projects i.e. are in advanced negotiations with viable off-takers, will be granted temporary waivers for their flare sites and will be under pressure to conclude their typically lengthy discussions with such off-takers or else their flare sites will be included in the pool of flare sites to be licensed.

Also, the successful licensees will be required to obtain the necessary permits and approvals, and enter into a series of agreements with the FGN and the Flare Gas Producer. These include the Gas Supply Agreement and the Milestone Development Agreement between the off-taker and the Government, the Connection Agreement and Deliver-or-Pay Agreement between the off-taker and the Flare Gas Producer.

In spite of some the concerns identified in the commercial structure of the NGFCP, it is without doubt, expected to have some beneficial impact. Nevertheless, some of these concerns could be remedied if the NGFCP adopts a commercial structure mutually advantageous to both flare gas off-takers and producers of associated gas. Successful utilization of flare gas could yield tremendous environmental and economic benefits for the host communities in the Niger Delta region.

This program invariably, will save government the billions of dollars lost annually through a flare of gas that could be put to commercial use.

For a better society