“On behalf of the Federal Government of Nigeria [FGN], this programme seeks to attract investments and develop a transparent market mechanism through a competitive procurement process for allocating gas flares, under clear and transparent criteria, to competent third party investors using proven technologies in commercial application globally. The Nigerian Gas Flare Commercialization Programme (NGFCP) is an opportunity for Government, industry, State Government, ethnic nationalities, and local communities to work together to resolve an oil field unacceptable practice.”
– NGFCP website https://ngfcp.dpr.gov.ng/about-us/historical-background/
“…The FGN has approved the National Gas Policy 2017 with specific policy measures for the upstream, midstream and downstream segments of the petroleum sector. On that basis, the FGN took the decision to commercialise Flare Gas.”
Preamble (Para 1), Guidelines for Grant of Permit to Access Flare Gas, December 2018[1]
Introduction
Although Nigeria has for several decades established herself as a major producer of crude oil, she has often been rightly described as “a gas province with some oil in it”.[2] The Nigerian National Petroleum Corporation (NNPC) recently disclosed that Nigeria’s proven gas reserve has gone up (as at 2018) to 202 trillion cubic feet (TCF), with unproven gas reserves of about 600TCF.[3] Thus, Nigeria is ranked 1st in Africa and 9th globally in terms of proven natural gas reserves, whilst fellow African producer, Algeria, is ranked 2nd in Africa and 11th globally.[4] Ironically, at 95,898.5 million cubic metres (MCM),[5] Algeria produces more than double of Nigeria’s marketed production of natural gas.[6]
Despite historic efforts by the Federal Government (FG) to encourage gas utilisation for power generation as well as for industrial and domestic use, “with almost 8 billion cubic meters of gas flared annually according to satellite data, Nigeria is the seventh-largest gas flarer in the world. At the same time, approximately 75 million Nigerians lack access to electricity.”[7] Such alarming wastage of a very valuable resource that Nigeria sorely needs to fuel its development, literally amounts to burning cash, not to talk of the environmental degradation and hazards that result thereby.
This article examines the issues around gas flaring in Nigeria and analytically explore the prospect of the FG’s recently announced Nigerian Gas Flare Commercialisation Programme (NGFCP),[8] which is envisaged as an antidote to gas flaring. We will preface our discussion with some historic background of gas flaring in Nigeria and how it became an endemic, festering problem that has hitherto significantly defied all solutions.
Quagmire: The Evolution of Gas Flaring in Nigeria
It is safe to state that gas flaring inexorably began when oil production commenced in Nigeria. Associated gas (unavoidably lifted together with crude oil), must either be harvested or disposed onsite, as an unwanted by-product of oil.[9] Unfortunately, most of the production facilities, including refineries at the time, did not possess gas gathering and/or processing infrastructures.[10] Thus, the practical alternative was to flare the gas.
As mentioned, this is not only wastage of a valuable economic resource, but has also resulted in dire health and environmental consequences. For instance, it has been stated that more than 400 million tonnes of carbon dioxide is injected into the world’s atmosphere yearly from gas flares in Nigeria.[11] This is quite sobering. Indeed, widespread gas flaring has indisputably inflicted untold hardship and damage to human, plant and animal life in the Niger Delta region.[12]
Various Federal administrations have sought to curtail gas flaring through diverse policies, incentives, programmes and projects. Some of these includes legislative action: the enactment of the Nigeria Liquefied Natural Gas (Fiscal Incentives Guarantees and Assurance) Act[13] (NLNG Act) which facilitated undertaking of the NLNG project, itself currently under plans for expansion to a 7-train facility;[14] the Petroleum Profit Tax Act[15] (PPTA); Companies Income Tax Act[16] (CITA); and the Associated Gas Re-injection Act[17] (AGRA), etc. Private sector led initiatives like the West African Gas Pipeline (WAGP) project;[18] Escravos Gas-to-Liquids (EGTL),[19] ramp up activities in the liquefied petroleum gas (LPG) and compressed natural gas (CNG) space, various gas processing projects, their associated infrastructure as well as increase in the number and capacity of gas powered generating plants, amongst others have, and are contributing their quota, in addition to regulatory prescriptions on Domestic Gas Supply Obligations (DGSOs).[20] Nigerian power sector policy documents had always recognised the place of “gas to power”, whilst obviously we have not made as much progress that was envisaged.[21]
A gas flare reduction project that did not see the light of day, and alleged to be a scam on Nigeria because the sponsor lacked execution capacity, involved Process & Industrial Development (PI&D). The dispute aftershocks of the failed arrangement is still attracting global attention, and being monitored to see the eventual outcome.[22] Undoubtedly, lessons are being learnt too.
And not the least on the positive side is industry advocacy, exemplified by the Nigerian Gas Association (NGA).[23] All these must have ‘influenced’, the FG’s various deadlines/directives for the cessation of gas flaring;[24] the more recent flare deadline being 2020,[25] as obviously, the optimism expressed by NAPIMS about a 2008 flare-out date was not realised.[26] The proposed trans-Saharan gas pipeline through Niger and Algeria to Spain would have also contributed its own quota in reducing quantum of flared gas, but alas it is yet to fully take off even though initial commissioning timeline was August 2018.[27]
According to a World Bank (WB) study, “…only a few oil-producing countries have significantly reduced associated gas flaring and venting volumes, and in most jurisdictions flaring and venting volumes continue to rise with increased oil production.”[28] Government had instituted both “carrot and stick” approaches to reverse the trend without significant success. The carrot is exemplified by enacted gas related tax/ investment/utilisation incentives in the NLNG Act, PPTA and CITA, respectively.[29]
One may even ask the question whether Nigeria has been too liberal with its carrot and stick approach to gas flaring? For example, section 11(2) PPTA (part of incentives for utilisation of associated and non-associated gas), provides that “the company shall pay the minimum amount charged by the Minister of Petroleum Resources for any gas flared by the company”. This provision which allows the operator to pay the lowest applicable rate (if there are two or more rates), severely blurs the boundaries between carrot and stick.
On the other hand, the stick is exemplified by the various penalties aimed at discouraging the practice of gas flaring/ameliorating the harmful effects of the practice on the environment. Although, the various policies which represents the stick approach is discussed in greater detail below, suffice to say that Nigeria has very little to show despite the adoption of penalties by the government over the years.
Little progress has been made to reduce gas flaring after over six decades of oil production and refining in Nigeria. The pertinent question is why has the practice of gas flaring defied solution in Nigeria? Perhaps, a peep into the legal regime, if any, for the practice of gas flaring will provide a clue.
Legality and Legal Regime for Gas Flaring in Nigeria
Nigerian Constitutions have, over the years vested the sovereignty over the entire property in and the control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria, or her territorial waters and the Exclusive Economic Zone (EEZ), in the FG.[30] Pursuant to this, the FG grants Oil Prospecting Licenses (OPLs) and Oil Mining Leases (OMLs) to upstream operators. It is also interesting to note that Section 17(d) 1999 Constitution contemplates the prevention of exploitation of human or natural resources in any form whatsoever for reasons, other than the good of the community. In the same vein, section 14(b) 1999 Constitution declared that the security and welfare of the people shall be the primary purpose of government.
Ordinarily, the combined reading of these latter provisions should render the practice of gas flaring unconstitutional, in the light of its harmful health and environmental implications. However, such effectual outcome is implausible, as the entire Chapter 2 1999 Constitution comprising sections 14 and 17 amongst others, are not justiciable.[31]
Furthermore, section 7 (g)(h)(j) and (k), National Environmental Standards and Regulations Enforcement Agency (Establishment) Act,[32] (NESREA Act) excludes the oil and gas sector from the powers of the NESREA to enforce environmental standard regulations and legislations.[33] Instructively, the Environmental Impact Assessment Act[34] (EIAA) says nothing about gas flaring, much as none of the Acts on the environment expressly seek to prohibit gas flaring. Consequently, there has been series of bills seeking to prohibit and regulate gas flaring.[35]
Thus, the dearth of enforceable express legal instruments prohibiting gas flaring explains why most of the actions challenging the practice/continuation of gas flaring are usually brought pursuant to international instruments such as the International Covenant on Economic, Social and Cultural Rights, the International Covenant on Civil and Political Rights, and the African Charter on Human and Peoples’ Rights.
In SERAP v. Federal Republic of Nigeria,[36] the Court of Justice of the Economic Community of West African States (ECOWAS Court) held that Nigeria should take all effective measures, within the shortest possible time, to ensure restoration of the environment of the Niger Delta; take all measures that are necessary to prevent the occurrence of damage to the environment; and take all measures to hold the perpetrators of the environmental damage accountable.[37]
Over the years, the FG has only sought to regulate gas flaring in order to minimise its harmful effect. Thus, gas flaring may only become illegal when done outside the ambit of extant legal provisions. The first major legislation regulating gas flaring in Nigeria is the AGRA (enacted in 1979), and its subsidiary legislation, the AGRA (Continued Flaring of Gas) Regulations 1984. They both prohibited gas flaring without the written permission of the Minister of Petroleum Resources vide a certificate for the continued flaring of gas.[38] Penalty for non-compliance was put at 2Kobo/1000 Standard Cubic Feet (MSCF), which was later increased to 50 Kobo per 1000SCF in 1990, and then to N10 /1000SCF in 1998.[39]
The current detailed legal regime for the regulation of gas flaring is the Flare Gas (Prevention of Waste and Pollution) Regulations 2018 (FGR 2018), issued pursuant to section 9(1) Petroleum Act[40] (PA) and section 5 AGRA. FGR 2018 focus on the reduction of the environmental and social impacts of gas flaring, prevention of waste of natural gas resources and creation of social and economic benefits from gas flare capture. FGR 2018 aims to discourage gas flaring through the imposition of a new flaring fee regime: payment of US$2.00 per MSCF gas flared where the lessee produces 10,000 or more barrels of oil a day; and US$0.50 per MSCF where the field produces less than 10,000 barrels a day.[41]
Gas Flare Commercialisation: Panacea to Causes and Catalyst of Gas Flaring?
Nigeria’s below par performance on gas flaring underscores the truism that drastic problems require drastic solutions, and it is heart-warming that NGFCP essentially symbolises a “root and branch” approach to dealing with the problem. Attending to root causes will yield faster, more impactful and sustainable results. Whilst the NGFCP’s objectives and framework seem lofty and workable, its success is heavily dependent on its ability to effectively address the various historic catalysts of gas flaring in Nigeria.[42]
We now discuss some of these root causes/catalysts below:
Low Profitability of Associated Gas Capturing
Although associated gas incurs no added costs of exploration, the difficulties and high costs of transportation to a domestic market which is not sufficiently large or concentrated to absorb the costs, has always been a major incentive for upstream operators in Nigeria to adopt the “easy route” of gas flaring.[43] Overall profitability will continue to be a critical consideration; presumably the NGFCP bid round itself affords intending participants opportunity to think through their strategy in case they are eventually successful at the end of the process.[44] They are presumed to want to “get their hands dirty”, since the entire purport of the NGFCP is to ‘uproot’ or terminate gas flaring.
Lack of Critical Gas Capturing and Transportation Infrastructure
Gas infrastructure is critical to harnessing Nigeria’s gas reserves; although there are insufficient gas capturing and transportation infrastructure, the key infrastructure deficit is primarily on the nation’s gas transmission backbone.[45] Thus gas projects have been experiencing relatively slow pace of growth. Again, a major transformation of the Nigerian gas sector is hinged on the Nigeria Gas Transportation Network Code (NGTNC), which was recently launched by FG as the uniform protocol for users of the Gas Transportation Network (GTN) in order to provide open and competitive access to gas transportation infrastructure and development in Nigeria.[46] The introduction of the NGTNC will provide windows of opportunity to various industry players, investors and potential gas off-takers to engage in different aspects of the gas value chain.[47]
Pursuant to NGFCP, direct investment by successful bidders in operations around the flare sites is meant to beneficially reduce or eliminate flaring.[48]
Pricing Issue
A market reflective pricing framework needs to come to full effect in Nigeria to incentivise investors into the gas sector. Pricing of natural gas should reflect the increasing demand for the resource in Nigeria and the capital requirement to actualise that. Previously, another concern was the price subsidy offered to gasoline – a substitute for compressed natural gas (CNG), but which has more or less gone now. In all, investors are more likely to embrace NGFCP where it is clear that the price of gas will not be regulated but will be determined by market forces.[49]
Tax Deductibility of Gas Flare Penalty
Prior to FGR 2018, there was little financial deterrence to gas flaring in Nigeria, and (as borne out by the law reports), challenge to the deductibility of gas flare penalties is a somewhat recent event; the FIRS “leniently”, appeared to have accepted same as a matter of course historically.[50] It appeared that the change in FIRS’ approach was influenced by the position of the Nigerian Extractive Industry Transparency Initiative (NEITI) that gas flare fines are not deductible, hence FIRS started disallowing them leading to tax appeals. The lenient or traditional view (that once fines are actually incurred, they should be deductible) must have also informed the earlier decisions by the Tax Appeal Tribunal (TAT) which upheld deductibility.[51]
In MPNU v. FIRS, the TAT held that once the Ministerial sanction is obtained and the stipulated penalty is paid for the SCM of gas flared, by section 10(1) PPTA the penalty will qualify as deductible expense being wholly, exclusively and necessarily incurred for the purposes petroleum operations. Also, section 10(1)(l) PPTA provides that all sums incurred by an upstream company by way of tax, rates, fees, duties or any like charge shall be deductible for the purpose of computing the taxable profits of such company for the relevant accounting year.
However, the TAT decisions in MPNU and SPDC were reversed on appeal by the Federal High Court (FHC) in FIRS v. MPNU, [52] and FIRS v. SPDC.[53] In the former, Shagari, J held that flaring gas without permit or certificate from the Minister amounts to an invalid act, which disentitles the operator from enjoying section 10(1)(l) PPTA deduction. This is moreso that the discretionary ministerial power does not mean that applications for gas flaring certificates would be automatically granted, neither can none or delayed response be presumed to be approval of such application. Given that the purpose of AGRA is to discourage gas flaring, the Respondent cannot benefit from section 10(1) PPTA in the circumstances.
In the latter, the FHC (Aikawa, J), also held that fees for gas flaring without the approval of the Minister is not within the category of expenses incurred wholly, exclusively and necessarily from a company’s operation as envisaged by section 10(1) PPTA and are therefore not tax deductible. In line with the doctrine of judicial precedence, the TAT is bound by the appellate decisions; we can therefore safely say that the FIRS approach has, in line with judicial imprimatur, evolved from leniency to a more aggressive stance.
Whilst it is now clear from recent cases that the courts were – as a means of discouraging gas flaring – leaning towards disallowing upstream companies’ gas flaring penalties, the debate is now moot by virtue of section 12 FA2 2020.[54] That provision inserts a new section 27(k) CITA listing: “penalty or fine imposed pursuant to a legislation enacted by the National Assembly or State House of Assembly” amongst “deductions not allowed”. It is trite law that the Courts must give effect to express words of the legislature, where they are clear and unambiguous: NB Plc v Governor of Oyo State.[55] If the penalties are significantly stiff and non-deductible, that would be a double-edged disincentive to continue, or not to, minimise flaring.[56]
Given that the FA2 2020 became effective on 1st January 2021, it has become more imperative for operators to gird their loins, especially as the PIB (discussed below, which is expected to be enacted in 2021), also leans heavily against gas flaring. The possibility of future flaring ultimately reflecting the unfortunate conclusion that it may still be more economic for upstream companies to flare gas on some assets, in lieu of the massive investments required for gas gathering, processing and transportation from such assets, is now moot courtesy of the NGFCP.
Lack of Sufficiently Prohibitive Measure against Gas Flaring
Indeed, the challenges with the practice of gas flaring in Nigeria can be summed up as resulting from historic lack of regulatory cum political will of instituting a sufficiently prohibitive regime against gas flaring, and enforcing same. Thus, upstream companies often found it easier, (and profitable) to pay the stipulated gas flare penalty than capture same.
This is not the case in Algeria, where gas flaring is forbidden and an exceptional authorisation for a period not exceeding ninety (90) days with a penalty of US$62 per MCM which is not tax deductible, is seldom available. A similar regime exists in South Sudan where gas flaring or venting is prohibited unless specifically authorised or in the event of an emergency, and investors are obliged to invest in necessary facilities to utilise any gas they produce.[57]
Hopefully, the anti-flaring stance of the new CITA and proposed PIB provisions will, together with the NGFCP, provide the requisite incentives to making large scale gas flaring a thing of the past in Nigeria.[58]
The NGFCP: Prospects of Gas Flare Commercialisation in Nigeria
The NGFCP is a part of the wider National Gas Policy (NGP) which “commits to ending gas flaring, create an enabling environment for investors, achieve value addition for gas, and improve governance in the sector.”[59] The NGP itself has its roots from the Nigerian Gas Masterplan (NGM) approved by the Yar’adua administration in February 2008 to serve as guiding basis for the commercial exploitation and management of Nigeria’s gas sector.[60] The NGFCP is therefore a refined offshoot of several initiatives and decades of planning in the gas sub-sector, as a key mechanism for implementing Nigeria’s commitment and obligation to eliminate routine gas flaring.
The PA, the FGR 2018, and the corresponding Guidelines published by the DPR in December 2018, provide the basis for the NGFCP.[61] The dedicated NGFCP website details the background and objectives of the NGFCP.[62] Based on the right of the FG under the PA to take gas at the Flare Site free of cost,[63] the NGFCP was launched by the MPR in December 2016, after the Federal Executive Council had “approved the …NGFCP as the mechanism for implementing Nigeria’s commitment to eliminate routine gas flaring.”[64] The NGFCP is designed to offer a series of auction rounds to third party bidders in commercialisation of Flare Gas, with ultimate objective to end flaring.[65] By written instrument, the HMPR authorises Permit Holders[66] to take Flare Gas at specified sites on behalf of the FG; thus, a Permit to Access Flare Gas can be given only to companies other than producers of the gas being flared. [67]
A total of 238 applicants submitted their Statement of Qualification (SoQ) for participation in NGFCP, in response to the Request for Qualification published by the DPR, out which 203 emerged successful.[68] Whilst the entire process and timelines has been spelt out on the NGFCP website, owing to the Covid-19 pandemic amongst others, many of the steps and timelines have had to be postponed.
Incidentally, whilst the idea of a specific website is an innovative step for transparency, however it is important to ensure that real time, current information is reflected on the site. Such elevates the quality of the process, and enables third party observes keep track without let or hindrance from any location in the world. For example, process timelines revised in line with evolving circumstances should be promptly published for third party awareness.[69]
Also, Producers can participate in the NGFCP through a subsidiary midstream company in accordance with the provisions laid out in the Guidelines for Producer’s Associated Gas Utilisation Project (GPAGUP).[70]
The Petroleum Industry Bill 2020 (PIB) Dimension
In September 2020, President Buhari presented the Petroleum Industry Bill 2020 (PIB) as an executive bill to the National Assembly.[71] The PIB seeks to drastically transform Nigeria’s oil and gas operating, regulatory and fiscal landscape, after several previous failed attempts. Section 104 prohibits gas flaring except in the case of emergency, pursuant to regulatory exemption or as an accepted safety practice under established regulations (section 104(1)). Breach constitutes an offence and renders the operator liable to a fine that may be prescribed pursuant to regulation under the Bill. Such fine shall be payable in the same manner as royalty (section 104(2). Furthermore, such fine shall be neither be eligible for cost recovery nor be tax deductible (section 104(3)).[72]
Section 105 also provides for gas flaring penalty under the FGR 2018, suggestive that this is a separate penalty. By section 106, operators are obliged to measure flared gas through metering equipment, with breach criminalised, and liable to a fine that may be prescribed regulation. However, operators may be granted exemption to flare gas for specific period where required for facility start-up or for strategic operational reasons, including testing (section 107). According to section 108, operators are also obliged to submit their Natural Gas Flare Elimination and Monetisation Plan to the Commission, pursuant to relevant regulations under the Bill.
Finally, even if indirectly, the domestic gas delivery obligations in section 110 may also be relevant. Of particular importance is section 110(5) empowering the Commission to “require a lessee producing natural gas to carry out works and operation which may be required to increase production and to dedicate specific volume of the natural gas produced towards the requirements of the domestic market.”
Conclusion
The FG has stood with its 2020 deadline for ending gas flaring with the hope that NGFCP will help to put an end to the practice.[73] Unfortunately, evidence on ground shows that this deadline could not be met. This is because there has been little or no changes in the practice of gas flare. There is however no doubt that NGFCP is a step in the right direction towards ending gas flaring in Nigeria but the government must do more. Implementation is key for the actualisation of this programmes and other plans of the FG.
Also, there is need for increased transparency and adherence to due process in the oil and gas sector. Conflict of interest by the FG and its institutions like the NNPC as policy maker /significant contributor to policy making, legislator, regulator and commercial participant must be decisively addressed beyond the NGFCP. A more market driven commercial gas framework whereby government participation is focused on optimal regulation[74] and facilitative business environment including de-bottlenecking gas to power to unleash the potentials of that value chain, will be helpful in incentivising investments. It is trite that capital always obeys the law of attraction – it is attracted by prospects of reasonable returns, all things considered.
The NGFCP promises to be a strategic piece amongst current and proposed initiatives with potential to reinvigorate the Nigerian oil and gas industry which has more or less plateaued for over a decade. It is therefore critical that these initiatives are synched to ensure that there are no cross-fires/contradictions, and that each delivers optimality for greater overall impact. How does the ongoing Marginal Fields Bid Round (MFBR) relate to the NGFCP and vice versa?[75] How much of a transformation will the PIB bring? Whilst assumedly every prospective participant in the NGFCP and MFBR are conscious of the wider operating context that the PIB will represent, the regulatory authorities must also ensure a seamless interface of all these initiatives for sector efficiency that delivers benefits to all stakeholders.
In summary, the NGFCP has the potential not to be just another initiative in the long list of futile attempts to end gas flaring in Nigeria. We are positive that times of enhanced value contribution are ahead for the oil and gas industry, with a clear line of sight for the end of gas flaring as a result of the successful consummation of the NGFCP and MFBR initiatives.[76] Disciplined delivery can impel confidence to borrow the words of a popular advertisement in Nigeria, that “the future is looking bright”!
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