This issue-brief examines the novel provisions in the Petroleum Industry Bill and their possible impacts on the current state of gas utilisation in Nigeria.
Issue-Brief | Oyin Komolafe
Over the years, Nigeria has battled with the under-utilisation of its gas resources. This is in spite of the fact that the country possesses the largest volume of gas reserves in Africa. The flaring of associated gas still persists, gas fields are left to lay fallow until they become tagged as marginal fields, and gas investments remain low.
Whilst efforts have been targeted at incentivising the non-oil sector and fostering gas-based industrialisation, these efforts seem to be falling short of expectation, as in 2018 alone, Nigeria lost US$761.6 million to gas flaring. Worse still, from January to July 2020, the country lost $787.7 million to the same menace — a whooping increase of US$26.1 million from what the country had lost in preceding years, in just the first half of the current year.
However, the hopes of stakeholders have peaked as a result of the passage of the Petroleum Industry Bill by the Nigerian Legislature. This is as a result of the fact that the bill does not only revamp the structure of the Nigerian oil and gas industry, it introduces novel provisions which could potentially solve the challenges which plague the Nigerian gas industry, especially within the context of gas utilisation. The bill is currently before the President of the country, awaiting assent. As such, this brief examines the novel provisions in the Petroleum Industry Bill, and their possible impacts on the current state of gas utilisation in Nigeria.
Nigeria possesses proven gas reserves of over 200 trillion cubic feet(tcf), and unproven reserves of approximately 600tcf. In a bid to tap into the potential revenue from these resources, Nigeria has joined the bandwagon of countries like India and Qatar, to intensify gas production, marketing and distribution.
With the release of policies like the Gas Master Plan, the Nigeria Gas Flare Commercialisation Programme and the National Gas Policy, the country has kept stakeholders up-to-date on its long-term plans to incentivise its gas industry.
In yet another indication of the federal government's commitment to gas utilisation, the Nigeria Liquefied Natural Gas(NLNG) Ltd recently signed a US$3bn corporate loan to finance the construction of its seventh train. This train is expected to increase Nigeria's Liquefied Natural Gas output by 8 million tons per annum.
Yet, the factors hindering gas utilisation in the country are numerous. These challenges range from unfavourable gas pricing systems to weak enforcement frameworks. As such, there are doubts as to whether the mere provision of gas infrastructure would be the long-awaited panacea for the industry's problems.
However, the recently passed Petroleum Industry Bill seems to be the light at the end of the tunnel. The bill contains provisions which include the mandatory development of marginal fields, enforcement of the gas flare tax, a wider reach for gas incentivisation and even a novel gas pricing system which could boost FDI and gear domestic gas supply.
Mandatory Development of Marginal Fields
Marginal fields are fields which are low in oil or gas reserves, close to plugging, and have laid unproductive for at least, ten years. These fields are either farmed out to a third party (through a farm-out agreement) or they are transferred to the government. In a bid to boost indigenous participation in the oil and gas industry, and equally develop Nigeria's gas reserves, the country launched bidding rounds for these fields. The first bidding round was held in 2003, and currently, bidding rounds are ongoing for 57 marginal fields— marking the second marginal field bidding process in Nigeria's history.
However, the major problem with this initiative is that most winners of bidding rounds, often abandon these fields, primarily due to lack of the requisite capital to develop the fields or just general indifference.
In a bid to tackle this challenge, the bill mandates Oil Mining Lease(OML) holders to either develop their marginal fields, farm them out or relinquish the fields to the government. The bill further subjects the approval of a farm-out agreement to the presentation of a field development plan by the farmee. These provisions would help to ensure that gas fields do not lay unproductive, and gas resources will be harnessed for value creation.
Ending Gas Flaring
For several decades, the flaring of associated gas has remained prevalent in the Nigerian oil and gas industry. To combat this problem, Nigeria has set several deadlines to end routine flaring. Deadlines were pegged at 2008 and 2010, to no avail. The most recent deadline, 2020, also seems to have slipped from the country's hands, as revenue continues to be lost to gas flaring.
Nigeria imposed a carbon tax on gas flaring in 1991, with the Associated Gas Re-injection Act, 1979. Currently, the tax is pegged at US$2.00 for the production of over 10,000 barrels per day(bpd), and US$0.50 for the production of less than 10,000 bpd. However, the carbon tax has led to little or no improvement. There are several bottlenecks attached to its enforcement, ranging from false reporting to lack of government will.
In line with the country's gas flaring elimination plan, the Petroleum Industry Bill contains provisions which mandate natural gas producers to submit, within 12 months of production, a plan which details strategies in place for curtailing gas flaring. Similarly, the Bill mandates operators to install metering equipment in their oil fields, to track and measure flared gas. This is a laudable improvement, as it could potentially solve the problem of false reporting.
Incentivisation of Gas Production
The Companies Income Tax Act, has, for a long time, contained provisions detailing several fiscal incentives and benefits for companies involved in gas utilisation, which the Act defines as the marketing and distribution of gas. Basically, these incentives are only extended to downstream operators.
However, the Petroleum Industry Bill seems to have opened the floodgates, to give room for other operators to benefit from these incentives. The Bill extends the category of eligible operators to include companies involved in domestic midstream petroleum operations and large-scale gas utilisation industries(mini Liquefied Natural Gas plants and industries that use natural gas as feedstock). One of the major incentives is an initial three-year tax-free period, which can be extended for two years, subject to the satisfactory performance of the company.
A Beneficial Gas Pricing System
In Nigeria's long-term gas development plans, the country does not only seek boost gas investment, it also sets out to meet domestic gas demand. Whilst gas operators are usually mandated to fulfil their domestic supply obligations, these operators are often reluctant or generally disregard these obligations, as a result of the fact that the domestic sale of gas is often not profitable. Domestic gas prices are not high enough to ensure profitability, and as a result, operators often opt for exporting Liquefied Natural Gas instead.
To solve this problem, a new pricing system has been detailed in the Petroleum Industry Bill. Through this price system, prices are set for buyers in the strategic sectors on one hand, and gas retailers and distributors on the other hand. The strategic sectors constitute the power sector, commercial sector and gas-based industries. According to the pricing system, the domestic base price for gas will be pegged at US$3.20 per Million British Thermal Units (MMBtu). This is a US$0.7 increase from the current base price of US$2.5.
The bill also states that from 2021, the base price will be increased annually by US$0.05, till 2037, when the base price will be pegged at US$4.00. This new system will help to boost the domestic supply of gas, and attract investment in the gas sub-sector, as more investors would begin to get their money's worth.
Whilst the Petroleum Industry Bill promises to kickstart the transformation of the Nigerian oil and gas industry, the process does not stop with the passage of the bill into law. Already, countries like Norway are far ahead of Nigeria, both in the development of oil and gas resources, the revitalisation of the economy, as well as the elimination of gas flaring, and this is in spite of the fact that both countries (Nigeria and Norway) launched their flaring elimination plans at around the same year.
Should the Petroleum Industry Bill be finally passed into law, Nigeria will need to show its full commitment to realising gas-based industrialisation in Nigeria by gearing the enforcement of its carbon tax, accelerating the completion of gas projects in order to build a strong gas transmission network, and creating an enabling environment for investment by cutting down on legal and regulatory inconsistencies.
This is part of our series on #ThereIsABillinTheHouse.
This issue brief was provided by
Oyin Komolafe | Research Assistant, Energy | firstname.lastname@example.org
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