Oil and Gas, Energy, Gas Pricing, Natural Gas, Company Law, Oil and Gas Companies in Nigeria.
By Oluwaseun Lawal,
Associate, Allen & Brooks.
The Nigerian natural gas sector is a critical component of the country's energy mix and has significant potential to drive economic growth and development. Nigeria has struggled to maximize the potential of the sector due to a range of challenges, including a lack of adequate infrastructure, poor pricing mechanisms, and inadequate regulatory oversight.
In August 2021, the Nigerian government enacted the Petroleum Industry Act (PIA) to address some of these challenges and provide a comprehensive legal framework for the oil and gas industry. One of the key provisions of the PIA is the establishment of both the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA or the Authority) and the Nigerian Upstream Petroleum Regulatory Commission (NUPRC or the Commission). The Commission was established to regulate and oversee the upstream petroleum industry in Nigeria and to supervise, monitor and regulate all exploration and production activities of oil and gas in Nigeria while the Authority is tasked with regulating the natural gas market and ensuring the efficient supply and distribution of natural gas to both the domestic and international markets.
To this end, on February 9, 2023, the NMDPRA released the Gas Pricing and Domestic Demand Regulations 2023 (the regulation) in consonance with the PIA which provides for a comprehensive framework to regulate gas pricing, quality standards, delivery infrastructure, and third-party access to the domestic gas market. The regulation seeks to ensure that natural gas is adequately supplied to the domestic market by regulating prices, specifying quality standards, reviewing tariff structures, and promoting free market conditions for gas stakeholders. Some key provisions of the regulation include:
Domestic Gas Delivery Obligations and Domestic Gas Demand Requirement
In Nigeria, the Domestic Gas Delivery Obligation (DGDO) is a policy framework that mandates gas producers to allocate a percentage of their total gas production for sale to the domestic market. This policy is aimed at increasing the supply of natural gas to the domestic market and encouraging the growth of the domestic gas industry.
On the other hand, Domestic Gas Demand Requirement (DGDR) refers to the amount of natural gas required by the domestic market, including households, commercial entities, industries, and power plants, to meet their energy needs. The DGDR is an estimate of the total amount of natural gas that is needed to satisfy the energy demands of the domestic market. It is used by gas producers and aggregators to plan their gas production, aggregation, and distribution activities to ensure that the required amount of gas is available to meet the market's needs. The DGDR is to be published by the Authority on or before the 1st of March of each calendar year.
The Nigerian gas market has been divided into three domestic markets also referred to as the strategic sectors, which consists of the power sector, gas-based industries, and the commercial sector. The power sector comprises power plants that generate electricity using natural gas as a fuel source, while gas-based industries use natural gas as a feedstock for industrial processes such as fertilizers, petrochemicals, and methane production. The commercial sector utilizes natural gas as a fuel source for heating, cooking, and air conditioning, among other purposes.
As per Section 167 of the PIA, the Authority is empowered to regulate the gas pricing of industries in the three strategic sectors. The industries that constitute these strategic sectors are also to be published by the Authority in the Federal Gazette. However, the regulation exempts certain industries such as mini-grids that do not connect to the national grid and operate on renewable energy sources as well as captive or embedded power plants that supply electricity to a single user or customer such as factories, mines or private investors, unless they use gas as their energy source. In the case of gas-based industries, their inclusion in the list of industries published in the Gazette will be based on the pricing mechanisms the Authority implements in accordance with Section 168(5) of the PIA.
Industries excluded from the gazette can also apply for inclusion where they believe they should be included.
Under the regulation, pricing in the natural gas sector is grouped into regulated and unregulated pricing. Regulated pricing solely affects natural gas sold in the regulated domestic market as opposed to the unregulated pricing where natural gas is sold to other buyers, such as international buyers or industrial consumers who negotiate prices directly with suppliers on a willing buyer and seller basis. Therefore, natural gas sold outside of this regulated domestic market is not subject to the regulated prices specified by the Authority.
The unregulated pricing applies to the following:
Sale of raw gas by the producer
Sale to wholesale customers who have negotiated their supply contracts with the lessee and the gas aggregator no longer serves as their agent
Wholesale gas suppliers
The unregulated pricing shall be free from government control and shall include free market prices.
The minimum price at which natural gas can be sold to the domestic market is referred to as the domestic base price. The Authority determines the domestic base price on the 1st of April each year, and it must be the lower of the export parity price or the domestic gas supply price.
For proper context, this domestic base price is determined based on the export parity price, which is a pricing methodology used to determine the price of natural gas for export and the domestic gas supply price is the price which producers charge for supplying gas to the domestic market.
For feed gas utilized by gas-based industries, the Authority determines the price on a monthly basis, based on the average month-end price for the previous month.
The Authority also determines the average international gas price, which is the average price of natural gas in emerging countries. The list of countries used in the determination of prices is published before the 1st of February of each calendar year.
The gas aggregator is responsible for collecting natural gas from various sources and aggregating it before supplying it to end-users, such as industries, power plants, and households. This ensures that there is a steady supply of natural gas to the strategic sectors and that the pricing of the gas is in line with the government-approved pricing framework. The Gas Aggregation Company of Nigeria Limited (GACL) is an example of a gas aggregator in Nigeria. The regulation empowers the gas aggregator to collect both the DGDO and the DGDR from the Commission and the Authority respectively to compare and ensure both sets of information correspond and in the contrary, the aggregator is to refer the information to the Commission and the Authority to ensure any discrepancies are corrected.
The gas aggregator will also conduct due diligence on applicants willing to engage its services as a client i.e. engage its services as an aggregator and afterwards issue a gas purchase order to the consumer and the producer. This gas purchase order must include the following:
The lessee supplying the required volume of natural gas
The quantity and quality of natural gas supplied
Price payable by the wholesale customer
Location for delivery
The delivery schedules
Other details as may be determined by the aggregator
Upon issuance of gas purchase orders, the producer alongside the consumer can enter a Gas Purchase and Sale Agreement. The parties are to also make payment into an escrow account pending delivery of the gas to ensure it conforms with the necessary requirements. Where the parties intend to discontinue the payment into the escrow account, they shall inform the aggregator, the Commission, and the Authority. This means the parties are free to negotiate on a free-market basis and shall cease to be clients of the gas aggregator.
Where the supply of gas is higher than the demand requested by the strategic sectors, the gas aggregator is required to advise the consumer to enter into agreements with the producers on a free-market basis. A free-market basis refers to a situation where the prices are negotiated between a voluntary seller and voluntary buyer devoid of government intervention.
Adoption of a Free Market
As earlier explained, in a free market, natural gas producers and consumers are free to engage in transactions without interference or manipulation by the government, subject to basic safety and environmental regulations. The Authority is empowered to determine whether a particular strategic sector has achieved a free-market status and where it is determined in the affirmative, such sector shall be given at least a year’s notice after consultation with the Commission notifying major stakeholders that the regulated pricing will cease to apply to that sector. In determining whether a strategic sector has achieved free market status, the Commission puts into consideration the following factors:
Whether such sector has been largely unregulated
Whether pipelines or trucks delivering gas to that sector are adequate to prevent monopoly of gas by producers.
The existence of adequate trading platforms to ensure buyers and sellers have access to reliable information leading to a more efficient and competitive market. Some examples of trading platforms in the natural gas sector include the Nigerian Gas Company Electronic Platform (NGC EP) and the Nigerian Electricity Supply Industry Trading Plc (NEST).
The existence of key infrastructures for transporting natural gas like pipelines and also the existence of third-party regulations to ensure non-discriminatory access to delivery infrastructure and also ensure purchase of natural gas at competitive prices.
The existence of bilateral and over-the-counter (OTC) agreements, gas balancing agreements and standard trading contracts to ensure natural gas is bought at the best possible prices.
The regulation also provides the following penalties:
For failure to obtain license, furnish accurate information or failure to comply with directives under the license and permits, such defaulter shall be liable to pay a sum of USD100,000 in addition to suspension or termination of the license.
For failure to comply with domestic gas delivery obligations, such producer or supplier shall be disallowed from delivering gas to any export project until the domestic gas delivery obligation is met.
For failure to pay money into an escrow account, the liability is payment of an administrative penalty not exceeding USD 1,000,000.
The Nigeria Gas Pricing and Domestic Demand Regulations of 2023 represents a significant step towards ensuring an efficient, competitive, and sustainable natural gas market in Nigeria. The regulations provide a framework for the regulation of gas pricing, quality standards, and third-party access to delivery infrastructure, among other things. The regulations seek to create a balance between the needs of consumers and the interests of gas suppliers, while also promoting investment and innovation in the sector. With the implementation of these regulations, Nigeria is well-positioned to unlock the full potential of its natural gas reserves, promote economic growth, and improve the welfare of its citizens.
Originally published by Oluwaseun Lawal on LinkedIn
Reach Oluwaseun Lawal on LinkedIn.