Nigeria’s Flare Gas (Prevention of Waste & Pollution) Regulations 2018

Introduction

Nigeria has natural gas reserves of over 166 trillion standard cubic feet ¹ and is reputed to have the ninth largest gas reserve in the world. ² Natural gas production is currently put at 12 billion scf, mainly from associated gas produced in the course of crude oil production. ³ However, more than 60 per cent of this associated gas volume is flared. ⁴ Consequently, Nigeria’s abundant gas resources remain under-utilised, despite its reputation as a gas province with little pockets of oil. ⁵ Worse still, the preponderance of routine gas flaring has caused severe environmental despoliation, ⁶ leading to agitation in Nigeria’s Niger-Delta for an end to this process.

Gas flaring has been prohibited since 1979. ⁷ Nevertheless, nearly four decades later, producers have continued to rely on the proviso that allowed gas flaring upon receipt of the Petroleum Minister’s written permission. ⁸ The proviso was supposed to last only for a transitory period. ⁹ Aside from the environmental pollution, Nigeria has lost sizable proportions of its petroleum revenue as a result of the practice. From 2016–2017, 817.92 mmscfd of natural gas had been lost to flaring, ¹⁰ estimated in revenue terms at approximately $1 billion annually. ¹¹

The damage to Nigeria’s petroleum-producing communities in the Niger-Delta arising from gas flare activities have long been bemoaned. According to the international NGO, Friends of the Earth:

Gas flares burn several stories high throughout the Niger Delta, often within a few hundred yards of communities. Some flares…have been burning constantly day and night for over 30 years. People living in villages near the flares suffer from polluted air and water, and contract asthma and cancer as a result of breathing flare smoke…In Nigeria, only 40 percent of people have access to electricity. There is a real need for flared gas to be processed, distributed, and used for fuel for cooking or for electricity production. Using processed natural gas as fuel for cooking would replace the firewood that many Nigerians use for cooking and improve indoor air quality. ¹²

Gas flaring is also blamed for biodiversity loss as a result of the extinction of certain plant species in the Niger-Delta and for certain health conditions. ¹⁴ Discontented Niger-Delta indigenes have even applied to the courts for reprieve. To this end, a Nigerian court had found that the flaring of gas constituted deprivation of the people’s right to life. ¹⁵ Nevertheless, the practice has persisted, ostensibly as a result of lack of investment in gas production infrastructure.

The Nigerian Government initiated several projects to utilise gas that would ordinarily have been flared. ¹⁶ Along these lines, much progress in natural gas utilisation has been made with the Nigerian Liquefied Natural Gas, West African Gas Pipeline Company, Escravos Gas to Liquid Plant, SPDC Afam Power Plant projects etc, ¹⁷ thereby reducing gas flaring. Nevertheless, the problem has persisted.

The latest measure adopted by the Federal Government of Nigeria (FGN) to achieve the elimination of routine gas flaring by 2020 is the Nigerian Gas Flare Commercialisation Programme. In a nutshell, the FGN will, in the public interest, exercise its rights to take gas which producers have historically flared free of cost. Corporate entities that invest in natural gas development will acquire special permits to act on behalf of the FGN to take the gas. The machinery through which this would be achieved is the Flare Gas (Prevention of Waste and Pollution) Regulations 2018 (hereafter, ‘Regulations’). This article analyses the Regulations which entered into force on 5 July 2018.

The taking of gas at flare by the FGN via the regulations

The Constitution vests ownership of mineral resources, including oil and gas, exclusively in the FGN. ¹⁸ The FGN grants interests to petroleum companies in the petroleum resources in the form of leases and licenses. ¹⁹ Section 11 of the Petroleum Act provides as follows:

Subject to this Act and any special terms or conditions imposed under paragraph 34 of this Schedule, the lessee of an oil mining lease shall have the exclusive right within the leased area to conduct exploration and prospecting operations and to win, get, work, store, carry away, transport, export or otherwise treat petroleum discovered in or under the leased area.

It is important to note, however, that notwithstanding the above provisions, the Petroleum Act confers on the Petroleum Minister the right to impose special terms and conditions on a lease or license on grounds of public interest, as indicated in paragraph 35 of the First Schedule to the Petroleum Act. Paragraph 35(b) of the Petroleum Act states that the Minister may, if he considers it to be in the public interest, impose on a license or lease, special terms and conditions, not inconsistent with the Act, including terms and conditions as to special provisions applying to any natural gas discovered including:

The right of the Federal Government to take natural gas produced with crude oil by the licensee or lessee free of cost at the flare ²² or at an agreed cost and without payment of royalty.

The above provisions imply that (a) a license holder has exclusive rights to explore and produce petroleum, inclusive of gas on the leased area at all times during the term of the lease; (b) Special terms and conditions may, however, be imposed on the license only on grounds of public interest, including the right of the FGN to: (i) take associated gas free of cost where the producer intends to flare it or at an agreed cost without payment of royalty; approve the price at which the gas produced is to be sold; and (ii) to require the lessee to pay royalties to the FGN for gas produced and sold.

Further analysing the above, it can be seen that the question of whether the FGN has rights to flare gas is not one of ownership but one of a right to take if it is in the public interest of Nigerians. Wasting Nigeria’s associated gas resources and the accompanying environmental despoliation is a public interest that justifies the imposition of a condition on OMLs and marginal field licenses that the FGN takes flare gas. ²³ It is against this background that paragraph 2(1) of the Regulations provides as follows:

Pursuant to Section 9(1) of the Petroleum Act, Paragraph 35(b)(i) of the First Schedule to the Petroleum Act and all other laws in this regard, the Federal Government takes natural gas produced with crude oil free of cost at the flare and without payment of royalty.

Permit to access flare gas data

No doubt, the FGN would require accurate data as to gas flare points and volumes etc, to effectively carry out the objectives of the Regulations. The producer is required to provide accurate and complete flare gas data within 30 days of a Department of Petroleum Resources’ (DPR) request ²⁹ or risk being fined 50,000 naira and/or a sentence of up to six months’ imprisonment on conviction. ³⁰

The Department of Petroleum Resources would grant bidders for the flare gas volumes access to the flare gas data by issuance of a Data Access Permit. ³¹ In addition, as part of the bid process, bidders would, upon authorisation by the DPR, be entitled to enter the flare site to assess the site and related facilities of the producer in so far as the producer has had seven days’ prior notice and the Data Access Permit holder conducts the assessment in compliance with applicable safety standards and regulations. ³²

Permit to access flare gas

A Permit to Access Flare Gas is defined by the Regulations as: ‘…a permit granted to a Permit Holder by the Minister to take Flare Gas at a Flare Site on behalf of the Federal Government’. ³³ The Regulations then provides:

The Minister may grant a Permit to Access Flare Gas, which shall authorise the Permit Holder on an exclusive basis to take Flare Gas from one or more sites as designated in the Permit on behalf of the Federal Government and to utilise the Flare Gas or otherwise dispose it in any manner authorised by the Federal Government, provided that, any such authorisation shall be subject to such terms as may be specified in the Permit to Access Flare Gas, including the Flare Gas volume. ³⁴

Copious provisions are also made in the Regulations regarding revocation of the permit for breach, ³⁹ assignment of the permit, ⁴⁰ and fees to be charged through the permitting process. ⁴¹

Compliance and reporting obligations in the regulations

The producer and permit holder are required to maintain daily logs of gas flared and submit same to the DPR within 21 days of the end of each month. ⁴² To achieve this they are obligated to install metering equipment. The data provided in the log should conform to the Metering and Data Collection Standards issued by the DPR. ⁴³ It must include date, time, duration, rates, volumes and gas source or type relating to the flaring. ⁴⁴ They are also required to preserve copies of the logs for at least 36 months. ⁴⁵

The producer must maintain daily records of all associated gas produced, setting out details in a log which format conforms to the metering and data collection standards issued by the DPR. This should be submitted to the DPR monthly. ⁴⁶ The producer must also file an Annual Report at the DPR by every 31 March ⁴⁷ which must include flare gas data in a format to be specified by the DPR ⁴⁸ and a list of all flare sites for which a producer has no Connection Agreement ⁴⁹ with a Permit to Access Flare Gas holder. ⁵⁰

In like terms a Permit to Access Gas at the Flare Holder also has responsibility to submit annual reports to the DPR. ⁵¹ It should include details of flare gas volumes utilised at the flare site ⁵² and volume of gas flared and vented by the permit holder. ⁵³

The DPR is responsible for compiling all the above reports, preparing its own annual reports and publishing the report on its website by 30 June each year. ⁵⁴ The report compares: the volume of gas flared by all producers against the percentage of natural gas produced in the last two years; ⁵⁵ the percentage of associated gas produced against crude oil produced, ⁵⁶ associated gas utilised by producers; ⁵⁷ gas flare percentage for the current report year against previous years; ⁵⁸ and ranks producers on the basis of associated gas utilisation. ⁵⁹ The report will also consider the volume of gas utilised as against those flared by permit holders. ⁶⁰ It will compare this against records of previous years ⁶¹ and then detail payments received by producers for flare gas. ⁶² The Regulations also detail metering and safety standards. ⁶³

Ensuring compliance with the regulations

The Associated Gas (Reinjection) Act is re-echoed in the Regulations which prohibits the flaring of associated gas by the producer or Permit to Access Flare Gas holder unless the Minister consents otherwise. ⁶⁴ The penalty for flaring natural gas has now been increased from a mere ten Naira (NGN10.00) ⁶⁵ to $2.00 (two United States dollars) per 28.317 scf of gas flared within a mining lease or marginal field area producing 10,000 barrels or more of oil per day ⁶⁶ and $0.50 (fifty United States cents) per 28.317 scf of gas flared within a lease area or marginal field producing less than 10,000 barrels of oil per day. ⁶⁷ The penalties are payable for both routine and non-routine gas flaring. ⁶⁸ However, flaring that occurs as a result of force majeure events will not attract penalty payments. ⁶⁹

The only excusable reason to flare gas going forward would be that the producer has already entered into a Deliver or Pay Agreement with a Permit to Access Flare Gas for the gas volumes flared. ⁷⁰ It then becomes the permit holder’s responsibility to explain why the flare gas has not been harnessed. The rationale is obviously that any producer who has failed to take advantage of the FGN’s Nigerian Gas Flare Commercialisation Programme (NGFCP) has no excuse to flare gas. Indeed, the Regulations expressly allows the Minister to deny an application for permission to flare gas or even revoke a permission already granted where the producer commercialises the flare gas without recourse to the procedure stipulated in paragraph 3 of the Regulations or fails to comply with them. ⁷¹

The pooling of all flare sites by the Regulations allows for effecting the Nigerian Gas Flare Commercialisation programme for historical flare sites. Public interest therefore justifies penalising producers who have commercialised flare gas without recourse to paragraph 3 of the Regulations and yet continue to flare gas. To allow individual producers to commence uncoordinated gas flare commercialisation after the historically flared associated gas has been taken by the FGN at the flare will destabilise the NGFCP that has arranged the elimination of gas flare menace on the basis of flare gas available to investors.

The major objective of the Regulations is the elimination of gas flaring. They therefore put together a gas flare utilisation programme to ensure producers have an alternative to flare gas. Those who fail to cooperate with the FGN in bringing an end to the menace of gas flaring will suffer the penalty of a flare gas payment regime of $2.50 (two United States Dollars and fifty cents) per 28.317 scf of gas flared or vented in addition to the flare gas payment of paragraph 13 of the Regulations. ⁷² Default for which the flare gas penalty applies include the producer failing to: provide gas flare data requested by the DPR; ⁷³ allow an applicant for a permit or permit holder access to the flare gas site pursuant to the Regulations; ⁷⁴ failing to timeously prepare and submit any of the gas flare data logs, records or reports provided for under the Regulations; ⁷⁵ failing to timeously install appropriate metering equipment as required by the DPR; ⁷⁶ and refusing to enter into a connection agreement with a Permit to Access Flare Gas holder. ⁷⁷

As a final measure, the Minister may suspend the operations or indeed revoke the lease/license of a producer who continues in default of the Regulations. ⁷⁸ The suspension or revocation finds support in the Petroleum Act and the Associated Gas (Reinjection) Act pursuant to which the Regulations were made. Copious provisions are made in both Acts, particularly in the Petroleum Act, detailing the powers of the Minister generally and even the Minister’s regulation-making power. For instance, the Minister is empowered to demand information regarding the operations of a petroleum leaseholder ⁷⁹ and to make regulations regarding the keeping of records, making returns on the records and their inspection by the Minister. ⁸⁰ This is what the parts of the Regulations requiring provision of various flare gas data to the Minister seek to achieve. All other portions of the Regulations may indeed be justified by the Minister’s power and duty to ‘make regulations prescribing anything requiring to be prescribed for the purposes of this Act’ ⁸¹ particularly relating to the ‘the conservation of petroleum resources’ ⁸² and ‘the prevention of pollution of water courses and the atmosphere’. ⁸³ Regarding the powers of suspension and revocation it is pertinent to keep in mind that the Petroleum Act allows the Minister to suspend a producer’s operations for falling foul of the Act or regulations made thereunder. ⁸⁴ It also allows the Minister to ultimately revoke the lease/license for breaches of the Act or regulations and even for failure to provide information on operations required by the Minister. ⁸⁵

The Associated Gas (Reinjection) Act more than justifies the flare gas penalty, even for the double payment regime imposed on producers who refuse to cooperate with the FGN’s programme to eliminate the practice but yet go ahead to flare gas. The Minister has the discretion to determine terms and conditions under which gas can be flared. ⁸⁶ To do so without permission from the Minister also grounds a revocation. ⁸⁷

No doubt, the Regulations have far-reaching implications for producers who would have to allow third parties (holders of the permits regime of the Regulations) access to their lease areas either to access flare gas data or to access (take) the flare gas. The machinery through which this is to be achieved is the Deliver or Pay Agreement ⁸⁸ and the Connection Agreement ⁸⁹ which the permit holder is to enter with the producer. These enable the permit holder to be guaranteed a supply of flare gas volumes and to be able to connect its gas-taking infrastructure with the producer’s facility. Thus, implementation of the Regulations will be underpinned by contracts voluntarily entered into by both the producer and the permit holder. Of course, to ensure workability, the terms of the contract will be monitored by the FGN. This is why paragraph 11(2) qualifies the agreements with the word: ‘approved’.

Consequently, the question which may arise as to whether the producer is obligated to engage in oil production of which associated gas is a by-product in order to make flare gas available is to be answered in the affirmative. The producer would already be bound by a contract to deliver the gas with the Permit to Access Flare Gas holder. Paragraph 21 of the Regulations is an incentive to enter into the connection agreement. Failure to enter this agreement means the producer pays very high gas flaring penalties and ultimately risks revocation of its lease as a consequence of flaring gas. In addition, failure to engage in petroleum production in the lease area which results in the flare gas could be termed a breach of the producer’s obligation to operate the petroleum asset in a vigorous and business-like manner. This is a ground for revocation of the petroleum lease itself. ⁹⁰

In concluding, it is pertinent to point out that the holder of a permit to Access Flare Gas can also have it revoked for failure to abide by the Regulations. ⁹¹

Conclusion

Gas flaring in today’s Nigeria is obviously a monumental waste of resources given that a major part of Nigeria’s electricity problems is because of the unavailability of gas. ⁹² Obviously, since gas flare penalties are tax deductible, ⁹³ the producers who have little to lose for flaring gas may not have enough incentives to invest in associated gas development. Regardless, the Nigerian environment and especially oil producing communities will continue to suffer the deleterious effects of gas flaring if drastic action is not taken such as has been done with the Regulations. Hopefully, the Regulations will result in vigorous activities in gas development since the producers now have to compete with flare gas investors directly.

As has been emphasised throughout this article, the Regulations are borne out of public interest to end gas flaring. If and whenever the courts are called upon to interrogate their provisions, ⁹⁴ public interest/policy factors will predominate to justify them. ⁹⁵