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THE IMPACT OF THE DOWNSTREAM GAS ACT ON GAS PRODUCTION AND SALES

THE IMPACT OF THE DOWNSTREAM GAS ACT ON GAS PRODUCTION AND SALES. ‘Gbite Adeniji Partner AELEX Legal Practitioners Lagos, Nigeria aeadeniji@aelex.com www.aelex.com. Key objectives of the Act. Develop the virtually non-existent domestic market for gas in Nigeria

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THE IMPACT OF THE DOWNSTREAM GAS ACT ON GAS PRODUCTION AND SALES

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  1. THE IMPACT OF THE DOWNSTREAM GAS ACTON GAS PRODUCTION AND SALES ‘Gbite Adeniji Partner AELEX Legal Practitioners Lagos, Nigeria aeadeniji@aelex.com www.aelex.com

  2. Key objectives of the Act • Develop the virtually non-existent domestic market for gas in Nigeria • Complement the growth in the export market, thereby diversifying the risk of over-reliance on any one sector • Reduce greenhouse gas emissions and achieve the gas flare-out target. • Create a secure framework for investment in gas-to-power projects • Create a competitive wholesale market • Facilitate a competitive retail market • Encourage private sector participation in transportation infrastructure and other gas projects

  3. KEY PRINCIPLES • Provide for regulation of activities in the downstream gas sector • Defines roles and activities of the key players in the downstream gas sector

  4. Sector participants Act envisages following as downstream sector players • Policy Maker: Hon. Minister of Petroleum Resources • Regulator: Gas Regulatory Commission [GRC] • Investors, as Licensees for: • Transportation • Distribution • Supply • and maybe others, to be defined as needed • Customers • as the end consumers who utilise the gas as a fuel or feedstock

  5. Downstream Activities • According to the DGA Downstream begins at the point that natural gas enters a facility producing pipeline specification gas for commercial purposes. It also includes the following activities: • Transportation • Distribution and supply of Gas to customers • Extraction of liquefied petroleum gas for commercial purposes

  6. Concept of the Downstream Gas Sector • Upstream Producers sell gas wholesale to gas Suppliers • Transporterstransport Supplier’s gas through high pressure pipelines, for a fee • Distributors deliver Supplier’s gas from Transporter to the end consumer through low pressure distribution system; also for a fee • Major gas consumers have option to buy gas directly from wholesalers and arrange their own transport and supply

  7. The Licensing Regime • A licensing regime is created in the Gas Act. • Act contemplates 4 types of Licence - The Transportation Network Operator Licence (TNO) - The Supply Licence - the Transportation Pipeline Owner Licence (TPO) - The Distribution Licence • Carrying out of these functions in the absence of a valid licence (or specific exemption) is prohibited. • Scope will remain for additional roles to be defined as and when required.

  8. Concept of Transportation Network Operator • It is anticipated that eventually, the interlinked transportation networks will grow to an extent where a network manager (holder of Transportation Network Operator licence) is required to balance the inputs / outputs and overall operation of the integrated network. • The TNO would be solely a system operator, without ownership interest in any gas supply

  9. Supply Licence • Supply of Gas to industrial and commercial users requires the procurement of a Supply Licence. • A producer of gas who wishes to obtain a Supply licence shall be a Qualified Person. • A Supply Licence authorises the licensee to sell and deliver gas to purchasers of gas at any location in Nigeria.

  10. Transportation Pipeline Owner Licence • Transportation Pipeline means pipeline used for the bulk conveyance of Gas under high-pressure. • A Transportation Pipeline Owner must procure Transportation Pipeline Owner Licence which is granted by the Commission to Qualified persons. • The Licence grants exclusive right to own, construct, operate and maintain a Transportation Pipeline within a route as defined in the Licence.

  11. Distribution Licence • The Distribution Licence is an exclusive licence for the transportation and supply of Gas within the Local Distribution Zone to purchasers who are non-Wholesale Customers.

  12. Unbundling NGC • NGC’s merchant & transportation role will cease through functional unbundling • A National Gas Transportation Company (NGTC) will be created out of NGC & licensed to operate the existing transportation network • NGTC will be held 51% private sector, 49% NNPC • A National Gas marketing Company (NGMC) will be created out of NGC • NGMC will be a subsidiary of NNPC and will be a gas Supplier • NGMC will basically supply all NNPC equity gas in the JVs and, ultimately, in PSC concessions

  13. Wholesale Market • A wholesale market for gas will be enabled by the Gas Act. • Certain gas users and Distributors declared eligible by the Regulations will be permitted third-party access to the transportation network, thereby enabling them to contract directly with upstream producers for gas supplies.

  14. Market Concept • Several upstream gas Producers competing to provide wholesale gas to Suppliers • Multiple Suppliers who will supply gas to Distributors (or very large consumers – through distributors) using the transportation network

  15. WHOLESALE GAS MARKET • The Act provides for the definition of ‘Wholesale Customers’, to be established in Regulations rather than in the Act itself, so as to give the regulator the ability to gradually introduce competition, if and when considered appropriate, without having to change the primary legislation • Wholesale Customer determined by Qualifying criteria set out in Regulations • Potential participants in the Wholesale Gas Market: - Licensed Suppliers, including gas producers - Wholesale Customers

  16. The Pricing Regime - Pricing Principles The DGA provides pricing principles to regulate and monitor prices in downstream activities. • Gas prices shall be disaggregated into the component elements of the supply chain • The prices charged for each Licensed activity shall reflect the costs incurred in the efficient provision of that activity. • Prices charged shall permit a reasonable return for Licensees on their investments. • Prices shall not discriminate between customers with similar characteristics, such as similar size or consumption profile.

  17. The Pricing Regime • Transitional pricing provisions incorporated in Act to: • Permit a gradual increase in non-commercial prices to reach commercial levels • Prevent ‘price shocks’ and adverse macroeconomic effects • Allow for existing contracts to transit to new pricing structure

  18. Transitional Pricing Plan • Transitional pricing provisions incorporated in Act to: • Permit a gradual increase in prices • Prevent ‘price shocks’ and adverse macroeconomic effects • Allow for existing contracts to transit to new pricing structure

  19. Wholesale Gas Prices • Wholesale Gas supply between a Supplier and a Customer shall be negotiated directly between the parties on an arms length basis and monitored by the Commission to ensure transparency.

  20. THIRD PARTY ACCESS • Open Access regime & open, non – discriminatory terms and charges critical to development of a competitive Wholesale Gas market • TPA facilitates the transportation of gas from Supplier to consumption points - All Transporters and Distributors are obliged to provide Suppliers access to their respective pipelines, subject only to pipeline capacity limitations • Terms on which access granted set out in the form of a Transportation Network Code • Transportation Network Code developed by the Commission in conjunction with the TNO, TPO & Distributors • The applicable tariffs are to be published

  21. CUSTOMER PROTECTION • A general duty on the Commission to protect the interests of customers • Power to introduce a number of measures for specifically protecting retail customers. • Commission may designate suppliers and distributors ‘of last resort’, to provide a service in the absence of anyone applying for a Licence for a particular area, or becoming insolvent. • Similarly, the Commission may nominate a ‘wholesaler of last resort’ in the event that competition at the wholesale level does not develop. • Other customer protection provisions include the setting of service standards and reporting of performance, and the development of Customer Service Codes.

  22. THE CONCEPT OF “UNREASONABLE WITHOLDING” Concept seeks to regulate activity which might hinder the development of projects by 3rd parties interested in the purchase of Wholesale gas • Commission granted power to compel gas supply to 3rd interested party free of cost at the flare subject to criteria specified in the Act. • Note that S.34 (1)(b) of the Petroleum Act allows gas to be taken free of cost at the flare by the Minister

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