By: Marlon Ayakpo

“Natural Gas is the future. It is here.” – Bill Richardson (American Politician, Author, and Diplomat)

• Introduction:

Despite boasting vast natural gas reserves, with estimates placing proven reserves at 206.53 trillion cubic feet (tcf) as of January 1, 2021 (further broken down into 100.73 tcf of associated gas and 105.80 tcf of non-associated gas)1 Nigeria’s historical emphasis on Liquefied Natural Gas (LNG) projects, alongside a previously underdeveloped legal framework, has demonstrably constrained domestic gas utilization. The 2015 Nigeria and World Bank Global Gas Flaring Reduction (GGFR) Partnership report underscores this challenge, highlighting systemic regulatory deficiencies that impede gas use.

Recognizing this limitation, Nigeria has undertaken a significant course correction by establishing a comprehensive legal and regulatory framework to unlock its gas potential and ensure a sustainable domestic supply. This framework centers on the Petroleum Industry Act (PIA) of 2021 and the Domestic Gas Delivery Obligation Regulations of 2022, both administered by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC). These legislative measures aim to streamline the operations of the natural gas sector, promote transparency, and guarantee that domestic gas needs are prioritized. This article delves into these regulations, outlining the responsibilities and compliance requirements for upstream petroleum lessees. 

1.1. The Petroleum Industry Act, 2021

The Petroleum Industry Act, 2021 (“PIA”), represents a significant overhaul of Nigeria’s oil and gas sector, aiming to create a more transparent, accountable, and efficient industry.

 Nigerian Upstream Petroleum Regulatory Commission (NUPRC) Report, “Nigeria’s Proven Gas Reserve” <https://www.nuprc.gov.ng/nigerias-proven-gas-reserve-now-206-53tcf-says-dpr/> accessed July 15, 2024

Two key sections of the PIA, sections 10(f) and 110, are particularly pertinent to natural gas delivery obligations:

1. 1. Section 10(f): Grants the NUPRC the authority to regulate the supply and allocation of natural gas for domestic use.
   2. Section 110(1): Mandates lessees to supply natural gas to the domestic market as part of their contractual obligations.

• Section 110(5): NUPRC requires a lessee producing natural gas to carry out works and operations which may be required to increase production and to dedicate specific volume of the natural gas produced towards the requirements of the domestic market.

1. Section 110(10): NUPRC shall discontinue the imposition of domestic gas delivery obligation where Nigerian Midstream and Downstream Petroleum Regulatory Authority (“NMDPRA”) has determined that natural gas market has attained full market status.

1.2. Domestic Gas Delivery Obligations Regulations, 2022

Enacted on November 18, 2022, the Domestic Gas Delivery Obligations Regulations provide detailed guidelines for the implementation of the natural gas delivery obligations stipulated in the PIA. These regulations are designed to ensure that domestic gas demand is met efficiently and transparently.

2. Key Provisions of the Domestic Gas Delivery Obligations Regulations:

     2.1. Information Reporting Requirements

Lessees are required to submit comprehensive data on their natural gas reserves and resources by February 1st of each year, reflecting the status as of December 31st of the preceding year. This data must include:

1. Proved Developed Producing Reserves: Based on the average first-day sales prices from January 1st to December 31st of the preceding year.
2. Proved Developed Non-Producing and Proved Undeveloped Reserves: Determined by the commercial value of the natural gas at the measurement point, considering the total revenue expected from raw gas, natural gas liquids, and condensates.
3. Natural Gas Reserves Classification: The classification of natural gas reserves under Nigeria’s Domestic Gas Delivery Obligation Regulations, 2022, is structured to ensure comprehensive management and utilization of the country’s abundant natural gas resources. Proved reserves are categorized into developed producing, developed non-producing, and undeveloped reserves, each serving distinct purposes within the domestic and international markets. The classification of natural gas reserves under the Domestic Gas Delivery Obligation Regulations, 2022 is structured as follows:

Proved Reserves:

1. Proved Developed Producing Reserves:

1. Associated Natural Gas:

• Gas being exported and for the free market.
• Gas for the domestic gas demand requirement.

1. Non-Associated Natural Gas:

• Gas being exported and for the free market.
• Gas for the domestic gas demand requirement.

1. Proved Developed Non-Producing Reserves:

1. Associated Natural Gas (Tier 1 and Tier 2):

• Gas destined for exports and the free market.
• Gas for domestic gas demand requirement:

• Connected but not produced or delivered for lack of domestic gas demand or for
•  Not Connected to gas infrastructure or connected to such gas infrastructure, but with insufficient spare capacity for the delivery of the gas.

1. Non-Associated Natural Gas (Tier 3):

• Gas being exported and for the free market.
• Gas for the domestic gas demand requirement:
• Connected but not produced or delivered for lack of domestic gas demand or for force majeure, inability for a purchaser to accept the allocated natural gas volumes, the inability to transport the allocated natural gas volume for reason beyond the control of the lessee, or the failure of a purchase to pay for the allocated natural gas volume.
• Not Connected to gas infrastructure or connected to such gas infrastructure, but with insufficient spare capacity for the delivery of the gas.            
• Proved Undeveloped Reserves:

1. Associated Natural Gas (Tier 1 and Tier 2):

• Gas being exported and for the free market.
• Gas for the domestic gas demand requirement:

• Connected but not produced or delivered for lack of domestic gas demand or for force majeure, inability for a purchaser to accept the allocated natural gas volumes, the inability to transport the allocated natural gas volume for reason beyond the control of the lessee, or the failure of a purchase to pay for the allocated natural gas volume.
• Not Connected to gas infrastructure or connected to such gas infrastructure, but with insufficient spare capacity for the delivery of the gas.

1. Non-Associated Natural Gas:

• Gas destined for exports and the free market.
• Gas for the domestic gas demand requirements:

• Connected but not produced or delivered for lack of domestic gas demand or for force majeure, inability for a purchaser to accept the allocated natural gas volumes, the inability to transport the allocated natural gas volume for reason beyond the control of the lessee, or the failure of a purchase to pay for the allocated natural gas volume.
• Not Connected to gas infrastructure or connected to such gas infrastructure, but with insufficient spare capacity for the delivery of the gas.

Furthermore, in accordance with paragraph 2(a)(iii) of the Third Schedule to the PIA, 2021, the classification of natural gas reserves for domestic market supply is structured as follows:       

1.    all associated gas from producing fields shall be designated as tier 1 for the domestic market;
2.  all gas cap gas from depleted oil field shall be considered as tier 2 gas, and designated for the domestic gas market; and 
3. available gas in non-associated gas fields onshore  and offshore  shall be considered  as tier 3 to be evaluated for eligibility of supply to the domestic gas market based on its cost supply.                                                                                                                                                                                     
4. Domestic Gas Demand Requirement Supply Curve:

Lessees must also submit a domestic gas demand requirement supply curve in $/MMBtu and $/Mscf for the lease, based on proved developed producing reserves. This curve, due by February 1st each year, helps the NUPRC allocate domestic gas delivery obligations effectively. The curve should reflect:

1. Total Hypothetical Proved Reserves: At each price level.
2. Cheapest Classes of Hypothetical Proved Reserves: At the lowest price levels.

       iii. Highest Cost Classes: At the highest price levels.

4. Allocation of Domestic Gas Delivery Obligations:

The NUPRC aggregates these supply curves to form a national supply curve, which is then used to allocate domestic gas delivery obligations. This allocation is done sequentially, from the lowest to the highest domestic base price, ensuring that the domestic gas demand for power, commercial, and gas-based industrial sectors is met.

5. Compliance and Penalties:

Lessees who fail to meet their domestic gas delivery obligations are subject to penalties. Specifically, a penalty of US$3.50 per MMBtu of gas not delivered is imposed. However, if a lessee has a gas purchase and sale agreement with a wholesale supplier in the strategic sector, the penalty is adjusted accordingly. The NUPRC has the authority to investigate claims of non-compliance and adjust obligations as necessary.

6. Conclusion:

The Nigerian legal and regulatory framework for natural gas delivery obligations, established by the Petroleum Industry Act (PIA) and the Domestic Gas Delivery Obligations Regulations, 2022, aims to achieve a reliable and transparent domestic natural gas supply. The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) play a crucial role in enforcing these regulations. Their oversight ensures that lessees comply with their obligations, ultimately fostering stability and growth within Nigeria’s natural gas sector.

7. Reference:

• Akintola, A. A., & Fagbenle, O. M. (2020). The role of natural gas in Nigeria’s economic development: A critical review. International Journal of Energy Economics and Policy, 10(2), 22-32.

• Eberlein, B., & Rycroft, M. (2019). Nigeria’s gas revolution: Infrastructure and policy challenges. Chatham House. <https://www.chathamhouse.org/2019/04/buharis-second-chance-oil-and-gas-reform-nigeria)> accessed July 15, 2024.
• Domestic Gas Delivery Obligation Regulations, 2022, No. 206, Volume 109, 
• Nigerian Upstream Petroleum Regulatory Commission (NUPRC) Report, “Nigeria’s Proven Gas Reserve” <https://www.nuprc.gov.ng/nigerias-proven-gas-reserve-now-206-53tcf-says-dpr/> accessed July 15, 2024.
• Petroleum Industry Act,  2021.

Marlon Ayakpo is an Associate of the Firm  in the Energy and  Oil & Gas Practice Group.