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THE IMPACT OF THE DOWNSTREAM GAS THE IMPACT OF THE DOWNSTREAM GAS ACTACT

ON GAS PRODUCTION AND SALESON GAS PRODUCTION AND SALES

‘‘Gbite AdenijiGbite AdenijiPartnerPartnerAELEXAELEX

Legal PractitionersLegal PractitionersLagos, NigeriaLagos, Nigeria

aeadeniji@aelex.comaeadeniji@aelex.comwww.aelex.comwww.aelex.com

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Key objectives of the ActKey objectives of the Act Develop the virtually non-existent domestic Develop the virtually non-existent domestic

market for gas in Nigeriamarket for gas in Nigeria Complement the growth in the export market, Complement the growth in the export market,

thereby diversifying the risk of over-reliance on thereby diversifying the risk of over-reliance on any one sectorany one sector

Reduce greenhouse gas emissions and achieve Reduce greenhouse gas emissions and achieve the gas flare-out target.the gas flare-out target.

Create a secure framework for investment in Create a secure framework for investment in gas-to-power projectsgas-to-power projects

Create a competitive wholesale marketCreate a competitive wholesale market Facilitate a competitive retail marketFacilitate a competitive retail market Encourage private sector participation in Encourage private sector participation in

transportation infrastructure and other gas transportation infrastructure and other gas projectsprojects

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KEY PRINCIPLESKEY PRINCIPLES

Provide for regulation of activities Provide for regulation of activities in the downstream gas sector in the downstream gas sector

Defines roles and activities of the Defines roles and activities of the key players in the downstream key players in the downstream gas sectorgas sector

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Sector participantsSector participants

Act envisages following as downstream sector Act envisages following as downstream sector playersplayers– Policy Maker: Hon. Minister of Petroleum Policy Maker: Hon. Minister of Petroleum

ResourcesResources– Regulator: Gas Regulatory Commission [GRC]Regulator: Gas Regulatory Commission [GRC]– Investors, as Licensees for:Investors, as Licensees for:

TransportationTransportation DistributionDistribution SupplySupply and maybe others, to be defined as neededand maybe others, to be defined as needed

– CustomersCustomers as the end consumers who utilise the gas as a fuel or as the end consumers who utilise the gas as a fuel or

feedstockfeedstock

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Downstream ActivitiesDownstream Activities

According to the DGA Downstream begins According to the DGA Downstream begins at the point that natural gas enters a at the point that natural gas enters a facility producing pipeline specification facility producing pipeline specification gas for commercial purposes. It also gas for commercial purposes. It also includes the following activities:includes the following activities:

TransportationTransportation Distribution and supply of Gas to Distribution and supply of Gas to

customerscustomers Extraction of liquefied petroleum gas for Extraction of liquefied petroleum gas for

commercial purposes commercial purposes

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Concept of the Concept of the Downstream Gas SectorDownstream Gas Sector Upstream ProducersUpstream Producers sell gas sell gas

wholesale to gas Supplierswholesale to gas Suppliers TransportersTransporters transport Supplier’s gas transport Supplier’s gas

through high pressure pipelines, for a through high pressure pipelines, for a feefee

DistributorsDistributors deliver Supplier’s gas from deliver Supplier’s gas from Transporter to the end consumer Transporter to the end consumer through low pressure distribution through low pressure distribution system; also for a feesystem; also for a fee

Major gas consumersMajor gas consumers have option to have option to buy gas directly from wholesalers and buy gas directly from wholesalers and arrange their own transport and supplyarrange their own transport and supply

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The Licensing RegimeThe Licensing Regime A licensing regime is created in the Gas Act.  A licensing regime is created in the Gas Act.   Act contemplates 4 types of LicenceAct contemplates 4 types of Licence

- The Transportation Network Operator Licence - The Transportation Network Operator Licence (TNO)(TNO)- The Supply Licence- The Supply Licence- the Transportation Pipeline Owner Licence (TPO)- the Transportation Pipeline Owner Licence (TPO)- The Distribution Licence- The Distribution Licence

Carrying out of these functions in the absence of a Carrying out of these functions in the absence of a valid licence (or specific exemption) is prohibited.valid licence (or specific exemption) is prohibited.

Scope will remain for additional roles to be defined Scope will remain for additional roles to be defined as and when required.as and when required.

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Concept of Concept of Transportation Network Transportation Network OperatorOperator It is anticipated that eventually, the It is anticipated that eventually, the

interlinked transportation networks will interlinked transportation networks will grow to an extent where a network grow to an extent where a network manager (holder of Transportation manager (holder of Transportation Network Operator licence) is required to Network Operator licence) is required to balance the inputs / outputs and overall balance the inputs / outputs and overall operation of the integrated network.operation of the integrated network.

The TNO would be solely a system The TNO would be solely a system operator, without ownership interest in operator, without ownership interest in any gas supplyany gas supply

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Supply LicenceSupply Licence

Supply of Gas to industrial and Supply of Gas to industrial and commercial users requires the commercial users requires the procurement of a Supply Licence.procurement of a Supply Licence.

A producer of gas who wishes to obtain a A producer of gas who wishes to obtain a Supply licence shall be a Qualified Supply licence shall be a Qualified Person.Person.

A Supply Licence authorises the licensee A Supply Licence authorises the licensee to sell and deliver gas to purchasers of to sell and deliver gas to purchasers of gas at any location in Nigeria.gas at any location in Nigeria.

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Transportation Transportation Pipeline Owner LicencePipeline Owner Licence Transportation Pipeline means pipeline used Transportation Pipeline means pipeline used

for the bulk conveyance of Gas under high-for the bulk conveyance of Gas under high-pressure. pressure.

A Transportation Pipeline Owner must procure A Transportation Pipeline Owner must procure Transportation Pipeline Owner Licence which Transportation Pipeline Owner Licence which is granted by the Commission to Qualified is granted by the Commission to Qualified persons.persons.

The Licence grants exclusive right to own, The Licence grants exclusive right to own, construct, operate and maintain a construct, operate and maintain a Transportation Pipeline within a route as Transportation Pipeline within a route as defined in the Licence.defined in the Licence.

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Distribution LicenceDistribution Licence

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

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Unbundling NGCUnbundling NGC NGC’s merchant & transportation role will NGC’s merchant & transportation role will

cease through functional unbundlingcease through functional unbundling A National Gas Transportation Company A National Gas Transportation Company

(NGTC) will be created out of NGC & licensed (NGTC) will be created out of NGC & licensed to operate the existing transportation network to operate the existing transportation network

NGTC will be held 51% private sector, 49% NGTC will be held 51% private sector, 49% NNPCNNPC

A National Gas marketing Company (NGMC) A National Gas marketing Company (NGMC) will be created out of NGCwill be created out of NGC

NGMC will be a subsidiary of NNPC and will be NGMC will be a subsidiary of NNPC and will be a gas Suppliera gas Supplier

NGMC will basically supply all NNPC equity gas NGMC will basically supply all NNPC equity gas in the JVs and, ultimately, in PSC concessionsin the JVs and, ultimately, in PSC concessions

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Wholesale MarketWholesale Market

A wholesale market for gas will be A wholesale market for gas will be enabled by the Gas Act. enabled by the Gas Act.

Certain gas users and Distributors Certain gas users and Distributors declared eligible by the declared eligible by the Regulations will be permitted third-Regulations will be permitted third-party access to the transportation party access to the transportation network, thereby enabling them to network, thereby enabling them to contract directly with upstreamcontract directly with upstreamproducers for gas supplies. producers for gas supplies.

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Market ConceptMarket Concept

Several upstream gas Producers Several upstream gas Producers competing to provide wholesale competing to provide wholesale gas to Suppliersgas to Suppliers

Multiple Suppliers who will supply Multiple Suppliers who will supply gas to Distributors (or very large gas to Distributors (or very large consumers – through distributors) consumers – through distributors) using the transportation networkusing the transportation network

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WHOLESALE GAS MARKETWHOLESALE GAS MARKET The Act provides for the definition of The Act provides for the definition of

‘‘Wholesale Customers’Wholesale Customers’, to be established in , to be established in Regulations rather than in the Act itself, so as Regulations rather than in the Act itself, so as to give the regulator the ability to gradually to give the regulator the ability to gradually introduce competition, if and when considered introduce competition, if and when considered appropriate, without having to change the appropriate, without having to change the primary legislationprimary legislation

Wholesale Customer determined by Qualifying Wholesale Customer determined by Qualifying criteria set out in Regulationscriteria set out in Regulations

Potential participants in the Wholesale Gas Potential participants in the Wholesale Gas Market:Market:- Licensed Suppliers, including gas producers- Licensed Suppliers, including gas producers- Wholesale Customers- Wholesale Customers

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The Pricing Regime - The Pricing Regime - Pricing PrinciplesPricing PrinciplesThe DGA provides pricing principles to regulate andThe DGA provides pricing principles to regulate andmonitor prices in downstream activities. monitor prices in downstream activities.

1.1. Gas prices shall be disaggregated into the component Gas prices shall be disaggregated into the component elements of the supply chain elements of the supply chain

2.2. The prices charged for each Licensed activity shall reflect The prices charged for each Licensed activity shall reflect the costs incurred in the efficient provision of that the costs incurred in the efficient provision of that activity.activity.

3.3. Prices charged shall permit a reasonable return for Prices charged shall permit a reasonable return for Licensees on their investments.Licensees on their investments.

4.4. Prices shall not discriminate between customers with Prices shall not discriminate between customers with similar characteristics, such as similar size or similar characteristics, such as similar size or consumption profile.consumption profile.

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The Pricing RegimeThe Pricing Regime

Transitional pricing provisions Transitional pricing provisions incorporated in Act to:incorporated in Act to:

Permit a gradual increase in non-Permit a gradual increase in non-commercial prices to reach commercial commercial prices to reach commercial levelslevels

Prevent ‘price shocks’ and adverse Prevent ‘price shocks’ and adverse macroeconomic effectsmacroeconomic effects

Allow for existing contracts to transit to Allow for existing contracts to transit to new pricing structurenew pricing structure

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Transitional Pricing PlanTransitional Pricing Plan

Transitional pricing provisions Transitional pricing provisions incorporated in Act to:incorporated in Act to:

Permit a gradual increase in pricesPermit a gradual increase in prices Prevent ‘price shocks’ and adverse Prevent ‘price shocks’ and adverse

macroeconomic effectsmacroeconomic effects Allow for existing contracts to transit to Allow for existing contracts to transit to

new pricing structure new pricing structure

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Wholesale Gas PricesWholesale Gas Prices

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

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THIRD PARTY ACCESSTHIRD PARTY ACCESS– Open Access regime & Open Access regime & open, non – discriminatory open, non – discriminatory

terms and charges terms and charges critical to development of a critical to development of a competitive Wholesale Gas marketcompetitive Wholesale Gas market

– TPA facilitates the transportation of gas from TPA facilitates the transportation of gas from Supplier to consumption pointsSupplier to consumption points

- - All Transporters and Distributors are obliged to All Transporters and Distributors are obliged to provide Suppliers access to their respective provide Suppliers access to their respective

pipelines, subject only to pipeline pipelines, subject only to pipeline capacity capacity limitationslimitations– Terms on which access granted set out in the Terms on which access granted set out in the

form of a Transportation Network Codeform of a Transportation Network Code– Transportation Network Code developed by the Transportation Network Code developed by the

Commission in conjunction with the TNO, TPO & Commission in conjunction with the TNO, TPO & DistributorsDistributors

– The applicable tariffs are to be publishedThe applicable tariffs are to be published

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CUSTOMER PROTECTION CUSTOMER PROTECTION

A general duty on the Commission to protect the A general duty on the Commission to protect the interests of customers interests of customers

Power to introduce a number of measures for Power to introduce a number of measures for specifically protecting retail customers. specifically protecting retail customers.

Commission may designate suppliers and distributors Commission may designate suppliers and distributors ‘of last resort’, to provide a service in the absence of ‘of last resort’, to provide a service in the absence of anyone applying for a Licence for a particular area, or anyone applying for a Licence for a particular area, or becoming insolvent. becoming insolvent.

Similarly, the Commission may nominate a ‘wholesaler Similarly, the Commission may nominate a ‘wholesaler of last resort’ in the event that competition at the of last resort’ in the event that competition at the wholesale level does not develop. wholesale level does not develop.

Other customer protection provisions include the Other customer protection provisions include the setting of service standards and reporting of setting of service standards and reporting of performance, and the development of Customer performance, and the development of Customer Service Codes.Service Codes.

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THE CONCEPT OF THE CONCEPT OF “UNREASONABLE WITHOLDING”“UNREASONABLE WITHOLDING”

Concept seeks to regulate activity which might Concept seeks to regulate activity which might hinder the development of projects by 3hinder the development of projects by 3rdrd parties interested in the purchase of parties interested in the purchase of Wholesale gas Wholesale gas

Commission granted power to compel gas Commission granted power to compel gas supply to 3supply to 3rdrd interested party free of cost at interested party free of cost at the flare subject to criteria specified in the the flare subject to criteria specified in the Act. Act.

Note that S.34 (1)(b) of the Petroleum Act Note that S.34 (1)(b) of the Petroleum Act allows gas to be taken free of cost at the flare allows gas to be taken free of cost at the flare by the Ministerby the Minister