What is Gas Flare?

Gas flaring is a combustion device to burn associated, unwanted or excess gases and liquids released during normal or unplanned over-pressuring operation in many industrial processes, such as oil-gas extraction, refineries, chemical plants, coal industry and landfills.

What is the purpose of gas flaring?

Flaring is undertaken as a way to remove dangerous gasses with lower harm to the environment. It is used in safely regulating pressure in chemical plants, as well as handling natural gas release in wells. Alternatives, such as piping the gas to a plant or on-site capture and use, are of great interest

Read: Oil & Gas Registrations, Permits, Licenses, Certificates 

 

EFFECTS OF NATURAL GAS FLARING

Gas flaring is one of the most challenging energy and environmental problems facing the world today. Environmental consequences associated with gas flaring have a considerable impact on local populations, often resulting in severe health issues. Generally, gas flaring is normally visible and emitted both noise and heat.

CLIMATE CHANGE
Gas flaring has serious implications on climate change. The burning of fossil fuel, mainly coal, oil and gas has led to warming up the earth and is projected to get worse according to the inter-governmental panel on climate change (IPCC).

ACID RAIN
The primary causes of acid rain are emissions of sulphur dioxide (SO₂) and nitrogen oxides (NO) which combine with atmospheric moisture to form sulfuric acid and nitric acid respectively. These acidify lakes and streams and damage vegetation.

EFFECTS ON AGRICULTURE
The flares give rise to atmospheric contaminants. These include oxides of Nitrogen, Carbon and Sulphur, (NO₂, CO₂, CO, SO₂) particulate matter and hydrogen sulphide (H₂S). These contaminants acidify the soil, hence depleting soil nutrient

POLLUTION
Gas flaring leads to the emission of pollutants which are harmful to both humans and the society at large. Incomplete combustion of gas leads to the production of carbon monoxide which is one of the major pollutants with adverse effects on human health and the society at large.

HEALTH IMPLICATIONS
The implication of gas flaring on human health are all related to the exposure of those hazardous air pollutants emitted during incomplete combustion of gas flare. These pollutants are associated with a variety of adverse health impacts, including cancer, neurological, reproductive and developmental effects. Deformities in children, lung damage and skin problems have also been reported. Hydrocarbon compounds are known to cause some adverse changes in hematological parameters.

Read: DPR Permit, Requirements & Registration

 

GAS FLARING’ REGULATIONS IN NIGERIA

THE FLARE GAS (PREVENTION OF WASTE AND POLLUTION) REGULATIONS 2018

The Federal Government in September 2018 gazetted the approved ‘Gas Flaring’ Regulations, which has its origins in the National Gas Policy approved in mid-2017. The Gazetted Flare Gas (Prevention of Waste and Pollution) Regulations 2018 was signed by President  Muhammadu Buhari.

Gas Flaring’ Regulations provides a legal framework to support the policy objectives of the Federal Government for the reduction of Green House Gas (GHG) emissions through the flaring and venting of natural gas.

The Regulations provide the legal basis for the implementation of the Nigerian Gas Flare Commercialisation Programme (NGFCP), The Regulation provides a legal framework to support the government’s plan to reduce Green House Gas (GHG) emissions through flaring and venting of natural gas. It introduces a new payment regime (penalties) for gas flaring which adopts the “polluter pays” principle and mimics a carbon tax. The regulations also imposes significant obligations on producers and gas flare out projects for the reporting of data in respect of activities related to gas flaring.

On the other hand, the Regulation aims to open up a potential market for the commercialization of the flared gas, thereby creating a revenue stream from an otherwise non-viable entity. The effective commencement date of the regulation is 5th July 2018.

 

PROJECTED MARKETS FOR FLARE GAS CAPTURE

1. The production of high-value fuels and chemicals such as methanol, ethanol, gasoline, and diesel oxygenated fuel blends.
2. Domestic Liquefied Petroleum Gas (LPG)
3. Gas to Liquids (GTL)
4. Small scale Liquefied Natural Gas (LNG)
5. Gas to Power projects

 

THE KEY OBJECTIVES OF THE REGULATIONS:

1. The reduction of the environmental and social impact caused by the flaring of natural gas in Nigeria;
2. Protection of the environment;
3. Prevention of waste of natural resources; and
4. Creation of social and economic benefits from gas flare capture.

 

GAS FLARE PENALTIES

The Federal Government of Nigeria increased the penalty for gas flaring to $2 per 1,000 standard cubic feet of gas, SCF, from N10 per 1,000 SCF of the commodity flared.

Government also stipulated a fine of N50,000 or a six months jail term or both, for anyone who provides inaccurate flare data.

 

The new gas flare regulation stipulates that in the case of any organisation producing 10,000 barrels of oil or more, the gas flare penalty had been increased to $2 per thousand standard cubic feet of gas and, in the case of anyone producing less than 10,000 barrels of oil per day, it had been increased to $0.50 per thousand standard cubic square feet of gas, irrespective of whether it is routine or non-routine flaring.

KEY HIGHLIGHTS OF THE REGULATION

The Right of Access to Flare Gas

Section 2 of the Regulation reiterates the right of the Federal Government of Nigeria to take or access associated gas free of cost at the flare without payment of royalties. This provision already exists in Nigeria’s Federal jurisprudence by virtue of Paragraph 35(b)(i) of the First Schedule to the Petroleum Act. Section 2, therefore, incorporates the already existing provision into the Regulation. It is also noteworthy from the wordings of the section that only the Federal Government has the right to take or access flare gas. However, as is clear from subsequent provisions of the Regulation, the Federal Government can exercise this right by authorizing “Qualified Applicants” to take flare gas on its behalf.

Who Can Take Flare Gas?

Section 3 of the Regulation provides that the Minister may authorize a “Qualified Applicant” selected further to a bid process to take flare gas on behalf of the Federal Government. Sub-section 2 further provides that a Producer may apply to the Minister to utilize Flare Gas for commercialization after satisfying some conditions, one of which is that such application must be made by the producer on behalf of a midstream subsidiary corporate entity. In other words, a producer (which would most likely be an upstream company) must incorporate a midstream company to enable it apply to utilize flare gas for commercialization from its exploration and production activities. However, the regulation

creates a lacuna here, as there are no further provisions on the application process after a mid-stream entity has been incorporated. After incorporation of the mid-stream entity, does such an entity apply and go through the same bid process as other third-party investors or is there another application regime to be followed? The regulations do not provide these details and hence the lacuna. This is a minor omission and can easily be addressed by releasing further guidelines on the application process for Permit Holders and Producers alike. Another condition that must be satisfied by a producer applying to utilize flare gas is that the producer must show that such application will not affect any flare gas volume that is being offered in a bid process conducted by the Federal Government or assigned to a Permit Holder.

 

Reg. 3(3) goes on to provide that a Producer is free to utilize associated gas for its own purposes provided that such utilization shall not reduce the flare gas volume that is subject to a bid process or has been assigned to a permit holder. The implication of this provision is that it infringes on the rights of operators of OMLs and Marginal Fields to associated gas produced from the oil wells. As a holder of an OML or Marginal Field Operator, one should be able to utilize all gas produced as long as it has not been directed to the flare site. Perhaps this provision is targeted at flare gas alone and not associated gas. However, in the event that the regulation has been correctly drafted, it creates a problem. The purpose of this provision is to protect the Permit Holder who has acquired an interest in a specific volume of flare gas after acquiring permits and signing the necessary contractual documentation. It is possible that in future a producer may want to utilize associated gas, which he/she is entitled to as holder of an OML or Marginal Field Operator. Such utilization of associated gas could possibly reduce the amount of flare gas volume a Permit Holder is entitled to, especially if the associated gas being utilized by the producer was previously being diverted to a flare site for flaring. If such a scenario becomes a reality, how can it be resolved? The government and regulatory authorities will have to look closely at this particular provision and come up with further guidelines to address this issue.

Reg. 14 of the Regulation also makes reference to another avenue where a producer may commercialize flare gas under a “Producer’s Approved Flare Out Project”. This provision seems to create a totally different platform where a producer can commercialize flare gas different from the one provided for under Reg. 3(2) of the Regulation. Thus, a producer seeking to utilize flare gas for commercial purposes has two options to pursue: such producer can apply to the Minister pursuant to Reg. 3(2) of these Regulation or can pursue the option of undertaking a Producer’s Approved Flare Out Project. This Project is intended to be commenced by the Producer, which approval is subject to certain criteria by the Department of Petroleum Resources. The guidelines for its implementation, when released, will provide more details and delineate the difference between this project and the midstream subsidiary corporate entity. However, this development permits the bidders to choose which flare site out of the 178 flare sites in the country to  bid for, the gas price, the end market or gas product and the technology to be employed.

 

PERMITS

The Regulation provides for a number of permits to be issued to participants in the gas industry who are subject to the Regulation. Section 6 provides for a Data Access Permit to be issued by the Department of Petroleum Resources (DPR) on a non-exclusive basis. Such Permit enables a Qualified Applicant to access flare gas data held at the DPR in respect of any flare gas site.

Section 8 of the Regulation provides for a “Permit to Access Flare Gas” which is issued on an exclusive basis by the Minister. The Permit authorizes a Permit Holder to take flare gas from one or more flare sites as designated on the Permit on behalf of the Federal Government to utilize or dispose of it in any manner authorized by the Federal Government. The Permit specifies the amount/volume of flare gas that the permit holder is entitled to. Furthermore, sub-section 3 provides that a Permit to Access Flare Gas will only be issued to a Nigerian Company who is not a Producer. This means that holders of oil mining leases and marginal fields are not eligible to access or utilize flare gas. The result of this provision is that it creates a new class of participants in the oil and gas industry and confirms the Federal’s Government’s intention to treat gas as a separate commodity from crude oil. In addition to the issuance of the permits, the Regulation also provides for the validity and revocation of permits in the event that certain terms and conditions are not satisfied.

Under the Regulation, it is possible for a Permit holder to assign or transfer its interests or rights under the Permit. First, the transferee must satisfy the minimum technical and financial requirements necessary to become a Qualified Applicant and must assume all obligations of the Permit Holder (i.e. the Transferor). Secondly, the transferor must obtain the prior written approval of the Director General of the DPR.

It is important to note that holders of the respective permits must adhere to the terms and conditions attached to such permits and also the provisions of the Regulation. If not, such Permit Holder runs the risk of revocation of the permit by the Minister and DPR.

 

The Prohibition Against Gas Flaring

Section 12 of the Regulation in clear terms prohibits the routine flaring of gas by producers or permit holders unless pursuant to a certificate issued by the Minister further to the provisions of the Associated Gas Re-Injection Act. Section 12 also provides that there shall be no gas flaring from any Greenfield project (i.e. projects where no oil & gas production has commenced).

 

Payments for Gas Flaring

In keeping with the “Polluter pays principle”, producers which produce 10,000 barrels of oil or more per day will be liable to the Federal Government for a gas flare payment of $2.00(N613)/28.317 standard cubic meters (one thousand cubic feet) of gas flared within any OML or designated marginal field. Where production is less than 10,000 barrels, the gas flare payment is $0.50 28.317 standard cubic meters. These new gas flare payments represent a significant increase on the previous gas flare payment of N10/Mscf. The Federal Government hopes to de-incentivize the practice of gas flaring through the imposition of significantly higher payments. It is expected that this will be a veritable tool to not only disincentivize gas flaring but further ensure significant downslide of Nigeria on the world’s top gas flaring countries.

 

Flare Gas Data and Records

The Regulation introduces various provisions that mandate the keeping of gas flare data and records by the Producers and Permit Holders and provides a timeline for submission to the DPR. A Producer shall maintain and submit a record of all natural gas produced in association with crude oil. However, Producers and Permit Holders are mandated to maintain daily logs of gas flaring which should be submitted to the DPR within 21 days. Both participants are also mandated to prepare and submit annual reports to the DPR with the content of the annual report for each participant being different. Under the regulation, the DPR is also obligated to publish annual records of flare gas data on its website.

The Regulation also provides for penalties in the event that a Producer or Permit Holder breaches the provisions in respect of the keeping and submission of flare gas records and data. A producer is liable to pay an additional sum of $2.50/28.317 standard cubic meters (one thousand cubic feet) for each day the default continues. On the other hand, a Permit Holder runs the risk of getting his permit revoked for failure to keep proper flare gas records and failure to submit such records within the stipulated timeframe.

 

Fees and Contractual Arrangements

The Regulation provides for a number of fees to be paid by a Qualified Applicant and a Permit Holder.

1. The Data Prying, Data leasing and Award Fees are to be paid by a Qualified Applicant to the Federal Government pending the grant of the Permit.
2. After the grant of the Permit and the assumption of the position of a Permit Holder, the Handling Fee is to be paid to the Producer for operating and maintaining the transferred interconnection assets under the approved Connection Agreement.
3. A Guarantee Fee will also be paid under an approved Deliver or Pay Agreement.

All Permit Holders will have to enter into Connection Agreements with the Producers in respect of the connection of the respective facilities of the parties for the delivery and off-take of flare gas.

The parties will also enter into Deliver or Pay Agreements under which the Producer guarantees the delivery of the contracted quantity of flare gas at the agreed volume and composition range.

A Permit Holder will also in addition have to enter into a Gas Supply Agreement with the Federal Government albeit through a state entity, most likely the NNPC.

Although not specifically stated in the Regulation, there are other Agreements and approvals which can be expected to govern the parties:

Permit Holder and the Federal Government

1. Milestone Development Agreement
2. Performance bond
3. Environmental Impact Assessment approval to be given by the relevant State government and the Federal government.

Permit Holder and Financial Institution

1. Security and loan agreements

Permit Holder and Gas Transport Company

1. Gas Transportation Agreement