-Uche Val Obi, SAN
Nigeria has proven estimates of over 200 trillion cubic feet (tcf) of natural gas reserves, presently 2.9% of total world proven reserves. The DPR (former Upstream Regulator) projects reserves increases on account of new discoveries to about 250 tcf by 2030. About 41% of Nigeria’s gas production is exported, 31% is used in oil fields mainly for gas lifts and re-injection, while about 18% is used locally and the remaining 10% is flared. Although Nigeria has made bold efforts to reduce the quantity of gas flared, it still occupies the 7th position in the world’s gas flare index.
One identifiable cause of poor gas production, flaring and low utilization is the perennial gas infrastructure deficit. About $3 trillion is required over the next 30 years to bridge wide infrastructure gap.
There have been past government interventionist policies on gas development, but a bolder step was made under the Petroleum Industry Act, 2021, (PIA) which creates a dedicated institution charged with gas infrastructure, funding and development, namely, the Midstream and Downstream Gas Infrastructure Fund (the Fund);
SCOPE OF NATURAL GAS INFRASTRUCTURE
Pipelines used to gather, transport and distribute natural gas from the producing wells to end-use customers. Facilities used in gas transportation such as compression, metering stations and storage facilities. Gas processing facilities including the plants 4
The Midstream & Downstream Gas Infrastructure Development Fund (The Fund)
Legislative Framework & Governance
The Fund was established, subject to appropriation by the National Assembly as a body corporate with perpetual succession and shall reside in the Authority (i.e. the Midstream & Downstream Petroleum Regulatory Authority) see sec. 52(1) (a-b) PIA.
The first point that strikes at ones mind is the autonomy and independence of the Fund. Although the Fund is established as a body corporate with perpetual succession and vested with property rights ownership, this status was compromised by the same provisions in the same Act making it an appendage of the Authority by virtue of its residence in the Authority and its Management being headed by an executive director of the Authority, as well as the Authority retaining oversight rights over the Fund, (despite the latter’s supervisory Governing Council)
Clearly, this does not give the much-needed assurance that the Fund would be truly independent. Instead, it will be controlled by the Authority which will be playing managerial, supervisory and regulatory roles over the Fund which is conflicting and offensive to best practices.
LEGISLATIVE FRAMEWORK & GOVERNANCE
The Governing Council of the Fund will be largely redundant. In the UK, its National Infrastructure & Construction Pipeline (2021 ) (though not restricted to gas infrastructure development) which sets out a £650 billion fund for public & private investment fund towards infrastructure development, has an independent authority administering the fund with clearly defined mandates, strategy and focus .
There is need to address this structural governance headwinds by making the Fund truly independent so as to reassure other funders/investors (such as multilateral and bilateral agencies, and financial institutions) who may be circumspect in investing in a government -controlled Fund which may compromise commercial considerations in preference to political exigencies . This should be seen as a wakeup call to de -risk the Fund.
SOURCES OF GAS INFRASTRUCTURE FUND
Under sec 52(7) (a) of the PIA, 0.5% of the wholesale price of petroleum products and natural gas sold in Nigeria which shall be collected from wholesale customers, and such levy shall be in addition to the levy provided for under sec. 47(2) (c) of the Act.
Now sec. 47(2)(c) of the PIA also provides for the same 0.5% of the wholesale price of petroleum products sold in Nigeria which shall be collected from the wholesale customers.
It is apparent that the only difference in the above two provisions is that whereas sec. 52(7) (a) of the PIA uses the phrase “0.5% of wholesale prices of petroleum products and natural gas…” (which is more encompassing), sec 47(2)(c) of the Act limits its provision to “0.5% of wholesale price of petroleum products sold in Nigeria”.
Arguably, the scope of sec. 52(7) (2) is wide enough to subsume the provision of sec. 47(2) (c), and the latter is therefore redundant. This should be carefully noted to avoid double dealing against operators who may be levied 0.5% twice (i.e. under S.52 (7) and under S.47 (2) (c)).
Again, going by Sec. 52(7) (a) of the Act, the levy of 0.5% to be collected under sec. 52(7) (a) shall be subject of the Authority’s regulations after consultation with the Governing Council of the Fund – one would have expected the Governing Council of the Fund to perform this function instead of being relegated to a mere consultative or advisory body to the Authority (which already has more than enough functions to discharge under the PIA). This unnecessary bureaucracy ought to be avoided or minimized.
SOURCES OF GAS INFRASTRUCTURE FUND
Another source of fund under The PIA under Sec. 52 (7) (e) provides that money received from gas flaring penalties by the Commission (Nigerian Upstream Regulatory Commission) under sec. 104 (4) of PIA, however this fund was to be for the purposes of environmental remediation and relief of the host communities of the settlor on which the penalties are levied.
One wonders if this provision aligns with the purposes of the Fund. Can the Fund embark on environmental remediation projects or extension of reliefs to host communities of settlors on which the penalties are levied? We struggle to find where this function is captured under the narrow statutory purpose of the Fund which is strictly for equity investments in designated infrastructure projects. It is our humble view that the application of the fund as enshrined under Sec. 52 (7) e above falls outside the prescribed statutory purpose of the Fund and this conflict ought to be resolved one way or the other, either by tweaking application of the fund generated as Commission from gas flare or enlarging the purpose of the Fund to include the role.
THE PURPOSE OF THE FUND
The purpose of the Fund shall be to make equity investments of Government owned participating or shareholder interests in infrastructure related to midstream and downstream gas operations aimed at:
- a) Increasing the domestic consumption of natural gas in Nigeria in projects which are financed in part by private investment; b) Encouraging private investment through risk sharing by participating initially in selected high risk projects and in such other equity investments that encourage investment in midstream and downstream gas infrastructure; and c) reducing or eliminating gas flare (see sec. 52 (10) PIA).
The first point to note is the statutory limitation of the Fund to only equity investments (which is taking shareholding or similar ownership stake in entities or infrastructure related to midstream and downstream operations). No debt investment is contemplated, and no investment in upstream gas infrastructure is permissible.
LIMITATION ON APPLICABILITY OF FUND ET AL
This restriction of the Fund intervention to only equity investments would stifle its role given its aversion to debts or hybrid transactions (such as partly debt & partly equity) or even convertibles. Again, its non-inclusion of upstream gas infrastructure development needs to be seriously interrogated given that this segment is not isolated from the huge gas infrastructure deficit facing the country. The era of dominance of the IOCs in the upstream gas value chain is fast fading with the emergence of lower capitalised indigenous E & P operators who would need funding support to grow the upstream gas infrastructure as well.
Furthermore, the drafters of the PIA appear to have glossed over some salient implications of restricting the Funds’ intervention to equity investment alone as this may make the Fund unable to meet the desired funding needs. Being a government initiative, the fund will always shy away from taking majority equity stake that would convert the project/entity into a government subsidiary, as that will further stifle the ability of the entity borrowing additional funds and giving security (given that Federal Government agencies cannot be seen to be directly borrowing and giving security on account of restrictions imposed on the country under the World Bank negative pledge conditions as a borrowing nation). So we will be faced with a situation where the Fund may not be able to supply sufficient funds to meet project exigencies on account of this statutory restriction.
There is therefore an urgent need to amend this provision and improve the chances of the Fund making greater impact in addressing the huge infrastructure deficit in the gas sector. Equity investment alone cannot begin to address the problems. The Fund should be able to also make debt investments in the deserving circumstances, more so, given that the exit windows for debt investment are more easily accessible than those of equities, and this will make for a more flexible intervention of the Fund and optimal re-allocation of resources.
LIMITATION ON APPLICABILITY OF FUND ET AL
Under sec. 52(10) of PIA, the need for transactions advisory was identified but the Act provided only for “a transaction advisor” who shall provide transaction advisory services (including technical, commercial and any other duty as may be assigned by the Council on behalf of the Fund). It may be difficult to get a sole Transaction Advisor that will have the competence, capability, and professional authority to do all the advisory jobs, hence clarifications should be made that more than one transaction advisors can and in fact, should always be involved for each transaction.
For instance, legal opinions, drafting and negotiation of transaction documents and their perfection, legal restructuring of entities, legal due diligence, etc are matters within the exclusive professional competence of lawyers. This error should be noted, given that the bankability of the transactions or investments which the Fund will be intervening in, must be preserved in the interest of all stakeholders. However, until there is a chance to amend the PIA, this aspect can be taken care of by importing the constructions of words in singular to include plural forms under the various Interpretation laws in force.
CONCLUSION AND RECOMMENDATION
Given the global trend towards Energy Transition, which continues to diminish the relevance to fossil-based systems of energy production and consumption – including oil, natural gas and coal – to renewable energy sources like wind and solar, as well as lithium-ion batteries; gas nations like Nigeria must aggressively develop infrastructure and harness its reserves for the much needed revenues over the next 2 – 3 decades and develop power generation capacities as well as accelerate industrialization. All these can only be possible if the wide infrastructure deficit in the gas sector is abridged through massive injection of investments.
The PIAs introduction of the Fund is plausible but its limited scope, opaque legal and governance structures are headwinds which need to be urgently addressed. The Act ought to be amended to make the Fund more ambitious in order to meet the lofty goals of aggressively accelerating gas infrastructure development in Nigeria.
This paper was delivered at the Session of Center for Petroleum Information (CPI) by: Uche Val Obi, SAN, FCIArb. Managing Partner Alliance Law Firm.