The President and Chief Executive Officer (CEO) of General Electric (GE) Nigeria, Dr Lazarus Angbazo, was recently reported as having said that Nigeria requires 10,000 kilometres of gas pipelines to power the country’s electricity sector.
He was reported to have said that gas supply was probably one of the biggest challenges facing the country’s power sector, stressing that the current 1,000kilometres of pipelines supplying gas to the various electricity generating plants across the country were grossly inadequate.
We examine here, in brief, Natural Gas as a source of Energy and particular legal considerations that might be applicable to it. Although particular legal issues have been identified for Natural Gas, some legal issues are relevant to other technologies as well.
Electricity Made from Natural Gas
Natural gas is a clean-burning fuel produced by deposits of methane from within the Earth’s crust. Plant operators use natural gas to power combustion turbines. Just like a jet engine, the turbines suck in air, mix it with the fuel and ignite a fireball. The hot gases from the fireball turn the blades of the turbine to cause motion, creating mechanical energy. The turbine, connected to a generator by a shaft, spins and powers the generator. At this point, the generator converts the mechanical energy into electricity before it is transmitted for customer use.
Instead of being wasted, exhaust gases from the combustion engine are carried into a Heat Recovery Steam Engine (HRSE), where cold water is being pumped in through pipes. The engine uses the heat of the exhaust gases or flue gases to convert water into steam.
Once steam is created in the HRSE, it is sent to a steam turbine. The pressurized steam travels over the blades of the turbine and causes it to spin. This motion, mechanical energy, is what powers the generator. The generator makes electricity that is then transferred to customers. In theory, Nigeria has abundant gas, with 187trillion cubic feet (TCF) of proven gas reserves, ranking eighth in the world and 600tcf of unproven gas reserves.
Gas can be found in the process of drilling for oil or while drilling for gas. The key stages of gas collection; cleaning/processing and transportation to the point of use takes a lot of investments. The finished gas product from that process described is relatively hard to come by in Nigeria.
Specific legal issues that may arise include:
Confusion about terms: Oil is Oil and Gas is Gas
Sometimes when reading contracts and case law, this simple distinction can be lost, especially in contracts and case law that use the words “Oil” and “Gas” seemingly interchangeably. For the lawyer, “gas” often means “natural gas” or “associated gas”. After processing gas we have Natural Gas Liquids (NGLs) Liquefied Natural Gas (LNG) and Liquefied Petroleum Gas (LPG).
Oil “black gold” is refined into a thousand and one finished products including petrol and diesel. The distinction between oil and gas is quite important and means a lot to our clients and to lawyers as we advise our clients and negotiate contracts on their behalf. Oil and gas are sold in different markets, each with its own distinct set of pricing variables.
Oil is usually sold in an international market, while gas, by dint of more troublesome transport, is sold more locally in “developed countries”. In emerging economies gas is either sold via liquefied natural gas (LNG), LPG and NGLs or flared, some of it is however sold locally as infrastructure for local sale of gas is in the early stages of construction. However, LNG seems to have changed a part of the formed equation, with gas being sold internationally via LNG vessels. Pipeline development and control seems to be growing but its fate seems uncertain as Floating LNG has now come into the equation.
Gas Contracts Are Stories…
Many years ago, energy contracts were sealed with a firm handshake. Nowadays Energy contracts are always in writing. Interestingly, energy contracts are not different from novels in the sense that they tell a story about the agreement that the Buyers and Sellers of Gas have arrived at having started their negotiation from the initial negotiating points of the “The Nigerian Template Gas Sales and Aggregation Agreement” Hereinafter referred to as (Model Gas Contract). A good story has a beginning, middle and an end. A good Gas lawyer would know how to manage risk, what material to look out for in each part of the document and how to negotiate for the exclusion of some items and the inclusion of others.
Model Gas Contracts Are Initial Negotiating Points.
“Model contracts” are the initial negotiating points from which the Buyers and Sellers of Gas proceed in their journey towards a mutually beneficial Gas sale and purchase contract. Consequently, negotiating Gas contract requires acumen, knowledge, foresight and plenty of common sense as well.
What are the essential functions of a Gas Contract?
Firstly, it forces consideration by the Government, Buyer and Seller, transporter of gas, of the issues involved in a particular Gas transaction.
It ought to clearly establish the obligations of the parties to each other in a way, hopefully, that will preclude future dispute and will, if a dispute does occur, enable a tribunal better to determine the issues involved, as a result of the clarity of the drafting of the said Gas contract.
A basic understanding of key issues like; who are the Parties to the contract? What exactly, is the subject of the Gas contract? What is the preferred Choice of Law? Are the essential safety clause properly worded? What are the provisions for risk allocation and indemnity clauses?
Sound knowledge of key clauses like; Penalty; Termination; Third Party Indemnity; Force Majeure; National Interest Provisions/ Local Content; Stabilization; Settlement of Disputes; Choice of Law and Abandonment/Decommissioning.
Gas supply issues
The availability of reliable Gas supply is a major issue in Nigeria, with power companies complaining about shortage of gas supply, recently Nigeria paid $10,000,000.00 to Ghana over a shortfall of gas meant to be supplied under the West African Gas Pipeline project. Typical gas sale contracts are usually depletion contracts or supply contracts.
Obtaining appropriate operating permits and licences
Pipelines are a crucial part of the core infrastructure of oil and gas production. Pipelines are used for the transportation, storage and marketing of natural gas, crude oil, and refined petroleum products. As a mode of transportation, pipelines pass through different parts of Nigeria. As with all other activities relating to Oil and Gas, appropriate permits and licenses have to be sought and obtained from the exploration to the gas processing stage. These permits and licenses will cover the wells drilled, pipelines and processing plants.
Oil spills and Gas blow-outs from these pipelines are risks that stake holders in the industry have had to deal with. The surface pipelines are particularly susceptible to damage, in all there is a need for proper protection of the oil and gas pipeline network in Nigeria.
Funding Arrangements for Gas Powered Energy Projects
The nature of the Oil and Gas industry makes it unattractive for commercial lenders to agree to finance Gas powered energy projects embarked upon by smaller companies. Lending is even more uncommon when the project has no foreign technical partners as the use of gas as a fuel is seen as a virgin area with unknown levels of risk. Insurance is also a major issue with premiums constantly on the rise due to the risk of vandalism of power plants and destruction of gas pipelines. The risk involved, the difficulty in securing loans and the layers of regulatory compliance have added to the difficulties being faced by gas powered energy projects.
Alternative and concurrent land uses (laying of pipelines, agriculture, etc.)
Unlike other modes of transporting gas such as tankers by road and ships, pipelines can be an intrusive means of transportation as they do not improve access for people in communities through which they pass. Rather, they impose constraints on them, bring about costly construction work to bury the pipelines in the first place. The impact of laying pipelines seems to encourage the clamour for compensation by those affected by the pipeline in question.
Gas resource assessment
Depletion contracts vs. Supply Contracts
The need to assess the amount of gas available usually arises when deciding on the type of Gas sale contract to use. Depletion contracts are used where there is a nominated gas field dedicated to the buyer, contract quantities are based on economically recoverable reserves and no obligation on seller to secure additional reserves to meet supply obligation.
Emergence of Normative Social Influence in Gas.
Social norms refer to the unwritten rules that govern social behaviour. Lax enforcement of the law in the area of environmental degradation sometimes results in host community hostility targeted at the operators that are believe to be given a free pass to operators in the realms of industrial pollution. Another issue is the visual and noise impacts of gas turbines, these are challenges that need to be properly managed to avoid the whip lash that seems to have driven some Oil companies from land based operations offshore.
Political issues (gas diversion, gas prices, etc.)
Beyond economic and legal factors, political issues also come into play in gas powered energy projects, gas supply may sometimes be diverted to meet domestic or other needs leading to a deficit in agreed contract quantities. Gas prices are also a major source of concern with stakeholders complaining that gas prices are artificially low. However, there seems to have been a decoupling of Oil and Gas prices, historically there has always being some relationship between the price of crude oil and that of natural gas, that is, barring any unforeseen occurrences like natural disasters etc. Decoupling is usually temporary. However three factors tend to point to a possible permanent decoupling of prices and a possible dip in some areas. They are:
The globalization of natural gas
Specialization in all parts of oil and gas industry by companies
The emergence of shale gas.
IP/Data Protection in the Gas Industry
Research and operations in the gas industry constantly produce new pipelines, ideas, procedures, software, equipment and plenty of data, especially in areas bordering on pipeline integrity, gas leak detection systems and pipeline safety.
This innovation has potentially transformed the oil and gas industry from a commodity market to knowledge/innovation/intellectual property-based industry.
In addition, the divestment of assets by oil and gas companies can lead to employee mobility – the kind of employee mobility that usually makes the loss of valuable data or even intellectual property more probable.
It may seem wise for oil and gas companies to pay more attention towards protecting such IP and proprietary information – especially as it concerns former and disgruntled employees.
Negotiating Gas Contracts requires legal knowledge, foresight and common sense. The information contained in this piece should help inform the Government, Buyer and Seller, transporter of gas as to some possible alternatives, and possibly foster frank discussion between the Parties prior to signing any Contracts.
By Olufola Wusu Esq. © 2014
Commercial Lawyer, Oil and Gas Contracts Specialist and I.P. Consultant