IOCs Reluctant to Sell Flare Gas to Third Parties – FG

• IOCs Reluctant to Sell Flare Gas to Third Parties – FG

International oil companies that are involved in the flaring of gas in Nigeria are often reluctant to sell the commodity to third parties, the Federal Government has said.

It was gathered that the oil producers preferred to pay the tiny cost incurred in gas flaring, rather than to deal with a third-party investor that might be interested in off-taking the commodity.

Flare gas is essentially associated gas that is produced with oil, as they both come out of the ground. But flare gas pollutes the environment, causing sickness and other environmental hazards, particularly in locations where these IOCs operate, like in the Niger Delta.

“Although the Federal Government owns the flare gas and has the power to take it, oil producers have, up till now, treated flare gas as if it is their own, to sell or to flare as they choose,” the Programme Manager, Nigeria Gas Flare Commercialisation Programme, Justice Derefaka, said.

In a copy of the presentation he made at the 3rd Lawyers in Oil and Gas conference in Lagos, Derefaka explained that IOCs were reluctant to sell flare gas because the cost of gas flaring to a producer had been tiny and tax deductible.

The presentation, which was entitled, ‘The Impact of Government Regulatory Policy and the Road to Sustainable Economic Growth Through The Lens of the NGFCP,’ was made available to our correspondent in Abuja on Wednesday.

The programme manager for the NGFCP said, “Typically producers have been reluctant to sell to third parties, preferring to make the miniscule flare payment than have the operational hassles of dealing with third parties, the poor technical gas evacuation system and the poor gas payment record.

“The result is that the low hanging fruit has been fully picked for producers’ own projects, and the higher hanging fruit, i.e. the 178 flare sites left, have been ignored.”

Derefaka, however, noted that “under the new regulations approved in 2018, the Federal Government has asserted its right to take gas free at the flare and will auction it off to third parties. Those third parties will have surety of title from the Federal Government. Under the regulations, flare payments have been increased substantially.”

Historically, associated gas is regarded as a waste product, as the commodity was separated from the oil and flared in situ.

Meanwhile oil was piped to local refineries or for export and progressively associated gas has been captured or harnessed and used for power generation; in industry for fertiliser, methanol and petrochemical plants; and for production of liquefied petroleum gas (and liquefied natural gas.

However, flare capture is expensive, therefore it is often only done at production sites where there are economies of scale

Derefaka noted that there had been no teeth in the flare payment structure that was set in 1998 at N10/million standard cubic feet, which was approximately $0.50 in 1998

He observed that currently, this flare payment sum had been eroded by inflation, as “the value of that flare payment today is approximately $0.028/mscf.”

He added, “This has equated to a total of about $8m in flare payments for 2017. The moral hazard is that these are tax-deductible which, at 85 per cent tax rate, means that the Federal Government received net $1.2m (gross export revenue of crude oil in 2017 was $33bn).

“This net figure expressed as an average cost per barrel of crude oil produced is less than $0.002 (one fifth of a US cent).”

But Derefaka noted that the 2018 regulations required a higher flare payment, expressed in $/mscf, adding that a legislative change was being developed to make the flare payment non-tax-deductible.

“The Flare Gas (Prevention of Waste and Pollution) Regulations 2018 has been approved by Mr. President and gazetted to underpin the implementation of the NGFCP. It was approved on July 5, 2018, and gazetted on 9th July, 2018,” he stated.