FLARE GAS (PREVENTION OF WASTE AND POLLUTION) REGULATIONS, 2018 – A BRIEF OVERVIEW

Introduction

Recently, the President of the Federal Republic of Nigeria acting in his capacity as the Minister of Petroleum Resources and under powers conferred on the Minister of Petroleum Resources by section 9 of the Petroleum Act 1969 and section 5 of the Associated Gas Reinjection Act 1979 (as variously amended) made a regulation – the Flare Gas (Prevention of Waste and Pollution) Regulations, 2018 (“Flare Gas Regulations” hereinafter). The Flare Gas Regulations comes at the back of increased calls for more stringent measures to be implemented against the gas flaring activities of oil exploration and production companies operating especially within the Niger Delta region, which activities have various detrimental effects on the environment and economy at large as well as on the health and lives of the host communities. This regulations adds legislative bite to the Nigerian Gas Flare Commercialization Programme (NGFCP) launched by the Federal Government. Accordingly, the Flare Gas Regulations aims to realize the reduction of negative environmental and social impacts of flaring natural gas, while introducing a framework for the realization of economic benefits from flare gas capture, especially given Nigeria’s enormous gas reserves proven to be over 5 billion cubic metres.

Salient Provisions of the Flare Gas Regulations

It is noteworthy that the aforementioned aims of the Flare Gas Regulations are mainly set to be realized through the establishment of a legal framework that is designed to herald the era of commercialization of hitherto flared natural gas. Below, we discuss the salient provisions of the regulation.

Firstly, by the provisions of sub-regulation 2 of the Flare Gas Regulations, the Federal government reiterates its right as provided for under Paragraph 35(b)(i) of the Petroleum Act to take natural gas produced with crude oil from any holders of mining leases or operators of marginal fields free of cost at the flare and without payment of any royalty. This is an important provision as it is essential for the Federal Government to actually own the natural gas being flared free from any encumbrances before same can be assigned by the Federal Government to qualified persons for the purpose of commercializing. On the basis of the Federal Government’s ownership right therefore, the Flare Gas Regulations empowers the Minister of Petroleum Resources to grant a ‘Permit To Access Flare Gas’ to a Qualified Applicant who shall take flare gas on behalf of the Federal Government from the producers at any flare site and utilize same on terms set out in the Permits. Such qualified applicants are selected through a competitive bid process conducted by the Federal Government.

To ensure the supply of flare gas to eligible holders of permits, the Flare Gas Regulations reiterates the prohibition on flaring of natural gas by production companies provided for under section 3(1) of the Associated Gas Re-Injection Act except where such production companies have obtained a certificate from the Minister of Petroleum Resources pursuant to the provisions of section 3(2) of the afore-referred Act. It must be noted that under section 3(2)(a) of the Associated Gas Re-Injection Act, the Minister of Petroleum Resources is empowered to permit a company to continue to flare gas in a particular field or fields if the company pays a monetary penalty which the Minister is further empowered to prescribe from time to time. Pursuant to this power, the penalty for continuing to flare natural gas by any production company was adjusted under the Flare Gas Regulations. By sub-regulation 13(1) and (2) of the Flare Gas Regulations, where 10,000 barrels or more of oil is produced per day in any Oil Mining Lease (OML) area or any field designated as a Marginal Field, the flaring of every 28.317 standard cubic metres of gas attracts a flare payment of $2.00 (two United States Dollars). This penalty is reduced to $0.50 (fifty United States Cents) where less than 10,000 barrels of oil is produced per day in the OML area or a field designated as a Marginal Field.

It is interesting to note that recently (in March last year), the Federal High Court overturned the decision of the Tax Appeal Tribunal in Mobil Producing Unlimited vs FIRS[1] which allowed production companies that flare gas to deduct the expenses they incur for so doing when calculating their tax liability. The Federal High Court in that case held that expenses for gas flaring activities done without obtaining the prior permission of the Minister of Petroleum Resources are not deductible for the purpose of calculating Petroleum Profits Tax (PPT) liability. The rationale for this decision is that gas flaring without the Minister’s permission as provided for under the Associated Gas Re-Injection Act is an illegal and invalid act, and the gas flaring company cannot be allowed to benefit from such an illegal activity. This decision is a game changer from the common practice in the industry where production companies that flare gas usually simply apply for the Minister’s permission to flare gas, but without waiting to receive the permission (the permission is usually unprocessed by the Minister for years), proceed with their gas flaring activities and pay the necessary penalties. The companies then deduct the expenses incurred, including sometimes the penalty payments as expenses in computing their PPT liability. Thus, it would seem that on the authority of the above case, only production companies who have been granted a permit to flare gas by the Minister of Petroleum Resources at the pain of paying the relevant penalties may deduct their expenses in that regard when computing their PPT liability.

To protect the nascent industry for flare gas commercialization and make it further attractive to investors, the Flare Gas Regulations contains provisions designed to ensure that flare gas is commercialized by only holders of a Permit to Access Flare Gas or pursuant to permission granted by the Minister of Petroleum Resources. A producer of flare gas is prohibited from utilizing such gas for commercial purposes except where such producer applies and obtains the permission of the Minister to utilize gas for commercial purposes. Such a producer however cannot apply for itself. It must apply on behalf of a midstream subsidiary corporate entity either existing or to be incorporated, and its application must not relate to flare gas volume that is being offered to qualified persons in a Federal Government bid process, or which has been assigned to a permit holder. This is a shift from the spirit of the Associated Gas Re-Injection Act which requires oil producing companies to develop and submit to the Minister of Petroleum Resources a programme for schemes for the viable utilization of all associated gas produced from a field or a group of fields, and projects to re-inject all gas produced in association with oil. Under the Act, the producing companies are required to lead the process of gas utilization, and the proceeds of such utilization go to the producing companies. Under the new regime introduced by the Flare Gas Regulations however, the production companies are stripped of all responsibility in the associated gas they produce and also of any interest in the proceeds from the commercial utilization of such gas. It is curious as to why the Federal Government chose to establish this new legal framework through subsidiary legislation and not by pushing through a legislation on the subject at the National Assembly. Surely, the intendment of the Flare Gas Regulations could be interpreted as conflicting with the spirit of the Associated Gas Re-Injection Act leaving the regulations susceptible to a legal challenge.

Another significant provision of the Flare Gas Regulations is the requirement for production companies and holders of Permit to Access Flare Gas to maintain daily logs of flaring and venting of natural gas produced by them or in their custody, and submit same within 21 days following the end of every month to the Department of Petroleum Resources (DPR). Both producers of flare gas and permit holders are also required to install metering equipment for measuring both the quantity of gas flared, and the quantity of flare gas either produced or acquired from flare points. Stiff penalties are imposed for various breaches of the Flare Gas Regulations including the failure to provide flare gas data if required by the DPR to do so, the failure to provide either a qualified applicant or a permit holder with access to a flare site or flare gas, the failure to agree to enter into a connection agreement with a permit holder, and the failure to install metering equipment within the time required to do so by the DPR. In addition, the Flare Gas Regulations makes it a criminal offence for any person acting on behalf of a producer of associated gas to supply inaccurate or incomplete flare gas data to the DPR or to any other duly empowered lawful authority. The prescribed penalty upon the conviction of such a person is a fine of N50,000 (fifty thousand Naira) or imprisonment for a term of not more than 6 months, or to both the fine and the term of imprisonment.

What is the process of obtaining the Permit to Access Flare Gas?

The office of the Minister of State for Petroleum Resources runs the Nigerian Gas Flare Commercialization Program (NGFCP). The Permit to Access Flare Gas are issued pursuant to competitive and transparent procurement process under the NGFCP. Flare gas is available under the program to the successful bidders at a price which the investors bid for. The bidding process employs a two-stage procurement process as follows:

1. Submission of a Request for Qualification (RFQ), documentary package for which will be available to interested investors who have registered with the NGFCP through the program portal. Registration is free and provides access to the RFQ materials. Using the format in the RFQ, applicants may submit a Statement of Qualification (SoQ) together with a Confidentiality Agreement. A submission fee is applicable.
2. Following evaluation by the NGFCP, Qualified Applicants are selected and then invited to proceed to the Second Stage (i.e. issuance of the Request for Proposal– RFP) of the bidding process. They will be requested to submit a detailed proposal for their proposed utilization of gas project which must be in conformity with the RFP package requirements. The proposal must also be accompanied by a bid bond. A proposals Evaluation Committee appointed by the Minister of Petroleum Resources will evaluate all proposals and select preferred bidders who may then develop their gas utilization projects pursuant to the Permit to Access Flare Gas.

Some of the contracts that may be involved in the process of investment and participation as Permit Holder in the NGFCP are as follows:

1. Gas Supply Agreement with the Federal Government of Nigeria
2. Milestone Development Agreement with the Federal Government of Nigeria
3. Performance Bond with the Federal Government of Nigeria
4. Deliver or Pay Agreement with associated gas producing company
5. Facility Connection Agreement with associated gas producing company
6. Gas Transportation Agreement with pipeline operators or transportation companies

Conclusion

The Flare Gas Regulations is a much needed legislative backing for the Federal Government’s initiative under the NGFCP. It is a step in the right direction towards the elimination of gas flaring in Nigeria and the meeting by Nigeria of its goals and commitments to the international community under the Paris Accord. More importantly however, the Flare Gas Regulations and the NGFCP is designed to achieve the above ends through the commercialization of hitherto flared gas, thereby making important contributions to the nation’s economy. Players in the oil and gas industry are already jostling to secure their economic interests under this new regime. Despite a few concerns with the Regulations itself, it is the hope that the Federal Government will keep its own side of the bargain by providing the much need political will towards the implementation of the Regulations. Where this is the case, it is likely that the Regulations will attain the goals it sets out to attain.

[1] (2015) TAT/LZ/033/2013

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CASE REVIEW – THE IMPLICATIONS OF THE COURT OF APPEAL DECISION IN NOSDRA v. EXXONMOBIL

INTRODUCTION

In March 2018, the Calabar Division of the Court of Appeal upheld the ruling of the Federal High Court, Uyo Division (the trial Court) which held that the National Oil Spill Detection and Response Agency (NOSDRA) had acted beyond its statutory powers when it imposed a fine on Mobil Producing Nigeria Unlimited (ExxonMobil) for its alleged infringement of the National Oil Spill Detection and Response Agency Act 2006 (NOSDRA Act) and regulations made thereunder. NOSDRA (the Appellant) had instituted the action against ExxonMobil (the Respondent) claiming the sum of N10,000,000 (ten million Naira) as penalty for the infringement.

THE DISPUTE

The dispute between the parties arose as a result of oil spillage from ExxonMobil’s facility. ExxonMobil averred at the trial Court that the spillage was accidental and upon becoming aware of the spillage, it immediately shut down the affected tanks, activated its Emergency Response Procedure and carried out a clean-up, remediation and assessment exercise on the impacted site in accordance with the stipulated standards of the NOSDRA Act and its regulations. ExxonMobil further alleged that NOSDRA rated the Emergency Response Procedure it implemented as satisfactory. NOSDRA however, subsequently instituted the action against ExxonMobil claiming the sum of N10,000,000 (ten million Naira) as penalty for an alleged infringement of the NOSDRA Act and its regulations.

In its judgment, the trial Court held that NOSDRA’s imposition of the penalty was ultra vires (outside) its powers. NOSDRA was dissatisfied with the decision and appealed to the Court of Appeal.

In dismissing the appeal, the Court of Appeal considered whether, having regard to Section 6(2) and (3) of the NOSDRA Act, the judge was right in holding that the imposition of a penalty on ExxonMobil by NOSDRA was ultra vires its powers.

NOSDRA argued that its act of levying a fine on the ExxonMobil was done under Section 6(2) and (3) of the NOSDRA Act[1] which provides as follows:

(2) An oil spiller is by this Act to report an oil spill to the Agency in writing not later than 24 hours after the occurrence of an oil spill, in default of which the failure to report shall attract a penalty in the sum of five hundred thousand naira (N500,000.00) for each day of the failure to report the occurrence.

(3) The failure to clean up the impacted site, to all practical extent including remediation, shall attract a further fine of one million naira.

ExxonMobil on its part, argued that only the judicial arm of government has the exclusive powers of imposing fines and penalties, and queried if NOSDRA, being a non-judicial entity, could impose a fine or penalty on ExxonMobil.

After considering the parties’ submissions, the Court of Appeal dismissed the appeal and affirmed the ruling of the trial Court. Relevant portions of the decision are set out below:

1. “On the facts and circumstances of this case, I am of the firm, but humble view that the imposition of penalties by the Appellant was ultra vires its powers, especially where no platform was established to observe the principles of natural justice.

2. Penalties or fines are imposed as punishment for an offence or violation of the law. The power as well as competence to come to that finding belong to the courts, and the Appellant is not clothed with the power to properly exercise that function in view of the law creating the Appellant (NOSDRA). There is, therefore, a Lacuna in that law establishing the Appellant.”

ANALYSIS OF THE JUDGMENT

It could be distilled from the above decision that the imposition of a fine on ExxonMobil by NOSDRA was invalidated :

1. Under the 1999 Constitution, only judicial bodies can impose fines or penalties, and NOSDRA not being a judicial body, cannot impose fines or penalties;
2. The law establishing NOSDRA does not clothe it with the powers to impose fines; and;
3. NOSDRA did not observe the principles of fair hearing in its fact-finding, thus the fine imposed as a result of that flawed process cannot stand.

In examining ground (1) above, it appears the Court of Appeal was of the view that before a fine or penalty is imposed on any person or entity, such person or entity must have been found guilty of a contravention of a law, and only judicial bodies have the powers to conduct this fact-finding, achieved via a criminal trial.

I concur that the Court of Appeal was right when it held that only judicial bodies can conduct criminal trials. Section 36(4) of the 1999 Constitution provides that whenever a person is charged with a criminal offence, such person shall be entitled to a fair hearing in public within a reasonable time by a court or a tribunal. Thus the courts and other criminal tribunals created under different statutes in Nigeria are the proper fora for the conduct of criminal trials in Nigeria.

However, I am of the opinion that it is not correct that every imposition of a fine or penalty must be preceded by a criminal trial which must prosecuted before judicial bodies. In Nigeria, administrative bodies can make findings of fact that can lead to the imposition of sanctions on subjects within their regulatory purview provided that no finding of fact regarding the criminal guilt of such subjects is made.

While NOSDRA in this case is clearly not a criminal tribunal and lacks capacity to conduct a criminal trial, the facts of this case do not require the conduct of a criminal trial as held by the Court of Appeal. No crime was committed, and the NOSDRA Act did not intend that there will be a prosecution and determination of guilt by a court. It can be argued that the aim of the legislature in enacting the NOSDRA Act, is to de-incentivise or penalise certain conducts but without the necessity of a criminal conviction.

For example, in 2015, a US$5.2 billion fine was handed down to MTN, a mobile network operator by the Nigerian Communications Commission (NCC). The issuance of the fine was not preceded by a criminal trial but was made by the NCC in its capacity as the regulator. The NCC arrived at a factual determination that MTN had failed to meet the deadline for disconnecting the Subscribers Identification Modules (SIM) that were improperly registered. MTN was then fined $1000 for every improperly registered SIM, and the total fine amounted to $5.2 billion.

It is my view that the powers NCC exercised in penalising MTN is similar to NOSDRA’s powers under the Act. The implication of the ruling of the Court of Appeal in this case would be that the NCC did not have the powers to impose the fine on MTN since making the findings of fact that led to the imposition of the fine is the exclusive preserve of the courts.

This position, if upheld, could weaken the regulatory powers of various bodies, and will subject matters that can be speedily settled administratively to lengthy criminal prosecution.

As regards ground (2) in the Court of Appeal’s decision above, the lacuna which the Court of Appeal held exists in the law can either be the absence of the power to impose fines, or the lack of provisions that mandate the observance of the principles of fair hearing in the course of the fact-finding investigations prior to the imposition of a fine or penalty. Concerning the absence of the power to impose fines under the NOSDRA Act, an examination of the Act reveals that there is no provision expressly designating NOSDRA as the authority to impose or collect the fine stipulated under its section 6 (2) and (3) of the NOSDRA Act.

A literal interpretation of the Act would mean that even though it prescribes a fine for a failure to report an oil spill, a person who fails to report an oil spill can escape this liability simply because the Act did not expressly designate a particular authority to collect the fine or to ensure the payment of the fine.

Notwithstanding, I believe that the Court of Appeal could have interpreted the provisions of the NOSDRA Act in a way that renders its provisions useful. The provisions of Section 6(1)(a) and (e) of the NOSDRA Act could have been interpreted as conferring on NOSDRA the power to collect this fine as those provisions provide as follows:

6(1)(a) The Agency shall be responsible for surveillance and ensure compliance with all existing environmental legislation and the detection of oil spills in the petroleum sector;

6(1)(e) The Agency shall perform such other functions as may be required to achieve the aims and objectives of the Agency under this Act or any plan as may be formulated by the Federal Government under this Act.

I am of the opinion that there is enough latitude in the above provisions within which the Court of Appeal could have found that the Appellant was clothed with the necessary powers to impose the fine.

CONCLUSION

Administrative agencies are vital for the smooth operation of the modern state, thus a ruling that restricts their powers without a good basis (as in this case) could have far-reaching consequences. Even where there is a lacuna in an enabling law, courts should in providing an interpretation, strive to ensure that the mischief the law was created to address, is cured.

Nonetheless, it remains to be seen what position the Supreme Court would take in this matter upon any further appeal. It is expected that a Supreme Court decision will provide more clarity on the application of NOSDRA’s powers under the Act.

Notes

[1] Cap N157, LFN 2004.

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