THE

ROBERT GORDON
UNIVERSITY
ABERDEEN
FACULTY OF MANAGEMENT
Aberdeen Business School

Title: An evaluation of the adequacy of Nigerias gas policies to meet

domestic gas supply and infrastructural development challenges.

Name: OSAI SIMEON NNODIM

Matriculation Number: 1213331

Submission Date: 29TH JANUARY, 2014

Supervisor: DR. LABARAN M. LAWAL

Aim: To shed more light on the impact of recent gas policy changes as
captured in the NGMP and proposed PIB on gas supply and
infrastructure development in Nigeria.

Objectives:

1. To assess whether or not the NGMP and provisions of the proposed PIB have
robust measures to guarantee domestic gas supply to consumers.
2. To assess whether or not the NGMP and PIB concerning gas adequately
provide for gas infrastructure development.

Signed: OSAI NNODIM

Total word count (excluding acknowledgements, diagrams, references,

bibliography and appendices) 21,183

A Dissertation submitted in partial fulfilment of the requirements for the

Postgraduate Certificate/Diploma/MSc Degree in Oil and Gas Accounting.
 ABERDEEN BUSINESS SCHOOL

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Name OSAI SIMEON NNODIM

Email/contact tel no.: o.s.nnodim@rgu.ac.uk/07584063217
Course: MSc Oil And Gas Accounting
Module: BSM 581 Dissertation
Dissertation Title:
An evaluation of the adequacy of Nigerias gas
policies to meet domestic gas supply and
infrastructural development challenges.
Supervisor/Tutor: DR. LABARAN M. LAWAL

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Signed...........Osai S. Nnodim............................. Date..........29TH January, 2014...........

 THE
ROBERT GORDON
UNIVERSITY
ABERDEEN

An evaluation of the adequacy of Nigerias gas policies to meet domestic

gas supply and infrastructural development challenges.

OSAI S. NNODIM

The Robert Gordon University, Aberdeen, UK

Aberdeen Business School
MSc Oil and Gas Accounting
Submission Date: 29TH January, 2014

ABSTRACT
This study sought to evaluate the adequacy and performance of the recent policy
changes in the gas sector as captured in Nigerias Gas Master Plan and the
proposed petroleum legislation, the Petroleum Industry Bill. The study answered
the question whether Nigerias gas policies adequately provide for domestic gas
supply and infrastructural development. Adopting stakeholder theory as the
theoretical framework, a qualitative Multi Criteria Evaluation model was used to
assess policy measures against relevant criteria sourced from literature. The
findings of the study revealed that Nigerias gas policies perform better at
guaranteeing domestic gas supply for consumers than providing for gas
infrastructure development. Furthermore the Gas Pricing Policy, Domestic Gas
Supply Obligation, 3rd party pipeline access and licensing policy measures were
the best performers based on the selected criteria and as such are adequate policy
measures. The study also indicated that Nigerias gas policies score highest in
transparency, then feasibility and equity with flexibility and stringency having the
least scores.

Keywords: Petroleum Industry Bill; Nigeria Gas Master Plan; Nigerias Gas Policies;
Domestic Gas Sector; Gas Infrastructural Development.

i
ACKNOWLEDGEMENTS
Profound gratitude to my parents for their unwavering support and enablement to
conduct this study and complete my MSc program.

I express my sincere appreciation to my amiable supervisor, Dr Labaran M. Lawal

for his priceless comments and painstaking guidance towards the accomplishment
and success of this dissertation.

I also give special thanks to my friends whose moral, spiritual and financial support
saw me through the period of my study and writing this dissertation.

ii
Table of Contents

ABSTRACT ............................................................................................................................................................ i
ACKNOWLEDGEMENTS .................................................................................................................................... ii
List of Figures......................................................................................................................................................... v
List of Tables .......................................................................................................................................................... v
List of Abbreviations and their Meanings ............................................................................................................. vi
CHAPTER ONE ..................................................................................................................................................... 1
1.1 INTRODUCTION ............................................................................................................................................ 1
1.2 BACKGROUND OF THE STUDY ................................................................................................................. 1
1.3 RESEARCH AIM AND OBJECTIVES ........................................................................................................... 4
1.4 RESEARCH QUESTION ................................................................................................................................ 4
1.5 JUSTIFICATION OF STUDY ......................................................................................................................... 4
1.6 SCOPE AND ORGANIZATION OF STUDY ................................................................................................. 5
CHAPTER TWO .................................................................................................................................................... 6
LITERATURE REVIEW ....................................................................................................................................... 6
2.1 INTRODUCTION ............................................................................................................................................ 6
2.2 THEORETICAL BACKGROUND .................................................................................................................. 6
2.3 THE BEGINNING OF THE GAS INDUSTRY .............................................................................................. 8
2.4 INTRODUCTION OF POLICIES AND REGULATION ............................................................................... 9
2.5 FACTORS AFFECTING GAS POLICIES .................................................................................................... 12
2.5.1 GAS RESOURCES AND RESERVES ................................................................................................... 13
2.5.2 GAS MARKETS ..................................................................................................................................... 14
2.5.2.1 GAS PRICING ..................................................................................................................................... 15
2.5.3 MONETIZATION OF GAS .................................................................................................................... 17
2.5.3.1 REDUCTION OF GAS FLARING ...................................................................................................... 18
2.5.3.2 GLOBAL GAS FLARING REDUCTION PARTNERSHIP ............................................................... 19
2.6 OBJECTIVES OF GAS POLICIES ............................................................................................................... 19
2.7 GLOBAL GAS POLICIES TODAY: A REGIONAL OVERVIEW ............................................................. 20
2.7.1 NORTH AMERICA ................................................................................................................................ 20
2.7.2 EUROPE .................................................................................................................................................. 21
2.7.3 ASIA-PACIFIC ....................................................................................................................................... 22
2.8 TRANSPORTATION OF NATURAL GAS.................................................................................................. 23
2.8.1 SECURITY OF SUPPLY ........................................................................................................................ 24
2.8.2 GAS INFRASTRUCTURE DEVELOPMENT ....................................................................................... 25
2.9 SUMMARY ................................................................................................................................................... 27
CHAPTER THREE .............................................................................................................................................. 28
AN EXAMINATION OF NIGERIAS GAS POLICIES ..................................................................................... 28
3.1 INTRODUCTION .......................................................................................................................................... 28
3.2 NIGERIAN GAS INDUSTRY ....................................................................................................................... 28
3.2.1 DOMESTIC GAS MARKET .................................................................................................................. 29
3.3 REVIEW OF NIGERIAN GAS POLICIES FROM 1969 TO 2008 ............................................................... 30

iii
3.4 NIGERIAN GAS MASTER PLAN (NGMP) ................................................................................................ 33
3.4.1 GAS PRICING POLICY (GPP) .............................................................................................................. 34
3.4.2 DOMESTIC GAS SUPPLY OBLIGATION (DGSO) ............................................................................ 35
3.4.3 GAS INFRASTRUCTURE BLUEPRINT (GIB) .................................................................................... 36
3.4.4 DISCUSSION ON NGMP....................................................................................................................... 36
3.5 PETROLEUM INDUSTRY BILL (PIB)........................................................................................................ 38
3.5.1 PIB 2012 AND THE GAS REGULATORY FRAMEWORK ................................................................ 39
3.5.2 UPSTREAM GAS OPERATIONS ......................................................................................................... 40
3.5.3 DOMESTIC GAS SUPPLY OBLIGATION (DGSO) ............................................................................ 41
3.5.4 GAS FLARING AND PENALTIES ....................................................................................................... 41
3.5.5 DOWNSTREAM GAS OPERATIONS LICENSING ............................................................................ 42
3.5.6 DOMESTIC GAS MARKET REGULATION........................................................................................ 42
3.5.7 DISCUSSION ON PIB ............................................................................................................................ 43
3.6 SUMMARY ................................................................................................................................................... 44
CHAPTER FOUR ................................................................................................................................................ 45
RESEARCH METHODOLOGY ......................................................................................................................... 45
4.1 INTRODUCTION .......................................................................................................................................... 45
4.2 RESEARCH APPROACH ............................................................................................................................. 45
4.3 QUANTITATIVE AND QUALITATIVE RESEARCH METHODOLOGIES ............................................. 46
4.4 DATA SOURCES .......................................................................................................................................... 47
4.5 THEORETICAL FRAMEWORK .................................................................................................................. 48
4.6 METHODOLOGY ......................................................................................................................................... 48
4.6.1 LIMITATIONS OF THE METHODOLOGY ............................................................................................. 49
4.7 SUMMARY ................................................................................................................................................... 50
CHAPTER FIVE .................................................................................................................................................. 51
DATA ANALYSIS AND DISCUSSION OF RESULTS .................................................................................... 51
5.0 INTRODUCTION .......................................................................................................................................... 51
5.1 DATA DESCRIPTION .................................................................................................................................. 51
5.1.1 MCE MODEL AND POLICY MEASURES .......................................................................................... 51
5.1.2 SELECTION AND DESCRIPTION OF EVALUATION CRITERIA ................................................... 54
5.1.3 KEY STAKEHOLDERS ......................................................................................................................... 54
5.2 RESEARCH FINDINGS AND DISCUSSION .............................................................................................. 56
5.2.1 SUMMARY RESULTS .......................................................................................................................... 56
5.2.2 DISCUSSION OF RESULTS ................................................................................................................. 58
5.2.2.1 ENSURING DOMESTIC GAS SUPPLY FOR CONSUMERS .......................................................... 58
5.2.2.2 DOMESTIC GAS INFRASTRUCTURE DEVELOPMENT............................................................... 60
5.4 SUMMARY ................................................................................................................................................... 66
CHAPTER SIX .................................................................................................................................................... 67
CONCLUSIONS AND RECOMMENDATIONS ............................................................................................... 67
5.1 CONCLUSIONS ............................................................................................................................................ 67
5.2 RECOMMENDATIONS ................................................................................................................................ 68
BIBLIOGRAPHY ................................................................................................................................................ 70

iv
List of Figures
Fig 2.1 World Proved Reserves for Natural Gas
Fig. 2.2 Trade Movements in the global gas markets
Fig 2.3 Natural Gas Price Trend
Fig 3.1 Top 20 flaring countries
Fig 3.2 Production and Consumption in Nigeria
Fig 3.3 Energy Consumption Mix in Nigeria
Fig 3.4 Gas Value Chain in Nigeria
Fig 3.5 Nigerian Gas Master Plan
Fig 3.6 Gas Infrastructure Blueprint
Fig 3.7 PIB 2012 AND THE GAS REGULATORY FRAMEWORK
Fig 3.8 DOWNSTREAM GAS OPERATIONS LICENSING
Fig 5.1 Structural Model for Evaluative Analysis of NGMP and PIB
Fig 5.2 Network of Key Stakeholders
Fig 5.3 Policy Measures Ranking
Fig. 5.4 Evaluation Criteria Ranking
Fig 5.5 Pipeline Structure showing Network Configuration

List of Tables
Table 5.1 Pipeline Infrastructure Capacity (2015 projection)

v
List of Abbreviations and their Meanings
NGMP Nigeria Gas Master Plan
PIB proposed Petroleum Industry Bill
CSR Corporate Social Responsibility
FG Federal Government of Nigeria
NERC Nigerian Electricity Regulatory Commission
NG Natural Gas
LNG Liquefied Natural Gas
ToP Take or Pay Contracts
LPG Liquefied Petroleum Gas
NNPC Nigerian National Petroleum Corporation
NLNG Nigerian LNG Limited
ECT Energy Charter Treaty
DGA Downstream Gas Act
NAGFRA Natural Gas Fiscal Reform Act
SA Strategic Aggregator
NGC National Gas Company
GPP Gas Pricing Policy
DGSO Domestic Gas Supply Obligation
GIB Gas Infrastructure Blueprint
GSPA Gas Sales and Purchase Agreement
CPF Central Processing/Gathering Facilities
IOC International/Independent Oil Company
PRG Partial Risk Guarantee
MPR Minister of Petroleum Resources
PTB Petroleum Technical Bureau
UPI Upstream Petroleum Inspectorate
DPRA Downstream Petroleum Regulatory Agency
MCE Multi Criteria Evaluation

vi
CHAPTER ONE

1.1 INTRODUCTION
An evaluation of the NGMP and PIB is being proposed to assess its adequacy in
providing for domestic gas supply and infrastructure development.

1.2 BACKGROUND OF THE STUDY

The global demand for natural gas is steadily rising. From 2012 to 2035, there is
an expected growth rate of 1.8%, driven by various factors like the emergence of
shale gas as a preferred energy source in the US, increased gas usage plans in
the growing economies of India and China, discovery and utilization of gas
resources in Latin America, and Europes continued efforts to reduce carbon
emissions, to mention a few (Balat 2009). Natural gas is regarded as the least
polluting fossil fuel, and has other economically favourable characteristics like
improved efficiency, relatively lower capital costs, and environmental stewardship
(Hansen 2000). These factors coupled with the increasing demand suggest that
gas as a power source is becoming more attractive especially with increased
environmental sensitivity in recent times (Hansen 2000, Odumugbo 2010).
Therefore, countries with natural gas deposits should want to have a policy
framework in place that encourages effective and environmentally responsible
exploitation.

Nigeria is blessed with massive reserves of associated and non-associated gas,

estimated in excess of 180TCF (trillion cubic feet), ranking amongst the ten largest
in terms of proven natural gas reserves in the world (Ukpohor 2009, NLNG 2011).
Reserves/production is given as a comfortable approximate of 109 years, and
there also have been strong suggestions from geologists and earth scientists that
there may be undiscovered reserves in quantities almost double the reported
amounts (Ukpohor 2009, Odumugbo 2010). Sadly, studies show that the enabling
infrastructure for effective monetization and domestic utilization of this natural
resource is inadequate (Adaramola and Oyewola 2011, Ukpohor 2009, Sonibare
and Akeredolu 2004). For example, in 2008, 530 billion cubic feet (bcf) of
associated gas was wastefully flared resulting in financial losses of approximately
$2.5 billion/year and all the attendant environmental degradation implications of
flaring gas (Ogbe et al 2011). Furthermore, a large percentage of the local

1
populace, including the host communities still do not have access to gas for
domestic energy uses (Okorie 2010) and instead rely on crude sources. In a study
of energy consumption patterns Oseni (2011) is able to establish that large
proportions (over 40%) of Nigerian households do not have access to electricity
and still depend largely on traditional forms of energy (e.g., firewood and
kerosene) as energy sources. In order to meet domestic and export sector demand
for gas, and effect a transit from a predominantly oil industry to an integrated oil
and gas industry, the Nigerian government has initiated several key policy
changes from 2008 (Onyeukwu 2010, Akinpelu and Iwayemi 2010). These
changes are captured in the Nigeria Gas Master Plan (NGMP) and the current
Petroleum Industry Bill (PIB) undergoing ratification by the National Assembly.
These policies are expected to, among other things, provide a much needed boost
in the domestic gas sector by jumpstarting infrastructure development (Onyeukwu
2010).

A survey of relevant literature reveals attempts to provide a critical analysis of the

impact of these policy changes on the Nigerian economy and petroleum industry.
For example, Iledare (2010) reviewed the fiscal terms of the draft PIB and its
effects on offshore deep-water oil and gas ventures and opines that the PIB needs
to incorporate fiscal terms that willingly give up appropriate economic rent to
investors in order to guarantee sustainable flow of capital investment for resource
development. However, this study does not fully examine the entire gas value
chain and is limited to fiscal provisions alone. In another related study, Onyeukwu
(2010) examines the potential of the Nigerian gas market and discusses the
possible ways the NGMP might be constrained from positioning the Nigerian gas
market on a sustainable growth path. The study finds that contrary to the avowed
objectives of the NGMP, the approach to its implementation lacks political will
because it is premised on a desirable social agenda, not on strategy. This position
appears to be largely drawn from the fact that at the time there was no specific
regulatory framework for the implementation of the policy and its initiatives.
However, it is expected that the passing of the PIB into law should rectify this
shortcoming by providing an appropriate regulatory framework (Fagbohunlu and
Ikweazom 2012).

2
In an attempt to link industrial development with the oil industry Okoye (2012)
adopts a conceptual approach in analysing the PIB, finding that corporations can
move beyond self-interest models of corporate social responsibility (CSR) by
meaningful and fair engagement with facilitative regulatory frameworks. Her
paper is an exploratory discussion in that examines the potential and limitations
of linking business to development agendas in an ongoing context, however it
focuses on CSR behaviour and does not address infrastructural challenges.
Regarding investment incentivising, using an optimization model Ogbe, Ogbe and
Iledare (2011) suggests that the NGMP provides the right gas price incentives to
jump start the local gas market and promote domestic gas usage. Furthermore,
Akinpelu and Iwayemi (2010) made an attempt to determine an appropriate
pricing model for the emerging Nigerian gas market. They conclude that a simple
and flexible model will send the right signals to producers, transporters and end
users. However, a major shortcoming of this position is that pricing alone may not
be the sole factor that affects infrastructural development.

In contrast to the significant amount of proven gas reserves Nigeria can boast of,
domestic consumption of this valuable resource appears to be relatively low
(Igbatayo 2005). The recent power sector reform that successfully introduced
privatisation and decoupling of the Power Holding Company (PHCN) into separate
generation companies (GenCo) and distribution companies (DisCo), provides an
opportunity for significant investment in transmission infrastructure to effectively
utilise otherwise stranded gas for power generation (Okoro and Chikuni 2007).
This same infrastructure can also be used for supplying gas as a feedstock for the
petrochemical industries. In line with this aim Nigerias gas policies provide for a
Gas Infrastructure Blueprint which is expected to address the transmission
infrastructure challenges (Oni 2011).

However, addressing the gas infrastructure challenge is a complex matter having

political, social, technical and economic considerations (Onyeukwu 2010;
Chinweze et al 2012; Kurmanov 2012). This complexity might be a reason behind
infrastructural inadequacy despite over 40 years of gas production (NLNG 2011).
Recently, in the power sector the GenCos have had gas supply shortages resulting
in less power available for DisCos to distribute amid growing concerns of reducing
electricity supply from the local communities (Olusola-Obasa 2013). While a

3
transitional period is expected with any major reform, is this transitional period
properly captured and accounted for regarding gas supply in Nigerias gas policies?
The question that then arises is whether these policy changes as captured in the
NGMP and the proposed petroleum industry legislation, the PIB, adequately
address the infrastructural challenge.

1.3 RESEARCH AIM AND OBJECTIVES

Based on proceeding analysis, this study aims to shed more light on the impact of
recent gas policy changes as captured in the NGMP and proposed PIB on gas
supply and infrastructure development in Nigeria. The NGMP and PIB were chosen
because they are the most recent gas policy changes, and as such are most likely
to provide current gas policy information.

The objectives of the study are:

3. To assess whether or not the NGMP and provisions of the proposed PIB have
robust measures to guarantee domestic gas supply to consumers.
4. To assess whether or not the NGMP and PIB concerning gas adequately
provide for gas infrastructure development.

1.4 RESEARCH QUESTION

The above mentioned aim and its objectives will be achieved by answering the
following question;

Do Nigerias gas policies adequately address the local gas supply and
infrastructure challenge?

1.5 JUSTIFICATION OF STUDY

Nigerias commitment to reforming the gas sector underscores the justification of
this study. In that light, this study will focus on looking at the Nigerian gas policies
and regulatory framework from 2008 till date from the perspective of gas
infrastructure development. Also, the study will attempt to form an opinion on
how robust these policies might be to handle transitional issues during this reform.
This study will attempt to determine if the recent gas policy changes have a
positive impact on the decision to invest in gas exploitation in Nigeria. It is
necessary to reconcile the need for private companies to maximise profitability

4
and the FGs requirements of optimum economic rent, environmental
responsibility and sustainable industrial development, and have these
reconciliations captured in the terms of the NGMP and PIB.

Therefore the study is significant in exploring the effectiveness of its gas

infrastructure policies because it may affect investors facing the decision to
commit to the huge capital investment outlay necessary to jump start the Nigerian
gas market and accelerate the shift from a mainly oil industry to a fully integrated
oil and gas industry. Additionally, the findings of this study may be of assistance
to the FG, NERC, legislators, financial institutions, and other stakeholders in the
Nigerian petroleum industry, more so because the PIB legislation is currently
undergoing ratification by the National Assembly. Lastly, academicians and
industry practitioners may find this research work useful as it sheds light on the
elements that constitute a robust gas policy from a security of supply viewpoint,
and also could also raise more issues for further research.

1.6 SCOPE AND ORGANIZATION OF STUDY

Chapter one provides an overview of the study and a brief background of gas
policies in Nigeria. It also presents the aim and objectives of the study and its
justification. Chapter two reviews related and relevant literature on the gas
industry highlighting factors that affect it. Chapter three closely examines
Nigerias gas industry and key policies that guide it. Chapter four provides a
discussion of the research design as well as the sources and description of the
data used in the study. In addition, it discusses the research methodology applied
in achieving the aim of the study. Chapter five describes the data used for the
study. It also presents the research findings as well as the detailed discussion of
the results obtained using MCE to evaluate the gas policies, while chapter six
draws conclusions based on the result of the study and makes recommendations.

5
CHAPTER TWO

LITERATURE REVIEW

2.1 INTRODUCTION
This aspect of the study is concerned with the theoretical background by reviewing
of existing literature on the global gas industry and the policies that drive it. It
covers the origin of policies and regulation in the gas industries and discusses the
factors that affect gas policy formulation and implementation. It further reviews
the objectives of a gas policy, then undertakes a regional review of policies in the
global gas industry. Finally, the concepts of security of supply and gas
infrastructure development are reviewed. The chapter concludes with a brief
summary.

2.2 THEORETICAL BACKGROUND

Natural gas (NG) is a naturally occurring mixture of carbon based gases consisting
primarily of methane. It is an energy source often used for cooking, heating of
homes, generation of electricity, fuel for vehicles, and an important chemical
feedstock in the manufacture of commercially important plastics and chemicals
(Rogge et al 1993). NG can usually be found trapped in rock formations within the
earth as conventional or unconventional gas. Unconventional natural gas includes
coal bed methane, shale gas, tight gas, biogenic gas and methane hydrates.
Conventional natural gas is considered as gas sourced from rocks that do not fall
into the above unconventional categories (Mohr and Evans 2011). The gas
produced is further categorized as associated or non-associated natural gas
(Gudmundsson et al 1998; Kamada et al 2013). Associated natural gas, also
referred to as wet gas, contains in addition to methane, varying amounts of other
higher alkanes (ethane, propane and n-butane), and sometimes a lesser
percentage of carbon dioxide, nitrogen, and hydrogen sulphide (Kamada et al
2013).On the other hand, non-associated natural gas or dry gas basically consists
of methane and little else (Berner and Getwick 2003). Wet gas and, to a lesser
extent, dry gas, requires processing to remove impurities, including water, to
meet the specifications of marketable natural gas (Bakar and Ali 2010).

6
The demand for NG is high in the global market place because it is a relatively
clean energy source and is well suited for use in the existing industrial and
domestic infrastructure (Dmitrievsky 2005; Dorsett and Ackerman 1992; Berner
and Getwick 2003). The production of energy helps to build a better world by
providing more comfort for mankind and making the world a better place to live
in. Thats why energy is sought wherever it might be, especially that locked up in
hydrocarbon fuels. Barring any future breakthrough in other forms of energy, it
has been argued that gas is the fuel of the 21st century (MIT Energy 2011;
Dmitrievsky 2005). A statistical study by Laherrere (2004) forecasting a steady
rise in gas production and demand appears to agree with this, although it indicates
that the rise is subject to fluctuations in gas prices and economic depression.
However, Hughes (2011) disagrees with this argument. In his opinion, the massive
build out of new infrastructure, including pipelines, gas storage and refuelling
facilities is a logistical, geological, environmental, and financial pipe dream.
Interestingly, Barreto et al (2003) takes a different perspective, arguing that a
complete structural transformation of the global energy system from
hydrocarbons to hydrogen as a fuel source will result in accelerated
decarbonisation of the energy mix and subsequently a reduced climatic impact. In
all, the unique characteristics of NG make it a premium fuel/energy source in many
applications in the industrial, commercial and domestic sectors.

According to the International Energy Agency (IEA), NG currently has the highest
statistical difference from 1973 to 2011 of 10.31Mtoe (million tonnes of oil
equivalent), making it the worlds fastest growing energy source in recent times
(IEA 2013). Nations that are endowed with it are doing everything to ensure its
development because markets around the world are developing rapidly for natural
gas, often in the form of LNG (Liquefied Natural Gas) for its relative ease of
transport (Small 2005). Adding to the demand growth, coal-fired and oil-fuel fired
plants are under pressure to convert to cleaner burning NG and newly built power
generators are strongly encouraged to use gas as a fuel (Walsh and Fletcher 2004;
Dorset and Ackerman 1992). The incentive is twofold; NG burns cleaner and, in
the long run, is cheaper than coal or other liquid fuels because of the
environmental savings. Dorset and Ackerman (1992 p.99) succinctly summarise
the relationships existing between factors that affect demand and consumption of
natural gas with the quote:

7
 For both economic and environmental reasons, natural gas is becoming
the fuel of choice in many markets. The forms of contracts employed, the
ease of access of new entrants to the gas business, the pricing formulas
and the use that both suppliers and consumers can make of gas
transmission and distribution systems will all affect the policies under which
old and new gas comes to the marketplace. All these factors will have a
major impact on whether gas use picks up and if so, at what pace.

2.3 THE BEGINNING OF THE GAS INDUSTRY

Britain was the first country to commercialize the use of natural gas, although the
United States of America has the longest history of NG use. Around 1785, natural
gas produced from coal was used to light houses, as well as streetlights (Darley
2006). Manufactured NG of this type (as opposed to naturally occurring gas) was
first brought to the United States in 1816, when it was used to light the streets of
Baltimore, Maryland by the Gas Light Company marking the beginning of the gas
industry in the United States of America. However, this manufactured gas was
much less efficient, and less environmentally friendly, than NG that comes from
underground (Darley 2006). By the mid-19th century commercial output of NG
began in the Caspian basin, particularly around the Absheron peninsula in Baku
region (Bahgat 2004). In 1821, the first well specifically intended to obtain NG
was dug in Fredonia, New York by William Hart (Curtis 2002). After noticing gas
bubbles rising to the surface of a creek, Hart dug a 27-foot well to try and obtain
a larger flow of gas to the surface. Hart is regarded by many as the 'father of
natural gas' in America. Expanding on Hart's work, the Fredonia Gas Light
Company was eventually formed, becoming the first American natural gas
company.
During most of the 19th century, NG was used almost exclusively as a source of
light (Bakar and Ali 2010). Without a pipeline infrastructure, it was difficult to
transport the gas very far, or into homes to be used for heating or cooking (Darley
2006; Curtis 2002; Small 2005). Most of the NG produced in this era was
manufactured from coal, as opposed to being transported from a well. Near the
end of the 19th century, with the rise of electricity, natural gas lights were
converted to electric lights and this led producers of NG to look for new uses for
their product (Darley 2006; Curtis 2002).

8
In 1885, renowned scientist Robert Bunsen invented what is now known as the
Bunsen burner. He managed to create a device that mixed NG with air in the right
proportions, creating a flame that burned cleanly and could be safely used for
cooking and heating. The invention of the Bunsen burner opened up new
opportunities for the use of NG in America and indeed throughout the world (Bakar
and Ali 2010). But without any way to transport it effectively, NG discovered pre-
WWII was usually just allowed to vent into the atmosphere, or burnt when found
alongside coal and oil, or simply left in the ground when found alone. This
unwanted NG was a disposal problem in the active oil fields. If there was not a
market for it near the wellhead it was virtually valueless since it had to be piped
or transported to the end user (Younger 2004; Bakar and Ali 2010). It wasn't until
the 1920s that any significant effort was put into building a pipeline infrastructure.
After World War II, welding techniques, pipe rolling, and metallurgical advances
allowed for the construction of reliable pipelines. This post-war pipeline
construction boom lasted well into the 60s, and allowed for the construction of
thousands of miles of pipeline to transport NG from the wellhead to a processing
plant or facility (Younger 2004; Speight 2008). As a result of this development of
distributive capability production increased rapidly (Sanford 1979).

Once the transportation of NG became possible, new uses for NG were discovered.
These included using NG to heat homes and operate appliances such as water
heaters and oven ranges. Industry began to use NG in manufacturing and
processing plants. Also, NG was used to heat boilers used to generate electricity.
The transportation infrastructure had made NG easy to obtain, and it was
becoming an increasingly popular form of energy.

2.4 INTRODUCTION OF POLICIES AND REGULATION

In 1938, the U.S. government first regulated the NG industry with the passing of
the Natural Gas Act (NGA). This was because at the time members of the
government believed the natural gas industry to be a 'natural monopoly' (DeVane
1946). According to Radetzki (1994), in the years prior to the passing of this Act
there was rising concern about monopolistic behaviour from the interstate gas
transmission companies. Because of the fear of possible abuses, such as charging
unreasonably high prices, and also given the rising importance of NG to all
consumers, the Natural Gas Act of 1938 was passed. The aim was to impose

9
regulations and restrictions on the price of natural gas to protect the end
consumers (Bushnell et al 2009). The Federal Power Commission (FPC), which
eventually became the Federal Energy Regulatory Commission (FERC) in 1977,
was instituted to oversee this function (Ross and Foster 1954; Bell 1964; Bushnell
et al 2009). Since then the natural gas industry has seen various attempts to
introduce regulatory frameworks to guide gas policy and strategy with varying
outcomes. Many authors have studied these events to better understand the
relationships existing between gas policies and industry performance.

For most of this century, firms in some industries especially public utility industries
like energy, transportation and communications, have been economically
regulated to alleviate public fears that that such firm will use its market power to
increase prices artificially and arbitrarily (Jess 1997). These type of industries
exhibit some type of scale of economies over a range of output that makes cost
per unit of output decline as output increases. This characteristic means that a
single firm could have the lowest costs of production and monopolise the market
(DeVane 1946). Hence these industries are treated as natural monopolies and
regulated to control factors such as entry, prices and profits. The gas transmission
industry is one such natural monopoly according to Radetzki (1994) and Bushnell
et al (2009) which might explain why it is usually regulated.

The development of a vibrant regional gas industry appears to be closely linked to

the policies that guide it. Price and Weyman-Jones (1996) used non parametric
indices to reveal that the rate of productivity growth increased significantly after
privatization of the UK natural gas industry, although differences in technical
efficiency within regions still exist. This finding suggests that there is the possibility
for potential gains from yardstick regulation of direct or indirect competition.
Sanford (1979) takes a related but different stance. After a study of the effects of
deregulation in the American gas sector he argues that deregulation would not be
the answer because of the possibility of massive windfall profit taking by gas
companies and, if this profit is not regulated and taxed, will hinder the
development of domestic energy resources. As such, price controls could have a
boomerang effect of closing the only market in which incentives previously existed
for firms to explore for and develop new gas supplies while minimising cost.

10
It is common knowledge that businesses generally intend to maximise profit and
usually seek to have a competitive edge. Applying this concept in a study of the
role of gas regulatory agencies in North America, Salazar (2007) makes a case for
regional harmonization of gas policies to leverage competitive market edge. In her
opinion an energy crisis in the near future because of the roller-coasting prices of
oil is not so far-fetched therefore she advocates for cooperation and support
amongst agencies with a common regional market. The concept of cooperation
also appears to be tied in with the issue of 3rd party access to gas pipelines. This
may explain Riordan (1994) whose study took a critical look at the institutional,
legal and economic frameworks for pipeline networks in America and finds that
freedom of access to pipeline transportation systems and services plays a
significant role in favourably altering the position of gas in relation to alternative
fuels in the energy sector. Cremer, Gasmi and Laffont (2003) agree with Riordan
(1994), further opining that optimal economic indicators for tariffs and charges by
pipeline companies are related to distance, although this relationship is not always
straightforward.

Arguably, increased access to transportation infrastructure improves efficiency of

gas supply systems (Thomas and Dawe 2002). Hawdon (2003) studied policy
developments affecting efficiency of resource usage in the gas sector by using
quantitative methods to benchmark relative performance of the gas industry. The
findings of the study support the notion that the reforms introduced in Great
Britain and intended in the rest of the EU are associated with high levels of
efficiency, good utilization of labour and levels of underutilization of capital
sufficient to support the development of competitive markets. However, the study
concedes that current regulatory practices might well benefit from further
investigation into the uncertainty surrounding empirical efficiency frontiers,
implying a challenge in the area of properly measuring efficiency of gas policies.
The concerns surrounding efficiency also pertain to the export market as well. In
a notable study, Hamilton (1973) examines gas export policies of Canada and
compares the exportable surplus policy against an industry policy of free exports
and also one of export tax. This study finds that the exportable surplus policy as
well as the export tax policy reduces domestic prices while increasing domestic
consumption of gas. While there are obvious economic benefits, an exportable

11
surplus policy is not the most efficient one because of higher costs associated with
maintenance of gas inventories.

In all the literature under this theme, scholars seem to have divergent views as
shown by the earlier discussion. Nonetheless, a critical look at the effects of
policies in the gas industry reveals that there is a direct relationship between
sector growth and its guiding policies (Hudson and Jorgenson 1974; Darley 2006;
Recchione 1979; MacAvoy 1979, 1984, 2001). Majidpour (2012) confirms this
interrelationship between government policies and industry development in the
gas sector, going on to argue that a high level of state involvement is
a characteristic of the gas industry in developing countries. Therefore it is
pertinent to examine the factors considered when formulating a gas policy.

2.5 FACTORS AFFECTING GAS POLICIES

As NG demand and consumption has experienced growth on a global scale,
governments and policy makers have had to create policies that drive their
respective NG industries. Hence the decision by any country to implement a policy
for its upstream and downstream gas industry should take into account its specific
regional, political and economic peculiarities while benefitting from the experience
gained from other countries (Bahgat 2010). It is not sufficient to rely on blanket
policies regulating both oil and gas, even though their methods of extraction are
quite similar. There are major differences between oil and NG economics. First,
gas generally requires special marketing arrangements with customers on a long-
term basis while oil can be sold freely on the international market including on a
short time basis. Even if more gas is progressively sold on the spot markets,
especially liquefied natural gas (LNG), the development of gas fields and the
building of gas processing and transportation is often contingent to the signing of
long-term gas purchase agreements (Le Leuch 2011; Mulherin 1986). Second, gas
transportation costs to the end-users are higher than for oil due to their respective
physical characteristics (Thomas and Dawe 2003). Third, gas processing costs per
unit energy content are usually higher than that of oil (Al-Mahroos and Al-Anaisi
2009).

12
According to Le Leuch (2011), Pierce (1994) and MacAvoy (1984) it is the answers
to the following questions that should inform the gas policy making process in any
country:
What are the quantities, types and compositions of NG available in the
country or region (Gas resources and reserves)?
Is there a potential market for selling the gas at the highest added value
(Gas Markets)?
How can the local gas industry be organized and monetized (Monetization
of gas reserves)?

2.5.1 GAS RESOURCES AND RESERVES

Gas reserves and gas resources correspond to quite different concepts in the
industry and therefore have to be correctly used. Gas is generally measured in
volume and sold on the basis of its gross calorific value or gross heating value
(GHV), often expressed in MMBtu (million British thermal units) under the Anglo-
Saxon units system, or in Gigajoules or MWh (megawatt hour) under the metric
system (Le Leuch 2011). Volumes of available gas are classified either as gas
reserves or gas resources depending on the degree of uncertainty of its extraction
(Scott 2012).

Thus, reserves are those quantities of gas anticipated to be commercially

recoverable by application of development projects to known accumulations using
existing technology from a given date forward under defined conditions (Scott
2012; Lee 2009). According to Wright and Gallun (2008), reserves are further
categorized as proved, probable or possible reserves in accordance with the level
of certainty associated with the estimates. On the other hand, resources have
larger volumes because they also include gas volumes that do not satisfy the
conditions for reserves classification. Inkpet (2011) is of the notion that, for gas
discoveries, the key question for a country and an investor is when contingent
resources already discovered can be classified as reserves, because only then can
economic benefits begin to accrue. In conclusion, and in accordance with good
petroleum practice, reserves only exist for gas when the commercial viability of a
given gas development project is demonstrated by appropriate technical and
economic studies and a decision for their development has been taken or is
envisaged shortly. Such a decision requires to have already identified the market

13
for the gas to be developed. Otherwise the gas should be only classified as
resources (Wright and Gallun 2008; Inkpen and Moffett 2011; Le Leuch 2011).
Fig 2.1 World Proved Reserves for Natural Gas

Source: BP Statistical Review of World Energy 2013

The physical composition of the gas in the reservoir is equally important in shaping
policy. Bergmann (1994) finds that gas extracted from oil fields (associated gas)
usually has a different legal and regulatory framework as compared to gas
produced from gas fields (non-associated gas). Furthermore, the composition of
a given volume of gas affects its calorific value, which is in turn linked to its price
(Villar and Joutz 2006). Additional issues like gas reinjection for improved
recovery, prevention of flaring or venting of stranded gas, and surface separation
and processing of produced gas before transportation also fall under this theme
(Scott 2010; Le Leuch 2011), thus needing to be considered during policy
formulation.

2.5.2 GAS MARKETS

Previously gas markets were regional because of the lack of availability of
transportation infrastructure to move the produced gas into viable markets (Garcia
and Vredenburg 2000; Al-Mahroos and Al-Anaisi 2009; Iledare 1995). Practically
all industrialized countries are undergoing profound structural changes brought
about by governmental policies aimed at developing the existing gas markets by
introducing gas-to-gas competition based on third-party access to gas supply
infrastructure and/or by privatizing public gas utilities, accompanied by

14
enforcement of new contract mechanisms such as spot markets, short-term or
non-dedicated contracts (Seliverstovs et al 2005). This phenomenon has been
referred to as the liberalisation of the gas market by some authors (see Hlatki and
Horanszky 2002; Golombek et al 1995; Seliverstovs et al 2005). Wellhead prices
are no longer regulated; meaning the price of NG in the market is largely
dependent on supply and demand interactions (Pierce 2004, MacAvoy 2001).

2.5.2.1 GAS PRICING

Gas is often sold under negotiated long term contracts (ToP) apparently to ensure
security of supply (Thomas and Dawe 2002). With the recent liberalisation of the
market, short term and spot sales based on selected quoted gas prices are
developing (Le Leuch 2011; Seliverstovs et al 2006). There are several possible
approaches for determining gas price, from negotiated prices representative of
market prices to regulated market based or cost-of-service based prices. Often, a
combination of market and regulated approaches applies over the gas value chain
(Creti and Villeneuve 2004).
I. Long Term Contracts
These are long-term agreements usually lasting above 20 years (Thomas and
Dawe 2002; Crocker and Lyon 1994). The main types of these contracts are given
below:
Gas Sales and Purchase Agreements (GSPA) signed between the producer
and buyer.
Gas Balancing Agreements (GBA) for allocating production and guiding sale
procedures between several holders of an upstream contract.
Gas Transportation Agreements (GTA) which is the legal and fiscal
framework covering gas transportation by pipelines.
Due to the high cost of new gas infrastructure, most of the gas is usually sold
under long-term contracts providing for an annual volume commitment and a base
gas price at a given date, as agreed during the negotiations of the contract. The
base price is then periodically adjusted according to a specific revision formula
containing a list of agreed indices such as the quoted prices for a set of crude oils
(oil indexation) and/or for gas competing fuels as well as indices representative
of costs, inflation and sometimes currency exchange rates (Villar and Joutz 2006,
Seliverstovs et al 2005, Le Leuch 2011, Crocker and Masten 1991). This agrees
with the finding of Crocker and Masten (1991) that price adjustment processes

15
tend to be more flexible for contracts with a longer duration, and that ToP
guarantees are likely to facilitate efficiency in gas trade (Crocker and Lyon 1994;
Crocker and Masten 1985). Mulherin (1986) disagrees, arguing that long term
contractual agreements do not facilitate competition but rather are consonant with
transaction cost economising to achieve higher return on investment. Also
disagreeing, Creti and Villeneuve (2004) imply that the main drawback of long
term contracting is inflexibility in the face of supply and demand fluctuations of
the market. In this context spot trading ought to complement ToP contracts.
II. Spot Trading
Under spot sales gas price may be either determined by reference to a selected
quoted spot gas price (applying a negotiated differential) or a negotiated fixed
gas price (Park, Mjelde and Bessler 2008). This spot gas market which is largely
used in North America is now developing in Europe and Asia. According to Park,
Mjelder and Bessler (2008), recent LNG sales are even made on a spot basis. For
the time being the gas spot market, although growing, remains, relative to oil
sales, quite small outside North America, due to the prevalence of the long term
gas sales contracts required for investing in costly infrastructure (Le Leuch 2011;
Seliverstovs et al 2006).

Currently, global gas markets loosely come under three (3) classifications; the
North American, European, and Asia-Pacific (Le Leuch 2011).
Fig. 2.2 Trade Movements in the global gas markets

Source: BP Statistical Review of World Energy 2013

16
While gas prices under long term contracts are usually confidential, there are
several daily quoted gas prices in the world representatives of spot gas prices.
The variations in the spot prices between the three regional markets can be
significant. Globally, the North American prices became recently significantly lower
than the European and Asian gas prices as a result of the US gas shale revolution
amplified by the 2008 economic crisis (Beaudoin et al 2010). The gas to gas
competition fostered by the emergence of the spot market may lead to total
decoupling of gas and oil prices (Butler 2013).
Fig 2.3 NG Price Trend

Source: BP Statistical Review of World Energy 2013

2.5.3 MONETIZATION OF GAS

For a gas discovery to be declared commercial requires the availability of sufficient
reserves and the identification of viable market(s) and motivated buyers ready to
commit for purchasing the NG to be produced in the long run under a specific
project (OCathain 2012). Difficulties for reaching the stage of commerciality with
gas occur in particular in the countries where no appropriate gas infrastructure
and markets already exist, and in such situations policies should give priority to
monetization of the discovered gas by;
(1) Identifying and developing viable long term gas markets and
(2) Finding ways for building the local processing and transmission infrastructure
to support the domestic market as well as export systems to support the export
market (Le Leuch 2011).

17
This is especially important if a nation has a large amount of stranded gas, which
is gas that has been discovered but remains unusable for either physical or
economic reasons. Regarding this challenge, Marcelle-De Silva and Jagai (2001)
opine that a key monetization activity is a favourable investment climate for
development of infrastructure for the petrochemical and gas based local
industries. Appert (2000) agrees, adding that the need to monetize gas resources
will increase with the depletion of mature fields and reduce wasteful gas flaring,
as such it is necessary to ensure an investor friendly policy and regulatory climate.
In addition, it would be useful to promote regional integration of gas markets by
facilitating transport/supply of gas via third party countries. These arguments
make a strong case for policies providing for an efficient gas transportation
system.

Possible uses for monetizing NG abound in the domestic and export markets.
Export trade is carried out via pipeline, and more recently, LNG, compressed
natural gas (CNG) and gas to liquids (GTL) technologies (Thomas and Dawe 2002).
Within a country, gas can be used thus:
Power generation is the generally regarded as the main driver for countries
starting monetization of gas reserves (Le Leuch 2011). Additionally, gas-
fired plants are more and more preferred over coal and oil-fired plants as
gas has the greater advantage of lower carbon emissions.
Industrial sector such as manufacturing, cement, steel, etc.
Commercial sector such as heating for buildings, cooking, etc.
Transportation sector for use by CNG powered vehicles, LNG powered ships,
etc.
As a chemical feedstock in the petrochemical industry.

2.5.3.1 REDUCTION OF GAS FLARING

Flaring of NG occurs primarily at oil wells where associated gas is considered a
by-product of crude oil production (Golombok and Teunissen 2003). In fields with
volume gas to volume oil ratios below 200, the associated gas is usually not
considered worth capturing or liquefying and is thus typically vented or flared,
with the justification for the latter process being that CO2 has a lower greenhouse
effect than methane (Tarmoom 1999).

18
According to Elvidge et al (2009) and Le Leuch (2011) flaring activities destroy
gas monetization value when compared against commercial benefits from selling
it, and this is in addition to the climate damage from adding about 400 million
tonnes of CO2 in annual emissions. Tarmoom (1999) is of the viewpoint that there
is substantial potential for gas flaring reduction in the area of gas conservation.
Aliabadi and Shamekhi (2012) examined gas flaring reduction approaches and find
that in recent times the preferred gas flaring reduction approach is finding new
ways to utilise associated gas as an energy source, or re-injecting it into the
reservoir for improved recovery. Adewale and Joshua (2010) concur, adding that
economic and energy initiatives need to be strongly integrated with existing
policies that promote national development. These viewpoints possibly informed
the launching in 2002 of the Global Gas Flaring Reduction initiative led by World
Bank (Svensson 2002).

2.5.3.2 GLOBAL GAS FLARING REDUCTION PARTNERSHIP

In order to limit the amount of gas flared, the Global Gas Flaring Reduction public-
private partnership (GGFR), a World Bank-led initiative, was launched at the World
Summit on Sustainable Development in Johannesburg in August 2002 (Svensson
2002). The partnership is constituted of representatives from governments of 15
oil-producing countries, national oil companies and major international oil
companies. It aims to reduce flaring by sharing global best practices, supporting
efforts to utilize currently flared gas, tackling constraints on gas utilization, and
developing ways local communities close to flaring sites can use NG and liquefied
petroleum gas (LPG), among others. Of significance is the publication of a global
standard for gas flaring reduction in 2009 that was endorsed by a majority of its
partners (World Bank 2004).

2.6 OBJECTIVES OF GAS POLICIES

Taking into cognizance the argument that the profitability of a gas project is often
lower than that of an oil project of similar size if the same tax/fiscal provisions
apply (Schulte et al 2012; Call, Carbon and Delgado 2008; Thomas and Dawe
2002), it is fully justified for the government of a producing country to adopt and
implement a gas policy focusing on two key objectives:
Encouraging investments in gas exploration and development by the private
sector (Marcelle-De Silva and Jagai 2001; Appert 2000),

19
 Promoting the domestic usage of gas to develop a local market, thus
increasing economic value of oil exports by reducing domestic oil
requirements (Penilla and Paez 1994; Sohall 1991; Pinkerton 1992).

As a result of the relatively high costs incurred in the entire gas export supply
chain, either in long-distance pipelines or under an LNG scheme, the economic
value and the opportunity costs for the gas produced and consumed locally is often
higher than exporting it when dealing with highly populated countries where large
domestic gas markets can be developed (Privey 2005; Alnakeeb et al 2001). Le
Leuch (2011) is of the opinion that priority is given to domestic or export markets
depending on if the country is supply limited or market limited. In a supply limited
country, which is a country with limited reserves and/or high local population,
emphasis is placed on domestic usage, only authorizing exports of additional
available gas. On the other hand a market limited country, which is a country with
abundant reserves and/or low local population, prioritizes gas exports because of
limited country needs.

2.7 GLOBAL GAS POLICIES TODAY: A REGIONAL OVERVIEW

From earlier discussion it has been established that attempts to control market
forces by regulatory policies often leads to unintended consequences. However,
policy does continue to have an appropriate role to play in a market driven gas
industry especially in the areas of encouraging an open and competitive market
and curbing the monopsony potential of pipeline companies (Naini and Hillary
1997). To give a picture of current trend in gas policies, a regional overview is
given of the 3 aforementioned global gas markets.

2.7.1 NORTH AMERICA

Similarities can be found between the US and Canada in their gas regulatory
frameworks, such as the role of a regulator (the US FERC and the Canadian
National Energy Board), the respective allocations of regulatory powers between
the federal state and the local states (or provinces) (US Public Utility Commissions
(PUCs) and the provincial Energy Utility Boards (EUBs) in Canada), and the
regimes of intrastate and interstate pipelines. Also, in both countries, gas exports
or imports are subject to obtaining a prior gas export or import licence following
an open hearing process (Amanova 2008; Angevine 1984; Keenan et al 2006).

20
On the other hand petroleum activities in Mexico have been fully nationalised as
such there is no option for 3rd party access to pipelines or other gas infrastructure,
it is wholly owned by the state through its NOC (Rodriguez-Padilla 1996).

Notably, the production of unconventional gas from shale plays has increased in
this region in recent times sparking debates mainly because of environmental
concerns surrounding the hydraulic fracking process (Jenner and Lamadrid 2012).
In spite of this Beaudoin and Serry (2010) find that, so far, shale gas regulation
is not much different from regulation of conventional gas. Jenner and Lamadrid
(2012) point out that shale gas can serve as a transition fuel into an age of
renewable energy. They add that stringent taxation and price regulation are not
likely policy options, rather increased disclosure may help quell environmental
concerns. While agreeing that there are likely economic and environmental
benefits of the shale gas revolution, Jacoby et al (2011) advise that other
competing low carbon emission policy programs may be stunted, thus it is crucial
not to allow the potential of shale gas exploitation erode long term goals of climate
change mitigation.

2.7.2 EUROPE
In Europe the trend towards natural gas consumption is largely being driven by
environmental as well as economic concerns (Hacisalihoglu 2008). According to
Hacisalihoglu (2008) there is a constant need to balance economic benefits of gas
consumption and its concurrent environmental impacts.

Russia is the largest producer, exporter and consumer of natural gas in this region
(Bahgat 2010, EIA 2013). Russias oil and gas supplies are crucial to maintaining
Europes economic prosperity and high standard of living while the revenues
Russia receives in return provide a major proportion of the nations national
income (Quast and Locatelli 1997; Seliverstovs 2009). The state has reinforced
Gazproms monopoly over gas production and export with the purpose of
preventing greater competition in the gas market in Europe by refusing to provide
3rd party access to its pipelines by outside suppliers (Locatelli and Rossiaud 2011).
However, Bahgat (2010) argues that Russias stagnating production from rapidly
depleting fields, unstable legal system and changing attitude towards private and

21
foreign investment mean that Europe has more reasons to worry about Russias
ability, rather than willingness, to deliver sufficient quantities of gas to the EU in
the future. As such the EUs efforts to establish partnership with energy producers
in Africa, Caspian Sea/Central Asia and the Middle East suggest that Russias share
in the European oil and gas imports is likely to decrease.

The issue of security of gas supply is a major policy consideration for most
European countries wanting stable and uninterruptible energy flows at reasonable
prices (Seliverstovs 2009). Additionally the low temperature of the European
climate especially in the winter months tends to have the effect of increased
demand of gas for heating (Thomas and Dawe 2002). Lochner and Dieckhoner
(2012) investigated Europe's exposure to gas supply disruptions from African
sources, finding that European security of supply could be severely compromised
if there is a significant disruption during the winter months. While this position
implies that weather and other acts of nature can have an effect on gas supply, it
also highlights the necessity of taking the political stability of supply countries into
account when assessing security of gas supply. In a bid to foster cooperation and
stability of energy supply the Energy Charter Treaty (ECT) was instituted and
legalised in 1998, establishing a multilateral framework based on
complementarities and mutual benefits for member countries (Konoplyanik and
Walde 2006). Konoplyanik and Walde (2006) are of the opinion that the ECT is a
model for economic liberalisation that reduces external energy dependencies,
although conceding in an earlier survey that the ECT still requires specific rules to
achieve a competitive and liberalised market (Walde and Gunst 2002). Currently
the EU is striving for a single internal market for gas and electricity, but Russias
reluctance to ratify the ECT casts a pessimistic shadow over its realisation
(Seliverstovs 2009; Stanic 2011).

2.7.3 ASIA-PACIFIC
This region has vast natural gas resources, though suitable policies are needed to
develop its potential (Aquilera 2013; Bin-Dehaish and Otman 2006). For instance,
incentives will be necessary for investment in gas and LNG technology, as
increased market share will not occur if investment does not take place in a timely
fashion (Majidpour 2012). In addition, Majidpour (2012) finds that development
of gas industries in the region is closely tied to its national energy policies, thus it

22
is important that government intervention not create disincentives for
development of the regional gas and LNG industries. With three of the largest
economies and energy consumers in the world located in Asia, there are a number
of benefits that could be achieved through overcoming the regulatory barriers that
are currently inhibiting free trade and legal convergence within the region.
Crossley (2013) argues that the removal of local content clauses and national firm
eligibility criteria in domestic subsidies will enable more competition and less cost.
Further, physical interconnectors of national transmission and distribution pipeline
networks could provide greater levels of stability and support in meeting peak
demand. These interconnectors and the creation of an Asian Super Grid, similar
to those interconnectors that already exist in Europe, could also add to the long
term energy security of the region (Crossley 2013; Sovacool 2009). Andrews-
Speed (2013) opines that, a reason for the fragmented nature of gas development
in the region may be that Asian nations lack faith in the liberalised international
energy markets that Europe and the USA claim to have and prefer a higher level
of state involvement in the energy sector. Burki (2012) and Ghorbani (2011) take
a different stand and call for more separation between the state and the market
for increased competition and efficiency. Hovdestad and Chow (1997) disagree
with both opinions, claiming that a less developed infrastructure for gas is the
cause.

However, of these three regions it appears that the Asia-Pacific gas market has
experienced the highest growth in recent years (IEA 2013). This might be because
of the booming spot market prices there bolstered by Japans LNG imports. Worthy
of note is the recent spate of policy reforms highlighting increased interest in
natural gas as a preferred energy source after the Fukushima nuclear incident in
2011, especially in China and Japan (Shadrina 2013).

2.8 TRANSPORTATION OF NATURAL GAS

Management of raw materials and finished products distribution is essential in all
industrial and commercial activities in order to meet its market demands
(Vasconcelos et al 2013). Proper management of distribution and supply to meet
demand also applies to the NG industry mainly because the points of production
are usually quite distant from corresponding points of consumption especially in
cases of large offshore gas fields (Abada and Massol 2011). According to Carvalho

23
et al (2009), and Villada and Olaya (2013), a NG transportation system consists
of a complex network of pipelines, ships and tankers, and storage facilities for the
fast and efficient transportation of gas from its origin to the areas where there is
demand.

2.8.1 SECURITY OF SUPPLY

As described earlier, gas supply security refers to the uninterrupted availability of
gas sources at an affordable price (Von Hirschhausen 2007). Uninterrupted in this
context refers to a reliable and adequate supply to meet demand. In the short
term this would mean avoiding disruption of supply; in the long term it means
having future provision for stable supply (Pulido 2011). The need to increase this
security of supply the uninterrupted availability of energy sources at an
affordable price may be an objective underpinning the formulation and
implementation of a nations gas policies. Long-term gas supply security is mainly
linked to timely investments to supply gas in line with economic developments
and environmental needs (Thomas and Dawe 2002). On the other hand, short-
term security focuses on the ability of the gas supply system to react promptly to
sudden changes in the supply-demand balance (Thomas and Dawe 2002; Pulido
2011).

The strong relationship between energy and economic growth (Paul and
Battacharya 2004; Aqeel and Butt 2001) makes a compelling argument for
securing a reliable supply of gas at reasonable costs to meet domestic demand
even under adverse external conditions like supply disruptions and/or price
shocks. These externalities cannot be avoided, but Manne, Roland and Stephan
(1986) are convinced such risks can be mitigated by prudent diversification
policies. Their paper describes a model based on two key ideas: that insecure gas
supply sources provide benefits during normal periods, and impose costs during
supply disruption periods. But like all risks, supply disruption can be mitigated
(Von Hirschhausen 2007). Villada and Olaya (2013) contend that securing gas
supply to meet domestic demand peaks and supply disruptions entails not just
reducing LNG exports and increasing pipeline capacity, but also installation of
adequate storage infrastructure. This approach agrees with the short term security
of supply concept of a flexible system with the ability to react swiftly to sudden
shifts in the gas supply-demand balance. Conversely, Hovdestad and Egbogah

24
(1995) argue that development of new gas fields, processing and transmissions
facilities, however, involves large capital commitments and long lead times. These
factors tend to favour a staged development process to ensure that facilities are
fully utilised when placed on-stream, in line with the long term security of supply
concept. The drawback to this approach is that it can lead to a mismatch between
supply and demand depending on the development timing for gas supplies and
increases to market demand. The benefits of a completed system are often long
deferred and hence of limited utility when actual project financing is to be
obtained.

A policy of market competition has been closely linked with ensuring security of
supply and increased transmission capacity. Von Hirschhausen (2007) in an
empirical analysis of case studies of the relationship between the regulatory
framework for the US natural gas sector and the development of investment in
LNG terminals, interstate pipelines, and storage facilities, finds that a market
oriented approach to the security of supply issue is cost effective. Apparently the
idea is that a competitive market has a positive effect on the security of supply
challenge. However because of the nature of the gas transmission industry
(natural monopoly) this proposed approach should be accompanied by appropriate
regulation.

2.8.2 GAS INFRASTRUCTURE DEVELOPMENT

In the context of security of supply, gas infrastructure development plays a crucial
role. A principal requirement of natural gas transportation systems is that it be
capable of meeting peak demand under uncertainty in an economically viable way
(Manne, Roland and Stephan 1986). To meet this requirement, the facilities
developed by the natural gas transportation industry are a combination of
transmission pipelines to bring the gas to the market areas and of underground
natural gas storage sites and liquefied natural gas (LNG) facilities located in the
market areas (Villada and Olaya 2013).

Hanouti and Ainouche (2005) opine that strategic geographic location is a prime
incentive for gas pipeline development. Their reason for this stance can be
attributed to the huge capital outlay, technological peculiarities, topological
challenges and political issues that must be successfully navigated before long

25
distance/multi-regional pipeline structures can be realised. The development of
gas infrastructure at such a scale is a complex and capital-intensive effort plus the
strong growth of the LNG export business has significantly reduced the need to
embark on such massive projects (Ellafi et al 2006). Many of the benefits such as
energy efficiency and environmental improvement are manifested in ways that
require governments to either mobilise the funds or set clear paths and guidelines
to promote financing by the private sector (Cayrade 2004).

According to Cayrade (2004) the fear of decoupling of oil and natural gas prices
leading to lower gas prices that are linked to spot markets does not provide the
right conditions for financing the huge projects for new gas supplies. Although it
would indeed secure a fair degree of market liquidity and facilitate short-term
management, it would not be appropriate for long-term security of supply. In this
context financing gas transmission development projects is a challenge.
Hovdestad and Chow (1997) agree that increased mobility of financial capital,
political stability, and a reasonable expectation of long term demand from a viable
market are driving forces for gas infrastructure development. Additionally, long
term planning and regional co-operation would materially reduce the costs of large
scale infrastructure development. Similarly, Lochner (2011) identified congestion
mark-ups between countries in Europe using an infrastructure model finding that
there exists minimal gas supply bottlenecks in regions of high
physical market integration and an open access policy, in essence agreeing with
Hovdestad and Chows (1997) position on regional cooperation. This position is
also consistent with Dieckhoner, Lochner and Lindenberger (2013) who also find
high market integration in Western Europe.

On the issue of market integration, Santana, Januzzi and Bajay (2008) argue for
the fostering of a competitive market policy by non-discriminatory open access,
focused on information transparency and tariff regulation to help the development
of infrastructure and competition within the gas transmission industry. While there
is a large potential for increasing the use of gas, priority should be given to market
forces in effecting gas-use gains (Penilla and Paez 1994). Innovative and bold
approaches are required by governments, in co-operation with industry, power
generation companies and the transportation sector to realize the opportunities
for gas use improvements, and the deployment of new gas-use technologies.

26
2.9 SUMMARY
This chapter has examined the existing literature concerning natural gas policies.
The literature review has revealed that the natural gas industry, while having
similarities with the oil industry because of similar extraction methods, has its
unique characteristics, some being its reliance on pre-establishing a market, long
term contracts and transportation challenges. The relationship between the
industry growth and policies that guide it was established. The factors that affect
policy making were analysed, an overview of global gas policies was undertaken,
and based on discussions of literature, the researcher established areas of interest
relevant to issues concerning security of supply and gas infrastructure
development.

27
CHAPTER THREE

AN EXAMINATION OF NIGERIAS GAS POLICIES

3.1 INTRODUCTION
This chapter describes and provides an overview of the Nigerian gas industry, its
growing gas market, and the policies that frame it. It also details the key features
of the Nigerian Gas Master Plan and outlines sections of the 2012 Petroleum
Industry Bill relating to gas.

3.2 NIGERIAN GAS INDUSTRY

Nigeria is paradoxically known as a gas province with oil in it (Oyewumi 2013)
as such gas utilisation is becoming a primary goal of Nigeria's petroleum and
energy policies (Odumugbo 2010). Hitherto, associated gas encountered during
the normal course of oil production has been largely flared because of the;
Limited numbers of reservoirs suitable for reinjection and high economics
of doing so.
High costs of pipeline and facilities development.
Low industrial and technological base for domestic consumption.
Limited regional and international markets.
Inadequate fiscal and pricing policies to encourage investment. (Igbatayo
2005).
Nigeria is reputed to be the one of the largest gas-flaring countries in the world,
and by not fully harnessing its gas resources, Nigeria loses an estimated 18.2
million U.S. dollars daily (EIA Report 2012).
Fig 3.1

Source: Defence Meteorological Satellite Program 2009

28
3.2.1 DOMESTIC GAS MARKET
The earliest attempt to commercialize natural gas in Nigeria was undertaken by
Shell-BP in 1964 when it piped natural gas from Port-Harcourt to the then ECN
power station at Afam and then to some industries at Aba (Eastern Nigeria), Liver
Brothers, Nigerian Breweries, Aba Textiles Mills, PZ-Industries, International
Equitable Ltd and a few others. In 1978, NNPC, through its then Gas Department
which 10 years later became Nigerian Gas Company Ltd (NGC), started to supply
natural gas to NEPAs thermal plant at Ogorode, Delta State (Ndubuisi and
Amanetu 2003). In recent times, natural gas consumption has increased
significantly to over 4 billion cubic feet/day due mainly to export of LNG of about
500mmcfd although current domestic demand of about 471mmcfd is low
compared to the countrys population and the size of Nigerias gas resources (EIA
Report 2012).
Fig 3.2 Production and Consumption in Nigeria

Source: OPEC Annual Statistics 2008

Fig 3.3 Energy Consumption Mix in Nigeria

Source: EIA 2010

29
As these illustrations depict, there is a divergence within Nigerias significant gas
reserves, low production and even lower consumption, making a strong case for
the development of a domestic market for gas utilization.

Fig 3.4 Gas Value Chain in Nigeria

Source: Oyewumi (2013)

3.3 REVIEW OF NIGERIAN GAS POLICIES FROM 1969 TO 2008

Nigeria does not have a single body of law for the gas sector (Okorie 2010)
although numerous legislations apply to natural gas. The Constitution and the
Petroleum Act (PA) vest ownership of petroleum in the Federal Government. The
PA defines petroleum to include natural gas and thus applies to the gas sector as
well (Petroleum Act 1969). The Petroleum Profit Tax Act (PPTA) 2004 regulates
taxation of the upstream oil and gas production; the Company Income Tax Act
2009 deals with taxation in the downstream sector. The Department of Petroleum
Resources (DPR) (and more recently the Department of Gas) and Ministry of
Environment (MOE) oversee the issuance of permit for pipeline construction
(Okorie 2010). However, there are other legislations that touch specially on the
gas sector.
1) The Petroleum Act (PA) (1969) is the principal industry legislation. It
defines Petroleum to include natural gas. Exploration, prospecting and
mining of petroleum (including natural gas) may be carried out further to
an Oil Exploration Licence, Oil Prospecting Licence and Oil Mining Lease
respectively, issued by the Minister of Petroleum. Federal Government has

30
 a right to take gas from licensees and lessees free of charge or at a price
without payment of royalty. The Federal Government is also to approve
the price at which produced gas is to be sold. However, there was no
provision for ensuring adequate infrastructure to develop and utilize this
collected gas (Dikko 2003).
2) The Petroleum (Drilling and Production) Regulations (1969) made pursuant
to the PA regulates oil and gas operations. A prospecting licensee is to
submit feasibility study, programme or proposal for the utilisation of
associated or non-associated gas not later than five years after the
commencement of production. Consequently, natural gas could be flared
for five years before the IOC submits the proposal. Worse still, the Act did
not prescribe any penalty for flaring or failure to submit such proposal.
3) The Oil Pipelines Act (1956) and the Oil Pipelines Regulations (1995)
governs the licensing and permitting processes for the construction,
operation and maintenance of gas pipelines, including LPG storage
operations. Applications are made to the Minister for access to pipelines.
The Minister will grant the application if the pipeline can conveniently
convey the gas. Terms and conditions of access will be as negotiated and
agreed upon between the pipeline owner and applicant. However, where
parties fail to reach an agreement, the Minister may impose such terms
and conditions expedient to secure the access rights of the applicant and
to regulate the access charge(s).
4) The Associated Gas Re-injection Act (1979) requires an IOC to prepare a
detailed programme for gas re-injection or in the alternative, present a
plan showing viable options for gas utilisation before commencement of
operation. It prohibits with penalties any gas flaring activities beyond
January 1, 1985, although allowing for continued flaring at the discretion
of the Petroleum Minister. This Act was criticized for failing to provide for
fiscal incentives and its paltry penalty created a willingness in the IOCs to
continue flaring because it was cheaper to pay than embarking on gas
utilization programmes (Okorie 2010).
5) The Associated Gas Re-injection (Amendment) Decree (1983) increased
the penalty for gas flaring. However, the imposition of stiffer penalties was
not a deterrent, more so when NNPC shares complicity as a holder of up

31
 to 60% interest in most of the JVs from where the gas is flared (Okorie
2010; Kurmanov 2012).
6) The Associated Gas Re-Injection (Continued Gas Flaring) Regulations
(1985) severely altered its predecessor and, subject to some conditions,
exempted 86 out of 155 oil fields from anti-flaring restrictions. Flaring of
associated gas continued unabated.
7) The Nigerian Liquefied Natural Gas (Fiscal Incentives, Guarantee and
Assurances) Decree (1989) was a bold step by the FG to encourage
utilization of AG as LNG. It made provisions for certain fiscal incentives
such as tax holidays, guarantees and assurances.
8) Associated Gas Framework Agreement (AGFA) (1992) was introduced as a
package of fiscal incentive for utilization of natural gas. These incentives
include;
- Tax holiday for three years
- All investments necessary to separate oil from gas from reserves into
suitable production is considered as part of the oil field development.
It was within this legal framework and Nigerias realization of the
importance of a viable gas industry some major gas projects such as Mobil
Oso condensate project, Escravos GTL project, NLNG project and WAGP
project were initiated.
9) The Downstream Gas Act (DGA) and Natural Gas Fiscal Reform Act
(NAGFRA) (1995) introduced fiscal flexibility to costs to ensure a fair rate
of return for all participants in the gas value chain. This is in addition to
unbundling the NGC into separate gas marketing and gas transporting
companies. These initiatives were collectively designed to stimulate
investment in upstream gas development as well as providing a clear
framework for investors in downstream projects, inclusive of gas
infrastructure. To much disappointment, both the NAGFRA and the
Downstream Gas Bill never became law as a result of intense industry lobby
and both bills expired in parliament by 2006 (Adesina 2012).
10) To give effect to the NGMP, FG issued the National Domestic Gas
Supply and Pricing Policy in February 2008 and the National Gas Supply
and Pricing Regulations in March 2008 to provide regulatory backing to the
domestic gas obligations and the gas pricing framework (Ejiogu 2013). The

32
 Department of Gas within the Ministry of Energy was established, and
mandated to create a Domestic Gas Aggregator.

3.4 NIGERIAN GAS MASTER PLAN (NGMP)

According to Onyeukwu (2010), YarAdua (2007) and Ibikunle (2006) there have
been 3 phases in the evolution of the Nigerian gas sector; the demand constrained
era, LNG era, and demand boom era.

The demand constrained era (pre-1999) was marked by intense flaring of

associated gas. There existed a focus on LNG exports as the most promising
source of demand and also a significant lack of a proper gas legal framework.
In the LNG era (1999-2005) NLNG kicked off with a corresponding reduction in
flaring activities. New export projects were initiated (Escravos GTL) and there was
an increase in gas legislation (DGA, NAGFRA etc).

The demand boom era (post-2005) has seen a sudden rise in domestic and export
sector demand for gas. There is a transformation from a demand constrained
industry (low demand) to a supply constrained industry (insufficient supply)
facilitating the need for a comprehensive gas policy to address these issues and
foster development of a competitive and efficient gas sector (Ibikunle 2006;
YarAdua 2007).

Following a forecasted gas demand growth rate exceeding 10% annually from
2005, the FG was sufficiently concerned about the inability to meet this demand
under the current circumstances that a decision was made to completely revamp
and revitalise the gas sector. The outcome of this decision was the birth of the
Gas Master Plan initiative (YarAdua 2007). The NGMP, approved by the Federal
Executive Council, is a suite of strategic agenda prescribing an appropriate
national gas strategy, viable market structure, and options for private sector
participation in the rehabilitation and development of the gas industry (Onyeukwu
2010). It aims to create a fully liberalised market within five years of its
implementation through a dual focus approach; firstly it prescribes innovative
ways by which Nigeria would maximise the benefits from its gas from both export
and domestic market, and secondly, it tries to achieve a dynamic balance between
satisfying export demands and domestic needs so as to assure long term energy

33
security (YarAdua 2007; Okorie 2010). Furthermore, it indicates a design to
establish central gathering and processing units in three locations of the country;
integrate the pipeline networks; adopt a uniform pricing mechanism and specify
standard gas specifications while maintaining reserve growth (Onyeukwu 2010).

The NGMP comprises of 3 main sections.

i. Gas Pricing Policy: This policy provides the framework for establishing
minimum gas prices buyers can be charged.
ii. Domestic Gas Supply Obligation: This policy provides assurance of gas
availability for domestic gas utilization projects.
iii. Gas Infrastructure Blueprint: This policy provides for the establishment of
3 gas gathering and processing facilities and a comprehensive network of
gas transmission pipelines to increase gas supply.
Fig 3.5 Nigerian Gas Master Plan

Source: Oyewunmi (2013)

3.4.1 GAS PRICING POLICY (GPP)

This pricing regime is to be differentiated across different sectors rather than being
fixed. The objective is to create a structured and transparent framework for gas
pricing across different sectors (Adefulu 2009).

For the domestic sector, pricing is based on the lowest cost of supply plus a 15%
internal rate of return (IRR) (Adefulu 2009; YarAdua 2007). Since this sector has
a multiplier effect on the economy, the strategic intent is to provide low cost
access to gas supply.

34
For the industrial sector, pricing is based on product netback with a floor price that
must never fall lower than cost of supply (Oyewumi 2013; Adefulu 2009). This
sector mostly uses the gas as a chemical feedstock in the creation of value added
products, hence the intent is to guarantee affordable and predictable gas supply.

Finally, for the commercial sector gas prices are indexed to prices of alternative
fuels (Adefulu 2009) because this sector basically uses gas as a fuel, and is also
able to pay higher prices for its alternatives.

In all, there is a general expectation that there will be an eventual graduation to

a pricing regime led by market forces (Ekwere and Balogun 2011).

3.4.2 DOMESTIC GAS SUPPLY OBLIGATION (DGSO)

In recognition of the need to have sufficient gas supply to meet the needs of the
previously mentioned sectors, the NGMP introduces an obligation for producers to
dedicate a specific amount of gas for domestic use and deliver this volume to a
purchaser. These volumes and their allocation are to be determined by the
Petroleum Minister. Failure to meet these requirements could lead to penalties
involving payment for volumes not supplied, or even prohibition to supply any gas
for export (Adefulu 2009).

The Gas Aggregation Company was established by FG in 2010 as a Strategic

Aggregator (SA) (Okorie 2010). Its duty is to co-ordinate purchase-orders from
buyers and places the demand-orders to the producers. The SA in its duty to
interface between producers and buyers, would set up an escrow account, conduct
due diligence on prospective buyers in order to get the qualified ones to execute
a Gas Sales Agreement (GSA) with the producers. It shall also forecast the
average domestic aggregate price, ensure that the buyer pays the sector price
and the producer receives an aggregate price.

This aggregate domestic price is a forecast based on projected total demand

portfolio using the pricing framework, and all suppliers would be paid this price.
However, YarAdua (2007) expressed the opinion that the SA concept will have a
strong impact on the commercial model of the NGC by redistributing the margin
between suppliers and the NGC.

35
3.4.3 GAS INFRASTRUCTURE BLUEPRINT (GIB)
The GIB provides a framework for gas infrastructure development in the future. It
details the provisions for 3 major central processing facilities (CPF), and a network
of transmission pipelines as well.
The CPFs will be at the Warri/Forcados, Obiafu and Calabar/Akwa Ibom areas
(Adefulu 2009). These strategic locations are placed within reserve clusters for
easy accessibility and increased capacity investment focus within each cluster.
According to YarAdua (2007) and Adefulu (2009), the overall objectives of the
GIB are given as:
Ensuring infrastructure access to demand centres.
Increased connectivity between reserves and demand centres.
Exploring JV synergies to reduce overall cost of infrastructure development.
Leveraging existing infrastructure to reduce incremental development cost.
Facilitating more gas supply flexibility than currently exists.
Fig 3.6 Gas Infrastructure Blueprint

Source: YarAdua 2007

3.4.4 DISCUSSION ON NGMP

In a bid to gain further insight into the NGMP it is necessary to touch on some of
the empirical studies relating to it. A notable study is when Onyeukwu (2010)
attempts to establish the extent to which the NGMP might be constrained and

36
finds that FG political will as well as other factors like supply challenges and
absence of a clear legal and regulatory framework act as constraints. This
hypothesis is supported in part by the conclusions of Ayoolas (2011) study on gas
flaring disclosure practices by IOCs in Nigeria. He finds that there is no supporting
legislative framework specifically for gas flaring disclosure.

The concept of political will appears to be closely linked with policy stability. The
FG is perceived as being without political will because of the reluctance to follow
through on previous policy statements (Oni 2011) an example being the constant
adjustment of a gas flare-out date (Kurmanov 2012). According to Oni (2011),
gas producers are wary of the creditworthiness of FG owned entities, hence the
utilisation of World Bank backed Partial Risk Guarantee (PRG) for securitization
under the Gas to Power (GTP) policy of FG. This is probably why Odizuru-Abangwu
and Okoronkwo (2011) argue for the use of ToP clauses alongside the PRG to
mitigate the securitization issue and give investors required comfort. On a related
note, Kurmanov (2012) compares anti flaring policies adopted in Kazakhstan and
Nigeria and finds that economic incentives alone are insufficient in curbing flaring
of AG. Harsher penalties and existence of a regulatory body independent of the
petroleum industry stimulates implementation of gas utilization projects by IOCs.
Therefore it is not sufficient to introduce a policy, there must be dedicated effort
to operationalize and enforce it.

The proposed transitional pricing framework of the GPP came under analysis as
well. Ogbe, Ogbe and Iledare (2011) developed a model for optimizing gas
utilization strategies under the NGMP using the Niger Delta as a case study, and
they find that gas price has a significant impact on profitability of gas projects.
Additionally, planned projects like OKLNG project are not profitable at current
prices, implying investor optimism about increased prices in the near future.
Akinpelu and Iwayemi (2010) also carried out a quantitative study to model and
determine appropriate wellhead price using a scalar factor to achieve levels of
support deemed necessary by the GPP. They argue that the pricing mechanism
should not specify a rate of return on gas investments like the cost plus pricing
approach is wont to do. A low rate of return could serve to disincentivise
prospective investors.

37
3.5 PETROLEUM INDUSTRY BILL (PIB)
The PIB is perhaps the most talked about piece of legislation in Nigeria given the
far reaching reforms which it proposes to an industry which is the single most
significant contributor to the national economy (Onyeukwu 2010; Isehunwa and
Uzoalor 2011). Originally introduced in December 2008, the bill has undergone
numerous revisions and has been the subject of intense debate.

In an attempt to restructure the oil and gas industry, the Oil and Gas Sector
Reform Implementation Committee (OGIC) was inaugurated on 24 April 2000
under the chairmanship of Dr Rilwanu Lukman (then serving as the Presidential
Adviser on Petroleum and Energy)(Iledare 2008; Onyeukwu 2010). The OGIC was
charged with the task of making recommendations for a far reaching restructuring
of Nigerias oil and gas industry. The recommendations of OGIC included a
proposal to separate the commercial institutions within the industry from the
regulatory institutions (Fagbohunlu and Ikwuazom 2012). In 2007, FG introduced
the National Oil and Gas Policy and re-constituted OGIC to make recommendations
towards the emergence of a new institutional framework to govern the operations
of the oil and gas industry, including the emergence of a new NOC, new regulatory
bodies and a new national directorate, for more effective policy formulation for
the industry. Subsequently the Lukman Report of 2008 was presented which
recommended a new regulatory and institutional framework that, when
implemented, would guarantee greater transparency and accountability (Iledare
2008).

This report formed the basis for the first PIB that was submitted in 2008 as an
Executive Bill. The draft bill of the OGIC that gazetted in the National Assembly
Journal of December 2008 was however subjected to further amendments by the
Inter Agency team comprised of Ministries of Petroleum Resources, Finance,
Justice, Department of Petroleum Resources (DPR), Federal Inland Revenue
Service (FIRS), Revenue Mobilisation Allocation and Fiscal Committee (RMAFC),
and the Nigeria Extractive Industry Transparency Initiative (NEITI) (Fagbohunlu
and Ikwuazom 2012).

Expectedly, the prospect of a new fiscal regime which almost certainly would
guarantee increased government take elicited strong opposition from IOCs who

38
argued that the Bill would create a harsh environment that would materially
change the economics of new and existing investments (Isehunwa and Uzoalor
2011). Additionally there were concerns raised about the 10% equity oil allocation
to host communities (Songi 2011). Initial reactions to the Bill prompted intense
discussions among stakeholders in the industry and signalled the commencement
of a process of multiple revisions of the Bill in an attempt to produce an acceptable
draft. On 18 July 2012, President Goodluck Jonathan presented a new version of
the PIB (PIB 2012) to the seventh session of the National Assembly for
consideration and enactment (Fagbohunlu and Ikweazom 2012). It proposes
fundamental reforms of the Nigerias oil industry anchored on five major goals viz;
creation of new regulatory institutions, transformation of upstream contractual
agreements, new fiscal regime, downstream sector deregulation, government
participation in the industry and transparency in contractual agreements
(Onyeukwu 2010). However there has been some doubt amongst stakeholders on
the ability of the PIB to meet these goals due to the inability of the bill to pass
into law after 4 years of its introduction (Oji 2013).

3.5.1 PIB 2012 AND THE GAS REGULATORY FRAMEWORK

The regulatory framework for the gas industry under PIB 2012 is illustrated as
follows:
Fig 3.7
The Minister

Petroleum Technical
Bureau PTB (formely
NNPC Frontier
Exploration Service)

Upstream Petroleum Downstream

Inspectorate UPI Petroleum
(formerly DPR) Regulatory Agency
DPRA (formerly DPR
downstream,
PPPRA, and
Department of Gas)

Gas Master Plan,

Policies and
Management Model
Source: Agbor and Segun 2012

39
Relevant Ministerial powers include (Sec. 6):
Unhindered access to all acreage and facilities, and power to take control of
plants and premises of licensees/leases and give directions.
Advise the President on appointment of all chief executives.
Right of pre-emption to all petroleum and its products obtained and
marketed in national emergencies.
Grants and revokes licenses and leases.
Determines gas flaring penalties.
The PTB assists the Minister with policy implementation strategies while UPI and
DPRA are the regulatory agencies for the upstream and downstream sectors
respectively. Under the PIB new commercial entities are created like a National Oil
Company, Nigerian Petroleum Assets Management Company Ltd, and National
Petroleum Assets Management Corporation (Sec. 120, 123, 148). Sec. 159
delineates the incorporation of Nigerian Gas Company (NGC) effectively
transforming it from limited liability status, releasing the NNPC from liabilities on
transferred assets and getting FG guarantees for debts secured (PIB 2012).

3.5.2 UPSTREAM GAS OPERATIONS

Under the PIB licensees/lessees are empowered to enter into any contract for the
exploration, prospecting, production and development of oil or gas or both. This
empowerment is hinged on the obtaining of licenses/leases under the following
categories (Agbor and Segun 2012):
Petroleum Exploration License (PEL) - geological, geophysical &
geochemical exploration.
Petroleum Prospecting License (PPL) - right to carry away and dispose won
petroleum (and gas).
Petroleum Mining Lease (PML) - to search for, win, work, carry away and
dispose of petroleum (includes natural gas). Confers proprietary interests
in produced petroleum, including gas.
Sec. 177 grants extensions of PPL on significant gas discoveries, to a maximum
of 10 years sequel to appropriate appraisal. Where domestic demand provides
opportunity for gas sales the licensee can declare a commercial discovery

40
(Fagbohunlu and Ikweazom 2012). Where PPL conditions are met and UPI
approves development plans, a PML is then granted. Awards of PEL/PPL/PML are
generally by an open, transparent competitive bidding process and all bids to be
processed based on NEITI guidelines (Section 190). However, Sec. 191 proposes
that the President can grant Licenses/Leases in special circumstances. There is no
clear definition of special circumstances, and no indication if the process will be
subject to NEITI guidelines (Agbor and Segun 2012). Moreover in a bid to assure
transparency Section 174 invalidates confidentiality clauses restricting access to
information/documents concerning agreements/contracts for upstream
operations.

3.5.3 DOMESTIC GAS SUPPLY OBLIGATION (DGSO)

Sec. 183(3) provides for a DGSO imposed by the UPI based on domestic gas
needs. DGSO default could lead to barring lessees from gas export operations and
production suspension (PIB 2012). The volume of gas to be dedicated by each
lessee for DGSO shall be based on an allocation system among lessees as
determined by UPI from time to time and the NGC/UPI are to determine when this
NGSO can be discontinued by any lessee.

3.5.4 GAS FLARING AND PENALTIES

Sec. 201 and 275-281 lay out modalities concerning gas flaring activities. Basically
all lessees are required by UPI to submit gas utilization plans and install flaring
measurement equipment. Fines for defaulters shall not be less than the real value
of the flared amount (Fagbohunlu and Ikweazom 2012). According to Fagbohunlu
and Ikweazom (2012) and Agbor and Segun (2012), Section 201(1) which states
that gas flaring penalties and flare out dates are to be determined by the Minister
from time to time is akin to the situation created by previous legislation
(Associated Gas Re-injection Decrees 1979, 1985 & the Associated Gas Re-
injection (Continued Flaring of Gas) Regulation, 1984) characterised by
continuously postponed deadlines and ineffective penalties. A new pragmatic
regulatory approach might be necessary.

41
3.5.5 DOWNSTREAM GAS OPERATIONS LICENSING
Fig 3.8

Source: Agbor and Segun 2012

3.5.6 DOMESTIC GAS MARKET REGULATION

The Minister prescribes regulations for the gas market on DPRAs request with the
aim of increasing competition (Onuegbu 2012).Stakeholder consultations are
required in the regulatory process, but the term stakeholders is undefined (Agbor
and Segun 2012). Third party access to transportation and distribution networks
shall be on a non-discriminatory basis subject to the pricing principles and
methodology in Sec. 252 256. Price regulation by DPRA shall be to curtail
monopolies, develop competition and protect customers (Sec. 252).
The scope of the DPRA includes, but is not limited to:
Gas pricing
Licensee tariffs and charges
Consumer protection
Enabling market competition
Monitor market growth
Annual updates of Domestic Gas Demand Requirement (DGDR)
Monitor GSPAs

42
Any export of gas requires a gas export licence issued by DPRA for a certain
volume of natural gas for a specified period of time. According to Agbor and Segun
(2012), this is another ambiguous provision. Does export of gas in Sec. 273
include LNG? This is because Sec. 362 defines "gas" or "natural gas" as all
gaseous hydrocarbons, and all substances contained therein, as exists in their
natural state in strata, associated or not with crude oil, and are in a gaseous state
upon production from a reservoir and excludes condensates (PIB 2012).

3.5.7 DISCUSSION ON PIB

Mark Ward, MD of ExxonMobil Nigeria and spokesperson of Oil Producers Trade
Section, is quoted as saying the terms proposed (in the PIB) increase royalties,
increase taxes, and lower allowances or incentives all at the same time, turning
Nigeria into what he described as one of the worlds harshest fiscal regimes
(Kennedy 2013). This appears to be the overwhelming opinion of IOCs operating
in Nigeria, as they have expressed their disagreement and discontent with the
fiscal terms of the PIB since its 2008 draft (Bala-Gbogbo 2013).

In a notable scholarly work by Iledare (2010), the fiscal provisions of the PIB were
modelled. He finds that the introduction of sliding royalty and tax rates makes the
PIB relatively progressive and efficient although restricted access to gross revenue
from upstream operations can be an area of concern to the IOC. For the PIB to be
perceived as a dynamic and stable fiscal arrangement there should be a
willingness to give up an appropriate amount of economic rents to investors to
guarantee sustainable capital investment flow for resource development.
Additionally, Isehunwa and Uzoalor (2011) look at the difference between
previously fixed royalty rates and the new sliding rates based on production
output, and find that sliding royalty rates compare favourably with fixed rates for
government take. In this case, the argument of the IOCs that FG take will increase
may have some merit. Therefore the challenge of the PIB becomes to
simultaneously increase government take of economic rent and offer sufficient
incentives for investment by IOCs. Minister of Petroleum Resources (MPR) Diezani
Alison-Madueke claims that this objective has been achieved by her quote
The PIB establishes a flexible fiscal regime that will increase government
take and yet encourage investment (Bala-Gbogbo 2013).

43
Some concern has been raised in the literature about the excessive powers
granted to the MPR under the PIB (Oji 2013). Royalties, rentals and penalties
would be calculated on the basis of output and will be set by the MPR, while the
President would be able to award licenses without competitive bidding (Kennedy
2013). These provisions seem to encourage arbitrary decisions by these officials
and impinge on the much touted transparency the PIB is supposed to usher into
the Nigerian petroleum sector.

The recent changes in Nigerias gas policies encapsulated in the NGMP and PIB
reveal an extensive suite of actions that, put together, are expected to effectively
utilize the abundant gas reserves the country has. Given the long history of sub
optimal domestic consumption of gas, it becomes necessary to evaluate these
policies and ascertain their adequacy in resolving this issue. This ties in with the
aim of this study.

3.6 SUMMARY
This chapter has reviewed the Nigerian gas industry and touched on policies and
legislation specific to it. The NGMP was examined in detail and legislation
pertaining to the gas sector in the PIB was highlighted. A discussion of relevant
literature on the NGMP and PIB was conducted with a view to better understand
salient issues surrounding them.

44
CHAPTER FOUR

RESEARCH METHODOLOGY

4.1 INTRODUCTION
This chapter describes the research method and approach selected to achieve the
aim and objectives of the study. The choice of method is based on the research
problem and the aim of the study; which is to determine if Nigerias gas policies
adequately address the domestic gas infrastructure problem. To this end, an
appropriate qualitative approach based on empirical relevance was adopted and
implemented. The chapter starts with the research approach and then the choice
of research methods, sources of data and its validation, as well as the provision
of a theoretical framework and method of data analysis.

4.2 RESEARCH APPROACH

Scholars have been involved in a long standing debate on the best approach to
use when conducting a research (Lin 1998; Leich, Hill and Harrison 2009; Lor
2011; Ragin and Zaret 1983). This debate is centred on two fundamental
concepts; interpretivism and positivism (Lin 1998).

Interpretivism is an approach based on the interpretation of a socially constructed

reality (Murray and Ozanne 1991). This approach is underpinned by the argument
that humans perceive and interpret events subjectively, creating their own unique
view of the world. A central concept in this ideology is that, ontologically no
attempt is made about what is and is not real, description and measurement of
phenomena begins with the researchers experience of them (Leitch, Hill and
Harrison 2010). The thrust of this interpretivist ideology appears not to be to
confirm or disconfirm prior theories, but to develop from the bottom up,
interpretive theories inextricably grounded in the lived-world (Leitch, Hill and
Harrison 2010). To the interpretivist, facts can be established but these facts are
context bound and cannot be used for generalisations (Murray and Ozanne 1991).

Positivism on the other hand believes that events are predictable and seeks to
identify propositions that can be tested and/or identified in other cases (Lin 1998).
It is concerned with what is, not what is hoped for. As such the positivist assumes

45
the independent existence of measurable events, and is concerned with
objectively ascertaining the relationships between them with a view to developing
theories that explain their behaviour (Fitzgerald and Howcroft 1998).
Independence and objectivity in this context means that other researchers with
the same viewpoint will arrive at the same conclusions if they carry out the study
under the same conditions (Roth and Mehta 2002).

The researcher has therefore found it necessary to adopt a positivist approach in

a bid to answering the research question; do Nigerias gas policies adequately
address the local gas supply and infrastructure challenges? This holds true
because the study ultimately seeks to form an opinion that is not context bound
by the researcher. However, the positivist approach has a major setback in that it
is difficult for the researcher to remain independent of the study and this
shortcoming may affect objectivity (Roth and Mehta 2002). The use of secondary
data sources and an objective analysis of the findings will help mitigate this
shortcoming.

4.3 QUANTITATIVE AND QUALITATIVE RESEARCH METHODOLOGIES

Research methods can generally be classified into two main categories;
quantitative and qualitative methods (Lor 2011). Quantitative research involves
the collection of facts and subsequent study of interrelationships between data
sets derived from these collected facts (Lin 1998). There is a reliance on empirical
techniques to produce quantified and generalised results when the results of
analysis of sample data is used to make inferences about the population (Di Pofi
2002).

On the other hand, qualitative methodology is an inquiry process of understanding

based on distinct and methodological traditions of inquiry that explore a social or
a human problem in natural situations (Srivastava and Thomson 2009). It
concentrates on subjectivity and contextual expressions to define phenomena
(Roth and Mehta 2002). A qualitative approach is generally characterised by a
greater depth of exploration and description than a quantitative approach, usually
resulting in sufficient details to fully grasp the idiosyncrasies of the situation being
studied (Westbrook 1994).

46
While it is argued that qualitative research is underpinned by an interpretivist
ideology, a positivist epistemology has been successfully described and applied by
qualitative researchers (Roth and Mehta 2002; Petty, Thomson and Stew 2012).
For example, a study by Petty, Thomson and Stew (2012) suggests that a
positivist qualitative approach is appropriate for evaluative research aiming to
better understand what is distinctive about a specific, complex and functioning
phenomenon. This study upholds this view because it evaluates the NGMP and
proposed PIB with a view to shedding more light on the impact of these policy
changes on gas infrastructure development in Nigeria. Furthermore, it will seek to
ascertain whether the gas policy changes as captured in the NGMP and proposed
PIB have adequate measures to guarantee domestic gas supply to consumers. As
such, an appropriate theoretical framework will be used to evaluate a policy model
representative of aspects of the gas policy changes relevant to the scope of this
study so as to come up with reasonable conclusions. From the foregoing, the
researcher finds it most suitable to adopt an evaluative qualitative approach
viewed through positivist lens in a bid to achieve the objectives of the study and
answer the research question.

4.4 DATA SOURCES

Data for research purposes may be obtained from primary or secondary sources
(Lor 2011). Primary data is data generated by the researcher through observation,
measurements, questionnaires and interviews during the course of the study. On
the other hand, secondary data is information already available that is adapted
for use in the study by the researcher. Such secondary data can be both primary
and/or secondary data culled from other sources (Hox and Boeije 2005).

The researcher acknowledges that primary data is a useful data source for
conducting research but it may not be appropriate for this study because majority
of the data required for the study already exists in written documents and articles.
These documents and articles, available largely from reputable academic journals
and news magazines, constitute the secondary data to be used in the study.
Furthermore, secondary data sources for input data are easily accessible which
enables faster conduct of the study. Additionally, secondary data can easily be
validated by comparison between a number of sources thus increasing credibility.
For the study, only credible data sources such as Energy Information

47
Administration (EIA), BP Statistical Review of World Energy, CIA World Fact book,
World Bank, NNPC and others will be used.

4.5 THEORETICAL FRAMEWORK

Government, just like every other organization, comprises of various stakeholders
with varied vested interests. When a government creates and implements policies
to drive strategy, these policies affect different groups and organizations as well.
These complex interrelationships can be explained by the stakeholder theory of
strategic management.

Stakeholder theory is grounded on the premise that adequate attention should be

given to the interests and well-being of all parties who can assist or hinder the
achievement of the organizations objectives (Philips, Freeman and Wicks 2003).
A stakeholder approach suggests that government must formulate and implement
policies and processes which satisfy all groups who have a stake (Freeman and
McVea 2001). The central task in this process is to manage and integrate the
relationships and interests of government, shareholders, employees, industrial
consumers, suppliers, communities and other groups in a way that ensures the
achievement of strategic goals in the long-term (Jawahar and McLaughlin 2001).
This theory assumes various levels of stakeholder groups, each with divergent
interests (Donaldson and Preston 1995). Government, acting as management,
attempts to achieve its strategic goals by implementing policies that drives its
strategy as well as satisfying the various stakeholder interests.

The stakeholder theory largely underpins the design of governmental policies and
explains the dynamics involved in aligning the interests of the government and
that of the various stakeholders involved, like the IOCs, industrial consumers, local
power sector and host communities. The researcher therefore found it appropriate
to adopt the stakeholder theory as a framework to underpin the methodology of
this study.

4.6 METHODOLOGY
Multi-criteria evaluation (MCE) is a social research method that aims to
simultaneously analyse multiple criteria (Mundaca and Neij 2009). This method is
particularly relevant in applied social sciences as it supplies theoretical results that

48
assure axiomatic consistency in social constructs characterized by complexity
(Munda 2004). The proposal of the concept of MCE as a possible useful framework
for the evaluation of the difficult policy problems of our millennium is a main
argument developed by some authors (Munda 2004; Greening and Bernow 2004).
It has been successfully applied in performance evaluation studies involving
multiple criteria (Yu and Hu 2010).

In the formulation and implementation of policies, there are typically multiple

criteria that need to be evaluated. This view agrees with previous discussion in
chapter 2, where the various interconnecting factors that affect gas policies were
reviewed. It is therefore found appropriate to adopt a MCE model to evaluate the
NGMP and proposed PIB in order to achieve the research objectives and answer
the research question. This approach is consistent with the approach adopted by
previous researchers such as Greening and Bernow (2004), Mundaca and Neij
(2009), Blechinger and Shah (2011), and also Gamboa and Munda (2007).

4.6.1 LIMITATIONS OF THE METHODOLOGY

The study recognises that while a MCE methodology is ideal for this study it is not
without its drawbacks; the major one being the element of subjectivity involved
in the identification of important attributes and their ranking of importance
(Greening and Bernow 2004). However, the use of a prescriptive rather than
normative MCE model, where policy information exists and the goals of the policy
makers are known, helps mitigate subjectivity on the researchers part because
the decision making process is not simulated but rather explored and evaluated
(Yu and Hu 2010).

In addition, MCE is often based on a lengthy iterative process, typically with data
aggregation methods for ranking and evaluation. Due to reasons of time and
resource constraints, the study will develop its MCE model as fit for purpose and
specific to the research question. The model could be considered as offering a
starting point from which researchers can build more elaborate and detailed
frameworks to study gas policy frameworks and statements. In other words, it is
not an end in itself.

49
In spite of these limitations, it remains useful to analyse the NGMP and proposed
PIB with the view to evaluating its adequacy in solving the domestic gas
infrastructure challenge, especially when examined against the themes and
concepts earlier discussed in chapter 2. Given the correlation between regulatory
environment and gas industry growth as earlier discussed (Hudson and Jorgenson
1974; Darley 2006; Recchione 1979; MacAvoy 1979, 1984, 2001), there ought to
be a positive correlation between domestic gas infrastructure development and
gas policy best practices.

4.7 SUMMARY
This research adopts a multi criteria evaluation methodology with stakeholder
theory as the underpinning theoretical framework. The NGMP and proposed PIB
will be evaluated in a bid to answer the research question. A critique of the
methodology and indicators was presented and steps to be taken to mitigate their
shortcomings were highlighted.

50
CHAPTER FIVE

DATA ANALYSIS AND DISCUSSION OF RESULTS

5.0 INTRODUCTION
This chapter provides discussion on the description of the sample data used in the
study. It analyses the results obtained from the research findings using the factors
identified from literature that affect domestic gas supply and infrastructure
development. It will also provide further discussions by comparing the results
obtained from the study with the research found in the literature.

5.1 DATA DESCRIPTION

This section discusses the features of the sample data used in the study which are
descriptive in nature. These descriptive features describe the relevance and tide
of the sample data used in this research and provide the content for analysis. The
sample data used for this study comprise mainly of a combination of documents
containing the provisions of the NGMP and proposed PIB as it concerns domestic
gas infrastructure development. These policies cover the recent strategic drive of
the FG to restructure and reposition the Nigerian petroleum sector and indeed its
economy on a viable, competitive path to long term growth (Onyeukwu 2010).
The data was collected majorly from the NNPC website www.nnpcgroup.com,
which collates the various terms and instruments of these policies, and other
relevant sources. The data collected is critically examined in relation to the
expectations of all identified stakeholders and in line with the research aims and
objectives to produce the results which are analysed to determine the adequacy
of these gas policies to address domestic gas supply and infrastructure challenges.

5.1.1 MCE MODEL AND POLICY MEASURES

For the purpose of the study, a simple MCE model based on previous work by
Konidari and Mavrakis (2007), and Blechinger and Shah (2011), will be used. Their
model will be adopted and modified to the requirements of this study. The analysis
will be carried out in three steps given as:
Selection of policy measures: Based on a review of the NGMP and PIB as
well as relevant literature and documents (Le Leuch 2011; YarAdua 2007;

51
 Ige 2008; Adesina 2012) a list of policy measures aimed at growing the
Nigerian economy through domestic gas utilization will be compiled.
Selection of evaluation criteria: Evaluation criteria will be devised based on
the recommendations of Blechinger and Shah (2011).
Evaluation of policy measures: Due to the absence of relevant quantitative
data, the analytical hierarchy process and multi attribute utility theory used
for pairwise comparison to assign relative weights to evaluation criteria will
not be applied (Blechinger and Shah 2011; Konidari and Mavrakis 2007).
Instead a 3-point Likert scale ranging from 0 for non-existent, 1 for
poorly defined, and 2 for well defined will be used to evaluate policy
measures against the selected criteria.

The policy model is used based on the research objectives of the study, which are
to assess whether or not the NGMP and provisions of the proposed PIB have robust
measures to guarantee domestic gas supply to consumers and assess whether or
not the NGMP and provisions of the PIB adequately provide for gas infrastructure
development. These classifications are compiled into a tabular form below.
Fig 5.1 Structural Model for Evaluative Analysis of NGMP and PIB

Source: Various sources

For the purposes of this study a policy measure is defined as those adaptable and
customisable tools that can be controlled by the government to achieve its policy
objectives (Borras and Edquist 2013). The basis for these policy measure

52
selections therefore are contingent upon the issues the policy objective seeks to
address. Policy measures can be combined to achieve complementary effects
(Borras and Edquist 2013). They are the building blocks on which government
hopes to achieve its policy target (Blechinger and Shah 2011). On this basis they
are the unit of analysis.

The policy measures selected are detailed below.

1. Gas consumption projects: This is described as the cross section of existing
and proposed domestic projects utilizing natural gas to support domestic
economic growth over a long period of time (World Bank ESMAP 2004).
Examples of gas consumption project options relevant to Nigeria are power
generation, GTL manufacture, LPG processing, cement, steel, aluminium
and fertilizer industries, as well as LNG exports.
2. Gas flaring reduction: This is described as policy measures aimed at
eliminating routine flaring of stranded gas (Debeyssey 2012).
3. Open access to pipelines: This is described as policy measures aimed at
ensuring gas pipeline owners offer equal access to other market players (De
Vany and Walls 1993).
4. Pricing regime: This is described as policy measures aimed at discouraging
vertical integration or industry monopoly in the gas sector through price
regulation, thereby protecting the customers (Seliverstovs et al 2005).
5. Privatization: This is described as policy measures that allow for private
ownership of important public utilities (Nellis 1994).
6. Licensing: This is described as policy measures that grant lease rights to
legally protected property, such that a business or individual can conduct
gas related operations (Fosfuri 2004).
7. Purchasing options: This is described as policy measures that set out
procedures and options for sale and purchase of gas for domestic utilization
(Thomas and Dawe 2002).
8. Pipeline capacity increase: This is described as the cross section of existing
and proposed domestic gas pipeline infrastructure to create an integrated
supply network (YarAdua 2007).
9. Supply obligation: This is described as policy measures that aim to enforce
domestic supply from a portion of total gas reserves (YarAdua 2007).

53
5.1.2 SELECTION AND DESCRIPTION OF EVALUATION CRITERIA
A review of relevant research papers (Konidari and Mavrakis 2007; Blechinger and
Shah 2011) suggests the policy evaluation criteria to be used. These criteria are
based on key stakeholder preferences and form the theoretical framework
underpinning the analysis of Nigerias gas policies (Blechinger and Shah 2011). A
detailed description of each criteria is given for clarification.
1. Feasibility is defined as the aggregate applicability of the policy measure
linked to national institutional and legal frameworks. A higher feasibility
value is assumed when there exists an enabling institutional/legal
framework supporting a policy.
2. Transparency is defined as the openness of implementation, or availability
of clear information, regarding the operationalization of the measure. A
higher transparency value is assumed when there is clear and detailed
information on the policy measure.
3. Equity is defined as the fairness of the policy measure in distributing costs
and benefits across key stakeholder groups. This is because unintentional
distribution of costs on non-participating target groups during the
implementation of the instrument may result in disproportional burden for
them (Konidari and Mavrakis 2007). A higher equity value is assumed when
there is evidence of a fair allocation system for the policy measure.
4. Flexibility is defined as the property of the policy to provide a range of
compliance options allowing stakeholder groups a timeframe for adjustment
to the policy measure. A higher flexibility value is assumed for a lengthier
timeframe allowed for implementation of/compliance to a policy measure.
5. Stringency is defined as the rigidity of the policy measure towards non-
compliance/non-participation. A higher stringency value is assumed when
there is evidence of clear rules and influencing mechanisms to ensure
compliance to the policy measure.

5.1.3 KEY STAKEHOLDERS

In an attempt to appraise the NGMP and PIB, the key stakeholders as regards to
gas infrastructure development and domestic gas supply are compiled as follows:

54
 i. Nigerian Government
This comprise the Federal Government of Nigeria (FG) on whom the
ownership right and title to all the nations petroleum resources vests,
responsible for the ministries and agencies involved in the management,
administration and regulation of the petroleum industry.
ii. Suppliers (IOC)
These are the companies that operate the fields that are expected to supply
gas for domestic consumption.
iii. Consumers
This classification comprises the domestic sector, the industrial sector, and
the commercial sector as broken down in the GPP.

For illustrative purposes the stakeholder network is given in figure 5.2

Fig 5.2 Network of Key Stakeholders

IOC FG

CUSTOMERS

DOMESTIC INDUSTRIAL COMMERCIAL

lines- contracts, regulation, advice

arrows- gas, electricity, products

Compiled from Adefulu (2009) and PIB 2012

These stakeholders all have direct influences, or are directly influenced by, the
gas policy changes of the NGMP and PIB. The policy measures of the NGMP and
PIB are critically examined against factors that affect gas supply and infrastructure
development to determine if they adequately provide for these factors. Since the
policy measures are the unit of analysis it logically follows that robust and
adequate measures should result in the meeting of policy targets (Konidari and
Makravis 2007). Hence, the policy measures will be evaluated against selected
criteria, and an ordinal ranking of the results will be carried out and
comprehensively discussed. This will form the basis for determining the adequacy

55
of the NGMP and PIB in meeting the domestic gas supply and infrastructure
challenges.

The review and analysis will be rounded up with recommendations on possible

steps to take in order to improve the robustness of policies meant to guarantee
domestic gas supply and infrastructural development, while guaranteeing proper
consideration of stakeholder interests in achieving policy targets.

5.2 RESEARCH FINDINGS AND DISCUSSION

This aspect covers the analysis and findings of the results obtained in the study.
It begins with an evaluative analysis of relevant policy measures as captured in
the NGMP and PIB, followed by a critical and detailed discussion of the results
obtained from the MCE model used. The results obtained will then be viewed the
lens of related findings available in stakeholder theory literature.

5.2.1 SUMMARY RESULTS

Fig 5.3 shows overall performance of the nine policy measures assessed against
selected criteria with the MCE model.
Fig 5.3

Policy Measures Ranking

10
9
8
7
6
5
4
3
2
1
0

Source: Authors calculations

56
Interestingly, the highest ranked policy measures are pricing regime, pipeline
access, licensing and supply obligation while the lowest ranked are gas
consumption projects and gas pipeline capacity increase (see Appendix I). The
average score across board for all policy measures was 7.3 out of a maximum
score of 101. A comparison of the key objectives also reveals that the security of
gas supply objective performed better with an average score of 8, than gas
infrastructure development objective which scored 7, even below the total
average.

The overall best policy measures from the model are also the highest ranked within
each policy objective category. They scored high under all evaluation criteria apart
from flexibility, because all timeframes for adjustment as measured for flexibility
were less than one year, or not clearly defined. The deviation between the top
scorers and the bottom scorers was a significant 50% as well.
Fig. 5.4

Evaluation Criteria Ranking

20

15

10

0
Feasibility Transparency Equity Flexibility Stringency

Source: Authors calculations

From Fig 5.4 illustrating the ranking and performance of evaluation criteria, it is
clear that the transparency criteria significantly outranks all others. Feasibility
comes second, with stringency, flexibility, and equity following. The bottom three
criteria combined also have the majority of available scores. They account for
51.6% of evaluation weight while the top two share 48.4% amongst them. Finally,
flexibility and stringency have equal scores of 11 out of a possible 18 and are the
lowest ranked.

1
The averages across a range were computed in line with Konidari and Mavrakis (2007)

57
5.2.2 DISCUSSION OF RESULTS
In order to achieve the objectives of the study, the preceding results of the MCE
will be discussed in the context of both key policy objectives as set out in Fig 5.1.
These key objectives are security of supply and gas infrastructure development.

5.2.2.1 ENSURING DOMESTIC GAS SUPPLY FOR CONSUMERS

Under the security of supply objective, the supply obligation and flaring reduction
measures scored 9 and 7 respectively out of a maximum score of 10. Considering
that the average score is 7.3, the implication is that supply obligation policy
measure outperformed the average while flaring reduction underperformed
against the evaluation criteria. Flaring reduction lost scores under equity, flexibility
and stringency criteria. This is because there is no mention of a definite flare-out
date, instead it is left to the MPR to set a date from which zero gas flaring will be
enforced. Additionally, although there are clear provisions for flaring penalties, the
MPR has the discretionary power to permit flaring in some cases (Sec. 277(2)).
These provisions lend credibility to the concerns raised by Oji (2013) and Kennedy
(2013) about how the discretionary powers the MPR wields affects the perceived
transparency of Nigerias gas policies. However, there are clear instructions for
IOCs to submit gas utilization/reinjection plans for approval in line with reducing
wasteful gas flaring. Without an approved gas utilization/reinjection plan a
production license cannot be issued,

On the other hand, supply obligation takes maximum scores in all criteria except
flexibility, because there is no clear timeframe given, rather there is reference to
a period in which the DGSO is to be implemented (PIB 2012, Sec. 183). DGSO
is a legal duty imposed on a gas producer to supply a stipulated quantity of gas
to the domestic market at a given period (PIB 2012). It gives rise to the concept
of the domestic and the non-domestic (export) gas obligations. Domestic
obligation is linked to an estimated utilization requirement ranged across major
consumers like the power sector, LPG sector, cement, fertilizer, aluminium and
steel industries, as well as smaller consumers in the commercial and residential
sector (Onyeukwu 2010).

Inasmuch as the DGSO seeks to ensure availability of gas for domestic utilization,
the issue of an export-oriented gas sector still persists (Onyeukwu 2010). Core

58
IOC operators appear to have a strong portfolio interest that is biased towards
export LNG (Boni, Castano and Dresda 2005; Igbatayo 2005). YarAdua (2007)
argues that this is because LNG has favourable economics relative to pipeline gas
for long distances. Considering that the Nigerian gas market is controlled by a few
major players, these IOCs preference for the export market creates a potential
resistance to the DGSO (Onyeukwu 2010). As such it is the intention of the FG
that this policy will mitigate against the rising shortfall in the domestic supply base
and force internal portfolio realignment within the IOCs (YarAdua 2007). The high
rank given to the supply obligation policy measure implies that these intentions
have been adequately covered.

The NGMP prescribes a DGSO for the IOCs of up to 50% of their gas production in
accordance with a Gas Management Model through which the demand forecast
would be made and quota allocated (Okorie 2010). It imposes a penalty of $3.5mcf
for non-compliance and an environmental surcharge of $0.5mcf for any gas flared.
To this end, the FG initially indicated a supply obligation for a minimum of five
years and would only allow export after the DGSO is met (Okorie 2010). This is
consistent with YarAdua (2007), who adds that allocated reserves to be supplied
will be based on estimated domestic requirement and should help mitigate the
current supply shortfall largely driven by focus on export by IOCs.

The PIB upholds the DGSO by requiring the UPI to impose and enforce compliance
of the DGSO (PIB 2012, Sec. 183(1)). The volume of gas to be supplied by each
lease holder shall be based on an allocation system to be determined by UPI.
Apparently this is to ensure equitable distribution of the supply obligation as a
blanket amount may not be fair to the smaller independent companies and
operators of marginal and deep-sea fields. Sec. 183(4) stipulates that the UPI is
mandated to ensure that the weighted average benchmarked unit costs of supply
from fields dedicated to a DGSO is never higher than the benchmarked unit costs
of supply alternatives in the export market. The implication of this instrument is
to provide a financial incentive to the IOC by ensuring that it is economical to
adhere to the DGSO as opposed to supplying gas for export. This appears to be
another measure by the FG aiming to change the export bias of IOCs as discussed
previously. Sec. 183(5) sets out the penalty for non-compliance to the DGSO. It
states that failure to comply with the DGSO shall lead to the loss of entitlement to

59
supply gas to any gas export operations. Where the IOC previously only supplied
gas to gas export operations, it shall be directed by the UPI to suspend production.
The message here is quite clear. A breach of the DGSO essentially translates to
forfeiture of gas export privileges (Okorie 2010). It does not stipulate any direct
financial charges as penalties.

A closer look at these policy instruments put together suggests a complementary

structure aimed at discouraging export-orientation by Nigerias major gas sector
players. Comparatively Nigerias LNG export market is experiencing significant
growth, arguably at the expense of the domestic gas market (Igbatayo 2005;
Boni, Castano and Dresda 2005; Onyeukwu 2010). If this assumption holds, then
the DGSO could be justified as a rational course of action for a government wishing
to develop a vibrant domestic gas market (Ige 2008).

5.2.2.2 DOMESTIC GAS INFRASTRUCTURE DEVELOPMENT

The term infrastructure refers to the framework that supports an organization or
system, enabling it achieve its objectives (Munnel 1992). Therefore gas
infrastructure development refers to policy measures that aim to build Nigerias
gas sector by positioning it on a path of sustainable and steady growth.

Results of the evaluation show that scores of the selected policy measures range
from 9 to 4 out of a maximum of 10. Pricing regime is ranked highest, suggesting
that this policy measure performed adequately. As previously discussed in chapter
3, the pricing regime is detailed as the GPP in the NGMP, and is exhaustively
covered from Sec. 252-256 of the PIB. A key feature of a liberalised gas market
is the influence of market demand and supply on prices and costs (Garcia and
Vredenburg 2000). As such the GPP appears to contradict the introduction of a
competitive gas market because it regulates prices for gas by stipulating minimum
prices for different strategic sectors. According to Adefulu (2009), YarAdua (2007)
and Oyewumi (2013), the reason behind this price regulation lies in the fact that
the different strategic sectors have different pricing structures and the economics
of supply are unfavourable for the lower priced sectors because of their inability
to pay market prices. Interestingly, the lowest priced sector, domestic power
sector, has the highest potential for growth therefore justifying a transitional
pricing regime to avoid supply imbalances between sectors (MacAvoy 1984,

60
YarAdua 2007). Pipeline access is also top ranked under this policy objective.
Pipeline access hopes to achieve greater competition for gas supply by increased
access to transportation infrastructure for interested parties. It scores low only on
flexibility as well because there is no specific timeframe for
implementation/compliance referred to. Similarly, licensing scores low on
flexibility because of the same reason. However, Sec. 224 indicates a notification
timeframe for any aggrieved party to object to tariffs set by the DPRA.

Purchasing options and privatization score 8 and 7 respectively. In particular,

these policy measures failed to get maximum scores for flexibility and stringency.
For purchasing options, this can be attributed to the lack of clarity in Nigerias gas
policies concerning a timeframe for gas aggregation price implementation, and a
punitive system to ensure compliance. It is possible that the intention is to utilize
the same measures provided in the pricing regime since there is a significant
relationship between the pricing regime and the ability to purchase gas (Garcia
and Vredenburg 2000). However, if this is the case, the study finds no evidence
in that regard.

The lowest ranked policy measures are gas consumption projects and pipeline
capacity increase, only scoring under transparency and flexibility criteria. There is
no legislative framework backing these policy measures, no fair allocation system,
and no penalties for implementation or compliance. Based on the MCE model,
these reasons add up to an explanation of the low scores of these measures. The
study notes that these policy measures are at the core of the GIB, thus a deeper
understanding of these measures should shed more light on their adequacy and
help answer the research question.

A breakdown of gas consumption projects are given below:

1. Nigerian Liquefied Natural Gas Project (NLNG) is a joint venture (JV)
involving NNPC, Shell, Total and Eni established in response to the NLNG
Decree of 1989 to improve gas utilization and limit gas flaring (Okorie
2010). Associated gas is processed at an LNG facility in Bonny Island and
transported through six special trains for export. LNG projects under
construction are Brass River LNG and Olokonla LNG (Igbatayo 2005). For
Brass LNG an MOU has already been signed with Suez LNG Trading SA, BG

61
 Group and British Petroleum (BP) and it has a design of 2 trains, while
Olokonla LNG is a JV with BG and Chevron Nigeria having stakes. It will be
fed associated gas from Shell and Chevron fields and is designed for 4 trains
(Okorie 2010; Igbatayo 2007).
2. Escravos Gas to Liquid (EGL) is developed by Chevron Nigeria Ltd, with
NNPC and Sasol also having stakes (Okorie 2010; Igbatayo 2007). Its
design capacity is to convert 300mcfd NG into fuel, diesel and other GTL
products. This project shall, in conjunction with Mobil Oso condensate,
deliver gas to Lagos and also supply the West African Gas Pipeline (WAGP)
project (Igbatayo 2005).
3. There are other regional market infrastructure projects under construction
ie which have all past the design stages. The WAGP established by the
governments of Nigeria, Benin, Togo and Ghana with Chevron Nigeria Ltd
as the majority shareholder focuses on transporting natural gas from
Nigeria to delivery points in Benin, Togo and Ghana (Igbatayo 2009). There
is also the Trans-Sahara Gas Pipeline Project (TSGPP) of which the Russian
giant Gazprom has acquired some interests. The TSGPP will transport
Nigerian gas to Europe and North America through Algeria (Igbatayo 2009;
Okorie 2010).

From the evidence given it appears that there a number of domestic gas utilization
projects. While this may indicate a high performance policy measure, NNPCs
Annual Statistical Bulletin (2012)(see Appendix II) suggests that a higher
percentage of gas currently utilized are sold to 3rd parties, re-injected, used for
LNG exports, or used as fuel for production activities. This is consistent with OPEC
annual statistics 2008, in which domestic gas utilization for Nigeria was given as
an average of 8% of total gas production. In this light the low score is justified.

Concerning pipeline capacity increase, the GIB advocates integration. An

integrated gas network is crucial to efficient gas supply (Pavlenko and Glukhareva
2010). According to Onyeukwu (2010), projected domestic gas demand growth
for base and high growth cases significantly exceeds available pipeline backbone
capacity in the West, North and Coastal regions of Nigeria. Hence, an optimal
reconfiguration of existing pipeline capacity as well as installation of additional
capacity will be critical to gas supply availability. An overview of the existing

62
pipeline infrastructure capacity as compared to forecasted demand scenarios is
given below:
Table 5.1 Pipeline Infrastructure Capacity (2015 projection)
Northern Region Base case 400mmscf/d
High Case 1200mmscf/d
Current Capacity ~300mmscf/d
Western Region Base case 5800mmscf/d
High Case 12000mmscf/d
Current Capacity ~800mmscf/d
Coastal region Base case 2500mmscf/d
High Case 3000mmscf/d
Current Capacity ~1100mmscf/d
Source: Ige (2008) and Adesina (2012)

As Table 5.1 depicts, there is a clear disparity between pipeline infrastructure

capacity and projected demand, making a good case for integration and
optimisation of the gas network. Existing gas pipeline infrastructure is inadequate
in capacity and reach for the current and projected demand growth. Additionally,
there is a lack of connectivity between the coastal region and western region, and
this factor coupled with limited throughput capacity severely constrains supplies
(YarAdua 2007). Whilst gas reserves are concentrated in the coastal region, there
is limited connectivity to the West where demand growth is highest and North
where demand growth is also expected, effectively skewing the demand-supply
balance across the regions. This infrastructure situation limits the flexibility of
supply (Weisser 2007).

Another issue appears to be infrastructure duplications. There are two main

pipeline networks in Nigeria, the Eastern and Western networks (YarAdua 2007).
According to Adesina (2012) and YarAdua (2007), there is evidence of sub-
optimal pipeline configurations between SPDCs offshore gas gathering system
(OGGS) and the Escravos Lagos offshore pipeline (ELOP). The OGGS pipeline runs
for 268km the Banga field through the Bight of Bonny to Bonny terminal, while
the ELOP system runs for 340km from Escravos to Lagos through the Bight of

63
Bonny as well. Similarly, NAOCs GTS4 and ENL Consortiums OUL pipelines are
also not optimally configured. An illustration is provided in Fig 5.4

Fig 5.5 Pipeline Structure showing Network Configuration

Source: YarAdua 2007

This sub-optimal structure exacerbates the issue of limited domestic gas supply
flexibility. As illustrated, there exists sufficient scope to harmonise pipeline
configurations. It is a strong opinion of some authors that poor collaboration
across different JVs entered into by IOCs is the driver behind the poor integration
of existing infrastructure and the apparent unwillingness to increase existing
capacity (Ige 2008, Onyeukwu 2010, YarAdua 2007).

Based on NNPC projections, available gas processing/gathering plant capacity is

expected to rise alongside demand growth (YarAdua 2007). A steady growth in
capacity has been recorded from 4091mmscf/d in 2004 to over 14000mmscf/d by
2010 (NNPC 2010). However, this pace of growth is not as aggressive as
forecasted gas demand growth implying that there is scope for increased plant
capacity as well (Ayankola 2008).

64
Some key investment categories have been identified and proposed as policy
measures to jump start network integration and capacity enhancement.

The first category is the proposed investment plans for three central gas gathering
and processing facilities (CPFs) at West Delta (Forcados Area), Obiafu (North Port
Harcourt) and Akwa Ibom /Calabar area (Ayankola 2008). This appears to be
aimed at bridging the forecasted plant capacity gap as earlier discussed. The
second is proposed establishment of three gas transmission lines and compressor
stations. These are given as the 1200 Kilometre North/South Line, 700 km
Western system with 200km offshore extension and 200 km Inter connector
system (Ayankola 2008). The CPFs are meant to treat wet gas, extract Liquefied
Petroleum Gas (LPG) and Natural Gas Liquids (NGLs) as well as export lean gas
into the integrated transmission system. CPF operators could, through an
extended gas gathering system, purchase stranded gas while it can also utilise its
acquired gas for its own LNG project. This measure may be seen an attempt to
incentivise private investment in CPFs.

According to YarAdua (2007), there are to be three franchise areas for

infrastructure capacity expansion, namely the Western, Central and South-Eastern
franchise areas. Within each franchise area, a forecasted gas demand has been
compiled. For the Western area, demand is expected to be in the range of 3-8
billion cubic feet per day by 2015, for the Central area, demand should range
between 1-4 billion cubic feet by that period while in the South Eastern area, 1-7
billion cubic feet (Ayankola 2008). For the three transmission lines; the South-
North line has as its key markets; domestic and the Trans Saharan Gas pipeline,
while the Western line has domestic and the West African Gas pipeline project as
its key markets, the third line is the inter-connector line. The three systems are
to operate independently, though connected. The strategic aim of establishing an
integrated gas infrastructure network is expected to be achieved with the
implementation of these plans which feature an optimised configuration
connecting the different regions and an increased capacity for gas processing and
gathering (Adesina 2012).

65
However, it has come to the notice of the researcher that there is no specific
provision within the proposed PIB to guarantee that the policy instruments in the
GIB as identified by this study are implemented. This omission may imply that the
FG lacks political will to follow through on its policies (Kurmanov 2012). On the
other hand it also could suggest that the FG is confident that there is sufficient
measures in place to introduce a liberalised, integrated market which in turn
should incentivise private investment in gas infrastructure (Villada and Olaya
2013). In support of this view, Sec. 223(1) of the PIB allows for the construction
and operation of independent pipelines, depots and jetties by private organisations
for the transportation of petroleum products (PIB 2012). The pipelines and depots,
however, will be subject to DPRA regulation.

5.4 SUMMARY
The sample data and their distinctive features and classifications for the purposes
of the study have been discussed. The results and findings of the study have also
been critically discussed with reference to relevant literature within the context of
the selected evaluation criteria based on stakeholder preference. Conclusions
based on analysis results were discussed then the chapter was summarised.

66
CHAPTER SIX

CONCLUSIONS AND RECOMMENDATIONS

5.1 CONCLUSIONS
Many researchers have carried out evaluative studies on public policies. This study
carries on with this tradition, but this time with a focus on Nigerias recent gas
policy changes and their effects on domestic gas supply and infrastructure
development. A qualitative MCE methodology was proposed and adopted to form
an opinion on the adequacy of these policies in contributing to the attainment of
effective and efficient domestic utilization of its significant gas reserves. This
study, therefore, contributes to available literature through the analysis of the
NGMP as well as relevant provisions of the proposed PIB. This exercise was done
in essence to ascertain if these policy documents have adequate measures to
guarantee gas supply to domestic consumers, and also to assess whether or not
they adequately provide for gas infrastructure development.

Results suggest that several policy measures hold potential for ensuring domestic
gas supply and infrastructure development in Nigeria. To reach these policy
targets, a combination of several policy measures should be used. In summary
the best measures to achieve these strategic targets are pricing regime, supply
obligation, pipeline access and licensing. An outlook for the possible
implementation of the most adequate policy instruments for the gas sector of
Nigeria is suggested from the ranking in Fig. 5.3. Policy measures less adequate
and more difficult to implement are situated closer to the right in Fig. 5.3.
Implementation could focus on improvements to low scoring evaluation criteria. A
focus on stakeholder engagement in policy development should be encouraged
(Jawahar and McLaughlin 2001). This is especially important for developing
countries so relevant supporting policies can be implemented (Blechinger and
Shah 2011). FG could set up a specific legal framework with subsidies to support
the installation and operationalization of more gas utilization technologies and
processes and also subsidies on end products of gas processing brought to market
(Konidari and Mavrakis 2007). Critical to success of the gas sector development
will be government support for the proactive stance of IOCs that are already

67
involved in gas utilization schemes. This must be encouraged, both as a means of
building momentum for sector transformation, and also to help shoulder the
administrative burden of government, passing some along to business and
industry to assist itself (Blechinger and Shah, 2011).

Summarised findings of the study are given below:

The study finds that Nigerias gas policies perform better at guaranteeing domestic
gas supply for consumers than providing for gas infrastructure development.
Furthermore, the study found the GPP, DGSO, 3rd party pipeline access and
licensing policy measures are the best performers based on the selected criteria
and as such are adequate policy measures.

The study finds that Nigerias gas policies score highest in transparency, then
feasibility and equity with flexibility and stringency having the least scores.

The study also exposes the inadequacy of these policies in ensuring effective
monetization of gas reserves. However, the study recognises that there are major
gas monetization projects either underway or in the pipeline, although their
efficiency in consumption as compared with available gas production can be called
into question.

Finally, the study identifies potential areas of conflict amongst key stakeholders in
the domestic gas sector. These are identified as the compulsory DGSO and the
ambiguity surrounding the rights granted to the MPR.

5.2 RECOMMENDATIONS
Following the detailed, critical and in-depth study and analysis of the NGMP and
relevant provisions in the PIB, possible areas of improvement have been identified.
They include:
The clarification of gas flaring penalties giving a clear and concise basis for
penalising defaulters based on level of default. Penalties should be
significant enough to discourage default and encourage DGSO participation.
Stakeholder involvement in policy development processes should be
encouraged more. This is especially relevant for policy instruments that may

68
 have a direct effect on a particular stakeholder group above the others.
However, a neutral stand should be maintained to discourage favouritism.
Policy implementation should focus on improving low ranking evaluation
criteria, especially flexibility and stringency.
The PIB should include relevant provisions for the incentivising of
investment in domestic gas utilization and increased pipeline capacity.
There is significant scope for increased domestic utilization capacity. Efforts
should be made to diversify gas utilization projects. For example non gas-
based power plants could be gradually phased out leading to significantly
increased utilization capacity in the power sector.

69
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 APPENDICES

Appendix I MULTI CRITERIA EVALUATION MODEL (COLOR CODED FOR CLARITY)

Evaluative
Policy Measures Criteria
Feasibility Transparency Equity Flexibility Stringency
Pricing regime 2 2 2 1 2 9
Supply obligation 2 2 2 1 2 9
Pipeline access 2 2 2 1 2 9
Licensing 2 2 2 1 2 9
Purchasing options 2 2 2 1 1 8
Flaring reduction 2 2 1 1 1 7
Privatization 2 2 1 1 1 7
Gas consumption projects 0 2 0 2 0 4
Pipeline capacity increase 0 2 0 2 0 4
14 18 12 11 11

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Appendix II 10 YEAR GAS PRODUCTION AND UTILIZATION STATISTICS

Source: NNPC Annual Statistical Bulletin 2012

88