The Nigerian Gas Transportation Network Code: Summary and Recommendations

Kehinde Adegoke, Sefton Fross

Introduction

About two months ago, precisely on Monday, 10 August, 2020, the Federal Government of Nigeria, in its bid to deepen the embrace, acceptability, and utilisation of gas amongst Nigerians, unveiled a Gas Transportation Network Code (“the Code”), which essentially, is a set of rules and guidelines for gas transportation in Nigeria. The Code which is meant to guide the use and operations of Gas Transportation Network system, is also expected to go a long way in deepening the domestic gas market while impacting positively on the growth and economic development of Nigeria. Unfortunately, many Nigerians are yet to appreciate fully the innovative provisions of the Code. It is appalling to know that many “energy experts” in Nigeria do not have sufficient knowledge of the contents of the Code. In this article, the writer attempts to do a section-by-section summary of the Code for the benefit of those who are passionate about understanding the nuances of the Code and of course makes cogent recommendations, to expedite the success of the Code.   

Network Code Summary

System Classification  

The Code introduces the reader to two important terms: (a) System; and (b) System Point. These two terms are very germane to the Code as they form the crux of the provisions of the Code. According to the Code, “System” means the pipeline systems known as the Escravos-Lagos Pipeline System, the Oben-Ajaokuta pipeline system, the Obiafu/Obrikom-Oben pipeline system owned by the Operator[1] and used to provide services for the conveyance of gas by Shippers[2] in accordance with the terms of the Network Code and all other pipeline systems that may be in existence or constructed in future and used to transport Gas to Shippers in line with the Network Code.[3] “System Point” is defined to mean a point on the System which is designed to permit gas to flow into or out of the System.[4] System Point comprises of “System Entry Points” and “System Exit Points”.[5] A System Entry Point is a System Point at which gas can flow into the System[6], while a System Exit Point is a System Point at which gas can flow out of the System.[7]

System Use and Capacity

Having successfully classified the System, the Code makes provision for the use and capacity of System. The System, according to the Code, is to be used by Shippers for delivering gas to any System Entry Point and offtaking gas from any System Exit Point.[8] In addition, the Code permits Shippers to apply for and hold capacity in the System called System Capacity at System Points.[9] The classes of System Capacity are “System Entry Capacity” and “System Exit Capacity”.[10]

The Code further distinguishes “Registered Capacity” from “Available Capacity”[11] when it states that a Shipper’s ‘Registered’ System Capacity in relation to a System Point is the System Capacity which the Shipper is registered as holding at that System Point on the Day,[12] and the Shipper’s ‘Available’ System Capacity in relation to a System Point is the Registered System Capacity adjusted to take account of any System Capacity Transfer.[13] Therefore, a Shipper is not permitted to use the System at a System Point on a Day unless it holds Available System Capacity at that System Point on that Day.[14]

A very important provision of the Code is the provision relating to Non-Code Arrangements.[15] This provision permits the Operator who, prior to the date at which the Code becomes effective, entered into an agreement (a “Legacy Agreement”) with any person to provide transportation services on terms and conditions that may differ from those of the Code to, with the assent of the Department of Petroleum Resources (DPR) continue to provide such services on such terms and conditions until the expiry, termination of such agreement or migration to and adoption of the Code.[16] There is however a proviso to the effect that all Non-Code Arrangements shall be migrated to the Code no later than six (6) months from the date the Code becomes effective.[17]

Nominations

In addition, the Code makes provision for Nominations.[18] This provision is to the effect that Shippers will nominate quantities of gas for delivery to and offtake from the System on each Gas Flow Day in accordance with the section[19] of the Code for the purposes of enabling the Operator to plan and carry out the operation of the System and to balance deliveries to and offtakes from the System.[20] In the Code, where any reference is made to a Nomination prevailing at any time before or during the Day, such reference is to a Nomination as amended up to that time.[21] A nomination is only deemed to have been made by a Shipper for the purpose of the Code where the Shipper has submitted a Nomination which has been approved or deemed approved by the Operator in accordance with the section[22] of the Code.[23] It must be noted that an approved or deemed to be approved nomination by the Operator shall not amount to a waiver by the Operator of any requirement of the section[24] of the Code, irrespective of the failure of such Nomination to comply with such requirement.[25]

The Operator may reject or at his discretion approve a Nomination or Nominations for certain reasons.[26] Where a Nomination which is submitted to the Operator has not been rejected within six (6) hours after the Nomination Time, such nomination is deemed approved.[27] Provision is also made in the Code for Trade Nominations.[28] Where two Shippers agree to do so, they may make in respect of any Gas Flow Day corresponding nominations (respectively a “Disposing Trade Nomination” and an “Acquiring Trade Nomination”).[29] A Trade Nomination is made, for the purpose of the Code, by a Shipper where the Shipper has submitted a Trade Nomination which has not been rejected by the Operator in accordance with the section[30] of the Code.[31]

Operational Balancing

Furthermore, the Code makes provision for Operational Balancing.[32] In the Code “Operational Balancing” means maintaining; both during and at the end of each Gas Flow Day, within such operational tolerance as the Operator may determine, after taking account of estimated shrinking and intended changes in Line pack, and having regard to all other factors relevant to the operation of the System, the balance between the quantities of gas respectively delivered to and offtaken from the System.[33] For this purpose, the Operator may take Balancing Actions in accordance with the section[34] of the Code.[35] In making decisions as to the taking of Balancing Actions, the Operator will and shall be entitled to take into account such information as it shall judge appropriate including its own estimates of supply and demand, Nominations submitted by Shippers, and Local Operating Information provided under the terms of Network Entry Agreements and Network Exit Agreements.[36] An invitation for Balancing Assistance can be issued by the Operator to any Shipper or CFO, seeking assistance in addressing the Operational Balancing Requirement.[37]

Further to the above, the provision for Curtailment in the Code states that where necessary for the purpose of Operational Balancing, the Operator may curtail deliveries at System Entry Points and offtakes at System Exit Points in accordance with the relevant section[38] of the Code.[39] Where Entry Curtailment Circumstances or Exit Curtailment Circumstances or any other circumstances concerning operation of the System arise, and the Operator reasonably believes that as a result of those circumstances there is a damage to life or property, the Operator may declare and notify the Shippers of the existence of Emergency Circumstances and may take any action it deems necessary to alleviate the Emergency Circumstances, acting in accordance with any relevant legislation.[40]

Daily Quantities and Imbalances

Also, provision as to daily quantities and imbalances[41] is made in the Code. For the purpose of the Code, the quantities of gas treated as delivered to the System and offtaken from the System by each Shipper each Day shall be determined in accordance with the section[42] of the Code.[43] Also, Daily Imbalance shall be determined for each Shipper in respect of each Day.[44] For each Shipper each Day, the “Daily Imbalance” is the difference between the quantities (adjusted to take account of Trade Nominations) treated as delivered to and offtaken from the System by the Shipper on such Day as determined in accordance with the section[45] of the Code.[46] In addition, Cumulative Imbalance shall be determined for each Shipper in respect of each Day.[47]

The provision as to Input and Output Quantities in the Code is also worthy of mention. For each Shipper, the Shipper Daily Quantity Inputs (SDQI) and Shipper Daily Quantities Output (SDQO) in respect of each System Entry Point and System Exit Point respectively for the Gas Flow shall be determined in accordance with the section[48] of the Code.[49] Provision on Entry Allocation Estimate and Entry Allocation Statement is to the effect that a person who is not a Shipper Agent may not submit an Entry Allocation Estimate or an Entry Allocation Statement or otherwise claim to have delivered gas to the System.[50] The Operator is permitted to disregard any such purported submission or claim.[51] It is also worthy of mention that the Code permits a Shipper to, pursuant to an Allocation Agreement appoint a Shipper Agent in respect of each System Entry Point for which it holds System Capacity on a Gas Flow Day and each System Exit Point for which it holds System Capacity on a Gas Flow Day, for the purposes of submitting Allocation Estimates and Allocation Statements.[52] 

System Clearing and Balancing Charges

The System Clearing and Balancing Charges[53] provision of the Code provides for (a) the sale and purchase of each Shipper’s Cumulative Imbalance Excess,[54] and (b) the calculation and payment of Cumulative Imbalance Charges, and Scheduling Charges.[55] By this provision, the Operator expects that the Department of Petroleum Resources (DPR) will from time to time notify the Operator of the “System Sell Price” and the “System Buy Price” (together the “System Price”) that the Department has determined will be applicable for each Shipper.[56] On receipt of any such notification, the Operator shall within 5 Business Days notify each Shipper of the System Prices applicable to it as determined by the DPR.[57] Prior to the notification by the DPR, the System Prices to be used shall be as follows (a) the System Sell Price shall be 110% highest GSAA price, and (b) the System Buy Price shall be 90% lowest GSAA price.[58] These shall be subject to the section[59] of the Code which states that the prices specified in paragraph 1.3.3 may be updated by the Operator and any updated price shall be as set out in the Transportation Charge Statement in force at the time. This provision also introduces the Scheduling Charge which is paid by the Shipper where the quantity of gas delivered to or offtaken from the System by a Shipper differs on a Day (by more than an allowed tolerance) from the quantities nominated by the Shipper in respect of the relevant System Point.[60] The Scheduling Price is pegged at 5% of the System Selling Price.[61]

Shrinkage Gas

The Code also makes provision relating to Shrinkage Gas.[62] In the Code, “Shrinkage” is defined to mean gas in the System which is used by the Operator in connection with the operation of, or which is unaccounted for as offtaken from the System.[63] Similarly, Own Use Gas is defined to mean gas used by the Operator in connection with the operation of the System, including gas used in running compressors and gas used for preheating.[64] In the Code, “Daily Shrinkage Quantity” in respect of any Day will be determined as the System Daily Quantity Delivered less the System Daily Quantity Offtaken adjusted by the amount of the change in Line pack for the day.[65]

Entry and Exit Requirements

By the Entry Requirements[66] provision of the Code, nothing in the Code confers on any person any entitlement to have any pipeline, plant or other installation connected to the System for the purposes of delivering gas to the System.[67] A “Connected Delivery Facility” is defined for the purpose of the section[68] of the Code to mean a single facility or system (comprising pipeline(s), plant and/or other installations), operated by one person (or jointly operated by several persons), and connected to the System at a System Entry Point.[69] A Network Entry Agreement to which the parties include both the Operator, and the Delivery Facility Operator is needed before a Shipper may deliver as to the System Point.[70] The Network Entry Agreement must contain the Network Entry Provisions and (if not incorporated into the Network Entry Provisions) Local Operating Procedures applicable in respect of the System Entry Point.[71] Network Entry Provisions are defined for the purpose of the Code as terms and conditions or other provisions which specify requirements (for the purposes of the Code) in respect of the delivery of gas to the System.[72] The Network Entry Agreement may also contain provisions other than the Network Entry Provisions.[73] In addition, the existence of a Network Entry Agreement shall not relieve Shippers of any obligation under the Code, and the Operator shall not be required (for itself or for the benefit of any Shipper) to secure in a Network Entry Agreement any remedy against the Delivery Facility Operator not to take steps to enforce any provision of a Network Entry Agreement.[74]

Further to the above, regarding the delivery of gas to the System, all gas delivered or tendered for delivery to the System under the Code at a System Entry Point on a Day shall be deemed to be delivered or tendered for delivery by the Delivering Shipper(s), irrespective of any act or omission of the Delivery Facility Operator or any other person.[75] The gas delivered or tendered for delivery to the System at a System Entry Point shall for all purposes of the Code be assumed to be a single homogenous gas stream.[76]

Like the Entry Requirements, the Exit Requirements[77] provision of the Code provides that nothing in the Code confers any person any entitlement to have any premises, pipeline, plant or other installation connected to the System for the purposes of offtaking gas from the System.[78] Also, like the Network Entry Agreement, the Code also makes provision for the Network Exit Agreement which is an agreement containing provisions relating to the Offtake of gas from the System as a System Exit Point, made between the Operator and the Offtake Facility Operator.[79] A Shipper will not be entitled to offtake gas from the System at the relevant System Exit Point unless there is a Network Exit Agreement in force.[80] Additionally, a Shipper shall not (in its capacity as Shipper) be required or entitled to be a party to a Network Exit Agreement in respect of a System Exit Point where the Offtake Facility Operator is already party to a Network Exit Agreement.[81]

Further to the above, regarding the offtake of gas from the System, subject to the provisions of the Code and to the Shipper delivering an equivalent quantity at System Entry Points, the Operator will make gas available for offtake by Shipper(s) from the System at the point of offtake in accordance with the requirements of the section[82] of the Code at each System Exit Point where the requirements (other than the requirements to be complied with by the Operator) of the section are complied with.[83] “Excluded Offtake Circumstances” is defined in the Code as circumstances in which, in accordance with the Code , the Operator is not obliged or not in breach of its obligation to make gas available for offtake at a System Exit Point or is not liable in respect of any failure to do so.[84] For the avoidance of doubt, Shipper’s obligations to pay Capacity Charges shall not be affected by the existence of any Excluded Offtake Circumstances.[85]

Maintenance and Operational Planning

Under the Maintenance and Operational Planning[86] provision, the Operator will establish and update each year a programme for the maintenance of the System, a “Maintenance Programme”.[87] The Maintenance Programme is a programme (or an updated programme) of planned maintenance of the System containing certain information specified in the Code and such other information as the Operator shall decide to include.[88] The Operator will publish the Maintenance Programme by the last working Day in November of the preceding year.[89] A “Planned Maintenance Period” is a non-binding estimate of the duration of the planned maintenance in any given year.[90]

Invoicing and Payment

The Code also makes provision for Invoicing and Payment.[91] For Invoicing, the amount payable by Shippers to the Operator and by the Operator to the Shippers in accordance with the Code will be invoiced and payable in accordance with the section[92] of the Code.[93] The Operator will submit to each Shipper, Invoice Documents in respect of each Billing Period.[94] The types of Invoice Documents to be submitted are Capacity Invoices, Balancing Invoices, Commodity Invoices, Adjustment Invoices, Interest Invoices, and Ad-hoc Invoices.[95] The Invoice types may be consolidated in a single Invoice Document.[96] The Code also specifies the form and content of Invoice Document.[97] It must be noted that all amounts expressed payable by a Shipper or the Operator pursuant to the Code are, subject to certain exceptions, exclusive of any applicable Value Added Tax.[98] Also, a Shipper shall notify the Operator of any invoice query by written notice.[99] The Operator and the relevant Shipper shall endeavour to resolve invoice queries by agreement.[100] As soon as reasonably practicable after any invoice query is resolved, and in any event by the end of the second following month, the Operator will prepare and submit to the relevant Shipper an appropriate Invoice Document in respect of the amount (if any) agreed or determined to be payable or repayable by the Operator or the relevant Shipper.[101]

Dispute Resolution

One of the most important provisions of the Code is the provision dealing with Dispute Resolution.[102] The provision provides for the resolution of dispute between the Operator and Shippers.[103] For the purpose of the Code, a dispute is any dispute or difference arising between the Operator and any Shipper or Shippers under or in connection with the Code or the Framework Agreement or any Ancillary Agreement; and in respect of any dispute “parties” means the Operator and the Shipper or Shippers party to such dispute, and “party” shall be construed accordingly.[104] By virtue of this provision, where the Code provides or the parties have agreed that a dispute is to be referred to or resolved by Expert Determination, subject to the section[105] of the Code, no party shall commence proceedings in any court in respect of or otherwise in connection with such dispute.[106] The parties may agree to refer any dispute to mediation in accordance with the section[107] of the Code dealing with Mediation.[108] Any dispute arising between or among the parties which is not a dispute which shall be determined by Expert Determination shall (unless the parties otherwise agree in writing) be finally resolved by arbitration conducted in accordance with the Arbitration and Conciliation Act Cap A18 Laws of the Federation of Nigeria, 2004 in accordance with the section[109] of the Code dealing with Arbitration.[110] However, nothing in the section[111] of the Code shall prevent any party from seeking interim or interlocutory relief in any court.[112]

General

Finally, the Code makes other general provisions regarding Shipper Admission[113], Code Credit Rules,[114] Discontinuing Shippers and Termination,[115] Information and Confidentiality,[116] Agents,[117] Liability and Related Issues,[118] Force Majeure,[119] Notices and Communications,[120] and General[121] provisions.

Conclusion

It goes without saying that the new Gas Code will unlock potentials in Nigeria’s domestic gas market. The absence of an effective framework for the transportation of gas has proved a hindrance to the progress of the gas sector in Nigeria. Prior to the Code, lack of transparency in the gas industry has resulted in discriminatory access to gas transportation network, and this has largely discouraged investors. However, with the introduction of the Code, there would be– at the very least- open and competitive access to gas transportation infrastructure. It would help grow gas infrastructure, expand gas utilisation, curb gas flaring, and provide codes to standardise the gas value chain in line with global best practices.  

However, in achieving the above, certain factors remain sacrosanct. For instance, the scanty number of pipeline system in the country must be quickly addressed. The deteriorating condition of some of the existing gas pipelines also calls for urgent attention. The Federal Government is expected to complete outstanding works on these pipeline systems to help achieve the lofty objective of transporting gas from the source to the end-user, to get value. In addition, stakeholders in the gas industry must be aware of their roles in the implementation of the Network Code. Finally, corruption and corrupt practices is a bane to the successful operation and implementation of this Code.

In light of the above, the following recommendations will expedite the success of the Code:

1.           Invest in more pipeline systems and repair existing ones to cater for the large needs for gas in Nigeria.

2.           Stakeholders in the gas industry to be aware of their roles in implementing the Code.

3.           Avoid corruption and corrupt practices.

About the Author

Kehinde is an Associate in the Energy, Natural Resources and Project Practice Group of Sefton Fross, Nigeria. He has advised (and still advises) broad range of clients which include energy firms in the upstream, midstream, and downstream sectors on diverse areas of local as well as cross-border, energy-related transactions. He graduated with a First Class from the University of Ibadan, Nigeria.

He can be reached via:

Email:[email protected]; [email protected]

LinkedIn: Kehinde Adegoke

[1] In the Framework Agreement signed between parties and supervised by the Minister of State for Petroleum Resources on 10 August 2020, the Nigerian Gas Company (NGC) will serve as the Operator.

[2] Gas Hub and Dangote Fertilizers Limited will serve as the Shippers in the Framework Agreement.

[3] Section A, Para. 1.1(a).

[4] Section A, Para. 1.1(b).

[5] Section A, Para. 2.1(a)(b).

[6] Section A, Para. 2.2.

[7] Section A, Para. 2.3.

[8] Section B, Para. 1.1.

[9] Section B, Para. 1.2.1.

[10] Section B, Para. 1.2.2(a)(b).

[11] Section B, Para. 1.3.

[12] Section B, Para. 1.3.1(a).

[13] Section B, Para. 1.3.1(b).

[14] Section B, Para. 1.3.2.

[15] Section B, Para. Para. 1.6.

[16] Ibid.

[17] Ibid. With the inauguration of the Code on 10 August 2020, the six (6) months deadline for migration of all Non-Code Arrangements came to an end.

[18] Section C.

[19] That is Section C.

[20] Section C, Para. 1.1.1.

[21] Section C, Para. 1.1.3.

[22] That is Section C.

[23] Section C, Para. 1.1.4.

[24] That is Section C.

[25] Section C, Para. 1.3.1.

[26] Reasons are clearly spelt out under Section C, Para. 2.6.1(i)-(vii).

[27] Section C, Para. 2.6.4.

[28] Section C, Para. 3.

[29] Section C, Para. 3.1.1.

[30] That is Section C.

[31] Section C, Para. 3.1.6.

[32] Section D.

[33] Section D, Para. 1.1(a)-(d).

[34] That is Section D.

[35] Section D, Para. 1.1.2.

[36] Section D, Para. 1.3.1(a)-(c).

[37] Section D, Para. 2.2.1.

[38] That is Section D, Para. 5.

[39] Section D, Para. 5.1.1.

[40] Section D, Para.6.

[41] Section E.

[42] That is Section E, Paras. 2 and 3.

[43] Section E, Para. 1.1.1.

[44] Section E, Para. 1.2.1.

[45] That is Section E, Para. 4.

[46] Section E, Para. 1.2.2.

[47] Section E, Para. 1.3.

[48] That is Section E, Paras. 2.1 and 3.1.

[49] Section E, Paras. 2.1.1 and 3.1.1.

[50] Section E, Para. 2.1.4.

[51] Ibid.

[52] Section E, Para. 6.1.

[53] Section F.

[54] Section F, Para. 1.1(a).

[55] Section F, Para. 1.1(b).

[56] Section F, Para. 1.3.1.

[57] Section F, Para. 1.3.2.

[58] Section F, Para. 1.3.3(a)(b).

[59] That is Section F, Para. 1.3.4.

[60] Section F, Para. 4.1.1.

[61] Section F, Para. 4.1.3.

[62] Section G.

[63] Section G, Para. 1.1.1.

[64] Section G, Para.1.2.1.

[65] Section G, Para. 1.4.1(a).

[66] Section H.

[67] Section H, Para. 1.1.3.

[68] That is Section H.

[69] Section H, Para. 1.2.1.

[70] Section H, Para. 1.3.1.

[71] Ibid.

[72] Section H, Para. 1.3.2.

[73] Section H, Para. 1.3.3.

[74] Section H, Para. 1.3.4.

[75] Section H, Para. 3.1.1.

[76] Section H, Para. 3.2.1.

[77] Section I.

[78] Section I, Para. 1.1.2.

[79] Section I, Para. 1.2.1.

[80] Section I, Para. 1.2.2.

[81] Section I, Para. 1.2.3.

[82] That is Section I, Para. 3.3.1.

[83] Section I, Para. 3.2.1.

[84] Section I, Para. 3.2.2.

[85] Section I, Para. 3.2.3.

[86] Section J.

[87] Section J, Para. 1.1.1.

[88] Section J, Para. 1.2.1.

[89] Ibid.

[90] Section J, Para. 1.2.2.

[91] Section K.

[92] That is Section K.

[93] Section K, Para.1.1.1.

[94] Section K, Para. 1.1.2.

[95] Section K, Para. 1.2.2.

[96] Ibid.

[97] Section K, Para. 1.3.

[98] Section K, Para. 1.5.1.

[99] Section K, Para. 4.1.2.

[100] Section K, Para. 4.1.3.

[101] Section K, Para. 4.4.

[102] Section L.

[103] Section L, Para. 1.1.1.

[104] Section L, Para. 1.1.2(a)(b).

[105] That is Section L, Para. 1.4.

[106] Section L, Para. 1.2.2(ii).

[107] That is Section L, Para. 1.3.

[108] Section L, Para. 1.3.

[109] That is Section L, Para. 1.4.

[110] Section L, Para. 1.4.

[111] That is Section L.

[112] Section L, Para.1.5.

[113] Section M, Para. 2.

[114] Section M, Para. 3.

[115] Section M, Para. 4.

[116] Section M, Para. 5.

[117] Section M, Para. 6.

[118] Section M, Para.7.

[119] Section M, Para. 8.

[120] Section M, Para. 9.

[121] Section M, Para. 10.