NIGERIA NATIONAL ASSEMBLY PREPARES DOWNSTREAM GAS

UNCLAS SECTION 01 OF 05 LAGOS 000097

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E.O. 12958: N/A
TAGS: EPET NI PGOV ENERG
SUBJECT: NIGERIA NATIONAL ASSEMBLY PREPARES DOWNSTREAM GAS
ACT

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1. (U) Summary: Final investment decisions (FIDs) will be
taken on the OK Liquefied Natural Gas (LNG),Brass LNG,
Nigeria Liquefied Natural Gas (NLNG) and Equatorial Guinea
LNG projects early in 2007. As a result, the Nigerian
National Petroleum Corporation (NNPC) is pushing Nigeria's
National Assembly (NA) to pass the Downstream Natural Gas
Act. At hearings in the House of Assembly and Senate,
witnesses from the public and private sector urged amendments
to the bill, to assure the independence of the Gas Regulatory
Commission (GRC). Members of both Houses also expressed
support for an independent Gas Regulatory Commission (GRC).
The Oil Producers Trade Section (OPTS) of the Lagos State
Chamber of Commerce, which includes the international oil
companies (IOCs),promised to submit proposed amendments for
the House committee's consideration. As the country nears
the FIDS, demand for gas is increasing. Nigeria hopes gas
revenues will equal oil revenues by 2010. End Summary.



2. (U) The Nigeria's National Assembly held hearings on the
Downstream Natural Gas Act in the House of Assembly Committee
on Gas, chaired by Chief Mercy Almonei Isei, on January
18-19. The Senate Committee on Gas, chaired by Senator Rufus
Initimi Spiff, held hearings on February 1-2.
Powers of Gas Regulatory Commission, Minister
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3. (U) The bill establishes a Gas Regulatory Commission
(GRC),which will provide commercial regulation for the
downstream sector. In that capacity, the Commission will
issue licenses relating to the supply, transportation,
distribution and operation of the transportation network for
natural gas. This includes licenses for the sale and
delivery of gas to end users; for the construction and
maintenance of pipelines and infrastructure for conveyance of
gas under high pressure from processing facilities, for
construction and operation of distribution networks in local
delivery zones; and for the management and operation of the
transportation network. The GCR must ensure that a licensed
Transportation Network Operator (TNO) provides third party
access to the network, and may not purchase, own, or sell gas
or participate in natural gas marketing or transportation.
The Department of Petroleum Resources will continue to do
downstream technical regulation as well as upstream
regulation.


4. (U) The bill provides that the Minister of Energy and
Petroleum Resources has the duty to formulate, determine and
monitor downstream gas sector policy, determine when
conditions are right for the initiation of a competitive
market, issue regulations and ensure the independence of the
Gas Regulatory Commission. The bill also provides that the
GRC may amend, suspend or remove license conditions only upon
consultation with the Minister of Energy.

Downstream Act Unbundles NGC
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5. (U) The bill also provides that NNPC subsidiary the
Nigerian Gas Corporation (NGC),will be bifurcated into the
Nigerian Gas Transmission Company (NGTC),a gas
transportation company, and the Nigerian Gas Marketing
Company (NGMC),a marketing and distribution company. The
NGTC will operate as an independent company; 51 percent of
the company's equity will be sold to strategic investors with
experience and financing capacity, while 49 percent will be
retained by the Government of Nigeria (GON). All physical
assets of the NGC will be transferred to the NGTC. Gas Sale

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and Purchase Agreements and Gas Transfer Agreements between
NGC and any third party will be transferred to the NGMC.

Pricing Provisions
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6. (U) The bill gives the GRC power to regulate prices for
monopoly services and services not sufficiently competitive
to protect the interests of consumers. Prices for using the
transportation and distribution networks will be regulated.
End-user prices for captive consumers will also be regulated
until competition is introduced and consumers have a choice
of supplier. The GRC is charged with monitoring the
downstream gas sector to determine its readiness for
competition. The GRC is also empowered to prevent and/or
curtail anti-competitive practices by its licensees.


7. (U) The GRC is charged with setting up a transitional
pricing regime that will ensure full cost recovery for
participants in the gas chain while avoiding a price shock
when the subsidies inherent in the current pricing
arrangements are removed. The regime will also eliminate
cross subsidies prevailing in the sector and between gas and
other sectors such as power and steel.

Fast Action on Bill Required for New Projects
--------------


8. (U) Group Managing Director of Nigerian National
Petroleum Company (NNPC) Funsho Kupolokun testified at both
hearings, explaining the purpose and content of the
legislation. Drafting of the bill was begun when Kupolokun
was Special Advisor to the President for Energy. NNPC took
three years to prepare the bill, holding three stakeholders
forums to get input from industry and interested others.
Consultants from to the World Bank, McKenzie and Wood and
Nigerian companies all worked on the draft.


9. (U) The legislation is necessary because the existing
legal and administrative framework was created primarily for
oil. There are insufficient legislative and regulatory
provisions for activities in the gas sector. Existing
contractual arrangements are opaque. For example, there are
currently no commercial terms for gas discovered in
Production Sharing Contract concession areas, Kupolokun
explained.


10. (U) Nigeria's gas reserves have risen steadily to
approximately 184 trillion cubic feet (TCF),despite the fact
that there has been no direct exploration for gas, Kupolokun
commented. Based on these numbers, Nigeria has the 7th
largest gas reserves in the world. As with Nigeria's Bonny
light crude oil, Nigeria's natural gas is high quality.


11. (U) Since the bill was introduced in 2003, there has
been an explosion of demand for Nigeria's natural gas,
Kupolokun said. Demand is expected to reach 15 bcf/d by
2010, with domestic demand accounting for about 30 percent of
this volume. There are four projects, for which final
investment decisions (FIDs) are scheduled in 2007, which will
use Nigeria's natural gas:

-- Olakola (OK) Liquefied Natural Gas (LNG): This project
will have a total of 4 LNG trains producing 5.5 million
tons/year. The final investment decision (FID) will be taken
in 2007. This project will boost Nigeria's LNG capacity by
22 million tons per year from 2011. 25 TCF of Nigeria's
natural gas reserves have been allocated to this project.

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-- Brass LNG: This project will have two LNG trains each
with 5 million tons per year capacity. Final investment
decision is targeted for 2007. Brass LNG will add 10 million
tons per year to global LNG supplies. 10 TCF of Nigeria's
natural gas reserves have been allocated to this project.

-- NLNG Train 7: 10 TCF of Nigeria's natural gas reserves
have been allocated to this project.

-- Equatorial Guinea LNG: 5 TCF of Nigeria's natural gas
reserves have been allocated to this project


12. (U) Kupolokun urged the committee to pass the bill as
quickly as possible because these FIDs will result in the
allocation of 50 trillion cubic feet out of the total 184
trillion cubic feet of reserves available, and the
legislation is needed to properly capture the economic value
of the gas for the country. Nigeria intends to collect as
much revenue from natural gas as from oil by 2010. The bill
will help Nigeria reach other goals, including ending flaring
and addressing related environmental issues, extending gas
penetration to the domestic market so as to facilitate the
growth of the power sector and other industries, creating a
level playing field between oil producers and other parties
involved in the domestic gas business and increasing private
sector participation, Kupolokun said.


13. (U) According to Kupolokun, historical and current
prices for natural gas in Nigeria are extremely low.
Domestic gas prices are below the cost of supply, which has
resulted to an annual subsidy to the power sector of USD
50-80 million, created a disincentive to investment in gas
gathering infrastructure; and distorted fiscal arrangements
for the power sector. According to Kupolokun, price setting
is opaque and discretionary; there is no basis for setting
tariffs and wholesale prices.

House Hearings Focus on Independence of Commission
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14. (U) Private attorneys and the Bureau of Public
Enterprise testified that the bill does not make the GRC
sufficiently independent of the Minister of Energy and
Petroleum. The Minister has the power to publish
regulations, to be consulted with respect to the issuance or
revocation of licenses, and to "ensure the independence of
the Commission." The Department of Petroleum Resources
expressed concern that the bill does not sufficiently
distinguish its powers to regulate the technical aspects of
downstream gas from the powers of the GRC to regulate the
commercial aspects of downstream gas. Companies with
existing contracts to transport and market gas expressed
concern about whether their existing 20 year contracts with
Nigerian Gas Corporation, a subsidiary of NNPC, would be
honored. The Bureau of Public Enterprises, the arm of the
Office of the President that is leading the privatization of
state-owned companies, pointed out that entities named in the
legislation, such as the National Gas Marketing Company and
the National Gas Transport Company, would be privatized and
thus should not be owned by NNPC as provided in the bill.
BPE also noted that other entities named in the bill, such as
the Petroleum Inspection Commission, have not yet come into
existence. Others questioned the need for the Nigerian Gas
Marketing Commission because gas can be marketed by the
companies that produce it.


15. (U) The Oil Producers Trade Section (OPTS) of the Lagos

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State Chamber of Commerce, which has as members many of the
international oil companies (IOCs),urged the committee to
minimize bureaucracy, avoid overlap with upstream sector
regulation, ensure clarity of definitions, provide for the
right to a hearing, ensure respect for contracts, set prices
so investors can recoup their investment, assure a level
playing field for new projects, respect existing commitments,
and assure participation by private companies in the
unbundling of NGC. The OPTS representative indicated that he
would submit proposed amendments to the bill for the
committee's consideration.


16. (SBU) The Special Advisor to the House Committee on
Gas, told Pol-Econ Chief that following the hearing, the
Committee adopted amendments assuring the independence of the
GRC. Regulations, as recommended by the GRC, will be
promulgated by the Minister. Fines and other penalties will
be retained by the Commission so as to assure its greater
independence. The number of members on the GRC was increased
to nine to guarantee membership from all six geo-political
zones. Tax benefits granted a project will not automatically
be extended to an expansion of the project.

Senate Hears Plea for 50 Percent Derivation
--------------


17. (U) According to press reports, communities in the
Niger Delta asked the Senate Committee to use the bill as a
vehicle to increase to 50 percent the revenue from gas
production shared with the communities. In addition, the
communities asked that five of the GRC Commissioners come
from the gas producing states, and that the headquarters of
the GCR be sited in one of the nine gas producing states.
BPE testified that the GCR should be independent of the
Ministry of Petroleum Resources. According to press reports,
Senators indicated that the failure of Minister of Petroleum
Resources Edmund Daukoru's failure to appear to defend the
provisions of the bill vesting power in his Ministry would
result in the adoption of the BPE's recommendations.

Changes to Fiscal Regime, PSC Gas Contract Planned
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18. (U) In his testimony, Kupolokun also discussed planned
changes to the current fiscal regime for natural gas.
Reforms are needed to ensure that Nigeria receives a share of
the economic rents generated from natural gas. The GON's
upstream government take is negative at the price of USD0.50
per metric cubic foot of gas, while other countries that
charge USD1.00 per mcf have positive government take. The
new fiscal regime, which will apply to both joint
venture/sole risk (JV/SR) concessions and to production
sharing contract (PSC) concessions alike. The new fiscal
regime is intended to have a neutral impact; it will neither
stimulate development of uneconomic gas projects nor deter
profitable projects.


19. (U) The new regime is based on a sliding scale
principle that allows the GON and the investor to share in
the upside and downside of the project, Kupolokun claimed.
The least profitable gas projects will be liable only to the
minimum gas profits tax while the most profitable projects
will be liable to gas profits tax at an effective 75 percent
rate (a 20 percent minimum rate plus 55 percent maximum
incremental rate.)


20. (U) The new fiscal regime is intended to be
automatically responsive to varying project costs and price

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conditions; progressive so that the government take increases
proportionately with project profitability; and simple, so as
to avoid multiple taxes and complex allowances that either
create loopholes or provide too much incentive. The regime
is focused on profit, not revenue or costs.


21. (U) Kupolokun also said that a gas development
agreement for Production Sharing Contracts will be drafted.
Because the PSCs are for oil exploration and development, gas
discoveries are incidental to oil operations. A separate
agreement is being developed to establish terms for the
commercial development of the gas, taking into account that
exploration costs are recovered from oil revenue, and
unsuccessful oil exploration is considered a sunk cost. The
NNPC retains ownership of PSC gas.
BROWNE