Legal experts and others have met in Lagos to discuss how to make the power sector work by strengthening its legal and regulatory framework. To them, for Nigeria to meet its energy needs, power must be on the Concurrent Legislative List to free it from the Federal Government’s exclusive right. JOSEPH JIBUEZE was there.
Nigeria’s energy requirements are enormous. The country’s energy output is far below the needs of its population, according to a professor of Energy Law, Yinka Omorogbe.
“There is still a long way to go,” she said.
Highlighting the gap, Omorogbe said South Africa, with a population of 55 million, has an installed electricity capacity of 44,175 megawatts.
Brazil, with a population of 211million, generates 137,000 megawatts of electricity, she said.
But, Nigeria, with a population of over 150 million, has a power generation capacity of about 7,000 megawatts. To Omorogbe, that is far below what Nigeria needs.
“Surely, Nigeria, with a population of about 170 million, must need at least 100,000 megawatts, which is, in fact, the figure given by the Energy Commission of Nigeria,” she said.
Omorogbe was one of the speakers at the second Lawyers in oil and gas conference, which was held last week at the Eko Hotels and Suites in Victoria Island, Lagos for two days. Its theme was: Gas to power: The role of the 21st century lawyer.
Decentralise sector control
Omorogbe, who is the Edo State Attorney-General and Commissioner for Justice, said the regulatory framework for the energy sector needs reform.
“If you build on bad laws, you’ll have a faulty building,” she said.
According to her, the energy industry must be considered from the perspective of how much it impact it has on the quality of lives, emphasising that petroleum does not equal energy.
“Until we fully comprehend that fact, the energy sector in Nigeria – the downstream, electricity, modern energy for the rural poor – will continue to be epileptic and fraught by problems,” she said.
She said the regulatory framework was not treated as a whole, nor is it driven by Nigeria’s energy needs.
The framework, she said, is driven by the Ministries of Petroleum and Works, Power and Housing, and does not cover renewables (such as wind, wave and tidal energy, geothermal energy, hydropower, biomass).
Omorogbe said while the Petroleum Industry Governance Bill (PIGB) awaits assent, the Petroleum Act of 1969 remains the energy industry’s primary law.
“If the other laws that will, together with the PIGB, change the legal landscape of petroleum in Nigeria are not passed, there will be no real structural change,” she said.
Omorogbe, an energy consultant and former research professor at the Nigerian Institute of Advanced Legal Studies (NIALS), called for more reforms in the gas sector, especially as electricity industry runs on natural gas.
“How can there be light when Nigeria’s electricity sector is premised on natural gas?” she wondered, adding that natural gas suffers poor infrastructure and “insufficient and ineffective legal framework.”
“The natural gas legal/administrative framework and infrastructure is defective. In the absence of industry reform, the problem of natural gas will never be resolved. It cannot be separated from the reform of the entire industry,” Omorogbe said.
The professor of law regretted that for nearly 50 years, Nigeria has largely been operating on the same legal framework, such as the Nigerian National Petroleum Act of 1969, Petroleum Profits Tax Act of 1959 and other laws on industry subsectors. “We still have a long way to go,” she said.
She backed calls to get more states more involved, saying there was the need to decentralise federal control of the sector.
“Energy matters should be in the concurrent list. The centre has always wanted to control as much as possible. If energy matters are in the concurrent list, we’ll be a lot better.
“It’s the states and local governments that wear the shoes. Considering that energy is a critical component of development, continued energy starvation cannot bode well. Why then are we planning to fail?” she said.
Tackling transmission, environmental challenges
Lagos State Law Reform Commission, Prof Gbolahan Elias (SAN) Chairman, decried what he called “wrong policy foundations” which are evident in the lack of an integrated energy sector master plan, and absence of a unified regulator.
In his paper entitled: Untangling the challenges of generation and transmission for sustainable power, he said there was “no further government investment” in generation and transmission, even as he accused the government of indecision, prevarication, and high-handedness.
Discussing the challenges of power generation and transmission, he said the government was slow in granting partial risk, sovereign and other guarantees; slow to grant liquidity support and funding; and slow to grant “put and call options for termination”.
Other challenges, he said, are inadequate gas; arrears of terminal compensation payments; prices of power and gas not being cost-reflective; poor enforcement machinery for debtor-consumers and power thieves; weak infrastructure; weak borrowing power; lack of private sector funding and discipline; premature withdrawal of capital and lack of true technical partners.
On the way out, Elias called for more government credit support. He urged the government to spend on buying out equity investors in power generation and on transmission infrastructure, and called for law reform on pricing, private sector participation and sanctions.
A partner at Aelex, a commercial and dispute resolution law firm, Mr Soji Awogbade, said Nigeria consumes 24.57 billion kilowatt hour (kWh) of energy per year, adding that while fossil fuels contribute over 80 per cent of the energy consumed, renewable energy sources contribute only 0.2 per cent.
Highlighting environmental challenges faced by Nigeria, he said there were 9,343 oil spills between 2006 and 2015, with 5,000 spill sites in the same period.
According to him, 400,000 tons of oil spilled into creeks, with 1,150 oil spill sites abandoned by various oil companies within the Niger-Delta.
He recalled that in 2010, Nigeria was named the “World oil pollution capital” by the BBC, while in January alone, Shell reported 10 oil spills, with another five reported in February.
There are no fewer than 178 gas flare sites in the country, he said.
The effects, he said, are blood disorders, cataracts, problems with the central nervous system, lung cancer, kidney effects, loss of livelihood for communities, arrested development, loss of professions and vocations, malnutrition and stunted growth in children.
Awogbade said there was the need to strike a balance, by, among others, improving coordination between different government agencies towards better planning, monitoring, evaluation and reporting of environmental issues.
Other required synergies and solutions, he said, are as follows: “Develop partnerships between national and international development partners towards producing statistics for development indicators and improving statistical capacity and other reporting issues; develop strong partnerships between government and the private sector, civil society and academic institutions;
“Promote environmental awareness among operators and the public; promote gas utilisation; promote use of clean fuels, through the introduction of compressed natural gas for vehicles as a substitute for petrol, and increase tax incentives for the production and utilisation of cleaner fuels.”
Awogbade called for more public participation in law and policy development.
He advocated the adoption of international best practices, enforcement of flare prohibitions and award of penalties for violations.
He suggested the revocation of licenses of operators who fail to provide environmental safety measures, noting that the Associated Gas Reinjection Act provides for revocation of Oil Mining License for flaring gas without permission.
“Tackle facility sabotage and improve funding to agencies,” he added.
Need for tax incentives
A partner at the law firm of Olaniwun Ajayi, Mr Edem Andah, who spoke on Gas supply for power generation through taxation: necessary action on incentives and taxation, said a gas to power (GTP) value chain development must address gas supply, tariff, generation, distribution and transmission constraints.
“Clarity and certainty in policy and the taxation terms are a pre-requisite for an efficient and sustained development of the value chain,” he said.
According to him, natural gas is the cheapest available fuel source when compared with alternatives such as petrol, diesel, Low Pour Fuel Oil (LPFO) and Liquefied Liquefied Petroleum Gas (LPG).
Andah believes that a lack of a cost reflective tariff has a negative impact across the power chain, while the non-implementation of the gas supply obligations under the various industry gas supply agreements with the successor Gencos was a also a constraint.
“The current regulatory framework provides very little for exploitation of gas resources. Existing policy instruments like the Gas Master Plan and the National Gas Policy do not adequately provide a clear legal framework required to attract investment in the gas sector,” he said.
Andah highlighted the tax provisions in Petroleum Profit Tax Act, Companies Income Tax, the National Petroleum Fiscal Policy, among others.
Some of the incentives, he said, are VAT exemption for plant, machinery and equipment purchased for utilisation of gas in down-stream petroleum operations; and custom duties exemption on machinery, equipment or spare part imported into Nigeria by an industrial establishment engaged in the exploration, processing or power generation through the utilisation of Nigerian gas.
Andah urged policymakers to continually examine the energy mix in light of emerging trends.
He said they should amend and develop regulations to support new gas to power projects, and look for opportunities for regional cooperation.
He added: “Incentives are required for the entire value chain; i.e. gas supply to GTP, power generation, transmission, and distribution. Be responsive to market demands in terms of tariffs and pricing. Tax terms must be certain and clear and avoid distortionary measures.”
Andah said global gas consumption is projected to grow by 33 percent by 2025, adding that there would be more investment in GTP options to displace high cost and environmentally-unfriendly oil-fired peaking generators.
“Brazil, Ghana, Chile, Egypt, Indonesia, and South Africa are all examples of countries that are actively exploring GTP options,” he said.
He called for consistency by the government, saying: “Tariffing must be smart and pricing must be flexible and appropriate. Policy somersaults must be avoided and dispute resolution should be prompt.”
Need for effective dispute resolution mechanisms
Nigerian Bar Association Section on Business Law pioneer chairman, George Etomi, gave an overview of legal issues arising from power sector privatisation.
He highlighted issues facing the electricity market, such as obsolete infrastructure, absence of specialised courts, bid documents mismatch, labour issues, among others.
On the judiciary’s role, Etomi said the courts must ensure sanctity of private contracts, design fast-track procedure for energy-related cases, and create special courts with requisite expertise to effectively resolve disputes.
Wole Olanipekun & Co Managing Partner, Mr Olabode Olanipekun, said disputes in the energy sector were inevitable and can be resolved quickly through arbitration.
He spoke on: Suitability of arbitration as a dispute resolution mechanism in energy disputes.
Olanipekun said Nigeria, being the largest producer of crude oil in the region and having the ninth largest gas reserves in the world, is a virile hub of energy transactions and activities, adding that the power deficit also makes the country a prime spot for investment in the power sector.
“Thus, with these foreign direct investments and participatory interest of International Oil Companies (IOCs) in the Nigerian energy space, and no doubt, with globally falling crude prices, the market for energy disputes is wide.
“Yet, the investor, before he deploys his business assets (which in an oil and gas activity, whether upstream, midstream or downstream, is usually a lot), wants to be assured that when disputes arise, the systems for resolution and quick, responsive and reliable,” he said.
Olanipekun called for the passage of the Arbitration and Conciliation Bill which is currently before the National Assembly.
The Arbitration and Conciliation Act (ACA), he said, dates back to 1988, a period of 30 years, while adjudicatory processes have moved on, and the sphere of international commercial arbitration has developed globally.
“Hence, the ACA provision that subjects interim awards, which are for the purpose of preserving the res, to the overriding veto of the court process, defeats the objective of making Nigeria a prime arbitration spot. This is especially compounded when we consider the unhurried nature of the judicial system,” he said.
Amending the law, he said, would help reduce the demand to take arbitral hearings abroad.
“The benefits of having the Bill before the House of Representative passed cannot be overstated.
“The practice often with IOC‘s is to, in drafting their farm-out agreements, or Power Purchase Agreements or even Joint Ventures and Production Sharing Contracts, to situate the arbitral proceedings in London, Singapore or anywhere else but Nigeria, even when the arbitrator(s) and lawyers on both sides are Nigerians with their practice in Nigeria.
“Essentially, the country loses millions of dollars in revenue every year from arbitration which causes of action are generated within the country. We cannot, however, bring parties back by any dint of force, the best we can do is to bring our laws in consonance with global best practices,” Olanipekun said.
The lawyer believes that having globally compliant laws would make Nigeria more investor-friendly.
“With particular respect to energy industry, which unarguably forms the main stay of the country‘s economy, the sophistication of the framework for the resolution of disputes must be styled to measure up with the global best practices and requirements.
“This will go a long way in not only making the country an investor friendly destination, it equally promises to impact positively on the economy and by direct implication, the Gross Domestic Product (GDP) of the nation.
“This has become more imperative in light of the incumbent administration‘s efforts at enhancing ease of doing business within the country,” Olanipekun added.
Respect agreements, strictly enforce laws
Gas Planning and Integration Manager at the Shell Petroleum Development Company of Nigeria Limited (SPDC), Mr. Vincent Chukwueke, noted that commercial agreements play critical roles in sustaining the gas value chain.
“Lack of vested (effective) commercial agreements are limiting growth of the sector,” he said.
For instance, he said gas sales agreements lack payment security; sovereign payment guarantees are not honoured; partial risk payments guarantees are not available; bank guarantees have non-standard terms; while letters of credit Rrquire cash-backing.
He regretted that terms of PPAs, transmission agreements, Grid Ancillary Services Agreements, Asset Sale Agreements, and Engineering, Procurement and Construction Agreements are usually not honoured.
On the way forward, he said continuous development of local commercial expertise in the industry was imperative.
“Contracts must be drafted to reflect Nigeria’s peculiar risks and operating challenges. Entrench respect for the sanctity of contracts on all sides, especially government. Have legal and commercial paths for enforcement of contract violations.
“There must be legal protection for investors and investments. Operation of free market system (business entry and exit) should be respected. Genuine consultation with industry is required for legislation/regulations, market rules.
“The government must honour its commitments and limit role to be enabler of commercial agreements and deals. Good faith in negotiation of sustainable deals is required by all,” Chukwueke said.
According to him, there exists a huge power supply/demand gap that has to be closed to spur further economic development.
He said the various initiatives of government should continually be fine-tuned to provide bankability and stability to the chain.
Company Secretary/Director, Legal Services Abuja Electricity Distribution PLC, Mrs. Olajumoke Delano, called for strict enforcement of extant laws on energy theft and vandalism in order to deter people from stealing energy and vandalising electricity installations.
“This requires collaborative efforts with the law enforcement agencies,” she said.
She also called for an end to litigations to ensure that major commercial customers pay their outstanding indebtedness to the Discos.
According to her, huge debt owed by some major customers “is really weighing down the Discos, preventing them from meeting their obligations across the value chain.”
Senior Attorney at Mobil Producing Nigeria Ultd, an ExxonMobil subsidiary, Mrs Busola Odusanya, called for the passage of the PIGB, which she said addresses the problem of multiplicity of regulators by providing for a one-stop shop. Removing regulatory bottlenecks, she said, would make it easier to attract investors.
Odusanya also spoke of the need to reduce the contracting and tender cycle time, which she said is usually “very long and protracted”.
“The reformatory process seems to be unending, and investors are jittery. It is a huge disincentive to investment,” she said.
Gas framework needed
A lawyer, Raqeebah Oloko, said Nigeria needs a strong legal framework for the gas sub-sector. To her, PIGB does not adequately address the need.
“The PIGB doesn’t provide much on transforming gas to power. There is need for a legal framework for the sector. A lot of investors want a solid framework in place to guide their investment,” she said.
Oloko, Managing Director/Chief Executive Officer of Bromshy Communications, which organised the conference, said the time has come for government to limit its control of the sector.
Fully privatising the sector, she believes, would result in more investments, remove bottlenecks, and end corruption.
She also wants central control of gas transmission removed and decentralised, adding that it would encourage healthy competition, which she thinks would benefit Nigerians and the economy in the long run.
On the essence of the conference, Oloko said: “We felt that one person cannot make an impact. We had to come together. That’s why we brought lawyers in oil and gas together to discuss issues affecting the industry and proffer solutions to them from the perspectives of the legal and regulatory frameworks.
“The buck still stops on our desks. We sign the contracts. We advise clients on whether or not to invest in the sector. When there are disputes, we go to court or arbitration. So, we felt we needed to come together to brainstorm and contribute to the sector. That’s why we started this project,” she said.
Oloko said the theme was chosen to highlight the need to transform gas to power as a means of solving Nigeria’s energy challenge.