* Seyi Owate
Operational and transactional activities in the Oil and Gas industry in Nigeria span the Upstream, Midstream and Downstream sectors. While the upstream and downstream markets have witnessed a lot of activity, the midstream market on the other hand has attracted the least attention from business owners.
The Upstream sector formally referred to as the Exploration and Production (E & P) sector involves the exploration and production operations of the oil and gas industry. The sector encompasses activities related to the search for, recovery and production of crude oil and natural gas. Companies in the upstream sector search for potential underground or underwater crude oil and natural gas fields, drilling exploratory wells, and subsequently drilling and operating the wells to recover and bring the crude oil or raw natural gas to the surface. The sector is further subdivided into offshore and onshore upstream. Offshore operations involve upstream operations in the sea while onshore involves drilling and exploration operations on land.
The Downstream sector of the oil industry on the other hand involves the processing of the natural or raw oil and gas products to manufacture derivatives therefrom and the handling of all transportation and marketing of the finished products to the final consumers or end users.
As implied by its name, the midstream sector denotes the operational activities which connect the upstream operators to the downstream markets. Activities within this sector involve the storage, transportation, and marketing (wholesale) of crude oil and natural gas products to those who process or refine the products for onward supply to and use by the consuming market. Transport Systems (often by pipelines, rails, oil tankers or trucks) are used to move crude oil from extraction sites to refineries and afterward delivered to the downstream distributors. Every barrel of the various energy commodities that come out of the ground each has its own set of midstream assets designed to maximize its value.
The Nigerian Narrative
Many oil and gas companies in Nigeria are considered integrated, being companies combining the activities of the upstream, midstream and downstream sectors in their operations.Whilst the operational activities in these three sectors of the oil and gas industry may differ, the reality of the Nigerian practice is that there is a fusion of these activities in the operations of the oil and gas companies in Nigeria. This practice has in fact enjoyed the subtle recognition of the Nigerian Supreme Court in the Case of SPDC Nigeria Limited v. Isaiah (2001) 11 NWLR (Pt. 728)168 @ 178-180, where Uthman Mohammed, JSC (as he then was), in defining what constitutes oil mining and prospecting operations held that “… the most important aspect of oil mining operation is the construction of oil pipeline for the evacuation of the crude oil to the oil terminal through an oil pipeline…for the foregoing reasons the construction, operation and maintenance of an oil pipeline by a holder of oil prospecting licence is an act pertaining to mining operations.” This position of the Supreme Court gives credence to the notion that the holder of an oil mining/prospecting licence (Upstream operation) may also be entitled to operate the equipment for transporting the oil and gas products (Midstream operations). More recently, the decision in SPDC’s case has been applied by the Court of Appeal in Mobil Producing (Nig.) Unlimited v Suffolk Petroleum Services Ltd (2017) LPELR-41734 9CA), Pp. 15-16, paras B-D.
Companies with exclusive midstream operations are not prevalent in the Nigerian oil and gas industry unlike the United States of America or Canada with large privately-owned storage facilities and pipelines managed by companies such as Oasis Midstream Partners, Hess Midstream and Magellan Midstream Partners, to mention a few. Like many of the prominent oil companies operating in Nigeria, transportation and storage of crude oil and natural gas are integrated with the upstream production business in most European oil companies. Shell, for example, reports transportation in line with production costs in their financial reports made annually. The 2019 Sustainability Report of Royal Dutch Shell Plc as a case in question, covered as part of its activities, a special report on its integrated gas project which included a combination of all their operations in the Liquefied Natural Gas sector. The report, at page 17, described Shell’s integrated gas operation as one which “… manages LNG activities and the conversion of natural gas into GTL fuels and other products. It includes natural gas exploration and extraction, and the operation of upstream and midstream infrastructure necessary to deliver gas to the market….”
In most European and Middle East countries, the midstream facilities, and in particular, the majority of the oil and gas pipelines are controlled by the federal or state (regional) governments of the pipeline regions. This ownership and control have deeply contributed to the absence or near absence of an actively functional midstream sector independent of or divested from the upstream operations (oil production).
Light in the Tunnel?
Recently, the Nigerian midstream market has experienced a surge in private sector participation in the midstream sector, independent of the large upstream and downstream operators. The employment and marginal investment rates in the sector have increased unlike the decrease seen in the upstream sector. However, operations of the major oil pipelines are still owned and controlled by either government through the NNPC or by the major oil companies. Nigeria currently has a network of pipelines totaling 5000 kilometres in length with 4315km being multi-product pipelines. Sadly, majority of these pipelines have mostly fallen into disuse.
The Executive Secretary of the Petroleum Equalization Fund (PEF) – Ahmed Bobboi stated during a panel session at the Nigeria International Petroleum Summit 2020 in Abuja that the Board of the Fund, in Consultation with the Nigeria Railway Corporation and its stakeholders plans to go into rail equalization, to ensure the usage of rail as a means of transporting petroleum products. He emphasized that the Board was working towards reducing the number of tankers plying the roads daily to minimize the havoc they cause. A question arises as to whether or not the involvement of the government in midstream operations will not be a threat to the commercial viability of the sector by stifling robust private sector interests.
Regulatory Framework for Operation in the Midstream SectorIt is important to state that the midstream sector is very crucial, not only to support the infrastructure needs of the oil and gas industry but also for investors. However, there is a need to understand the regulatory framework and possible challenges inherent in the commencement and operation of a venture in this sector.
The Oil and Gas sector in Nigeria is regulated by both the Ministry of Petroleum Resources, Nigeria National Petroleum Corporation (NNPC) and Department of Petroleum Resources (DPR). The Department of Petroleum Resources is charged with the responsibility of supervising all petroleum industry operations being carried out under licenses in the country to ensure compliance with the applicable laws and the terms of the licenses. They enforce safety and environmental regulations, ensuring that operations carried out conform to national and international industry standards. The processing of all applications for licenses are done by the DPR to ensure compliance with laid-down guidelines before making recommendations to the Minister of Petroleum Resources. They also ensure timely and adequate payment of all rents and royalties as and when due. All of the above functions of the DPR are contained on its website https://www.dpr.gov.ng/functions-of-dpr/.
As part of the regulatory function of the DPR, the Department bears the onerous responsibility of ensuring the safety of storage facilities managed by operators. They inspect facilities used for the storage, and distribution of petroleum products before grant of operational licenses. It is worth noting that storage, marketing and distribution of petroleum products play a vital role in the oil and gas industry. Petroleum products must be effectively and safely stored to prevent spills and leaks due to their combustible nature. Operators are therefore strictly required to ensure compliance with the statutory requirements underpinning DPR’s mandate and the guidelines issued by the Department from time to time.
The storage of petroleum products for instance is regulated by the Petroleum Regulations contained in Section 9 of the Petroleum Act, Laws of the Federation of Nigeria (LFN) 2004. This Regulation emphasizes that licenses and permits must be obtained by any operator for premises in which petroleum products are to be stored and makes provision for the construction, maintenance and operation of storage sheds. The regulation stipulates safety guidelines for the operation of these storage facilities.
A key issue relating to DPR’s mandate to ensure the safety of storage facilities is the likely exposure of operators to liabilities for injuries occasioned by their failure to comply with safety guidelines and the consequence of such failures being the liability to pay huge compensation to victims for damage caused by a spill, leakage, fire or other hazards as provided in section 11(5) of the Oil Pipelines Act. Sub-section (5)(c) of the same section provides that operators are also liable to pay compensation for damages occasioned by third parties operating on the operator’s pipeline and storage facilities. In Agip (Nig) Plc v. Ossai & Ors (2018) LPELR-44712 (CA), the Court held the holder of an oil mining licence liable to pay compensation for damages caused to a community in the Niger Delta region from a fire that lasted over two months, causing severe damages to farmlands and polluting the environment. Investors seeking to operate midstream businesses, especially the operation of storage facilities must therefore be conscious of this onerous liability.
The Oil Pipelines Act 1956 regulates the construction and operation of oil and gas pipeline facilities in Nigeria. Detailed guidelines for the design, construction and operation of oil and gas pipelines are set out in the Guidelines and Procedure for the Construction, Operation and Maintenance of Oil and Gas pipelines and Their Ancillary Facilities issued by DPR. The Minister of Petroleum Resources has the power to grant permits to survey routes for gas pipelines, and grant licenses for the construction, maintenance and operation of gas pipelines. The Oil Pipelines Act 1956 (Pipeline Act) and the DPR Guidelines and Procedure for the Construction, Operation and Maintenance of Oil and Gas Pipelines and their Ancillary Facilities (DPR Pipelines Guidelines) are the key legislations governing the construction, operation and maintenance of pipelines in Nigeria.
With regard to licenses for the transportation of Petroleum Products (by means other than pipelines), the Petroleum Regulations under Section 9 of the Petroleum Act, makes ample provisions regulating the distribution of Petroleum Products.
Obtaining Licence to Operate a Midstream Business
The issuance of midstream licenses is done by the Minister through the Department of Petroleum Resources (DPR). Any company looking to obtain a midstream license applies to the Department for guidelines and requirements essential to obtain such license. The approvals required to undertake the construction of a pipeline include:
- the Permit to Survey Pipeline Route
- the License to Construct, and
- Approval to Operate a Pipeline
Section 4 of the Oil Pipelines Act requires the proposed route of the pipeline to be surveyed before an oil pipeline license is granted. In obtaining an oil pipeline license, the initial step is to make an application to the DPR for a permit to survey the route of the pipeline. An oil pipeline license is referred to as a license to construct and an approval to operate a pipeline (Regulation 1.3.0 of the Guidelines and Procedure for the Construction, Operation and Maintenance of Oil and Gas Pipelines and Their Ancillary Facilities). Before the construction or commencement of operations of any pipeline, the Department requires a holder of a ‘Permit of Survey Pipeline Route’ to apply for a license. However, such application must be done within the validity of the permit.
The license to operate pipelines grants a licensee the right to enter and take possession of any land/or route (subject to payment of compensation to the owners of such land) specified in the license to construct, maintain and operate such pipeline. With regard to storage of petroleum products, a license to store is only issued by the Minister of Petroleum Resources.
The maximum tenure of a pipeline license is 20 years as provided under Section 17(2) of the Oil Pipelines Act. The Minister shall have the right to purchase the pipeline and its ancillary installations when this license expires. Where a Minister does not exercise his right to purchase, a licensee may remove the pipeline and any ancillary installation.
Application for Gas Storage Licence
The pre-required documents and procedure are contained in Sections I, II and III of the Procedure and Conditions to be Fulfilled Before the Grant of Approval and License for the Construction/Installation, Modification, Relocation and Operation of Liquefied Petroleum Gas (LNG) Facilities 2018. Under section I (1.1), some of the required documents include:
- A copy of application letter from the prospective applicant
- A copy of Certificate of Incorporation of the applicant’s company
- A copy of current Tax Clearance Certificate
- A survey Plan of the proposed plot of land
- An application fee, as may be determined by the Department of Petroleum Resources, made payable to “Federal Government of Nigeria – Treasury Single Account (TSA)” on submission of application.
Upon receipt of the application, an inspection is conducted by DPR officers in line with Section 2.2 (Procedure for Site Inspection) to ascertain the sustainability of the site. The validity period of site suitability approval granted is six (6) months.
Challenges with Regulation
The midstream sector and the oil and gas industry in general are currently fraught with a high rate of non-compliance with the provisions of the applicable laws and regulations and the regulatory bodies have not been diligent in their enforcement responsibilities. An explanation for the slipshod regulatory regime in the oil and gas sector generally could be the role played by the government as both a regulator and a player in the industry. The NNPC is a major player in the Nigerian Oil and Gas Industry and is involved in Joint Venture Agreements (JVA) with the major International oil companies, sometimes as the majority shareholder. A government as a partner in a business that it regulates is not an uncommon phenomenon; however, unless robust, independent regulatory and oversight mechanisms are in place, conflicts of interests and breaches of the law would almost inevitably occur.
A number of questions are therefore necessary to ponder upon – will the establishment of an independent body, separate and autonomous from the NNPC and the DPR be the solution? Should the industry be allowed to self-regulate? Should the government demutualize its investment holdings with the various oil and gas companies and focus solely on the role of a non-partisan regulator? It is hoped that this write-up would also stimulate more thoughts on possible reforms in the sector in addition to the ongoing efforts to reform the entire petroleum industry.
Technology and Midstream Operations
It is observed that a lot of midstream companies now pay attention to midstream automation for a centralized workflow. The use of technology makes way for security and efficiency in operations management. This can be no less for operations in the oil and gas industry. Technology in midstream operations also known as midstream automation is the pathway to a more efficient future for midstream companies. The midstream sector builds miles of new pipelines to accommodate the increasing need to transport petroleum products from the upstream to the downstream sector by providing automation solutions for pipelines and various transportation methods.
Although with the emergence of automation, there are growing legal challenges that have also sprung up, thus occasioning some legal conundrums. These challenges notwithstanding, it is important for operators to update their operational knowledge of the changing technological advancements in the sector and be prepared to adapt. Adaptation may also mean investing in research and development in areas touching on the possible legal changes that may also accompany the technological innovation within the sector.
The business of transporting oil and gas products from site to facility is a serious one which requires good control and a great organizational process allowing for quick response to the fluctuating demands and flexibility of the market. It is the middleman connecting the various operational stages in the oil and gas industry that make it possible for petroleum products to move from the wellhead to its final destination.
The midstream business is an economical option with a potential for increased profitability through costs reduction and increasing operational efficiencies. However, it is essential for midstream companies to stay ahead of evolving market dynamics and policy trends to ensure the allocation of infrastructure, time and capital where they are most needed. Given that the demand and supply of petroleum products determine the infrastructure needed, it becomes imperative that midstream companies have a well-detailed perspective of the oil and gas value chain.
This sector is often overlooked by investors, but it is less affected by commodity prices and essentially less risky than pure exploration and production companies. The midstream business should be an investor’s delight for anyone who truly appreciates the dynamics of the oil market in Nigeria. It is a gold valley in the oil sector waiting to be plowed while ensuring that the legal and regulatory requirements are complied with.
*Seyi Owate is an Associate in the commercial law practice of the Firm.
DISCLAIMER: This article is only intended as a general informative exposition on the subject matter. We do not, by the publication of this article create a client/attorney relationship between readers/viewers and Opal Law, nor does it serve as legal advice. We are available to provide legal advice and service on the readers’ specific circumstances in relation to the subject of the publication when they arise.