A Review of the Nigerian Gas Transportation Network Code

A. Introduction

The Federal
Government of Nigeria recently released to the public, the Nigerian Gas
Transportation Network Code (the “Code”) as a common set of rules that will
govern fair and transparent gas shipper –transporter relationship in Nigeria’s
open access gas transmission system. The Code comprises of legal and
contractual frameworks for gas transportation and it seeks to migrate parties
under existing Gas Sale, Aggregation and Transportation Agreements to the Code.
The objectives of the Code include:

Ø 
Ensuring non-discriminatory
access to pipeline system;

Ø 
Guaranteeing secure,
available, reliable, and safe gas transmission system;

Ø 
Ensuring cost
reflective tariffs for pipeline service;

Ø 
Supporting the
development of matured gas markets and

Ø 
Providing mechanism
for effective handling of contractual disputes.

In this briefing
note, we highlight key provisions of the Code and its impact on the
transportation of gas.

B. Highlights + Features of the Code:

C. Definitions

Before examining the
relevant provisions of the Code, it is necessary to mention that the Code
defines a few terms used in it; one of such term is the “Shipper”. The Code
defines a “Shipper” as a person other than Operator acting in its capacity as a
licensee who is for the time being bound by the Code pursuant to the Framework
Agreement.  According to paragraph 1.1.2
Section E of the Code, there are two kinds of Shipper under the Code which are:

·        
Delivery Shipper – a
Shipper delivering gas to the “System”.[1]
An example of such is a gas producing company.

·        
Offtake Shipper – a
Shipper offtaking gas from the System. An example of such is a power generating
company.

The Nigerian Gas Company Limited (NGC) and any
other pipeline system owner that is granted an Operator Licence/Authorisation
under the Code are defined as “Operator” of the System.

A point in the System may either be:

·        
An Entry Point, i.e.
a point where gas is delivered to the System; or

·        
An Exit Point, i.e. a
point where gas is offtaken from the System.

The Nigerian Gas
System

Having identified the above key terms under the
Code, the table below provides a summary of the relevant provisions of the Code
and our Remarks. Capitalized terms not defined in this briefing note shall have
the meaning ascribed to it in the Code or the NCAD.

D. Summary of Relevant Provisions of the Code and Remarks

1.  
Agreements mentioned under the Code

The Code makes mention of
certain agreements which are instrumental to the operation of the Code. Templates
for some of these agreements have been provided by the DPR in a document titled
Network Code Ancillary Documents (“NCAD”). Some of them will be
discussed further in the table of remarks below.

a.   Legacy Agreement:

This
is an agreement which the Operator has entered into, prior to the date at which
the Code became effective, for the provision of gas transportation services on
terms and conditions that may differ from those of the Code. The Operator may,
with the assent of the Department of Petroleum Resources (“DPR”), continue to provide such services on such terms and
conditions until the Legacy Agreement expires or is terminated. However, all
the Non-Code Arrangements must be migrated to the Code no later than six (6)
months from the effective date of the Code. Apart from the above provisions,
the Code also accommodates for the Legacy Agreements in the following instances:

i.    Relevant
Considerations: The Code provides that one of the “Relevant
Considerations” to be taken into contemplation by the Operator when approving
or denying an application for System Capacity, is the obligations of the
Operator under any Legacy Agreement to which the Operator is a party.[1]

ii.    System
Curtailment: Where System Curtailment measures are to be taken,
priority may be given to a System Exit/Entry Point at which gas is accepted for
delivery or made available for offtake under a Legacy Agreement, subject to
directives from the DPR.[2]

iii.   Entry
Point Daily Quantity Delivered: When calculating an \”Entry
Point Daily Quantity Delivered\” for each System Point, the quantity of gas
delivered to the System under any Legacy Agreements is also aggregated with the
quantity of gas delivered under the Code in accordance with Section H –
Paragraph 2.[3]

iv.   Exit
Point Daily Quantity Offtaken: When calculating an
\”Exit Point Daily Quantity Offtaken\” for each System Exit Point, is
the quantity of gas offtaken from the System under any Legacy Agreements is
also aggregated with the quantity of gas delivered under the Code in accordance
with Section I Paragraph 4.8[4].

v.    Non-Code
Quantity Delivered: An Entry Allocation Estimate and Entry Allocation Statement
is expected to specify the aggregate quantity of gas delivered at the System
Entry Point under any Legacy Agreements which is called the Non-Code Quantity
Delivered and it shall be a positive quantity.[5]

vi.   Non-Code
Quantity Offtaken: An Exit Allocation Estimate and Exit Allocation
Statement is expected to specify the aggregate quantity of gas offtaken at the
System Exit Point under any Legacy Agreements which is called the Non-Code
Quantity offtaken, and it shall be a positive quantity.[6]

vii.  Proposed
Non-Code Reconciliation Quantity: A Reconciliation Statement
is to be provided by a Shipper who was delivering or offtaking gas during the
relevant Reconciliation Period; and it must specify the quantity of gas
proposed to be subject to reconciliation under any Legacy Agreements (the
“Proposed Non-Code Reconciliation Quantity”) which shall be a positive
quantity.[7]

b.   Allocation Agreement:

This
is an agreement in respect of a System Point whereby deliveries or offtake of
gas to or from the System may be allocated between Shippers. It is also used to
appoint Shipper Agents as between the Shippers who will be responsible for
submitting Allocation Estimates and Allocation Statements as required under the
code.

c.    Network Entry Agreement:

This is an agreement which forms the basis for a Delivery
Shipper to deliver gas into the System. In addition to any other persons, it
must have the Operator and a Connected Delivery Facility Operator (DFO) as parties,
but a Shipper is not required to be a party to the Network Exit Agreement. The
agreement must contain terms and conditions or other provisions which specify
requirements for delivery of gas under the Code into the System (“Network Entry
Provisions”). The Network Entry Agreement is considered in every part of the Code
however it does not relieve Shippers of their obligations under the Code. Elements
of the agreement shall be discussed in greater detail in our Table of Remarks.

d.   Network Exit Agreement:

This is an agreement which forms the basis for an Offtake
Shipper to offtake gas from the System. In addition to any other persons, it
must have the Operator and an Offtake Facility Operator as parties, but a
Shipper is not required to be a party to the Network Exit Agreement. The
agreement must contain terms and conditions or other provisions which specify
requirements for offtaking gas under the Code into the System (“Network Exit
Provisions”).

e.   Operational Balancing Agreement:

This
agreement was not expressly defined in the Code however it is referred to in
relation to regulating daily or cumulative imbalances in the System. The
quantities of gas delivered to or offtaken from the System under any
Operational Balancing Agreement in respect of a System Point is also aggregated
with the quantities of gas delivered to or offtaken from the System under the
Code.

f.    Ancillary Agreements:

Ancillary Agreements are not defined however they
are referred to in the Code as any other agreement between the parties bound by
the Code which includes the other agreements mentioned in this part and those
not specifically mentioned.   

g.   Network Framework Agreement:
 

This
is an agreement in such form as may be required by the Operator pursuant to
which the Code is made binding upon the Operator and each Shipper. The
Framework Agreement is entered into to give contractual effect to the
provisions of the Code however it does not create contractual rights or
liabilities to the Shippers among themselves. Accession to the Framework
Agreement by an Applicant Shipper makes the Applicant Shipper bound by the
Section M of the Code which contains the general contractual provisions.  In order to become a Shipper the Shipper must accede
to the Framework Agreement and thereby agree to be bound by the Code.[8]

h.   Connection Agreement:

This
agreement was not expressly defined in the Code.

i.    System Clearing Contract:

This
is a contract between the Operator and a Shipper pursuant to which a quantity
of gas (which is or was or is not or was not delivered to or offtaken from the
System) is treated as purchased and sold.

2.  
Dispute Resolution under the Code

The Code mentions three dispute resolution mechanisms
that are to be explored in no particular order unless specified by the Code or
an agreement between the disputing parties: They are:

Ø  Expert
Determination;

Ø  Mediation
and;

Ø  Arbitration.

The Code also specifies the applicable dispute
resolution for some potential instances of dispute under its provisions:

a.   
Expert Determination:

i.             Any dispute (other than one resolved pursuant to
Network Entry Provisions under the Measurement Provisions in relation to the
System Entry Point) as to anything specified by the Operator pertaining to
amounts payable by a Shipper to the Operator for delivering non-compliant gas
to the System.[9]

ii.            
Any dispute (other than the ones resolved pursuant to
a Network Exit Agreement in relation to the relevant System Exit Point where
non-compliant gas was offtaken or the total quantity of non-compliant gas) as
to anything specified by the Shipper under an Exit Allocation Statement.[10]

iii.           Any disagreements as to the measurements and
calculations made by one party or measurements and calculations made by a party
on behalf of another; after parties have attempted direct discussions.[11]

iv.     Where the parties have agreed that a dispute is to be
referred to or resolved by Expert Determination.

Appointment of Expert

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Expert Determination Process

               (Image)      

The
expert\’s final determination shall be final and binding on the parties except:

Ø  It
was given after the appointment of a new expert;

Ø  in
the event of fraud and;

Ø  It
is so clearly erroneous on its face that it would be unconscionable for it to
stand, in which case another expert may be appointed in accordance with the Code.

Parties
cannot commence proceedings in respect of or refer any expert finding or
determination to any court.

It
is worthy to note that an expert involved in Expert Determination and a
mediator involved in Mediation are prohibited from acting as arbitrators
therefore the provisions of the Arbitration and Conciliation Act. An expert is
also prohibited from acting as a mediator.

b.   
Mediation:

Mediation will apply where the parties agree that
disputes are to be resolved or referred to Mediation under the Code, whether
alone or in addition to Expert Determination.

Appointment of Mediator

Within 5 Business Day after agreeing to refer a
dispute to mediation the parties shall meet and use their best endeavours to
agree upon a person to act as mediator. Where the parties agree, the parties
shall communicate the appointment and terms of appointment to such person. Once
the person accepts the appointment, he/she shall be treated as appointed as a
mediator for the purposes of the Code.

Mediation Process

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c.    
Arbitration:

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.[12] The site of arbitration
will be Lagos, Nigeria or any other place in Nigeria agreed by the parties.
Each party will bear the cost of arbitration in equal proportion.

Appointment of Arbitrator

 (Image)

3.  
Passage of Risk Under the Code

The Code specifies three
instances where the risk in the gas delivered or offtaken to the System will
pass between the relevant parties:

a.    Risk shall pass to the
Operator at the System Entry Point.[13]

b.    The warranty of the
Shipper as to title in gas and freedom from lien or encumbrances in Section I –
Paragraph 3.5.3(a), shall be treated as satisfied where the Shipper has
arranged for delivery or tender for delivery of gas to the System by a person
or persons who has or jointly have title (at the point of delivery) to such gas
and such person passes or persons jointly pass risk of handling such gas to the
Operator.[14]

c.     Risk in gas offtaken
from the System at a System Exit Point shall pass to the Offtake Shipper at the
relevant point of offtake specified (by description or diagram) in the Network
Exit Agreement.[15]

4.  
Warranties and
Indemnities under the Code

a.  
Shipper Warranties

Each
Shipper warrants to the Operator:

      i.    that such Shipper will
have title (at the point of delivery) to all gas delivered or tendered for delivery
to the System at any System Entry Point by that Shipper, and

     ii.    that all such gas will
(at such point) be free of any lien, charge, encumbrance or adverse claim (as
to title or otherwise), including any claim for any tax, royalty or other
charge in respect of the production, gathering, transportation, processing and
tendering of gas arising on or before delivery thereof to the System.

b.    Operator
Warranties

The
Code does not provide for any warranty from the Operator to the Shipper or any
other party.

c.     Offtake
Facility Operator (OFO) Warranties:

This
was not provided in the Code but in the template Network Exit Agreement
contained in the NCAD. The OFO warrants that from the Commissioning Completion
Date that the Offtake Facility:

      i.    Is and will be so maintained
as to continue to be technically and operationally compatible in all material
respects with the Exit Facility and the System; and

     ii.    Is safe and suitable
to receive natural gas in accordance with the parameters set out in this
Agreement and all other relevant statutes and statutory instruments.

Table of Remarks

Click here

Conclusion

The launch and release of the Code is the first step
on the DPR’s roadmap to operationalising the Code. With the go-live date of
August 10, 2020 in view some other measures the DPR is expected to take and
their implementation level are:

Ø 
Developing guidelines for Code
licensing & migration of Legacy Agreements: The DPR might want to consider
extending the deadline for migration to the Code until all operationalisation
gaps, some of which are highlighted above, are filled.

Ø 
Developed Code license regimes:
we note that the Shipper Agent License, Transporter License, Shipper License, have
been developed and are contained in the NCAD.

Ø 
Establishing Code Electronic
Licensing & Administrative System/Launch Network Code Electronic Licensing
and Administration (NCELAS): We note the NCELAS website has been created and is
available at https://ncelas.dpr.gov.ng/. To ensure an easy flow of
administration, the interface should be seamless and accessible.

Ø 
Emplacing a robust Industry
support mechanism for operationalization of the Code: having held various
stakeholder engagements regarding the Code it is expected that the DPR would
consider all suggestions and maintain the line of communication to ensure the
entire industry value chain plays their part in achieving this goal.

Ø 
Ensure gas transmission
system readiness: Currently, not all the three gas pipelines mentioned as part
of the System are fully functional enough to meet the gas demands in the
country. It is expected that the Code will encourage investment in the gas
sector and that the Federal Government will complete all outstanding works on
the pipelines. 

For further information on the foregoing, please contact 

Ogonna Nzekwe

Associate

ogonna.nzekwe@ao2law-intern.com

Moyo Omidiran

Associate

moyo.omidiran@ao2law.com

Oyeyemi Oke

Partner

oyeyemi.oke@ao2law.com

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