When the PSC Becomes an Albatross to Gas Investment - Africa’s premier report on the oil, gas and energy landscape.

When the PSC Becomes an Albatross to Gas Investment

BY THE BOOK

By Charles A. Osezua

Izombe was my first effort at building a gas processing plant. In order to do that, we entered into an agreement with Addax Petroleum, who was the operator of Oil Mining Lese (OML) 124. We signed an agreement with Addax to harness the gas at the flare. At that point in time the flared gas was between 55Million to 63Million standard cubic feet per day (MMscf/d), which was made up of Addax’ direct production as well as production from Chevron’s contiguous OML 53.

Based on the agreement, we entered and negotiated with Addax to develop that facility, Addax decided to become an equity shareholder in a 60/40 joint venture which we chose to call the Izombe Gas Processing Company.

The whole idea really was to build the gas processing facility in Izombe, produce natural gas liquids which is like crude oil, very light crude oil, and LPG which is your cooking gas and propane as a gas utilisation strategy for harnessing gas that was being flared from Chevron’s OML 53 and Addax’s OML 124. That was the core objective of the project.

A wikipedia entry referencing the project provides further insight from another perspective:

Owel-Linkso Group obtained approval from the Nigerian National Petroleum Corporation to progress the project in July 2010. The company had earlier signed a Heads of Agreement with Addax Petroleum Development (Nigeria) Limited, APDNL, in 2004, to develop and operate an LPG plant at Izombe in the OML 124 area. The Izombe Gas processing plant once operational will take feed gas from the Izombe flow station and other flow stations within the immediate vicinity and deliver dry gas to 381MW Egbema Power Station, an open cycle gas turbine power plant being developed in neighbouring Ohaji/Egbema There has been an ongoing effort to develop an Integrated Gas Processing Plant in Izombe. This is in response to Federal Government directive to Oil and Gas companies to stop routine gas flaring by end of 2008. The plant, estimated to cost about $135Million, is designed to produce 200 metric tonnes of LPG; and about 1,000 barrels of condensate from a feed gas of about 40Million standards cubic feet per day. Izombe Gas Processing Company Limited would help smaller companies operating in the area to save operational costs as companies whose gas volumes are not enough to feed major gas utilization projects would avoid the cost of constructing private gas gathering facilities to meet the Government’s directive.

In August 2012, Prime Minister Kamla Persad- Bissessar of Trinidad and Tobago said she was awaiting a report on the proposed Izombe Gas Processing Project between the National Gas Company, the National Energy Corporation and Phoenix Park Gas Processors Limited of Trinidad and Tobago and the Nigerian National Petroleum Corporation, NNPC. The Izombe Gas Processing Company is projected to serve as a major inland gas processing hub for most stranded gas within the oil-rich Njaba River basin and other stranded gas in that axis. Specifically, the project offers a total gas utilization strategy for gas that had been flared from ChevronTexaco’s OML 53 and Addax’s OML 124 in the area.

We had an agreement with Addax but there was a snag; Addax was operating a Production Sharing Contract facility. Dr. Taiwo Adebola Ogunleye, writing in his peer reviewed article “A Legal Analysis of Production Sharing Contract Arrangements in the Nigerian Petroleum Industry ” and published in the Journal of Energy Technologies and Policy, ISSN 2224-3232 (Paper) ISSN 2225-0573 (Online) V0I.5, No.8, 2015 provides an explanation of what a PSC is as well as its origins and application:

A PSC is a contractual arrangement made between an oil company(contractor), which in most cases is a foreign one and a designated state enterprise (state party) authorizing the contractor to conduct petroleum exploration and exploitation within a certain area (contract area) in accordance with the rules of the agreement (Taverne, B. 1996). It is considered as the oldest form of risk contract with a dual character; the first is that it represents a petroleum right since it authorises the contractor to undertake petroleum exploration and exploitation within the contract area (Taverne, B. 1996). Secondly, it embodies a contractual form of co-operation between the contractor and the state party (Taverne, B. 1996). PSC has been described as a form of taxation designed to satisfy the political objectives for state participation (Daniel, P. 1995). PSC often contains some terms that offer special advantages to the host country like production bonuses, scholarships, training, grants to government authorities or educational institutions, domestic market obligations and public participation options (Pongsiri, N. 2004). Indonesia was the first petroleum producing country to adopt PSC as the legal instrument for permitting foreign oil enterprises to carry out petroleum operations in its territory (Taverne, B. 1999). The origin of its adoption can be traced back to the Netherlands-Indies Mining Law of 1899, as amended in 1919 (Taverne, B. 1999). It is instructive to note that although the first PSC was executed in Indonesia, nonetheless the concepts date back to French Napoleonic traditions, under which mineral wealth was not owned by individuals, but rather by the state for the benefit of all citizens (Lawson, F.H. et al. 1967 cited in Duong 2004:1219). The initial use of the production sharing system took place in agriculture and under the system, farmers, as tenant-sharecroppers, cultivated field which title was held by the government or landlords

So what exactly was the snag?

Our Gas Sale and Purchase Agreement (GSPA) was negotiated with Addax, but Addax alone could not sign off on it. They needed NNPC to sign off and for the next one year plus, we were stuck with NNPC trying to get that agreement done. Even with ministerial directive for us to come up with an implementable commercial construct that works for all the parties, we still could not get NNPC to sign off as the ultimate owner, and the only one who could sign off to transfer title to gas, which we needed for bankability. Thus, we were stuck for a long time.

Anyway, while all those legal and administrative issues were being sorted out, we decided as a startup to begin from something we could do. We identified a plant in Gaviota which was doing what we wanted to do in Izombe. It was a 60MMscf plant and we acquired it with a view to re-engineering it to fit and meet the exact specifications at Izombe. We also bought another plant at Haynesville, Louisiana. We therefore had the plant we bought from Gaviota to extract the liquid and the one we bought from Haynesville to fractionate it.

Now, a quick description of how a gas processing facility works; it essentially has two integrated entities, but the first step is to remove the liquid and the next is to fractionate it. We had taken these major steps, but we still had the PSC issue to deal with. NNPC’s position was that since Addax was partnering with us, they were conflicted because Addax was benefitting twice. We said this did not make sense because downstream is completely different from upstream.

  By this time, we had acquired the equipment but we could not ship them to Nigeria because there was uncertainty about the law and regulation. That created a lot of problems. We held several meetings with several ministers but it did not seem to resolve the issue. We tried to convince them that we had an agreement, but nobody could sign off on that agreement because there was no policy, per se, governing the sale of PSC gas, because what the law governing PSC agreements said as noted by Dr. Taiwo Adebola Ogunleye in his already referenced essay is:

“(e) If commercially viable natural gas is discovered in the contract area and the contractor is required to submit proposals to NNPC for the commercial development of the gas field, the development will be under a separate agreement or supplemental agreement.”

The operating entity which was Addax in this instance, needed guidance from the ministers in order to execute a Joint Operations Agreement (JOA) with us.

We started this process in 2004 and by 2005 we had signed a formal agreement with Addax. This was under President Olusegun Obasanjo who was also the substantive Minister for Petroleum. We met with Dr. Rilwanu Lukman who was Special Adviser on Petroleum (what would now be called Minister of State for Petroleum) as well as with Engr. Funsho Kupolokun who was Special Assistant to the Minister of Petroleum. They came out with some papers but they did not fully address the PSC conundrum. We generally agreed on a few things. We said okay, let’s agree some gas and commercial terms and let the NGC be involved even if we have to escrow the money while the partners, Addax and NNPC, work out their own internal terms. But even with that general understanding, nothing could be done.

But there was some good news. As we were going through all this process, in the course of time, as more people got to know of what we were doing including the United States Technical and Developmental Agency (USTDA) and the US Embassy, we got recognised and they decided they were  partner with us to put in some money because we were going to be doing something they liked for the Niger Delta region. We received a $350,000.00 grant from the US government to fund the feasibility study for the Gas to Power project.

The negotiations went on until we got to the Honourable Minister of Petroleum at the time, Mrs. Diezani Alison-Madueke. It was with her that we signed what the government called the Accelerated Gas Development Agreement. She signed it and then mandated us to develop several gas fields up to a volume of 500MMscf/d in the Niger Delta. But up till now, that agreement remains inoperable, because government did not take the proactive steps to create the enabling environment for the implementation of its policy directive. Consequently, from one operator to the other, we were told; “while we appreciate the agreement you have with the government, we cannot be held responsible for an agreement we were not party to.” Put differently and as the African proverb says, “you cannot shave a man’s head in his absence.”

When I say we still did not get it done, what that means is that government was not able to determine what policy or commercial principle should govern the production of PSC gas. Consequently, Addax and NNPC could not execute the Gas Development Agreement. Since there was no Gas Development Agreement, we who had invested about $9Million at this stage were stuck. A lot of our equipment were in storage which we were paying for.

We had our tanks ready to ship from Longbridge, California. They had been at the port for one year. At the end of one year, my company paid a storage fee of $1.3Million. That was when we realised that our country had put us in a very precarious situation and we were on the verge of financial ruin, because we were paying for storage everywhere and Nigeria was not making a decision.

What did we do finally? We decided to sell the plant, and when Nigeria made up its mind, we would come back! That is how we sold the equipment in Houston and sold the tanks that were in California, then we licked our wounds and moved on to Ibeno. That is the summary of my experience in Izombe where I had my first mid-stream adventure.

Excerpted from The Rise of Gas: From Gaslink to the Decade of Gas, by Charles. A. Osezua, founder of the pioneering Nigerian gas utility firm Gaslink and the gas processing company PNG. Published in Nigeria by RADI8 Limiited.

 

 

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