Understanding the Gas Trading and Settlements Regulations 2023: Implications and Opportunities
Toma speaks on issues relating to salient provisions of the avant-garde gas trading regulations recently issued by the NMDPRA
I had an opportunity to host Toma Fortune for the Energy Brief Expert Insight segment to throw light on the Gas Trading and Settlements Regulations 2023 issued by the Nigerian Midstream and Downstream Petroleum Regulatory Authority. Being a regulation that touches a novel aspect of the gas value chain in Nigeria, Toma carefully unravels crucial provisions in this regulation and their impact on the nation’s gas ignition.
Toma Fortune is policy and legislative attorney with the National Assembly of Nigeria, as well as a regulatory support lawyer with Nigeria's Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) - where he contributes his two cents to the Authority's legal compliance, transactional and regulatory oversight roles for players across the Nigerian midstream and downstream oil and gas market. He’s also the Head of Research and Correspondence at the Lawyers in Energy Network (LIEN), a hub of astute legal professionals across the African energy industry.
Peter Okediya:
What motivated the need for Gas Trading and Settlements Regulations in the Nigerian gas sector?
Toma Fortune:
Essentially, I would say that since 2021 when Nigeria launched the Decade of Gas Initiative, a lot of focus has shifted from oil to exploring our gas opportunities as a country, especially considering that we are more of a gas nation, having over 200 trillion cubic feet (tcf) of proven gas reserves. In the past, the focus was more on crude oil exploration, to the extent that where we even have gas coming out with crude oil as associated gas, a lot of the gas is mostly flared.
In line with global talks of energy transition and the need for us to streamline what our definition of energy transition should be, the Federal government declared the decade of gas. Fast forward to 2021, the Petroleum Industry Act was enacted with provisions enabling the country to tap into its huge gas resources. In the past, we did not have that single piece of legislation that clearly defined what the gas market in Nigeria would look like in terms of the fiscals, in terms of the opportunities, in terms of the regulations. All of that led to the development of these regulations, the Gas Trading and Settlement Regulations. And this is one of many because the Nigerian Midstream and Downstream Petroleum Regulatory Authority (“NMDPRA” or “Authority”) has released a number of other regulations that are aimed at strengthening the gas market in Nigeria. So when investors see that if they were to bring say $10 billion into Nigeria's gas market, this is what the regulatory framework looks like, this is what they’re allowed to do, this is what they’re allowed to benefit from, there is clarity that can inform these investment decisions..
To be more specific, the Gas Trading and Settlement Regulations is an attempt to encourage the speedy development of our gas market as a country, and to keep up with international standards that align the country with global best practices.
Peter Okediya:
Has there been any form of gas trading platform prior to these Regulations?
Toma Fortune:
Nigeria has never had gas trading platforms (for what they are). I may have to explain what gas trading platforms are so that we have a better grasp of what I'm talking about. When you say gas trading platforms, you are talking about natural gas trading platforms, you are talking about platforms or exchanges where gas is traded, they are electronic or sometimes physical. They are essentially marketplaces where natural gas commodities are bought and sold. These platforms provide a structured environment for gas producers, gas suppliers, gas consumers, and all of the associated players in that value chain to transact natural gas contracts. Gas trading platforms serve as a centerpiece or a marketplace where price can be determined, where negotiations can be encouraged among parties, then transactions can be finalized for the purchase or sale of natural gas. You could liken it to the stock exchange - the regular capital markets, the Nigerian Stock Exchange, the London Stock Exchange, most of the popular exchanges in the world. So, essentially that is what a gas trading platform is. It's basically an exchange. So it could both be electronic or it could be physical. Most of the gas trading platforms are electronic.
In other parts of the world, you have these gas trading exchange platforms that exist as intermediaries where the gas producer brings its gas, the gas supplier can buy it and resell it to the gas buyer. There's a whole lot of stakeholders, even purchasers of gas derivatives can trade on these platforms. I should also add that these platforms are usually private sector led and we mainly have government regulations to regulate.
These trading platforms are not novel per se on a global level, but it is novel to Nigeria as a country, because we have not even developed our gas assets to that point. We are only just at the point where we are now giving more priority to gas development as a country, where we now have standalone gas development fields producing non-associated gas, and not just associated gas that comes from crude oil fields. So we have that growth path that we are building on as a country. It is thus important that we, as a country, prepare ourselves and provide the regulatory framework. This is why the Authority, which has that responsibility under the Petroleum Industry Act has now introduced and released this Gas Trading and Settlement Regulations.
Peter Okediya:
Do transactions on a gas trading platform involve delivery of physical gas or just a trade of contracts?
Toma Fortune:
On the basic level, contracts are agreements between the offeror and the offeree. So when we say gas contracts, of course, these contracts, they exist to have an effect on the physical gas. But you have to go through a system of agreements where I agree I want to buy from you. This trading and exchange platform is more or less an avenue where this trading can be done more seamlessly. It is considered a central marketplace. You can just bring your gas there, come and trade, at least for the physical exchanges.
Since most trading is done electronically, it doesn't mean that you physically always have to deliver like how trading is done in - what are the popular markets in Lagos? - Oshodi market in Lagos, or maybe the Garki market in Abuja. Yeah, it's not necessarily that, especially for the electronic trading platforms. For the physical trading platforms, that would be it. But, essentially, these trading platforms, these exchanges are there to encourage seamless trade. And I have to point out that perhaps as a country, it is the closest we have gotten to encouraging seamless trade. If I am a gas supplier, and I don't know who to sell it to, or I have to go out and start spending so much money on advertising, it reduces my profitability. But when there is an exchange that is popular (that I know I can just come and trade my gas), it helps to encourage long–term standing contracts. The exchange is there to ensure more seamlessness. More transparency.
Peter Okediya:
Just to be clear now, there is no physical delivery of gas involved since it will be entirely electronically done?
Toma Fortune:
There may be physical delivery. If I buy gas from a supplier, eventually I will receive my gas. When you buy stock from the stock market, is the stock not transferred to you? It may only take some time to finalize the transfer of stock, but it will eventually be transferred to you. So, the exchange is just there to secure contracts.
We can also have situations where I could exist as a trader on the gas exchange. Where I may not need or have use for gas. All I do is to aggregate gas. So we have gas aggregators on the value chain. In fact the Gas Aggregation Company of Nigeria is the most prominent gas aggregator. So what they do is they buy gas from the producers and aggregate it for industrial use to power plants who may need gas, that is thermal power plants that are powered by gas that need gas in huge quantities and need consistency and efficiency of supply to ensure that they are able to generate power steadily. You may prefer to meet the gas aggregator, who can receive gas, who can purchase gas, or even be an intermediary where you have more than one supplier or producer of gas, bringing the gas to be aggregated in one central location, in a central terminal. And then from there it can now be sent to where it is needed - whether they be for power plants, industrial use or whatever purpose – fertilizer plants and the likes. So, it's not enough to say that these exchanges, these trading platforms do not involve physical delivery of gas, because ultimately they do. These trading platforms are there to ensure ease of transaction, seamless buying and selling of gas.
You can also have situations where as a gas trader, I can buy gas on the electronic trading platform only to sell at a later date without taking delivery. Here, I can buy gas because it is cheaper now and to sell when it is more expensive without even having to receive the delivery of gas. So it's essentially like a trading platform, like a stock exchange. But then eventually these things are novel, we will have to see how well they can be implemented in-country.
Peter Okediya:
Who are the primary participants expected to be involved in these gas trading and settlement exchange platforms?
Toma Fortune:
The regulations provide for a long list of participants. But I could mention the most prominent ones. We have the gas producers, they're the ones who extract the gas, who produce natural gas. Then we’ve got gas buyers - entities that purchase natural gas for consumption such as for power generation, industrial use, or even distribution for end customers, retail use, cooking, or CNG -powered vehicles for the transporters. Then we have the gas exchange platform itself as a player, just like the Nigerian Exchange Group (NGX). Then we have the clearinghouse. It's not enough to trade. When you have an exchange, there is usually a clearinghouse responsible for clearing and settling trades that have been concluded on the trading platforms. Then we have maybe the compliance (a compliance officer), to assure compliance with the regulations and to ensure there's no fraud. In addition, the investors – individual and institutional local and foreign investors who are just coming to trade on the market, on the exchange. You know, they're just coming to buy at a certain price and sell in the future for profits - whether they're individual traders or institutional investors. Then there’s of course the regulators, in this case of course being the Authority. I think we could say those are the primary players.
I already mentioned the shippers who involve in shipping gas across countries because persons from across the world can participate on these exchanges. I have mentioned gas transporters, you have gas exporters, and you have gas storage providers, the owners of storage facilities that store the gas. There’s the owners of the facilities, the terminals and the importers. Then ultimately, I mentioned the gas aggregators before. These are the first persons that are involved or participate in this gas exchange.
Peter Okediya:
And that would lead me to the next question now, because you mentioned that retail traders and institutional investors may participate in the trading and settlements of natural gas. Does this make the market vulnerable to market manipulation, fraud or unethical practices like we see in other forms of exchange platforms? And what measures are in place to prevent market manipulation or unethical practices?
Toma Fortune:
Very brilliant. First, of course, in any business entity, any business enterprise, there's bound to be market manipulations and the likes. But of course, like any properly regulated exchange, there are a number of measures that are usually put in place by the Regulators.
To start with, the regulations make it clear that exchanges will be subject to the SEC (Securities and Exchange Commission) Rules regarding the operation of general trading platforms and exchanges. Apart from SEC Rules, the Regulations also provide for a number of its own oversight provisions beginning from the requirement of obtaining a trading license for a gas trading platform and a clearinghouse authorization for clearing houses. Before you can establish a trading platform, you will have obtained a license,, or if it's a clearinghouse, to clear those trades, a clearinghouse authorization from the Authority. Usually, you would have a situation where one company can obtain the license for gas trading and then the authorization to operate as a clearinghouse. Just like holding companies in financial institutions. A company may own the gas-trading platform and operate the gas trading platform and also have subsidiaries that act as clearinghouse. The idea is that by obtaining a license, you would have gone through some preliminary checks by the Authority. That is perhaps the Authority’s first step towards regulating the market and ultimately hedging against market manipulations. There are also many other measures that are in place to ensure that you don't experience market manipulation and I'll just speak to a number of them.
One of them is market surveillance. The regulations require that these trading platforms have surveillance departments within them that should be responsible for monitoring the transactions and surveilling generally. It monitors bidding patterns, transaction volumes, fluctuations and movement in price, to be able to detect any unusual or manipulation behavior. The surveillance department is one of the measures that the regulation has mandated exchange platforms to have to serve as a first layer of check.
There is the whistle blower policy that the regulation provides. As a third party or market participant, when you feel that there is some sort of unscrupulous activity or wrongdoing, you can come out as a whistle blower. In line with whistleblower policies, your identity as an informant will not be leaked as necessary actions would be taken against such unscrupulous persons.
Furthermore, there are daily and periodic reporting requirements. One of which is, a trading exchange platform is required to report price and volume of information daily on its website for market participants to assess market conditions and identify unusual price movements. There is provision for a market surveillance committee which I have mentioned before. There is also a provision for establishing new customer checks on members and clients to help verify the identities and backgrounds of the participants and prevent unauthorized or fraudulent activities.
Also, there’s a requirement that gas exchange platforms and clearing houses should have internal conflict resolution mechanisms. They would have manuals for conflict resolution where they prescribe the guidance and principles when issues arise manipulation-wise. These conflicts of interest management mechanisms can aid in resolving some of these issues. Trading platforms are also encouraged to do a lot of training and awareness programs for their members and for clients.
On the Authority's part, they have the power to inspect, audit and carry out investigations. So these are some of the things that are there to deter manipulation and sharp practices
.
Peter Okediya:
Considering the impact of these Regulations on the energy industry, what potential impact do you foresee these regulations having on the Nigerian gas industry as a whole? Do you think it will be welcomed by players?
Toma Fortune:
Yes of course, it will encourage and improve growth in the energy sector as a whole. Gas as a commodity is so intertwined with so many other commodities and deliverables. Gas is a very substantial percentage of our power generation as a country and globally. Gas is seen as a cleaner fuel compared to more hazardous fuels like crude and its derivatives. So essentially, there's no gainsaying that the impact of this regulation will be far reaching. What is left is to see how well it can be implemented. So what investors usually ask you is: “is the regulatory framework favorable for us to come and invest?” These regulations are there to provide clarity, to provide an opportunity for investors to come and say, I want to set up a gas exchange to make profit by housing gas sellers, traders, buyers, suppliers, transporters, shippers, aggregators and the likes. Having this regulation encourages investment in the market, in the gas market, first, then generally in the energy market, the implications are far reaching.
I just mentioned the ripple effect of having a gas exchange on power. Once you have a gas exchange and gas transactions are more seamlessly facilitated, you have the intended consequence or even unintended consequence of increasing output. You see a situation where because I know that there is a ready market where if they produce 5 billion cubic meters (bcm) of gas, I will sell it immediately under favorable market conditions. In fact, the issue will now be whether I can meet my delivery obligations based on what has been traded on my behalf. You will have a situation where there is more investment in production, there is more investment in transportation infrastructure pipeline infrastructure, there is more investment in storage infrastructure, there is more investment even in human capacity development to be able to manage this entire framework because they know the market is available now. So this is an ultimate upside.
As to the question of impacts of this regulation when it is properly implemented. This regulation stands to bolster the economy of this country by increasing gas outputs, increasing and encouraging trade, bringing in foreign investment, foreign exchange earnings. You can see the impact on even the naira. This is beyond the gas industry now. You can imagine the importance of the Nigerian Stock Exchange to the economy. Same with the importance of a gas exchange. A lot of foreigners come in through foreign investments through general trading. A lot of foreign exchange comes in. When you have situations of investors who don't want to set up installations or facilities, who don't want to come and make foreign direct investments, who don't want to come and establish entities in Nigeria to physically purchase, transport, sell, ship, gas, but want to just trade stock, you have to develop your exchange to enable trade.
What we just need to do now is to encourage awareness of these regulations and that is why I appreciate platforms like yours, Energy Brief, who play a major role in bringing attention to these regulations through features, articles and interviews like this one.
I want to say something I forgot to mention earlier. Because there is a negotiating power between buyers, sellers and all of the other associated stakeholders in between, you find the situation where the gas exchange would reduce monopoly drastically. When there is an exchange, there's increased investments, there's increased output, you necessarily see the implication that price is reduced. And so when you now take this into a lot of the other issues, the issues around what we are facing as a country today, where the price of fuel is so high, talk of moving towards autogas (CNG-vehicles) becomes more viable because gas is generally cheaper. And then you see the campaigns that are out there to encourage clean cooking, to ensure that the price of cooking gas, propane, propylene and n-butane, is reduced and affordable. Having centralized markets in gas exchanges, whether it's physical or electronic, would ease life generally in the country. So, I just want to point that out also.
Peter Okediya:
Before now we used to have domestic gas supply obligations, and then the PIA came around and introduced domestic gas delivery obligations to where the gas producer is mandated to supply some amount of gas to the domestic market. With this new regulation on gas trading and the exchange platforms, would there be any effect on the domestic gas delivery obligations on gas producers?
Toma Fortune:
The DGDO exists to ensure sufficiency of gas supply in the country. If anything, having this gas exchange in line with the gas trading and settlement regulations will encourage the availability of gas such that you can even outdo your delivery, when there's a sufficiency of the commodity. So when you look at the rationale, the standard reasoning for having domestic gas delivery obligations is essentially to ensure a sufficiency of supply and to ensure that there's prompt delivery. The trading and settlement regulations exist to further encourage companies to meet up with assigned DGDO.
Peter Okediya:
So would gas orders of foreign traders to gas producers on the gas trading platform be subject to DGDO also?
Toma Fortune:
DGDOs only apply to the extent that producers will produce gas in commercial quantities and have an obligation to deliver domestically. Remember that is the intention. Because there used to be a situation where, for example, NLNG (Nigerian Liquefied Natural Gas Ltd) in the past supplied more to the export market in order to bring in foreign exchange and that seemed more profitable than delivering domestically. DGDOs do not necessarily affect foreign traders, at least not directly. Because generally, the core people it affects are producers who have the obligation to deliver domestically, up to certain extents, before taking their product outside to the outside market. So that our fertilizer industry that requires gas to process its stock doesn't suffer. So that all of the associated companies and the industries, whether it's power, whether it's retail use, cooking, automobiles, will not suffer because there is insufficient gas whereas we have this unimaginable quantum of gas reserves. On that premise, you wouldn't say that foreign traders would be affected by domestic gas delivery obligations.
Peter Okediya:
How does the regulation adopt digitization to foster the exchange markets for gas?
Toma Fortune:
I think the first thing I would say is that because the regulations are new, they are up to date with global best practices in the 21st century and the place of digitization has been imprinted in the core of these regulations regarding trading platforms.
As to the degree or to the extent of the digitization, we have to wait for the implementation of these regulations for players to come in to establish these trading or exchange platforms. But I think I can highlight a number of key pointers to digitization.
First, the whole electronic trading system aspect of it is digitization in itself. The requirements of an electronic trading system is necessary for efficient and automated trading and that embodies the spirit of digitization. Trading will be done electronically. Essentially, when you make orders, the buying and trading itself are all done electronically. Checking of funds to be sure that the funds are available is done electronically, and the entire processing of orders is entirely electronic. That's what the regulations prescribe. Auditing should also be electronic. There would be an auditing of bids, offers, transactions, and all required data. There should be digital records of all your market activities for surveillance and compliance and you must maintain them for seven years. At any point where investigation is required, this data will be accessible. We don’t want a situation where they say files were engulfed by fire.
The requirement that gas exchange platforms need to report daily transactions and relevant data on their website daily, to encourage transparency, to encourage efficiency, to encourage industry, is also an aspect that connotes digitalization generally.
Finally, transfer of data between market participants and operators is also done electronically to ensure that it's secure. There's the requirement itself that it should be transferred through secure communication channels so that you reduce the risk of data manipulation and cyberattacks.
Peter Okediya:
Will the recent decentralization of the electricity sector affect gas trade tools? Are there possibilities of arbitrage trading between the different state electricity markets?
Toma Fortune:
In answering this question, we must try to be more relative and practical. First off, you must know that the decentralization of the electricity sector has not been fully implemented yet. I mean, we have only decentralized to the extent of having the legislative framework. True, the policy is now there, but I've seen only a few states like Ondo and Lagos take steps towards implementation such as having their own electricity regulator. It's a very enormous investment for a state to have its own grid, its own transmission infrastructure et al. Although the policy is there, in terms of implementation we are not there yet because it's not automatic. The way the electricity sector currently operates, you have a central transmission system where although distribution and generation were privatized and decentralized, the transmission infrastructure remains central. The regulatory infrastructure and the regulatory framework remain central.
It may be more practical to see the implementation come to bear first. Let us see states summoning up the courage and wherewithal to bring the necessary investments, where we can have state-owned transmission infrastructure. There are even going to be a lot of issues around distribution companies that operate in multiple states. You may have situations where one distribution company that operates across more than one state may have to start reporting to multiple regulators.
In my modest view, I do not think decentralization will affect gas trading significantly. But then again, we will have to see the decentralization come into play first. We need to be more practical first and less idealistic.
On the issue of arbitrage trading, you must first understand that what the regulations provide for are gas trading platforms and not electricity markets. Even so, in the case of gas exchanges, that possibility of arbitrage can only be there where there are multiple exchanges. For instance we do not even have a gas trading platform yet. That said, I’m of the opinion that since the core essence of these trading platforms is to encourage market driven pricing, efficiency of supply, adequacy of supply and demand and seamlessness of transactions, I don't think there will be much room for arbitrage. But then again, we need to see two markets first for us to properly determine the possibility of arbitrage. Nevertheless, we must remember that taking advantage of arbitrage trading is not an illegal activity as markets all over the world perceive the practice as contributing to market efficiency by ensuring price discrepancies don't last long.
Finally, the role of the regulators will also come into place. The Authority is empowered to make additional guidelines, additional directives, regulations to regulate aspects of gas trading and settlement as the architecture develops.
Peter Okediya:
How does Nigeria's approach align with or differ from global standards in gas trading?
Toma Fortune:
The common aspect in Nigeria and perhaps other global markets is first of all market transparency. So the focus on market transparency, price discovery, disclosure requirements; those things align with global best practices. We are in sync with what is obtainable in other jurisdictions, at least to the extent of what our regulations provide. There is also an emphasis on risk management. I didn't mention before that the regulations provide for a settlement guarantee fund. The fund is supposed to stand as a risk management mechanism. There is a minimum balance of USD500,000 required in the settlement guarantee fund at the start of the exchange. I think to that extent it is in accord with other gas trading markets across other countries, other jurisdictions.
However, one critical difference will be government regulation. Unlike what our regulations provide, where an exchange is going to be entirely government regulated, I think in certain jurisdictions, we have situations where there are certain independent regulatory organs or agencies that are regulating these exchanges rather than the government and they are also market controlled – but again I cannot confirm this. Also, our emphasis on the use of domestic gas resources and the promotion of domestic gas delivery is one defining difference that reflects our country's priority to drive the economy and increase gas utilization. I think the current framework is fit for our purpose also. We are still developing and these regulations need to be applicable to our own markets.
Peter Okediya:
Thank you so much Fortune for your time. It's over an hour now since we started and you have been so amazing. I would have offered to give you water right now, but maybe when we see each other physically, I would do that. I’d love to quickly round off with this. As someone that grew from being active in energy related activities in school, what would you advise students trying to find a career in the energy sector?
Toma Fortune:
What I would say is give the industry your energy. If you study courses like petroleum engineering, you know you'll be actively involved in the energy space. For those persons studying courses like law, who do not have that clarity yet, you need to gain clarity and be decisive. The one thing that helped me was that I had clarity, I knew I always wanted to be in this industry. And like I said, you mentioned my presence at the Energy Club in my university that time, It helped me network a lot. I had seen several events and attended several engagements as President of the club. It bolstered my image. If you have clarity and then you just start giving it your all, you find a situation where a lot of the things around you are energy related. Most of the things you hear are energy related. Most of your social media pages on LinkedIn, on Instagram are energy related. And you just learned intuitively, you just grow human capacity to deliver within the energy sector. Surrounding yourself with the atmosphere, that aura, that just screams energy, whether its climate activism, environmental sustainability, or energy security, whatever aspect of the value chain, whatever you are able to just surround yourself with within the energy space, it will help you as a student to prepare yourself out there for the labour market. If you get all these right, you would find out that when you come out of the university system, you will have something to offer as a fresh graduate not just with your good academic qualifications, but with some industry knowledge.
Peter Okediya:
Well, great. Let me wrap up by saying thank you to Fortune for being here today. You can connect with Fortune on LinkedIn for more insights and legal services. It is awesome to benefit from his experience and expertise today.
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