LAW 411 Oil and Gas Law I PDF

LAW 411 OIL AND GAS LAW I NATIONAL OPEN UNIVERSITY OF NIGERIA SCHOOL OF LAW COURSE CODE: LAW 411 COURSE TITLE: OIL AND GAS LAW I 1 LAW 411...

LAW 411 OIL AND GAS LAW I NATIONAL OPEN UNIVERSITY OF NIGERIA SCHOOL OF LAW COURSE CODE: LAW 411 COURSE TITLE: OIL AND GAS LAW I 1 LAW 411 OIL AND GAS LAW I COURSE GUIDE LAW 411 OIL AND GAS LAW I Course Developer/Writer: Oyetunji Eyitayo Ojuokaiye Esq. University of Ilorin, Kwara State Course Editor: Programme Leader: Course Coordinator: NATIONAL OPEN UNIVERSITY OF NIGERIA 2 LAW 411 OIL AND GAS LAW I National Open University of Nigeria Headquarters 14/16 Ahmadu Bello Way Victoria Island Lagos Abuja Office No. 5 Dar es Salaam Street Off Aminu Kano Crescent Wuse II, Abuja Nigeria e-mail: [email protected] URL: www.nou.edu.ng Published by National Open University of Nigeria Printed 2011 ISBN: All Rights Reserved 3 LAW 411 OIL AND GAS LAW I TABLE OF CONTENTS Introduction What you will learn in this course. Course Aims. Course Objectives Study Units. Course Marking Schemes 4 LAW 411 OIL AND GAS LAW I INTRODUCTION This course is created to give you the knowledge about oil and gas as a concept and as a natural resource. From your previous knowledge of various aspects of substantive law, this course will give you knowledge of the subject oil and gas law which is a branch of law on petroleum and natural gas and their operations. The existence of man in the society is founded on the resources available and discovered which are then employed for his use. These are natural resources which occur without any direct input of man. These resources have to be properly utilized for the purpose for which they are meant. Petroleum and natural gas are major natural resources that have been so utilized and it is intended in this course to expose you to the history and legal developments in the operations of the industry. Since oil was first discovered over 5,000 years ago a lot has changed in its character compared with what obtains now. To a large extent oil and indeed natural gas are the most widely used source of energy today having taken over from the use of other sources of energy such as wood and coal. Today every house, industry and factory uses oil to power its engine, operate small machines in order to produce one material or the other. In this wise, oil has been a moving fluid (or gas) that powers many aspects of life both domestically and in the manufacturing concern. In this respect, oil and gas law has been developed to treat the legal aspects of the subject. There is need to regulate this important substance of nature by the means of certain rules and regulations. In coming to this point, certain theories have evolved which have been employed in the transactions relating to the subject. Oil and gas can be seen as both economic and legal subject which also cut across various other fields like natural science, social and political sciences. This can be gleaned from its nature as a material that has many uses, and is a source of wealth for many nations including Nigeria. Thus, the legal aspect of oil and gas is our main focus in this course while the other aspects would be discussed as they relate to this subject. The history of petroleum has been full of startling discoveries, ranging from the classes of crude oil, the manner of 5 LAW 411 OIL AND GAS LAW I their occurrence and the use to which they have been put. The utility and availability of crude oil and natural gas have called for regulations which are the results of agreements and concessions on oil explorations. This course consists of 24 units of study which are designed to give easy understanding of the course to the students. It is an interesting subject which a concerned student would find revealing and possibly be gingered up to find solutions to some problems encountered in the present state of oil and gas development. You will find some useful self examination questions, and tutor marked assignments in the course guide. These questions and assignments are important to assess your proper understanding of the course and you are advised to take them seriously and treat them on your own using the course guide and other references. What You Will Learn in This Course: This course is about the legal aspects of oil and gas industry in general but with some specific reference to Nigeria as the cases demand. It is a 400 Level course for Law Students. The course is meant to expose the student to the history, development, law and policy of oil and gas. This course, Law 411 is the first part of the course on oil and gas law designed for the first semester. It is a 4 –Credit Unit Course. A minimum study time of 4 hours per week is required for the duration of each of the two semesters. The student will need to get acquainted with the various pieces of legislations that are related to the oil and gas industry. It is also essential to note that: All these statutes and other regulations will be consulted and referred to in the course of this study. There will be references to other pieces of legislations in some other parts of the world where there are similar practices and comparison will be made thereof. You should take note of the various terms and usages in this course as certain terms of art will inevitably occur in the proper analysis and discussion of the topics. However, as 6 LAW 411 OIL AND GAS LAW I much as possible we have tried to simplify the analysis to make you understand effectively. You need to relate any of the topics in this course to the occurrences in the society and through any examples that are given. Importance of Statutes and Regulations It is essential to note that this course for this semester finds its basis from statutes, regulations and policies. Some of the statutes include but are not limited to the Petroleum Act, the Oil Pipelines Act, Minerals Act, Associated Gas Re-injection Act, the Land-Use Act, Mineral Oil Act, NNPC Act, Petroleum Industry Bill, Local Content Act. etc. Its sources also include textbooks, journals and monographs on laws relating to oil and gas. You will be referred to some of these texts and you are expected to make adequate use of them along with this course guide. Relevant sections of statutes may be quoted or cited to give specific references during discussion of a topic. You are expected to get yourself familiar with these as much as they are relevant. Course Aims This course aims at providing the participants with basic knowledge and clear understanding of the law with respect to oil and gas. It is aimed at giving you the requisite knowledge of the facts, background, and development of oil and gas with the legal developments that are relevant to it. You will learn the theories of ownership of oil and gas, the nature of interests in oil and gas, concessions and agreements. Each of the topics in the course will be discussed in sequence and the terms defined to enable a clear understanding of them. By the foregoing, the aims of this course include: - The Historical Origin of Petroleum - Natural Occurrence of Crude Oil and Natural Gas. - Definition of Petroleum, Oil and Natural Gas. - Understanding the Nature of Oil and Gas as Natural Resources. - The Law and Policy of Exploration and Production of Oil in Nigeria. - Concept of ownership and control of oil and gas. 7 LAW 411 OIL AND GAS LAW I - The Role of the United Nations and International Law in the Preservation of Natural Resources. - Nature of Expropriatory Rights in Petroleum. - Petroleum Pipelines and Operations. Course Objectives: At the completion of the course, you should be able: i. To understand the origin, nature and development of oil and gas. ii. To understand the theories of ownership and control of petroleum and their incidences. iii. The nature of interests in oil and gas operations with a view to distinguishing between the various interests that can be created and their major characteristics. iv. To understand the concept of indigenous rights of ownership of land and minerals. v. To understand the concept of expropriation of rights in mineral oil resources and its effects. vi. To understand the role of the international organisation like the United Nations in the exploration of natural resources. vii. To understand the nature of oil and gas pipelines and the procedure for grant of operating licenses. viii. The student should also be able to have a sound knowledge of the current developments in legislation in the oil and gas industry and its prospects. Working through this Course To complete this course, you are advised to read the study units, recommended books and other materials provided by NOUN. Each unit contains Self Assessment Exercise, and at points in the course you are required to submit assignments for assessment purposes. At the end of the course there is a final examination. You will find all the components of the course listed below. You need to make out time for each unit in order to complete the course successfully and on time. Course Materials 8 LAW 411 OIL AND GAS LAW I The major components of the course are: a) Course guide. b) Study Units. c) Textbooks d) Assignment file e) Presentation schedule. Study Units There are Twenty four (24) study units in this course as follows: Module 1 Unit 1 : The nature and origin of oil and gas. Unit 2: Exploration for petroleum and natural gas. Unit 3: Importance of oil and gas. Unit 4: Discovery and development of petroleum in Nigeria. Unit 5: The legal regime for petroleum in Nigeria. Module 2: Unit 1: Theories of Ownership and Control of Oil And Gas. Unit 2: Ownership and Control of Petroleum in Nigeria. Unit 3: Ownership and Control of Petroleum in other Countries. Module 3: Unit 1: Types of Interests in Petroleum Exploration. Unit 2: Production Contracts. Unit 3: Participation Agreements in Nigeria. Unit 4: Oil Exploration Licence and Mining Lease. 9 LAW 411 OIL AND GAS LAW I Module 4: Unit 1: The concept of traditional ownership of land as natural resources. Unit 2: Divestment of rights in mineral oil resources. Unit 3: Effect of Divestment of interest in mineral oil. Unit 4: Resource control agitation. Unit 5: Compensation and Allocation of petroleum gains. Module 5: Unit 1: Natural Resources in the history of the United Nations. Unit 2: The role of international law in natural resources exploration. Unit 3: The role of international law in natural resources exploration continued. Module 6: Unit 1: Nature of oil and gas pipelines Unit 2: Legal status, regulations for oil pipelines. Unit 3: Conditions for grant of rights to lay pipelines. Unit 4: Rights and Duties of the Licence holder. All these Units are demanding. They also deal with basic principles and values, which merit your attention and thought. Tackle them in separate study periods. You may require several hours for each. We suggest that the Modules be studied one after the other, since they are linked by a common theme. You will then have a clearer picture into which to paint these topics. Each study unit includes specific objectives, directions for study, reading materials and Self Assessment Exercises (SAE). Together with Tutor Marked Assignments, these exercises will assist you in achieving the stated learning objectives of the individual units and of the course. 10 LAW 411 OIL AND GAS LAW I Textbooks and References Certain books have been recommended in the curse. You should read them where so directed before attempting the exercise. Assessment There are two aspects of the assessment of this course, the Tutor Marked Assignments and a written examination. In doing these assignments you are expected to apply knowledge acquired during the course. The assignments must be submitted to your tutor for formal assessment in accordance with the deadlines stated in the presentation schedule and the Assignment file. The work that you submit to your tutor for assessment will count for 30% of your total score. Tutor-Marked Assignment There is a Tutor-Marked Assignment at the end for every unit. You are required to attempt all the assignments. You will be assessed on all of them but the best three performances will be used for assessment. The assignments carry 10% each. When you have completed each assignment, send it together with a (Tutor Marked Assignment) form, to your tutor. Make sure that each assignment reaches your tutor on or before the deadline. If for any reason you cannot complete your work on time, contact your tutor before the assignment is due to discuss the possibility of an extension. Extensions will not be granted after the due date unless under exceptional circumstances. Final Examination and Grading 11 LAW 411 OIL AND GAS LAW I The examination for this course will carry 70% of the total course grade. The examination will consist of questions, which reflect the kinds of self-assessment exercises and the tutor marked problems you have previously encountered. All aspects of the course will be assessed. You should use the time between completing the last unit, and taking the examination to revise the entire LAW411 – OIL AND GAS LAW I course. You may find it useful to review your self assessment exercises and tutor marked assignments before the examination. Course Marking Scheme The following table lays out how the actual course marking is broken Course Marking Scheme The following table lays out how the actual marking is done. Assessments 30% of Course Marks Final Examination 70% of Overall Course Marks Total 100% of Course Marks How to Get the Most from this Course In distance learning, the study units replace the lecturer. The advantage is that you can read and work through the study materials at your pace, and at a time and place that suits you best. Think of it as reading the lecture instead of listening to a lecturer. Just as a lecturer might give you in-class exercise, you study units provide exercises for you to do at appropriate times. 12 LAW 411 OIL AND GAS LAW I Each of the study units follows the same format. The first item is an introduction to the subject matter of the unit and how a particular unit is integrated with other units and the course as a whole. Next is a set of learning objectives. These objectives let you know what you should be able to do by the time you have completed the unit. You should use these objectives to guide your study. When you have finished the unit, you should go back and check whether you have achieved the objectives. If you make a habit of doing this, you will significantly improve your chances of passing the course. Self Assessment Exercises are interspersed throughout the units. Working through these tests will help you to achieve the objectives of the unit and prepare you for the assignments and the examination. You should do each Self Assessment Exercise as you come to it in the study unit. There will be examples given in the study units. Work through these when you have come to them. Facilitators/Tutors and Tutorials There are tutorials provide in support of this course. You will be notified of the dates, times and location of the tutorials, together with the name and phone number of your tutor, as soon as you are allocated a tutorial group. Keep a close watch on your progress and on any difficulties you might encounter. Your tutor may help and provide assistance to you during the course. Do not hesitate to contact your tutor by telephone or e-mail if you need help. Contact your tutor if: · You do not understand any part of the study units or the assigned readings; · You have difficulty with the self assessment exercises; You should try your best to attend the tutorials. This is the only chance to have face to face contact with your tutor and ask questions which are answered instantly. You can raise any problem encountered in the course of your study. To gain the maximum benefit from 13 LAW 411 OIL AND GAS LAW I course tutorials, prepare a question list before attending them. You will gain a lot from participating actively. Conclusion We hope you will find this course interesting. We wish you the best of luck. 14 LAW 411 OIL AND GAS LAW I COURSE GUIDE LAW 411 OIL AND GAS LAW I Course Developer/Writer: Oyetunji Eyitayo Ojuokaiye Esq. University of Ilorin, Kwara State Course Editor: Programme Leader: Course Coordinator: NATIONAL OPEN UNIVERSITY OF NIGERIA 15 LAW 411 OIL AND GAS LAW I National Open University of Nigeria Headquarters 14/16 Ahmadu Bello Way Victoria Island Lagos Abuja Office No. 5 Dar es Salaam Street Off Aminu Kano Crescent Wuse II, Abuja Nigeria e-mail: [email protected] URL: www.nou.edu.ng Published by National Open University of Nigeria Printed 2011 ISBN: All Rights Reserved 16 LAW 411 OIL AND GAS LAW I CONTENTS PAGE Module 1 Unit 1: The nature and origin of oil and gas. Unit 2: Exploration for petroleum and natural gas. Unit 3: Importance of oil and gas. Unit 4: Discovery and development of petroleum in Nigeria. Unit 5: The legal regime for petroleum in Nigeria. Module 2: Unit 1: Theories of Ownership and Control of Oil and Gas. Unit 2: Ownership and Control of Petroleum in Nigeria. Unit 3: Ownership and Control of Petroleum in other Countries. Module 3: Unit 1: Types of Interests in Petroleum Exploration. Unit 2: Production Contracts. Unit 3: Participation Agreements in Nigeria. Unit 4: Oil Exploration Licence and Mining Lease. Module 4: Unit 1: The concept of traditional ownership of land as natural resources. Unit 2: Divestment of rights in mineral oil resources. Unit 3: Effect of Divestment of interest in mineral oil. Unit 4: Resource control agitation. Unit 5: Compensation and Allocation of petroleum gains. Module 5: Unit 1: Natural Resources in the history of the United Nations. Unit 2: The role of international law in natural resources exploration. Unit 3: The role of international law in natural resources exploration contd. Module 6: Unit 1: Nature of oil and gas pipelines Unit 2: Legal status, regulations for oil pipelines. Unit 3: Conditions for grant of rights to lay pipelines. Unit 4: Rights and Duties of the Licence holder. 17 LAW 411 OIL AND GAS LAW I MODULE 1 Unit 1: The nature and origin of oil and gas. Unit 2: Exploration for petroleum and natural gas. Unit 3: The importance of oil and gas. Unit 4: Discovery and development of petroleum in Nigeria. Unit 5: Development of natural gas in Nigeria. UNIT 1 THE NATURE AND ORIGIN OF OIL AND GAS. Contents 1.0 Introduction 2.0 Objectives 3.0 Main content. 3.1 Definition of oil and gas. 3.2 Nature of oil and its occurrence. 3.3 The physical properties of oil and gas. 3.4 Background and origin of petroleum and natural gas. 3.5 Growth in the search and use of oil and gas. 4.0 Conclusion. 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Reference/further readings 1.0 INTRODUCTION The existence of man in society is founded on the resources available in his environment. These resources have to be discovered and then employed for human use. Most of these resources are natural which occur without any direct input of man. These resources have to be properly utilized for the purpose for which they are suited. Petroleum and natural gas are major natural resources that have been so utilized and it is intended in this course to expose you to the history and legal developments in the operations of the industry. 18 LAW 411 OIL AND GAS LAW I Since oil was first discovered over 5,000 years ago a lot has changed in its character when compared with what obtains now. To a large extent oil and indeed natural gas are the most widely used source of energy today having over taken over from other sources of energy such as wood and coal. Today every house, industry and factory use oil to power its engine, operate small machines in order to produce material or the other. In this wise, oil has been a moving fluid (or gas) that powers many aspects of life. As ‘common’ as it is however, most everyday users of oil do not avert their minds to the source and component of this substance. But to the industry operators, legal experts, government, policy makers and scientists, the origin, source, formation and component of oil are as important as its production. This is essential because it will give the primary basis upon which policies are made. This is even more important to a legal practitioner who intends to practice in this area as it will help in having the knowledge of what the subject matter is all about from the very basis. 2.0 OBJECTIVES At the end of this unit, you should be able: i. To define ‘petroleum’, ‘crude oil’ and ‘natural gas’ ii. To understand the nature of these substances. iii. To understand how petroleum is formed. iv. To give details of the origin and early discovery of oil. v. To relate the search for oil with its growth for human use. 3.0 MAIN CONTENT 3.1 Definition of oil and gas. It is important at the inception to have the definition of few major terms of this subject matter to be able to capture their essence. Petroleum or crude oil is a naturally occurring, toxic, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights, and other organic compounds, that are found in geologic formations beneath the earth's surface. Put simply it is a form of naturally occurring liquid substance found in rock formations. It consists of a varying mixture of hydrocarbons of different weights, plus other organic compounds. 19 LAW 411 OIL AND GAS LAW I Yinka Omorogbe in her work The Oil and Gas Industry: Exploration and Production Contracts described petroleum as a mixture of hydrocarbon that occurs under the earth surface primarily within the pore spaces of sedimentary rocks, in liquid, gaseous or solid forms. The term petroleum is however more generally used for the liquid form, also commonly called crude oil. This is the most widely utilized type of petroleum. The term oil is used loosely to refer to petroleum in many cases and it usually means the same thing as crude oil unless the meaning is expanded in particular situations. Petroleum is a compound mainly composed of hydrogen and carbon and is commonly called hydrocarbon. When it is found as a solid, it is coal, shale, tar sands or bitumen. The most commonly known hydrocarbon is crude oil which as stated earlier many refer to as petroleum. However, from a technical point of view, the term petroleum covers other types of hydrocarbons. There has also been a statutory definition of petroleum under the Petroleum Act of Nigeria which provides that petroleum means “mineral oil (or any other related hydrocarbon) or natural gas as it exists in its natural state in strata, and it does not include coal or bituminous shales or other stratified deposits from which oil can be extracted by destructive distillation.” Furthermore, “crude oil” is defined in the Act as “oil in its natural state before it has been refined or treated (excluding water and other foreign substances)”. Natural gas means “gas obtained from borehole and well consisting primarily of hydrocarbon.” This is the definition given to it by the Petroleum Act. It is the combination of certain hydrocarbon substances in gaseous form that accompany crude oil in its occurrence. It is in this form of its unrefined state that makes it natural gas. From these definitions and descriptions of petroleum, it can be said that the term petroleum includes (crude) oil and natural gas, while each of oil and gas have similar qualities but are not the same in many of their components. Self Assessment Exercise 1. What is oil and gas? 20 LAW 411 OIL AND GAS LAW I 2. Explain your idea of what is petroleum. 3.2 Nature of oil and its occurrence Petroleum is fossil fuel that has been formed from long-buried plants and microorganisms. Fossil fuels, which include petroleum, coal, and natural gas, provide most of the energy that powers modern industrial society. The petrol that fuels our cars and the natural gas that powers electrical plants are all fossil fuels. Chemically, fossil fuels consist largely of hydrocarbons, which are compounds composed of hydrogen and carbon. Some fossil fuels also contain smaller amounts of other compounds. Hydrocarbons form from ancient living organisms that were buried under layers of sediment millions of years ago. As accumulating sediment layers exerted increasing heat and pressure, the remains of the organisms gradually transformed into hydrocarbons. The most commonly used fossil fuels are petroleum, coal, and natural gas. These substances are extracted from the earth’s crust and, if necessary, refined into suitable fuel products, such as petrol, heating oil and kerosene. As illustrated by Gene Whitney: “Fossil fuels formed from ancient organisms that died and were buried under layers of accumulating sediment. As additional sediment layers built up over these organic deposits, the material was subjected to increasing temperatures and pressures. Over millions of years, these physical conditions chemically transformed the organic material into hydrocarbons.” Most organic debris is destroyed at the earth's surface by oxidation or by consumption by microorganisms. Organic material that survives to become buried under sediments or deposited in other oxygen-poor environments begins a series of chemical and biological transformations that may ultimately result in petroleum, natural gas, or coal. Many such deposits occur in sedimentary basins, and along continental shelves. It can be seen therefore that oil and natural gas are natural resources which have been formed as a result of the continuous processes of organic materials under the soil over a long period of time. 21 LAW 411 OIL AND GAS LAW I It is a type of mineral resources but with a distinct character because of its components. It is not formed by the direct acts of humans but by nature through the processes explained in this unit. Self Assessment Exercise 1. Describe the nature of oil. 3.3 Physical properties of oil and gas. It is generally accepted that oil, like other fossil fuels, formed from the fossilized remains of dead plants and animals by exposure to heat and pressure in the Earth's crust over hundreds of millions of years. Over time, the decayed residue was covered by layers of mud and silt, sinking further down into the Earth’s crust and preserved there between hot and pressured layers, gradually transforming into oil reservoirs. Todd M. Doscher, a Professor of Petroleum Engineering, University of Southern California, opined that natural gas is formed from water-dwelling microorganisms. As these microorganisms died and accumulated on the ocean floors, they were slowly buried and the remains were compressed under layers of sediment. Over millions of years, the pressure and heat exerted by the overlying sediments chemically transformed this organic material into natural gas. Because petroleum and natural gas are formed by similar natural processes, these two hydrocarbons are often found together in underground reservoirs. The chemical composition of all petroleum is principally hydrocarbons, although a few sulfur- containing and oxygen-containing compounds are usually present; the sulfur content varies from about 0.1 to 5 percent. Petroleum contains gaseous, liquid, and solid elements. The consistency of petroleum varies from liquid as thin as gasoline to liquid so thick that it will barely pour. Small quantities of gaseous compounds are usually dissolved in the liquid; when larger quantities of these compounds are present, the petroleum deposit is associated with a deposit of natural gas. Doscher stated further that three broad classes of crude petroleum exist: the paraffin types, the asphaltic types, and the mixed-base types. The paraffin types are composed of molecules in 22 LAW 411 OIL AND GAS LAW I which the number of hydrogen atoms is always two more than twice the number of carbon atoms. The characteristic molecules in the asphaltic types are naphthenes, composed of twice as many hydrogen atoms as carbon atoms. In the mixed-base group are both paraffin hydrocarbons and naphthenes. Petroleum is formed under earth’s surface by the decomposition of marine organisms. The remains of tiny organisms that live in the sea—and, to a lesser extent, those of land organisms that are carried down to the sea in rivers and of plants that grow on the ocean bottoms—are enmeshed with the fine sands and silts that settle to the bottom in quiet sea basins. Such deposits, which are rich in organic materials, become the source rocks for the generation of crude oil. It is believed that the process began many millions of years ago with the development of abundant life, and it continues to this day. The sediments grow thicker and sink into the seafloor under their own weight. As additional deposits pile up, the pressure on the ones below increases several thousand times, and the temperature rises by several hundred degrees. The mud and sand harden into shale and sandstone; carbonate precipitates and skeletal shells harden into limestone; and the remains of the dead organisms are transformed into crude oil and natural gas. Self Assessment Exercise 1. Explain how petroleum and natural gas are formed and their basic components. 3.4 Background and origin of petroleum and natural gas. Petroleum in an unrefined state has been utilized by man for over 5000 years. Oil in general has been used since early human history to keep fires ablaze, and also for warfare. Ancient Persian language tablets indicate the medicinal and lighting uses of petroleum in the upper echelons of their society. Ancient China was also known to burn skimmed oil for light. An early petroleum industry was established in the 8th century, when the streets of Baghdad were paved with tar, derived from petroleum through destructive distillation noted, Ajram (1992). In the 9th century, oil fields were exploited in the area around modern Baku, Azerbaijan, to produce naphtha. These fields were described by al-Masudi in the 10th century, and by Marco Polo in the 13th century, who described the output of those oil wells as hundreds of shiploads. According to Zayn Bilkadi, 23 LAW 411 OIL AND GAS LAW I petroleum was distilled by al-Razi in the 9th century, producing chemicals such as kerosene in the alembic, which he used to invent kerosene lamps for use in the oil lamp industry. Its importance in the world economy evolved slowly, with whale oil used for lighting into the 19th century, and wood and coal used for heating and cooking well into the 20th Century. Halliday Fred in his work stated that a petroleum industry emerged in North America in Canada and the United States. The Industrial Revolution generated an increasing need for energy which was fueled mainly by coal, with other sources including whale oil. However, it was discovered that kerosene could be extracted from crude oil and used as a light and heating fuel. Petroleum was in great demand, and by the twentieth century had become the most valuable commodity traded on the world market. In another account by OPEC: The first oil well is said to have been dug in Shush, southern Iran in about 500BC and the Chinese are believed to have drilled for oil and gas with bamboo tubes and bronze drill bits as early as the third century BC. Originally, oil was collected from natural surface seepages and shallow pits, and for hundred of years was used mainly for medicinal purposes, water proofing occasionally as a basic lubricant and for lighting. It was used as asphalt in the building pavements of ancient Babylon. The first modern commercial drilling and production of oil is usually said to have begun in 1859 in the U.S when Col Edwin L. Drake sunk a well in Pennsylvania near some natural oil seepages. He was working for Pennsylvania Rock Oil Company which was interested in using oil for lighting. However, some authorities claim the first modern oil well was sunk in 1806 near Charlottesville in West Virginia. During the late 19th and early 20th centuries, the oil industry concentrated on extracting kerosene from crude oil for lamps and stores. Its use as lubricant also began to be developed at this time. However, more important was the development of crude oil as a boiler fuel which soon became competitive with other established energy forms, particularly with coal in locomotives and ships. By World War I advances in refining had extended its use as a fuel for car and aero engines. The large - scale conversion of 24 LAW 411 OIL AND GAS LAW I navies and merchants fleets to oil from coal helped to provide oil with an important boost. With this rapid advance, by the 1930s oil began to compete with coal as the chief energy source for the world’s industries. World consumption of oil rose from about one million barrels a day by 1940. However, it was in the post – World War II period of reconstruction and growth ending in the 1960s that oil over took coal’s predominant position in world energy consumption with total oil production reaching over 20 million barrels a day. Russia as one of the earliest producers of oil produced 3,500 tons of oil in 1825 and doubled its output by the middle of the century. After oil drilling began in what is now Azerbaijan in 1848, two large pipelines were built in the Russian Empire. At the turn of the 20th century, Imperial Russia's output of oil, almost entirely from the Apsheron Peninsula, accounted for half of the world's production and dominated international markets. The first modern oil refineries were built by Ignacy Łukasiewicz near Jasło, Poland from 1854– 56. These were initially small as demand for refined fuel was limited. The refined products were used in artificial asphalt, machine oil and lubricants, in addition to Łukasiewicz's kerosene lamp. As kerosene lamps gained popularity, the refining industry grew in the area. In the first quarter of the 20th century, the United States overtook Russia as the world's largest oil producer. By the 1920s, oil fields had been established in many countries including Canada, Poland, Sweden, the Ukraine, the United States, and Venezuela. In 1947, the Superior Oil Company constructed the first offshore oil platform off the Gulf Coast of Louisiana. After World War II ended, the countries of the Middle East took the lead in oil production from the United States. It will be realized that Drake’s success in 1859 marked the beginning of the rapid growth of the modern petroleum industry. Soon petroleum received the attention of the scientific community, and coherent hypotheses were developed for its formation, migration upward through the earth, and entrapment. With the invention of the automobile and the energy needs brought on by World War I (1914-1918), the petroleum industry became one of the foundations of industrial society. 25 LAW 411 OIL AND GAS LAW I As the world’s consumption of oil rises, the quest to have more reserves of oil increased and consequently it has led to more drilling effort by many countries in different parts of the world through the available scientific and technological means. For natural gas it is to be noted that human beings have used natural gas for centuries. Historical records show that natural gas was burned as fuel in China as early as AD 250. In the 17th century, natural gas was used for heating and lighting in northern Italy. In the United States, it was first discovered in Fredonia, New York, in 1821. As its name implies, natural gas emerges from the ground in gas form, which is difficult to transport and store. As a result, natural gas has historically been used in areas close to the gas reservoirs. As the petroleum industry grew in the 19th and 20th centuries, natural gas that was recovered with petroleum from underground reservoirs was typically treated as a waste by- product and was often burned off at the well. Today, natural gas is transported through extensive networks of pipelines or is liquefied and transported by ship. Again, the character of natural gas has changed as it is sought after for industrial use and for power. Between 1949 and 2002, approximately 2.5 million exploration and development wells were drilled in the United States. While domestic petroleum exploration continues on land, oil companies are also exploring promising offshore locations along the continental margins. Self Assessment Exercise 1. Discuss the origin of petroleum and its development. 2. Highlight the developments in oil and gas in perspectives. 3.5 Growth in the search and use of oil and gas. There were other sources of energy prior to the discovery of oil. Certain other energy sources, found only in localized areas, were also used in ancient times. These include: asphalt, coal, and peat from surface deposits and oil from seepages of underground deposits. 26 LAW 411 OIL AND GAS LAW I This situation changed when wood began to be used during the middle ages to make charcoal. The charcoal was heated with metal ore to break up chemical compounds and free the metal. As forests were cut and wood supplies dwindled at the onset of the Industrial Revolution in the mid- 18th century, charcoal was replaced by coke (produced from coal) in the reduction of ores. Coal, which also began to be used to drive steam engines, became the dominant energy source as the period progressed. From the late 19th century petroleum has been used as a major commodity in the world and it was propelled largely by the industrial revolution which required that petroleum, coal and other products thereby had to be used to power the engines. Thus, petroleum gradually became a major commodity being sought after. In the United States of America the oil industry expanded rapidly as refineries sprang up to make oil products from crude oil. The oil companies soon began exporting their principal product, kerosene—used for lighting—to all areas of the world. The development of the internal- combustion engine and the automobile at the end of the 19th century created a vast new market for another major product, gasoline. A third major product, heavy oil, began to replace coal in some energy markets after World War II. The major oil companies, which are based principally in the United States, initially found large oil supplies in the United States. As a result, oil companies from other countries—especially Britain, the Netherlands, and France—began to search for oil in many parts of the world, especially the Middle East. The British brought the first field there (in Iran) into production just before World War I (1914-1918). During World War I, the U.S. oil industry produced two-thirds of the world’s oil supply from domestic sources and imported another one-sixth from Mexico. At the end of the war and before the discovery of the productive East Texas fields in 1930, however, the United States, with its reserves strained by the war, became a net oil importer for a few years. During the next three decades, with occasional federal support, the U.S. oil companies were enormously successful in expanding in the rest of the world. By 1955 the five major U.S. oil companies produced two-thirds of the oil for the world oil market (not including North America and the Soviet bloc). Two British-based companies produced almost one-third of the world’s oil 27 LAW 411 OIL AND GAS LAW I supply, and the French produced a mere one-fiftieth. The next 15 years were a period of serenity for energy supplies. The seven major U.S. and British oil companies provided the world with increasing quantities of cheap oil. The world price was about a dollar a barrel, and during this time the United States was largely self-sufficient, with its imports limited by a quota. These companies also known as the “seven sisters” dominated the oil industry for a long time and their operations covered many countries due to their capital and experience. One major thing that also contributed to the expansion of these international oil companies was that it had the support of the governments of these two big countries at the time. i.e. the United States and Britain. This was the situation of oil and gas that affected the operations in the industry. It should be noted that oil and gas have been given serious attention by many people because of its growth as a source of energy in the world. As noted by Omorogbe energy is basically what makes things function. It is the underlying factor behind every type of activity or action. For this reason, the future of any society is dependent on its ability to have access to the energy it needs. The amount of energy a society uses or has at its disposal is also a function of its level of development. Therefore one finds that the energy consumption of any of the developed country is several times more than that of the average developing country. It can safely be said that any country whose energy needs are not being met will have severe development problems. This factor has been one of the major reasons oil and gas has been given priority by both the developed and the less- developed countries. Self Assessment Exercise - Take note of the periods in time and the societal responses to the use of oil as a source of energy. 4.0 CONCLUSION Since oil was first discovered over 5,000 years ago a lot have changed in its character compared with what obtains now. To a large extent oil and indeed natural gas are the most widely used source of energy today having over taken the use of other sources energy such as wood and coal. 28 LAW 411 OIL AND GAS LAW I Today every house, industry, factory use oil to power its engine, operate small machines in order to produce one material or another. In this wise, oil has been a moving fluid (or gas) that powers many aspects of life. The physical state of petroleum has significantly affected the evolution of the industry. The transportation of petroleum either in gas or liquid form is a primary concern of any producer especially since large scale movement of the product requires specially designed installations. Solids on the other hand, are easier to transport and can often be carried and/or stored with other materials. In early days oil was carried in barrels, then in bulk containers, and later through pipelines and increasingly larger tankers. The physical state of oil and the fact that several millions barrels daily are utilized by the average industrial state makes long term storage a problem. Other solid commodities can be stored with greater ease to the extent that a stockpile of several years can be built up by any consuming state. Even with increased technology this remains difficult for petroleum or natural gas. Therefore the producers remain important and a force to be reckoned with in the whole system. 5.0 SUMMARY In this unit we have been able to define oil and gas along its contents and its qualities. It is clear now that petroleum or crude oil is a naturally occurring, toxic, flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights, and other organic compounds, that are found in geologic formations beneath the earth's surface. Also we have seen the statutory definition for the term and its meaning in the context. The history of petroleum and natural gas have also been treated in detail for a proper understanding of what brought about this very important substance. The physical contents of oil shows that it is wasting asset, it is not renewable by man since he did not create it. It is natural resources which is formed by a series of scientific processes and can only be discovered by continuous exploration into the vast areas of the earth and under the waters. 29 LAW 411 OIL AND GAS LAW I The most important use of petroleum today lies in its current use for most of this century as the world’s major supplier of energy. Analysts are of the view that this is likely to continue for a long time to come. 6.0 TUTOR MARKED ASSIGNMENT. 1. Give a detailed account of the origin and development of oil and gas. 2. Carefully explain the nature of petroleum and how it is formed. 7.0 REFERENCES/ SUGGESTIONS FOR FURTHER READING. 1. Omorogbe, Y. 2001, Oil and Gas Law in Nigeria. (1st ed). Malthouse Press, Lagos. 2. Halliday, Fred. The Middle East in International Relations: Power and Ideology. Cambridge University Pres: USA, 270. 3. Frank, Alison Fleig (2005). Oil Empire: Visions of Prosperity in Austrian Galicia (Harvard Historical Studies). Harvard University Press. 4. Whitney, G, (2009) Fossil Fuel, Microsoft Corporation. 5. Doscher, T.M. (2008) Petroleum, Microsoft Corporation. UNIT 2: EXPLORATION FOR PETROLEUM AND NATURAL GAS. Contents 1.0 Introduction 2.0 Objectives 3.0 Main content. 3.1 What is oil exploration? 3.2 Beginning of oil exploration. 3.3 Natural gas production. 3.4 Oil and gas refining. 4.0 Conclusion. 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Reference/further readings 30 LAW 411 OIL AND GAS LAW I 1.0 INTRODUCTION It is a common occurrence to have petroleum being used by people for a variety of activities in their daily lives. It is also frequently carried in several forms by many but the process of getting it is far from the knowledge of many people. For petroleum to be useful for human and other use it has to be extracted from its source. Crude oil in its natural state has to be explored before it can be got for use and this unit is intended to discuss this topic. The process of exploration and prospecting for petroleum will be examined in details in a manner that will leave you the student with knowledge of how oil and gas are extracted from the ground, and refined into the state that they can be used. 2.0 OBJECTIVES At the end of this unit, you should be able to: i. Understand the meaning of exploration of oil. ii. Explain the effort made by different countries to explore oil. iii. Understand the nature of natural gas production. iv. Have an understanding of the basic process of refining and production. 3.0 MAIN CONTENT 3.1 What is oil exploration? To explore in relation to petroleum means “to make a preliminary search by surface geological and geophysical methods, including aerial surveys but excluding drilling below 91.44 metres.” See Section 15 of the Petroleum Act, Cap P10 Laws of the Federation of Nigeria (LFN) 2004. It is important to note that in this technical sense exploration will entail the use of certain techniques to search for the areas of the earth surface that have petroleum underneath. This definition of exploration of petroleum is particularly for the purpose of the operations that would be carried out under the Act in Nigeria. This is so because the term ‘exploration’ generally may be construed as meaning the search for or discovery of certain substance like mineral, oil and other materials from the sub-surface of the ground or the ocean beds. 31 LAW 411 OIL AND GAS LAW I Exploration is the general process of searching for oil and it is in this context that it will be used in this discussion. It is the first step in the actual search for oil among series of other steps. The other steps involved are ‘prospecting’ and ‘mining’ which normally involves actual drilling of the earth surface deep into the ground to locate crude oil deposits. By its nature petroleum is found underground deep inside the earth’s crust and under the sea beds. But it has to be extracted. After several thousands of years of formation of the dead bodies of organisms and their reaction with other chemicals to make oil, the crude oil sediments and remain in the pore spaces beneath the ground. Little drops of the oil seep to places within this pore spaces and settle there with the continuous pressure and heat which both cause further transformation and change in composition. Oil exploration involves the process of search for and discovery of oil from its natural source which is usually under the ground. In order to find crude oil underground, geologists must search for a sedimentary basin in which shales rich in organic material have been buried for a sufficiently long time for petroleum to have formed. The petroleum must also have had an opportunity to migrate into porous traps that are capable of holding large amounts of fluid. The occurrence of crude oil in earth’s crust is determined by these conditions, which must be met simultaneously, and by the time span of between ten million to a hundred million years required for the oil’s formation. Petroleum geologists and geophysicists have many tools at their disposal to assist in identifying potential areas for drilling. The only way to prove that oil is present in the subsurface is to drill a well. In fact, most of the oil provinces in the world have initially been identified by the presence of surface seeps. These petroleum scientists have developed techniques that indicate the possibility of oil or gas being found deep in the ground. Nevertheless, the only method by which oil or gas can be found is by drilling a hole into the reservoir. In some cases oil companies spend many millions of dollars drilling in promising areas, only to find dry holes. For a long time, most wells were drilled on land, but after World War II drilling commenced in shallow water from platforms supported by legs that rested on the sea bottom. Later, floating platforms were developed that could drill at water depths of 1,000 m (3,300 ft) or more. Large oil and gas fields have been found offshore: in 32 LAW 411 OIL AND GAS LAW I the United States, mainly off the Gulf Coast; in Europe, in Russia and Brazil. Most major finds in the future may be offshore. An oil field, once found, may comprise more than one reservoir—that is, more than one single, continuous, bounded accumulation of oil. Several reservoirs may be stacked one above the other, isolated by intervening solid rock strata. Such reservoirs may vary in size from a few tens of hectares to tens of square kilometers, and from a few meters in thickness to several hundred or more. Most of the oil that has been discovered and exploited in the world has been found in a relatively few large reservoirs. In the United States, for example, 60 of approximately 10,000 oil fields have accounted for half of the productive capacity and reserves. SELF ASSESSMENT EXERCISE - Explain what oil exploration means and what it entails. 3.2 Beginning of oil exploration. Exploration for oil has commenced in many parts of the world for centuries. In various countries and regions attempts have been made to discover oil through the geological means and within the technology available. It is believed that the first oil well is said to have been dug in southern Iran in about 500BC and the Chinese are believed to have drilled for oil and gas with bamboo tubes and bronze drill bits as early as the third century BC. As we have already noted the first modern commercial drilling and production of oil is usually said to have begun in 1859 in the United States when a well was sunk in Pennsylvania near some natural oil seepages. It is also noted that Russia was one of the earliest producers of oil producing 3,500 tons of oil in 1825, an output that was doubled by the middle of the century. After oil drilling began in what is now Azerbaijan in 1848, two large pipelines were built in Russia. The twentieth century saw tremendous growth in the exploration and prospecting for oil. Exploration for oil, started by the Navy during the World War II near Point Barrow in the Arctic Naval Reserve, was turned over to private contractors in 1946, and wells were driven in the 33 LAW 411 OIL AND GAS LAW I region approximately 100 miles South of Point Barrow, the northernmost tip of the North American continent. In Nigeria the search for oil was a product of the colonialists who were in control of the trade going on at the time around Oil Rivers Protectorates and the banks of the Rivers Niger and Benue. Mining and other activities for solid minerals like tin, columbite, limestone etc were already taking place in these areas and in the northern parts of the protectorates. It was in 1908 that the first recorded major exploration took place. This was carried out by the German Bitumen Company in 1908 around a place in the present day Ondo State of Nigeria. Prior to this time however, there has been some sort of legislation on mineral oil in Nigeria with the enactment of Petroleum Ordinance of 1889. This legislation was in existence before actual mineral oil exploration of any kind was undertaken. The 1889 ordinance was followed by Mineral Regulation (Oil) Ordinance of 1907. Both of these legislations laid down the basic framework for the development of petroleum and other minerals in Nigeria. Several regulations have been put in place by the governments of the various countries where oil has been explored for the regulation of the operations of this important segment of the industry. At the initial stages of the exploration of oil in the world, private companies and conglomerates were the ones taking up the operations while the government only allotted oil fields and coastal portions for the companies to prospect for oil. With the passage of time and the discovery of oil in various quantities, the governments of these countries have taken up interests and public corporations have been established to take part in the exploration process along side the already existing multinational companies. The environment has also been properly regulated with written and more comprehensive statutes that meet with the times. SELF ASSESSMENT EXERCISE Outline the early oil exploration efforts around the world. 3.3 Natural Gas Production. 34 LAW 411 OIL AND GAS LAW I Natural gas has been used for several centuries by man. Historical records show that natural gas was burned as fuel in China as early as AD 250. According to James Speight, in the 17th century, natural gas was used for heating and lighting in northern Italy. In the United States, it was first discovered in Fredonia, New York, in 1821. A certain amount of natural gas almost always occurs in connection with oil deposits and is brought to the surface together with the oil when a well is drilled. As its name implies, natural gas emerges from the ground in gas form, which is difficult to transport and store. As a result, natural gas has historically been used in areas close to gas reservoirs. As the petroleum industry grew in the 19th and 20th centuries, natural gas that was recovered with petroleum from underground reservoirs was typically treated as a waste by-product and was often burned off at the well. Today, natural gas is transported through extensive networks of pipelines or is liquefied and transported by ship and is put to many uses. To locate natural gas, exploration geologists search for geologic regions containing the ingredients necessary for the formation of natural gas. Natural gas is transported, usually by pipelines, to customers who burn it for fuel or, in some cases, make petrochemicals from chemicals extracted, or “stripped,” from it. Natural gas can be liquefied at very low temperatures and transported in special ships. This method is much more costly than transporting oil by tanker. Oil and natural gas compete in a number of markets, especially in generating heat for homes, offices, factories, and industrial processes. World production of natural gas is measured in two ways: gross production, which is the total amount obtained from oil and gas wells; and marketed production, which is the amount sold to consumers, as well as that used by producers as fuel. The difference between gross production and marketed production is the amount of gas that is either 'flared' (burned at or near the well because it cannot be piped to a customer economically) or re-injected into the earth's crust to maintain the pressure in the oil fields. Analysis for 1976 indicated that world production of marketed gas exceeded the 1975 level of 47,064 billion cubic feet, as efforts to utilize a greater proportion of gross production continued around the world. In 1977, natural gas production exceeded that of the previous year of 49,203 billion cubic feet (marketed production). Producing nations that formerly flared much of the gas produced as a by- 35 LAW 411 OIL AND GAS LAW I product of oil extraction continued efforts to increase economic utilization of this valuable resource. The United States remained the leading world producer, with an output nearly double that of the second-ranked Soviet Union, despite a decline in U.S. output and an increase in Soviet production. Nigeria has established the Liquefied Natural Gas Project which eventually took off in 1993. Self Assessment Exercise 1. Give a brief account of how natural gas occurs. 2. Take note that natural gas is sometimes a bye product of crude oil but is often discovered separately on its own which makes it a separate product. 3.4 Oil and Gas Refining. The oil and gas industry is regulated in many phases based on its divergent nature. Before crude oil can be useful it has to be refined into a suitable form. As crude oil or natural gas is produced from an oil or gas field, the pressure in the reservoir that forces the material to the surface gradually declines. In an effort to extract this remaining oil, oil companies have begun to use new techniques that allow operators to drill horizontally, as well as vertically, into very deep structures have dramatically reduced the cost of finding natural gas and oil supplies. After it has been extracted from the ground, crude oil is transported to refineries by pipelines, barges, or giant oceangoing tankers. Refineries contain a series of processing units that separate the different constituents of the crude oil by heating them to different temperatures, chemically modifying them, and then blending them to make final products. These final products are principally gasoline, kerosene, diesel oil, jet fuel, home heating oil, heavy fuel oil, lubricants, and feedstocks, or starting materials, for petrochemicals. Raw petroleum is heated to distill hydrocarbons by their weight. Crude with lighter molecular weights are separated and refined into gasoline (commonly called petrol) and other fuels, while heavier crude are processed into engine lubricants, asphalt, waxes, and other products. Because 36 LAW 411 OIL AND GAS LAW I demand for fuel exceeds demand for these other products made from the heavier hydrocarbons, petroleum engineers involved in the process of refining often break apart the heavy molecules into lighter ones that can be refined into gasoline. They do so by means of processes called thermal cracking and catalytic cracking. Several hundreds of products can be made out of crude oil during the process of refining which includes addition of certain chemicals and through heating process. The products that can be got from refined petroleum depend on the nature of the crude and the qualities it possesses. It also depends on the technology available at the refinery. When crude oil has been refined it usually brings out three major groups of products which are produced when crude oil is broken into fractions. They are: gas and gasoline, middle distillates, and fuel oil and residue cuts. The gas and gasoline group after refining gives the following products: aviation fuels, motor fuels and raw material, or feedstock for the petrochemical industry. The middle distillates refer to products from the middle of a hypothetical barrel of crude such as kerosene, and light gas oil, heating oil, diesel oil and waxes as well as some lubrication oil. The third group is the heavy or black products such as fuel oil for power stations, industrial boilers and ship furnaces. It also includes asphalt and bitumen used for roads, waterproofing and roofing material. In the initial period of the oil industry, the first refining processes were developed to extract kerosene for lamp. The light products and residue were considered waste and usually burned off. The first refining processes were developed to purify, stabilize and improve the quality of kerosene. Other uses were progressively developed for those parts of the barrel previously thrown away. By World War I, gasoline or petrol began to be used in increasing quantities as a motor fuel for cars, trucks. Other grades of refined crude oil have since been developed to cater for the different facets of machines that exist in the world today. SELF ASSESSMENT EXERCISE 1. State the process of refining crude oil and the end products. 37 LAW 411 OIL AND GAS LAW I 4.0 CONCLUSION Petroleum scientists and engineers have to devise means of getting crude oil from the sub-surface before it can be obtained and transformed into the required state. This is done through the process of exploration. When oil has been produced from an oil field, it is treated with chemicals and heat to remove water and solids, and the natural gas is separated. The oil is then stored in tanks, and later transported to a refinery by truck, railroad tank car, barge, or pipeline. Large oil fields usually have direct outlets to pipelines. Many parts of the world have crude oil deposits which have been explored by these countries for more than a century and are still being explored up till date. 5.0 SUMMARY In this Unit we have considered the concept of oil exploration, what it entails as the major preliminary step towards extraction of crude oil deposits from their natural basins in the ground. We have also considered the earliest attempts at exploration for oil and the successes of these efforts in Nigeria and other places. The process of refining petroleum was treated briefly while the basics of natural gas were explained. All these are meant to give the student the preliminaries of how oil is found. 6.0 TUTOR MARKED ASSIGNMENT. With the aid of examples give a detail account of the efforts at production of petroleum and natural gas in the world. 7.0 REFERENCES 1. Geoffrey Etikerentse,1985, Nigerian Petroleum Law, Macmillan Publishers.1st edition. 2. Omorogbe, Y. The Legal Framework for oil Production in Nigeria. Journal of Economic and Resources Law, 1987 pg 273). 4. James Speight, “Natural Gas”, in Microsoft. 2009. 38 LAW 411 OIL AND GAS LAW I 5. Gene Whitney., Petroleum and Natural Gas. Microsoft 2009. UNIT 3 IMPORTANCE OF OIL AND GAS Contents 1.0 Introduction. 2.0 Objectives. 3.0 Main content. 3.1 General uses of oil and natural gas. 3.2 Petroleum as a source of energy. 3.3 Oil producing countries and oil production. 4.0 Conclusion. 5.0 Summary. 6.0 Tutor Marked Assignment 7.0 Reference/further readings 1.0 INTRODUCTION. This unit deals with the importance of crude oil and natural gas to our world. From the ancient times when oil was discovered it has been used for different purposes. Its use transcends a number of instances in daily living. The physical properties of oil make it a product that has 39 LAW 411 OIL AND GAS LAW I special purposes. This highlight of the uses of crude oil and natural gas will show their importance all round the world and as a source of energy. The countries that are into production of oil and gas are examined to illustrate the contribution of oil and gas to their economy. 2.0 OBJECTIVES At the end of this unit, you should be able: i. To highlight the uses of oil. ii. To explain how oil became a product sought after by people of many countries. iii. To understand the importance of crude oil and natural gas. iv. To understand how oil has contributed to the growth of the economy of oil producing countries. 40 LAW 411 OIL AND GAS LAW I 3.0 MAIN CONTENT. 3.1 General Use of Oil and Natural Gas. It should be noted that the use of oil has changed over time in the world right from its early discovery through its development to the present age. During the late 19th and early 20th centuries, the oil industry concentrated on extracting kerosene from crude oil for lamps and stores. The oil industry which grew in the United States expanded rapidly as refineries sprang up to make oil products from crude oil. The oil companies soon began exporting their principal product, kerosene—used for lighting—to all areas of the world. The development of the internal- combustion engine and the automobile at the end of the 19th century created a vast new market for another major product, gasoline. A third major product, heavy oil, began to replace coal in some energy markets after World War II. The major oil companies, some of which are based principally in the United States, initially found large oil supplies in the United States. As a result, oil companies from other countries— especially Britain, the Netherlands, and France—began to search for oil in many parts of the world, especially the Middle East. Its use as lubricant also began to be developed at this time. However, more important was the development of crude oil as a boiler fuel which soon became competitive with other established energy forms, particularly with coal in locomotives and ships. By World War I advances in refining had extended its use as a fuel for car and aero engines. The large - scale conversion of navies and merchants fleets to oil from coal helped to provide oil with an important boost. With this rapid advance, by the 1930s oil began to compete with coal as the chief energy source for the world’s industries. World consumption of oil rose from about one million barrels a day by 1940. However, it was in the post – World War II period of reconstruction and growth ending in the 1960s that oil over took coal’s predominant position in world energy consumption with total oil production reaching over 20 million barrels a day. Petroleum also has certain qualities which makes it unique among other natural resources. Omorogbe opined that these peculiarities “are linked to its physical state of either liquid or gas.” This has had effect on the international industry so that the history of the industry would have 41 LAW 411 OIL AND GAS LAW I been different if it “could have been made into a powder, packeted, and sold in general stores.” Solid products are easier to transport, and can often be carried and stored with other materials. However large-scale transport of a liquid such as petroleum requires specially designed installations. One major consequence of the physical state of petroleum is that whereas other trades can rely on other means of transport which are capable of catering for a host of products and are thus not compelled to provide machinery of their own, transportation must be provided for by the industry. Transport is thus an integral part of the industry and a ‘constituent fact which has considerably influenced the structure of the industry’. Earlier forms of transportation were the barrel (which remains the international unit of measurement for liquid crudes) and then bulk containers. Pipelines have consistently been used from the earliest days of the industry, and are currently the most effective means of transport on land. However sea going tankers form one of the most visible characteristics of the industry today, and because of their flexibility are the major carriers. Over long distances they are the most economical form of transport, and since the larger the tanker the larger the unit cost of transportation, there is a natural tendency towards increasingly large tankers which constantly ply the seas and which require special loading jetties, artificial islands or large buoys moored far off shore. Another important use of petroleum is that it serves as lubricants for machines generally. Lubricants are applied to machinery to reduce friction between moving parts. There are various lubricants that are products of crude oil. Natural lubricants may be fluid, or semi fluid, such as organic and mineral oils. They may be semisolid, such as grease; or solid, such as graphite. Since the late 19th century, more than 90 percent of all lubricants have been obtained from petroleum or shale oil, which are abundant and can be distilled and condensed without decomposing. The discovery of oil has increased the revenue of several nations, from the discoveries of the Arabian Peninsula, the North Sea and the Gulf of Mexico. The same yield in revenue is found in the oil regions of Russia, West Africa, South America and other parts where oil is found. In Britain for example, by the 1980s it was adding significantly to the British economy as oil exports increased during a period of high oil prices. British taxpayers also benefited from the 42 LAW 411 OIL AND GAS LAW I taxes and royalties paid by the oil and gas companies, which were licensed by the crown to search for and produce oil and gas. Oil production in that country peaked during the 1990s. Natural gas production has contributed in great measure to development of the producing countries. This is particularly among the advanced countries. Gas has been used since the 19th century in London and other places, but it was manufactured from coal. Since the 1960s, when offshore gas fields were discovered, natural gas has been used. In the early 2000s natural gas accounted for more than two-fifths of the fuel consumption in Britain. Use of natural gas has continued to expand on the residential and commercial fronts in the United States with more than 26.8 million customers using gas for heating in the 1980s. In Nigeria since the 1980s, there has been increasing utilisation of gas in Nigeria, for power generation, industrial heating, fertiliser and petrochemical manufacturing and as feedstock for direct steel reduction. But the largest gas users will be the Liquefied Natural Gas (LNG) Project and the Aluminium Smelting Industry. Nigeria's LNG project had been on the drawing board since the 1960s. the Ministry of Petroleum Resources, in addition to imposing penalties which were intended to end gas flaring by 1994, has offered incentives to potential investors who are interested in gas exploration. SELF ASSESSMENT EXERCISE 1. Examine the general use of oil and natural gas in the world. 2. What is the importance of oil? 3.2 Petroleum as a Source of Energy The importance of petroleum today is due largely to the fact that it is a source of energy. Fossil fuels are primarily burned to produce energy. This energy is used to power automobiles, trucks, airplanes, trains, and ships around the world; to fuel industrial manufacturing processes; and to provide heat, light, air conditioning, and energy for homes and businesses. To provide fuel for transportation, petroleum is refined into petrol, diesel fuel, aviation fuel, and other derivatives used in most of the world’s automobiles, trucks, trains, aircraft, and ships. 43 LAW 411 OIL AND GAS LAW I Demand for natural gas, historically considered a waste by-product of petroleum and coal mining, is growing in business and industry because it is a cleaner-burning fuel than petroleum or coal. Natural gas, which can be connected directly to commercial plants or individual residences and used on demand, is used for heating and for air conditioning. This is common in the countries where technology is advanced. Residential uses of natural gas also include fuel for stoves and other heating appliances. “Without energy the wheels of industry do not turn. No cars, trucks, trains, ships or airplanes could be built. Without energy, houses would remain cold and unlighted, food would be uncooked. Without energy resources we would literally be back in the Stone Age.” The growth in the utilization of the mechanical engines and automobile during the twentieth century increased the need for the fuel to power these engines. This was found in petroleum and its products. Certain variants of this product like diesel, and aviation had to be used in the fueling of heavy equipments and consequently the demand for petroleum increased tremendously. In addition to direct utilisation for commercial purposes, fossil fuels are also burned to generate most of the world’s electric power. Oil is frequently used for this purpose in the developed countries. In Nigeria, there has been development towards this type utilization of gas for power. Energy experts are of the view that oil supplies may eventually become exhausted. Some estimate that world oil reserves will last from 63 to 95 years more. Consequently, attention is now being focused on other energy sources, such as solar, wind wave and hydro electric. However, major problems remain unresolved concerning their production and distribution. Today, oil continues to be the most important source of energy and its future availability is assured as long as the earth continues in its present form. Despite the environmental problems associated with oil exploration and production, oil will remain the largest international traded commodity. Oil in its refined state is useful in many ways such as petrol for cars, otherwise known as Premium Motor Spirit (PMS), aviation fuel, diesel, Kerosene, synthetic rubber, bitumen for roads, tar for ships, medicine, lubricants, grease, jellies. 44 LAW 411 OIL AND GAS LAW I Oil is a non-renewable resource. The supply is limited. It takes millions of years for oil to form. Once oil is used up, it’s gone. This was not a concern about 100 years ago. But over the years the world has used much oil and the demand for oil has increased yearly. New sources of crude oil will probably be discovered. So will new ways of draining the last drops of oil from known sources. Even so, most experts agree that the world’s oil reserves will be largely gone by the year 2050. Petrol makes vehicles and machines run. This liquid of nature is very important to all human beings. When a vehicle is running out of fuel, it’s time to fill up the vehicle’s tank at a gas station. When you’re at a gas station, you’re probably standing on top of a huge underground storage tank. The pump brings the petrol up from the storage tank, and a hose feeds it into the car’s gas tank. SELF ASSESSMENT EXERCISE 1. How would you describe petroleum as s source of energy? 3.3 Oil Producing Countries and Oil Production. Oil is found and produced in practically all parts of the world: in North and South America, the Caribbean, the Middle East, the Far East, Australia, Europe, the former Soviet Union, the North Africa. Today, oil is found in nearly 80 countries of the world, the largest 10 accounting for nearly three- quarters of the total production. Nigeria was the eleventh largest producer. The United States is a substantial producer, but a net importer, of crude oil. The former USSR appears to be self sufficient for its oil needs and also exports to Eastern Europe and a few Western European countries. Some of the largest exporters of crude oil are developing countries and the major proportion of the world’s proved oil reserves of crude oil are located in the Middle East. The Middle East accounts for more than 60 % of the world’s proved reserves of crude oil, but the region accounted for only 20% of the world production. The region could produce more oil but the weak oil market limited the amount of oil that could be exported and the Organisation of Petroleum Exporting Countries (OPEC) production ceiling also affected production. Saudi Arabia, Iran, Kuwait and United Arab Emirate (Abu Dhabi) are the major producers. 45 LAW 411 OIL AND GAS LAW I In North America, the US and Canadian production slightly exceeded that of the Middle East, but the reserve of crude oil represented less than 12 % of the world’s total. Latin America and the Caribbean contained about 11 % of the world’s proved reserves. The former USSR accounted for 22 % of the total world crude oil production and about 10 % of the reserves. In Africa, the proved reserves were about 7.5% and the production 8% of the world total. The major producers in Africa are Algeria, Libya, Nigeria, Gabon, Angola and Egypt. Oil production, mainly by Britain and Norway, in the North Sea has made Western Europe an important oil producing region. Germany and a few others produce small quantities of onshore oil. Western Europe accounted for over 6% of world production and had 3.5% of the world’s proved reserves.” World output of crude oil in 1975 totaled about 19,481 million barrels; each of the leading oil producing countries including Nigeria made significant production around this period. Returns for the first five months of 1976 for the Soviet Union, the world's leading producer, indicated an increase of 3.9 percent over 1975 output; the others in order of output at the time were the United States, the second-ranked world producer. Other significant producing countries, with their 1975 standing among world producers were Saudi Arabia (third), Iran (fourth), Venezuela (fifth), Kuwait (sixth), Nigeria (seventh), and Abu Dhabi, Dubai, and Sharjah (three of the United Arab Emirates, collectively eighth), the People's Republic of China (ninth) and Libya, which was ranked tenth in 1975. These ten leading producers together accounted for 78 percent of total world output in 1975. The gross production of the oil producing countries increased annually such that the estimated production of the leading producing nations in 1977 was put at 22,000 million barrels, about 5 percent above the 21,142 million barrels produced in 1976. Nigeria maintained its production level, now as the eighth leading producer of crude oil. The lesser crude oil producing countries like United Kingdom, India, Australia and Indonesia also made significant production that registered notable gains. 46 LAW 411 OIL AND GAS LAW I The type of crude oil found during exploration determines to a large extent the value to be placed on it. This is because crude oil condensates are in varying grades depending on their components. The crude with lighter contents of sulphur will not attract high value as the one with less sulphur. This in the long run affects the revenue to be got from the export of crude oil by the oil producing countries. With the exception of the United States and the former USSR, all major crude oil producers produce crude oil with high sulphur content. The most important destination for Nigeria’s crude oil exports are the United States, the Netherlands, United Kingdom, the West Indies, France and Germany, in descending order of magnitude. SELF ASSESSMENT EXERCISE. - Give an outline of the oil producing countries and how oil has contributed to their economy. - Take note of the production output of these countries and especially that of Nigeria. 4.0 CONCLUSION Oil has several uses. Its availability has made it a most sought after raw material in the world. It has become a main source of energy displacing the previously known sources like coal and fire wood. The discovery of petroleum has brought tremendous growth to the economy of many countries. Each of this oil producing countries has taken adequate measures to increase its production in order to sustain revenue that accrues to the nation. Nigeria ranks prominently within the ten highest oil producing countries in the world. 47 LAW 411 OIL AND GAS LAW I 5.0 SUMMARY We have dealt with the uses of oil in the society and its effects. The importance of as a source of energy has been examined along with the countries that produce oil. The discovery has had positive effect on these countries. 6.0 TUTOR MARKED ASSIGNMENT Petroleum is the world’s most important source of energy. Do you agree with this statement? 7.0 REFERENCES/ FURTHER READINGS. 1. M. O. Feyide, 1986, Oil in World Politics (University of Lagos, 1986). 2. Lawrence Atsegbua, 2004, Oil and Gas Law in Nigeria, Theory and Practice, 2nd Edition, New Era Publications, Benin. 3. OPEC Bulletin, (1985) July/August. 4. Oil Statistics and Energy Balance (Third Quarter of 1989), published by the Organisation for Economic Co-operation and Development (OECD). 48 LAW 411 OIL AND GAS LAW I UNIT 4: DISCOVERY AND DEVELOPMENT OF PETROLEUM IN NIGERIA. Contents 1.0 Introduction 2.0 Objectives 3.0 Main content. 3.1 History of petroleum in Nigeria. 3.2 Discovery of petroleum in commercial quantity. 3.3 Development of Petroleum in Nigeria. 3.4 Development of natural gas in Nigeria. 4.0 Conclusion. 5.0 Summary 6.0 Tutor Marked Assignment 7.0 Reference/further readings 1. INTRODUCTION Nigeria is the thirteenth largest producer of crude oil in the world. The country has a checquered history as far as petroleum resources is concerned. Since over a hundred years ago there has been concerned as to the search for oil. When oil was discovered it has been explored and employed for export and other uses by the nation. This has brought numerous developments to the nation as oil and gas is the main stay of the economy of the country. In the following sections of this unit we shall treat the history of crude oil discovery and production in Nigeria and other issues. 2. OBJECTIVES. At the end of this unit, you should be able to: i. Understand the history of oil exploration in Nigeria. ii. Outline the growth of petroleum since its discovery in commercial quantity to its legal development in Nigeria. iii. Understand how oil has become the mainstay of the Nigerian economy. iv. To understand the issues involved in the production of oil in Nigeria. 3. MAIN CONTENT. 49 LAW 411 OIL AND GAS LAW I 3.1 History of Petroleum in Nigeria. Historically, the Nigerian petroleum scene opened as far back as 1908, when a German company, the Nigerian Bitumen Corporation, was attracted to what is now known as the south-western Nigerian Tar Sand deposit. This company in that year commenced exploration for oil in Nigeria at a place near Okitipupa in the present Ondo State. This attempt however was not successful but was the pioneering effort at other future attempts at oil exploration in Nigeria. The search was not successful because oil was not found in commercial quantity. The activities of the German Bitumen Company ceased as a result of the First World War. Interest in the possibility of discovering oil in Nigeria was rejuvenated in 1937 with the establishment of the Shell D’Arcy Petroleum Development Company of Nigeria, an affiliate of the mineral oil companies of Shell Petroleum Company and British Petroleum Company. In November 1938 Shell-BP received an oil exploration licence (OEL) covering the whole of Nigeria i.e. 357,000 square miles from the British colonial government. After a five year interruption caused by the Second World War, Shell-BP intensified its exploration activities during the 1946-1951 period. In 1951 Shell-BP drilled its first well but it came up dry. During the next four years the company concentrated efforts in the areas around the Niger Delta in the southern part of Nigeria without discovering well that could produce oil. With continuous effort in the search for oil in these areas for few more years, Shell-BP discovered oil in commercial quantity in Oloibiri, in the present day Bayelsa State in 1956. Towards the end of 1956 another discovery was made at Afam. According to Prof. M.A. Ajomo, these finds were rapidly developed and by 1958 production had reached 5,100 barrels per day and the first shipment of Nigerian crude oil was made to Europe. Nigeria was, thus, ushered onto the international oil stage. From Geological and geophysical investigations the most favourable oil yielding structures lay in the Niger Delta situate in the southern part of Nigeria. By 1957, Shell-BP had voluntarily reduced its acreage to 40,000 square miles of its oil prospecting licences. Of this acreage Shell-BP converted nearly 15,000 square miles to oil mining leases (OML) in 1960 and 1962 and returned the remainder of its holdings to the Nigerian government. Until 1962, due to lack of competitors Shell was able to select at its leisure 15,000 square miles of the 40,000 square miles it had held 50 LAW 411 OIL AND GAS LAW I since 1962. The area it chose included the sites that geological and geophysical surveys indicated were most promising for the formation of crude oil deposits. SELF ASSESSMENT EXERCISE 1. How was oil found in Nigeria? 3.2 Discovery of petroleum in commercial quantity. As stated earlier in the topic at hand, commercially viable oil was discovered by Shell at Oloibiri in 1956. Initially, a 50 – 50 profit sharing system was implemented between the company and the government. Shortly after the discovery of oil in commercial quantity the other companies that had joined Shell also succeeded in their operations. Their exploration activities yielded the wealth of Afam field offshore. On the 7th February, 1958, the first crude oil export from Nigeria was shipped to Europe. The quantity of oil being produced at this time was an average of approximately 6,000 bpd. By 1959 this quantity had doubled. By 1962 concessionary rights was reviewed and therefore extended to more new comers. In the view of A. Ogbuigwe this was in consonance with the policy of increasing the pace of exploration while at the same time ensuring that the country was not over dependent on one company. 3.3 Development of Petroleum in Nigeria. Since the discovery of oil in commercial quantity, exploration and mining had continued up till the present day. This has been done in the Niger delta area of Nigeria which contains crude oil reserves in large and considerable quantities. From an initial output of 5,100 barrels per day in 1956, the nation steadily rose to the sixth position on the production chart of the Organisation of Petroleum Exporting Countries. This is due to the level of progress in the policy of the government to enter and participate fully in the oil industry which urge started in the early seventies. This came first with the establishment of the Nigerian National Oil Company (NNOC) in 1971. In 1972 the government announced the assignment to NNOC of all areas in the country not covered by existing licences or leases, and 51 LAW 411 OIL AND GAS LAW I also any concession areas presently being held by other companies which might be surrendered from time to time. By the mid-1970s Shell, the leading producer had exceeded the one million barrels a day production mark. In July 1977, the Nigerian National Petroleum Corporation (NNPC) was created, as the result of a merger between NNOC and the Federal Ministry of Mines and Power. By this time production had improved constantly, reaching the maximum of 2.3 million barrels per day. All this was the period of the oil boom for Nigeria before the glut set in. Petroleum dominates the Nigerian economy. Virtually 100 percent of export earnings and about four-fifths of government revenues are derived from petroleum. Fluctuations in world oil prices therefore have a dramatic effect on the Nigerian economy. Discovered in 1956, petroleum was produced at a rate of 818 million barrels in 2004 from more than 150 oil fields, mostly in the Niger Delta. About one-fifth of the oil fields are offshore. Although Nigeria’s petroleum is expensive to produce, it commands a high price because of its low sulfur content. Half of all exports go to the United States, and most of the other half to Europe. Indigenous participation in the oil industry in Nigeria has been encouraged at various levels by government in Nigeria. This involves incentives and allowances given to the companies that intend to undertake petroleum production. After over three decades during which the oil industry was dominated by foreign companies, a private indigenous oil company, Consolidated Oil, recorded its first discovery, Bella - 1, in 1991. Since 1992, following the release of new concessions in the Niger Delta to indigenous exploration and production companies, the number of indigenous companies has increased to 12. So far, out of some 870 oil fields discovered in Nigeria, only 120 fields are currently producing. Most of the fields are not producing because the country has to abide by OPEC's production quota of 1.8 million barrels per day to Nigeria. Violence in the oil-producing communities has also disrupted production, causing the shut-up of most land and swamp wells. Production is sustained by offshore fields. 52 LAW 411 OIL AND GAS LAW I Nigeria’s proven oil reserves are estimated by the U.S Energy Information Administration (EIA) as between 16 and 22 billion barrels but some other sources claim they could be as much as 35.3 billion barrels. These reserves make Nigeria the tenth most petroleum-rich nation, and by far the most affluent in Africa. In mid 2001 its crude oil production was averaging around 2.2 million barrels (350, 000 cubic metre) per day. Nearly all of the country’s primary reserves are concentrated in and around the Niger delta, while off shore rigs are also prominent in the well-endowed coastal region. You should take note of certain notable achievements and developments in Nigeria's petroleum exploration and production ventures. In order to raise the country's proven petroleum reserves from 23 billion barrels to the target 25 billion barrels set for in 1995, the Federal Government not only opened new acreages for exploration, but also offered a package of fiscal incentives to petroleum companies. Among the incentives is the reduction of petroleum tax to boost exploration in the deeper offshore. Potential reserves in billion barrels are estimated for the new blocks which hold good prospects for smaller fields with less than 50 million barrels. Generally, in the Niger Delta, about 73 per cent of crude oil discoveries are in fields having less than 50 million barrels of proven reserves. Petroleum prospects in the offshore Niger Delta are most attractive, with a potential 1.10 billion barrels of crude awaiting discovery in recently awarded Oil Prospecting Licences (OPLs). Oil Prospecting Licences in the deeper Offshore (200-150m water depth) have received highly competitive bids, which extensive regional seismic and geochemical surveys have shown to be quite attractive. A new development in Nigeria's petroleum prospecting is the unitisation scheme. Under this arrangement, petroleum prospecting companies, in order to reduce cost, conduct joint exploration and development of undeveloped oil fields which straddle their common concession boundaries. Shell Petroleum Development Company (SPDC) of Nigeria and Chevron Nigeria have formed such an alliance. Apart from reducing operating cost, the intention is to maximise the exploitation of adjoining fields. 53 LAW 411 OIL AND GAS LAW I New exploration technology has also made substantial impact on Nigeria's petroleum potential. Note that other companies like Chevron, Mobil Producing, Texaco, Total, have all taken steps in deep waters exploration and have been involved in various projects in the Niger Delta of Nigeria. In spite of its enormous crude oil reserves and substantial production by world standard, in 1992, Nigeria spent about 216 million pounds sterling importing heavy crude from Venezuela, at the rate of 50,000 barrels per day. Heavy crude is needed in the Kaduna refinery where it is used as base oil for blending with products such as lubricants and greases. Harnessing Nigeria's heavy crude from some Niger Delta oilfields and especially from the Tar Sand deposit in Ondo State (with 31 billion barrels of heavy crude), Nigeria will avert this import expenditure. SELF ASSESSMENT EXERCISE Give a detail background and discovery of oil in commercial quantity in Nigeria. 3.4 Development of Natural Gas in Nigeria. Gas utilisation is a primary goal of Nigeria's petroleum and energy policies. This is because, with a proven reserve of 260 trillion cubic feet of natural gas, Nigeria's gas reserve is triple the nation's crude oil resources. In the past, associated gas encountered during the normal course of crude oil production has been largely flared. Gas flaring has been a major problem in petroleum production in Nigeria. This is because of the environmental pollution it causes to the area where this gas is flared and the effect on the people of the area. Furthermore, there is a continuous loss of revenue that would have been generated by the conversion of the natural gas. Nigeria is reputed to be the largest gas-flaring country in the world. By not fully harnessing its gas resources, Nigeria loses an estimated 18.2 million U.S. dollars daily. On its part, the Nigerian Ministry of Petroleum Resources, in addition to imposing penalties which were intended to end gas flaring by 1994, has offered incentives to potential investors who are interested in gas exploration. Since the 1980s, there has been in