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EMPIRICAL ANALYSIS OF DETERMINANTS OF NATURAL GAS FLARING IN NIGERIA Author: Reuben Umoh Nyong Supervisors: Runar Brännlund and Jurate Jaraite-Kazukauske VT 2016 Department of Economics Master Thesis, 30 ECTS

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Page 1: EMPIRICAL ANALYSIS OF DETERMINANTS OF …1111784/FULLTEXT01.pdfEMPIRICAL ANALYSIS OF DETERMINANTS OF NATURAL GAS FLARING IN NIGERIA Author: Reuben Umoh Nyong Supervisors: Runar Brännlund

EMPIRICAL ANALYSIS OF DETERMINANTS OF NATURAL GAS FLARING IN

NIGERIA

Author: Reuben Umoh Nyong

Supervisors: Runar Brännlund and Jurate Jaraite-Kazukauske

VT 2016

Department of Economics

Master Thesis, 30 ECTS

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ABSTRACT

The World Bank has set 2030 as the year for the cessation of routine natural gas flaring in countries

concerned. Nigeria is among the most consistent natural gas flaring nations on earth and natural

gas flaring remains an intractable negative externality for approximately six decades of crude oil

exploration in the country. With a focus on the long run, we employ the Autoregressive

Distribution Lag bounds test to cointegration approach to search for the determinants of natural

gas flaring in Nigeria using secondary data from 1984-2013. Empirical result identified natural

gas flaring penalty, crude oil production, natural gas price, natural gas marketization and lack of

natural gas infrastructure as fundamental determinants of natural gas flaring in Nigeria. Crude oil

production contributed the highest to the increase in natural gas flaring while natural gas

marketization has the greatest impact on gas flaring abatement. The key conclusion from this paper

is that the implementation of policies targeting optimal natural gas flaring can result in natural gas

flaring mitigation in the long run and put Nigeria on the path towards meeting the 2030 World

Bank deadline on cessation of routine natural gas flaring.

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DEDICATION

To my dearly beloved mother Madam Nkoyo Nyong Ekpenyong who died on Wednesday 4th of

May and was interred on Friday 10th June 2011. Continue to rest in peace mother.

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ACKNOWLEDGEMENT

Deepest appreciation goes to Jehovah God for seeing me through my master program. I

appreciate the government and people of Sweden for granting me the privilege to study in

Sweden. I am thankful to my family for constant support. Immense gratitude to my supervisors

Professor Runar Brännlund and Dr. Jurate Jaraite-Kazukauske for their kindness to me

throughout the period of supervision. I am indebted to all the JJC members for being my family

in Sweden, particularly Dr. Amin Karimu, a brother and friend. Deep gratitude to my bosom

friends Obilor Eke, Okokon Akwa, Sylvester Anso, Bong Colins and Emmanuel Tekwe for

being always there for me. Lastly, I appreciate Mrs.Efemona Bassey and Ms. Dorathy Bassey

of the DPR for their assistance in obtaining the data on natural gas flaring penalty.

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Table of Contents

Abstract ii

Dedication iii

Acknowledgement iv

1. Introduction 1

1.1 Background to the study 1

1.2 What is natural gas flaring? 3

1.3 Why the Niger Delta region? 4

3. Limitation of study, scope, and sources of data 5

3.1 Methodology 5

4. Theoretical Review 6

4.1 Empirical Review 10

5. Determinants of Natural Gas Flaring in Nigeria 13

5.1.1 Relatively low natural gas price 13

5.1.2 Relatively low natural gas flaring penalty 14

5.1.3 Crude oil production 17

5.1.4 Natural gas utilization/marketization 17

5.1.5 Weak institutional framework 19

5.1.6 Insufficient natural gas infrastructure 20

5.1.7 Negative impacts of natural gas flaring 21

5.1.8 Lessons from other countries 23

6. Model specification and variable explanation 26

6.1.1 Determinants of natural gas flaring 26

6.1.2 Presentation of results and discussion 28

6.1.3 Unit root test 28

6.1.4 What are the determinants of natural gas flaring in Nigeria? 29

7. Conclusions and policy implications 34

Bibliography 37

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1. INTRODUCTION

1.1 BACKGROUND TO THE STUDY

Proven crude oil and natural gas reserve in Nigeria is estimated to be 9 billion tons and

184 trillion cubic feet respectively. The country is ranked the 6th largest producer of crude

oil by the Organization of Petroleum Exporting Countries (OPEC) and the 7th natural gas

reserve holder in the world. Thus, Nigeria is the highest crude oil and natural gas producer

in Africa (Atoyebi and Olatunbosun, 2012 and Huang, 2002). Estimates showed Nigeria

natural gas reserve could last for about 110 years while the crude oil for 37 years respectively.

Additionally, Ayoola (2011) estimated the daily natural gas production in Nigeria to be 5.78

meters cubic feet of which as large as 80% is flared, 12% re-injected leaving as little as 8%

for domestic, industrial, and export markets. Furthermore, out of the 208.4 trillion cubic

meters of proven world gas reserve, Nigeria account for about 2.5%. Thus, Nigeria has been

described as more of natural gas province than oil (Egila et al., 2013).

However, the Nigerian economy is blighted by electricity crisis despite enormous natural

gas endowment. Per capita electricity consumption in the country is put at 0.054kWh in a

country with a population of over 170 million (Oduneka et al., 2012). The country

experiences constant power outage with only 40% of the population having access to

epileptic electricity supply. Insufficient natural gas supply to the country´s gas-fired power

plants is, reportedly, the key obstacle to adequate electricity generation in the country

(Falade, 2010). Despite the shortage of natural gas to the country´s power plants, Nigeria is

among the countries that flare the most natural gas on earth and natural gas flaring is a

negative environmental externality contributing significantly to climate change (Oduneka et

al., 2012).

Specifically, data from the General Electric (GE) report revealed 150 billion cubic meters

as the estimated quantity of natural gas being burnt yearly globally. This, according to the

report, represents a 15 to 20 billion dollars waste of resources and a 260 to 400 million metric

ton of carbon equivalent contribution to global greenhouse gas emission (GE, 2010).

Multiple reports indict Nigeria as the highest natural gas flaring nation in the world while

many ranked the country as being next to Russia in the global gas flaring index Friend of the

Earth (FOE), 2004 and Gervet, 2007). To better understand the complex challenge of natural

gas flaring in Nigeria, FOE (2004) reported that in 2003 about 2.5 standard cubic feet of

natural gas equivalent to 25% of the UK natural gas consumption estimated to worth US $2.5

billion was flared daily. The economy of Nigeria was anchored on the agricultural sector

prior to commercial crude oil discovery in 1958 in Oloibri, a remote swampy village in the

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Niger Delta Region (NDR) southern Nigeria (Nnaji et al., 2012). The development and

growth of the oil industry shifted the focus from agriculture to crude oil and crude oil drilling

is associated with the production of large quantity of associated natural gas seen as a liability

rather than an assert (IGU, 2000 and Ukala, 2011).

The crude oil industry accounts for over 20% of Nigeria’s GDP, 95% of foreign exchange

earnings, and approximately 65% of budgetary revenues (FOE), 2004). According to Energy

Information Administration (EIA), 2013), Madueke et al. (2013) and Stanley (2009) the

production of about 1.2 trillion cubic feet of dry gas in 2012 made the country the 25th global

natural gas producer. However, most natural gas produce in Nigeria is burnt or flared into

the atmosphere resulting in negative environmental consequences. Moreover, because

natural gas flaring damages the environment, the practice is viewed as serious energy and

environmental challenge currently confronting the world (GE, 2010). The World Bank in a

response to the natural gas flaring challenge has set the year 2030 as the deadline for the

cessation of natural gas flaring in countries concerned (World Bank, 2015). The dominance

of the Nigerian oil industry by foreign International Oil Companies (IOCs) is seen as a major

contributing factor to the failure of several environmental laws and deadlines addressing

natural gas flaring abatement in Nigeria (Mähler, 2010). Indigenous participation in the oil

industry in Nigeria is about 6% translating to 94% dominance by the IOCs (Eboh, 2015).

Greater indigenous involvement in the oil industry enhances the capacity to reduce natural

gas flaring (GE, 2010).

Emphasizing on the quantum of ongoing natural gas flaring in Nigeria, Lubeck et al.

(2007) stated that over 76% of natural gas produced in Nigeria is flared. Furthermore,

Atevure (2004) and Uhren and Doucette (2004) listed Nigeria among the leading nations on

earth where over 60% of natural gas flaring occurs. On a global scale, Nigeria flares about

16%, Russia 11%, and Iran 10% of natural gas from crude oil exploration and the three

countries together accounts for about a third of world natural gas flaring. According to

Jideani et al. (2012), currently over 1000 natural gas flaring platforms built over five decades

ago continues to emit noxious gases from flaring approximately 15.2 billion cubic meters of

associated natural gas in the NDR. This practice account for about 11.34% of 134 billion

cubic feet of annual global natural gas flaring estimated by World Bank in 2010. Aside from

the negative environment externalities, there are enormous economic losses associated with

natural gas flaring. Eboh (2014) citing the Nigeria National Petroleum Corporation (NNPC)

quoted $1.705 billion (272.8 billion naira) as the estimated loss by Nigeria through flaring

about 409.311 billion standard cubic feet of natural gas in the 2013 fiscal year.

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Given the negative effects of natural gas flaring and the deadline by the World Bank for

concerned countries to ceased routine natural gas flaring by 2030, the objective of this work

is to search for the determinants of natural flaring in Nigeria. Note that the research objective

shall be examined within the long run context. There are four vital contributions this work

seeks to make. First, natural gas flaring remains a global intractable negative environmental

externality in certain countries like Nigeria, for example, we seek to provide useful evidence

on the factors driving natural gas flaring since controlling these factors can contribute to

global pollution mitigation. Secondly, to the best of our knowledge, there is a lack of research

on natural gas flaring in Nigeria analyzing the long run context, therefore, this work takes up

this challenge by focusing on the long run result. Thirdly, this paper seeks to provide practical

natural gas flaring reduction policy for the prudent management of the natural gas sector

specific to Nigeria and other countries facing similar challenge particularly against the

backdrop of the 2030 World Bank deadline on cessation of natural gas flaring in countries

concerned.

Fourthly, this paper is important because Nigeria is a signatory to several United

Nations Protocols on the environment and climate change and the United Nations Framework

Convention on Climate Change (UNFCCC) whose major goal is to stabilize greenhouse gas

emissions at a level that would prevent dangerous anthropogenic interference to climate

change (GGFR, 2012 and Aghalino 2009). The ongoing natural gas flaring in Nigeria

contravene these Protocols. Therefore, this work seeks to remedy the violation of

environmental Protocols by Nigeria by searching for the major factors driving natural gas in

the country for policy purpose. In this light, Nigeria faces a race against time to mitigate the

challenge of natural gas flaring because the practice accounts for about 1.2% of global CO2

emissions and natural gas flaring from oil producing countries, including Nigeria, contributes

to about one-third of their CO2 emissions (World Bank, 2011).

1.2 WHAT IS NATURAL GAS FLARING?

Crude oil exploration is often associated with impure natural gas production hence the

name associated natural gas. Options available to manage associated natural gas from crude

oil production includes re-injection into the ground, on-site electricity generation and

transportation via pipelines to natural gas purification plant en route to marketization. Natural

gas flaring is the controlled burning of natural gas because of technical or economic reasons

(Shutemov et al., 2012). The technical reason could be the lack of the requisite technology

and natural gas infrastructure while the economic borders on high capital-intensive nature of

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providing natural gas infrastructure and the profitability of such investment. The World Bank

defined gas natural flaring as an anthropogenic activity involving wasteful emission of

greenhouse gases (GHGs) that causes global warming, disequilibrium of the earth,

unpredictable weather conditions and key natural disasters. It further states that natural gas

flaring emits a mixture of noxious compounds including but not restricted to benzene, that

are harmful and dangerous to humans, animals, plants and the entire physical environment

(World Bank, 1995). Natural gas flaring occurs when unwanted or combustible natural gas

and liquids are burnt using elevated vertical stack or chimney on oil rigs or crude oil wells

during crude oil production. Safety measures and emergencies, equipment and power failures

or exigencies hazardous to personnel or residents are other reasons for natural gas flaring.

However, the unacceptable practice is more widespread in certain developing economies

including Nigeria (World Bank, 2011).

This study adopts gas to mean natural gas or associated natural gas. While natural gas

burning, natural gas flaring, flaring, and venting connotes similar meaning. Also, natural gas

utilization, natural gas consumption, natural gas monetization, and natural gas marketization

are used interchangeably. Also, oil means crude oil. The organization of this work is as

follows: section 1.3 provides an overview of the Niger Delta region, section 3 explains the

research limitation, scope, and sources of data, section 3.1 focuses on methodology, 4.1 looks

at theoretical reviews and part 5 reviews literature on determinants of natural gas flaring in

Nigeria. Remaining sections are section 6 which provides the model specification and

variable explanation and section 7 draws the conclusions and policy implications.

1.3 WHY THE NIGER DELTA REGION?

The Niger Delta Region (NDR) is the hub of natural gas flaring in Nigeria. NDR has been

described as Africa’s largest and the world third largest mangrove forest. The region is seen

as one of the largest wetlands in the world with approximately 2.370 sq. km made up of

rivers, creeks, swampy terrain and estuaries. The region is made up of expansive freshwater

forest situated mainly in East and West Africa, NDR covers stagnant swamps of 8.600 sq.

km with a coastline of over 450km (Jideani et al., 2012). The NDR is rich in biodiversity and

natural resources particularly hydrocarbon. The region is bordered to the south by the

Atlantic Ocean and to the East by Cameroon. It occupies the surface area of approximately

112, 110 square kilometers representing about 12% of Nigeria’s area total surface with the

population of over 31 million people.

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The wetland ecosystem is vital for the survival and livelihood of millions of people in the

region (Google, 2015). Additionally, over 60% of the population of the region depends on

the natural environment for survival, sustenance, and livelihood. Natural gas flaring and

crude oil spills are common features in the region and the leading cause of environmental

destruction making the poorest communities vulnerable. Extraction of crude oil and natural

gas causes colossal damages to the ecosystem, its services and natives of the region co-exist

with toxic anthropogenic perturbation of the environment which threatens the existence of

the region (Jideani et al., 2012). Indeed, the consequences of natural gas flaring in the NDR

are pervasive poverty, constant conflict escalation and non-state armed group leading to

instability and grief (Franscis et al., 2011). Cessation of pollution occasioned by crude oil

extraction is vital for the economic wellbeing of the people of the NDR (Franscis et al., 2011).

3. LIMITATIONS OF STUDY, SCOPE, AND SOURCES OF DATA

Some of the data for natural gas flaring were obtained from the state-owned Nigeria

National Petroleum Corporation (NNPC) which is a reliable data source. Part of the data on

natural gas utilized (natural gas marketed) and crude oil production were from OPEC annual

bulletin various editions and the data on natural gas price was obtained from World Bank.

Part of the data on natural gas flaring penalty came from the Directorate of Petroleum

Resources (DPR) which is a subsidiary of NNPC. Several emails were sent and twice trips

were made to Nigeria with many phone calls before an incomplete data (1999-2013) on

natural gas flaring penalty was obtained. While the remaining part, 1984-1998, came from

Niger Delta Environmental Survey (NDES) 1996 volume 1 used by Aghalino (2009). The

natural gas flaring penalty is the equivalence of the emission tax restricted to natural gas

flaring in Nigeria. Note that data on institutional quality was insufficient and stands omitted

as an explanatory variable. Finally, the data use in this study are annual time series data from

1984 to 2013 translating to a fairly small sample size of 30 which could impact the level of

confidence and reliability of the findings.

3.1 METHODOLOGY

To investigate the determinants of natural gas flaring, we shall use the Autoregressive

Distribution Lag (ARDL) bounds testing method to cointegration developed by Pesaran et

al. (2001) and Pesaran and Shin (1999). We acknowledge that the model specification on

determinant of natural gas flaring seems not to concisely fit into an economic theory this is

because of the nature of the research problem. However, we make assumption that our model

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is based on the supply function because natural gas flaring is practice by firms. This is rightly

so because natural gas being energy resource can be an input in the production process.

Specifically, since natural gas flaring is practice by firms the model specification appear to

mirror a supply function, we name it “pseudo-supply function” for analytical purpose. The

term pseudo-supply function seems appropriate for our model because flaring natural gas is

as a result of firms’ production activity mainly motivated by profit maximization and profit

maximization is a key feature of firms’ supply function. Importantly, as we shall observe, the

model mixes price, quantity, and technology which are also important features in a supply

function. Therefore, we adopted our model for operational purpose while acknowledging its

shortcomings.

The model specification shall describe the key factors in the natural gas flaring dynamics

using the ARDL framework. Application of the ARDL bounds testing methodology is suitable

for the analysis of the determinants of natural gas flaring in Nigeria within the long run context

because it possesses the desirable statistical properties (Pesaran et al., 2001 and Pesaran and

Shin, 1999). One of the statistical advantages that made the ARDL methodology the preferred

choice is because the technique does not require pretesting for unit root, however, we shall

pretest for unit root because the unit root test can be used to determine whether or not to proceed

with the use of the ARDL model. Secondly, the long run coefficients can be examined with a

high level of reliability whether the variables are I (0), I (1) or a mixture of both. Additionally,

ARDL cointegration bounds testing method is suitable for the estimation of small sample sizes,

particularly as we have in this study since the efficiency of the technique is not affected by

sample size (Pesaran et al., 2001 and Haug, 2002).

4. THEORETICAL REVIEW

Introduction: in this section, we examine related economic theories supporting this work, this

is critical for the validation of the findings in this paper.

Economic theory posits that a developing economy like Nigeria that derives its major

revenue from the extraction of crude oil and natural gas may likely be associated with high

pollution level. It is against this background that Garber (2011) argued that natural resource

extraction, application of less efficient and relatively dirty technology is usually associated

with early stage of economic development which results in higher pollution level. The

pollution-income nexus is captured in the Environmental Kuznets Curve (EKC) theory

(Panayotou, 2003). According to Panayotou (1993) at the early stage of economic

development, agriculture and natural resource extraction dominate while the takeoff of

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industrialization leads to natural resource depletion and increased pollution from waste

generation.

According to the EKC, as the economy becomes more developed and moves towards

information-based industries and services, application of efficient technologies and increased

agitation for environmental quality will lead to reduction in waste generation leading to the

decline in environmental degradation. These are depicted by an inverted U-shape showing

the relationship between environmental pollution and level of income. The theory imply that

economic growth is the remedy for environmental pollution in the long run (Beckerman,

1992). Beckerman (1992) infers that Nigeria should pursue economic growth to mitigate

natural gas flaring. The reason economic growth results in improved environmental quality

and natural gas flaring mitigation, for example, Stern (2009) explain is because a higher level

of development stimulates environmental awareness and enforcement of environmental laws

resulting in the decline of environmental degradation. Panayotou (1993) maintained that

tropical rainforest deforestation, the loss of biological diversity, extinction of species and

destruction of fragile ecosystem and irreversible changes in the natural environment signals

that critical ecological threshold may have been crossed because of market and policy

failures. The ecological threshold emphasized by Panayotou (1993) could be exceeded in the

NDR if natural gas flaring remained unmitigated. More so, because natural gas flaring is

fueling instability and conflicts in the NDR disrupting crude oil production and sustainable

development.

Natural gas flaring goes against the goals of sustainable development hypothesis.

Sustainable development paradigm seeks to address the “accelerating deterioration of human

environment and natural resources and the negative consequences of such deterioration on

economic and social development” (Drexhage and Murphy, 2010). The World Commission

on Environment and Development in 1987 defined sustainable development as the

“development that meets the needs of the present generation without compromising the

ability of future generations to meet their own needs”. Sustainable development seeks to the

prevent the over-exploitation of renewable resource, non-renewable resources and the

depletion of environmental sink functions. It includes maintenance of biodiversity,

atmospheric stability and ecosystem functions not classified as economic resources (Harris,

2003). The necessity to mitigate natural gas flaring is to prevent the destruction of the NDR

ecosystem through unsustainable exploitation of natural resources. The need to prevent

damages to the ecosystem is because certain environmental resources are non-reproducible

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while many are exhaustible. Thus, the destruction of the ecosystem threatens indefinite

economic growth and sustainable development (Stern, 2003).

Economists insist that pollution and environmental degradation are not captured in the

production function because of market failure. In order to account for this market failure, the

polluter should be held liable for polluting the environment. The objective of the Polluter

Pay Principle (PPP) is to compel the polluter to internalize environmental externalities from

economic activities European Environmental Agency (EEA),1996). The PPP states that the

economic agent causing environmental damage should bear the economic costs of the

negative externality (mez-Baggedthun et al., 2011). Environmental tax and tradable permits

are vehicles of the PPP (EEA),1996). The PPP is important because it takes into account the

damages to the environment and has been proven to be efficient in delivering environmental

improvements, stimulating innovations, and structural change. The environmental tax is an

effective incentive for producers and consumers to change behavior in favor of the

environment while enforcing compliance with environmental regulations and as a revenue

source (EEA),1996).

Nigerian version of emission tax is the natural Gas Flaring Penalty which is the vehicle

for operating the PPP.The natural Gas Flaring Penalty was tailored to mitigate natural gas

flaring in Nigeria and reduce emissions from flaring natural gas. The flaring penalty has been

unsuccessful in reducing natural gas flaring, stimulate technological innovation and

behavioral change in Nigeria as commonly associated with emission taxes. The failure of the

natural gas flaring penalty in Nigeria could fast-track the country and the NDR towards The

Limit to Growth if natural gas flaring remains unmitigated. The Limit of Growth framework

asserts that should the current trend on global population, food production, industrialization

and resource depletion continue unchecked, the limit to growth will be reached within the

next one hundred years. The consequence of reaching the Limit to Growth is uncontrollable

decline in industrial capacity and population. The Limit to Growth stressed the need for the

world to avoid the impending catastrophe by working towards establishing a condition of

sustainable ecological and economic stability (Meadows et al., 1972).

The Limit to Growth contends that no population grows in absence of food, and capital

is required for food production, in turn, more capital requires more resources, wastes

generated due to discarded resources results in pollution and pollution inhibits the growth of

population and food supply (Meadows et al., 1972). Crude oil production is responsible for

natural gas flaring in Nigeria and natural gas flaring is the leading factor in the exponential

rise in pollution in the NDR, food shortage and worsening economic misery (Odiong et al.,

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2010). The Limit to Growth noted, however, that technology has the capacity to mitigate

pollution but cautioned that the benefits of technology did not prevent the decline in

population and industry neither did it stop the collapse of growth beyond the year 2100 based

on computer simulation (Randers, 1972). Nigeria requires large technological investment to

optimize its natural gas resource and induce growth because technology is important for the

expansion of the natural gas market. Furthermore, technology is vital for supplying, growing,

and securing the natural gas network of the future (Evans and Farina, 2013).

Technology aside, a key policy available for Nigeria to mitigate natural gas flaring is

carbon pricing. This is because carbon pricing can stimulate technological innovation and

natural gas flaring abatement. It has been shown that carbon pricing and innovation has a

positive effect on productivity. This is because carbon pricing has been proven to drive

innovation in technologies and business models promoting resource efficiency and

productivity growth. The required condition for these to occur is that the carbon pricing

regime must be multilayered, predictable, and transparent (Sustainable Prosperity, 2012 and

Stepp and Atkinson, 2011). Specifically, significantly higher CO2 emission tax compare to

Pigovian levels could act as the catalyst for the development of emission reduction

technologies (Rosendahl et al., 2009). Stepp and Atkinson (2011) described carbon tax as a

simple and straightforward method of increasing productivity, innovation, and economic

growth. However, General Electric warned that strict (reasonably high) environmental

penalty (i.e. relatively high natural Gas Flaring Penalty) are often ineffective if there are

institutional constrains, such as subsidies on competing energy source, in developing outlets

for associated natural gas (GE), 2010).

Examining the impacts of climate change exacerbated by CO2 emissions, the Stern Review

averred that climate change will lead to decreasing crop yield in many developing countries,

rise in sea level, species extinction, and water shortage with negative effects on the

ecosystem. Others climate change-induced negative effects from pollution includes extreme

weather conditions i.e. flooding, heat waves, storms, and forest fires, risk of weakening

natural carbon absorption, increasing natural methane releases and many other irreversible

negative weather impacts. All these will occur as global temperature is likely to increase by

2-3 o C if emissions continue to grow. These negative effects of climate change call for an

immediate reduction in GHG emissions (Stern, 2007 and Nordhaus, 2007). Therefore,

addressing the natural gas flaring challenge will prevent the worsening of extreme weather

conditions which are already manifesting in the Niger Delta region of Nigeria.

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Addressing the seemingly difficult problem of natural gas flaring is important because

emissions from natural gas flaring negatively affect the wellbeing of the Niger Delta region

as it increases ecosystem and biodiversity decline. The decline in biodiversity reduces plant

productivity, soil fertility, water quality, atmospheric chemistry and other environmental

conditions. This is because ecosystem alteration because of human activities, such as natural

gas flaring, could alter the life support services and ecological functions vital to the well-

being of human societies (Tilman et al., 1999). Kaufmann (1995) listed climate control,

production of natural resources as well as waste treatment services as environmental life

support functions of the ecosystem. Nigeria needs to work towards abating the exponential

rise in natural gas flaring to achieve the desired environmental quality. We examine, briefly,

empirical literature on the factors responsible for and effects of natural gas flaring in the

preceding section.

4.1 EMPIRICAL REVIEW

Boxal et al. (2004) studied the impact of crude oil and natural gas facilities on rural

residential properties value with two variables characterizing hazard and amenity effects.

They showed that natural gas wells and flaring platforms cited within 4km of residential

properties devalue the price of the property. The report also showed a negative correlation

between property values and the number of sour gas wells. These findings reflect the health

hazards associated with the negative effect of hydrogen sulfide on property values. Hydrogen

sulfide is a constituent of natural gas. The World Health Organization (WHO) prohibits the

inhalation of hydrogen sulfide because of its health hazards. WHO (2003) categorized the

degrees of negative health hazards associated with exposure to hydrogen sulfide ranging

from short, medium and long term. Prolonging exposure to hydrogen sulfide may cause

infertility, human poisoning, and death. WHO listed the negative effects of prolong exposure

to hydrogen sulfide as ocular disease, respiratory stress, neurological disorder, cardiovascular

and metabolic disease and including but not limited to loss of appetite.

In their paper that studied the effect of corruption on natural gas flaring, He et al. (2007)

and Fredriksson and Sevesson (2003) showed that higher corruption level in an economy

inhibits the effectiveness of environmental regulations. Similar work by Tzeremes et al.

(2013) studied the effect of government on environmental performance in the NUTS 1

regions of France, Germany, and the UK. Assessments were made on three pollutants CO2,

CH4 and NO2 using non-parametric estimators. Findings showed that government quality

impact positively on pollution up to a point afterward becomes slightly negative. An

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indication that high government quality may not translate to increased environmental

efficiency. Government efficiency affects environmental quality positively because it

enhances the effectiveness of policies implementation (Sanglimsuwan, 2011). Sebastien et

al. (2011) assessed the link between environmental compliance, corruption and

environmental regulations in the forestry sector of 59 developing countries using cross-

sectional data and Principal-Agent model. Their work indicated that high judiciary efficiency

reduces corruption and environmental non-compliance. Furthermore, Sartzetakis et al.

(2011) and Sartzetakis et al. (2014) used overlapping generation models of two distinct

agents of politician and citizen to investigate the effect of corruption on environmental

regulations, their finding and conclusion revealed that rent seeking instead of environmental

protection, corruption and extensive tax evasion are elements causing the failure of

environmental policies. Therefore, the curbing of corruption increases the performance of

environmental regulations in natural resources management (Sundström, 2013).

Focusing on institutional weakness in the crude oil and natural gas industry in Nigeria,

Ayoola (2011) analyzed data from annual reports of 10 companies involved in natural gas

flaring in Nigeria. The paper found that improper disclosure of environmental policies,

objectives, and target was common in several companies’ annual reports. Most companies

report failed to disclose natural gas flaring information or emission quantity despite flaring

natural gas, none of the sampled companies had their environmental information verified by

a third party and only two companies report scantily acknowledged negative environmental

information regarding meeting emission target and objectives. Ayoola (2011) blamed

improper disclosure of natural gas flaring level by the companies on ineffective

environmental laws. World Bank (2011) reported that data on the volume of natural gas

flared by some governments are inconsistent and that in certain countries, companies under-

report volume of natural gas flared. The report found that the trend of poor reporting of

emission level and inconsistent data on natural gas flaring was more rampant in countries

with weak institutional governance and high corruption level.

Aghalino (2009) used primary and secondary data from the Niger Delta region to study

the impact of natural gas flaring on the environment while accounting for the factors driving

natural gas flaring in the region. The study found that weak enforcement of environmental

regulations, lack of incentives to abate natural gas flaring and relatively low natural gas

flaring taxes are factors increasing natural gas flaring in Nigeria. While Madueme (2010)

used time series data from 1965-2008 to assessed the economic wastages in the Nigerian

natural gas industry and found that natural gas flaring constitutes an economic cost that could

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be reversed by investing in natural gas utilization, monetization, and natural gas

infrastructure. Furthermore, Odiong et al. (2010) used trend fitting comprising primary and

secondary data to assessed the negative effect of natural gas flaring on the environment and

benefits of its reduction. Their finding strongly links natural gas flaring to environmental

degradation and showed that flaring natural gas was responsible for the rapid loss of soil

fertility and reduced sustainable agricultural practice because of soil acidification by

hydrogen sulfide. Odiong et al. (2010) noted that the loss of soil fertility resulted in

occupational loss with undesirable impact on food supply followed by massive rural-urban

drift.

Black carbon (BC) which is detrimental to health and the environment is a by-product of

natural gas flaring. An empirical estimation by Akinyemi et al. (2014) showed the amount of

black carbon released into the atmosphere through natural gas flared for about 5 decades.

The paper indicated that 55% of natural gas flared released 4.56 x 105 tons of BC into the

environment equivalent to 4.11 x 108 tons of CO2. The total quantity of natural gas flared

was 895.01 billion cubic meters worth $94.97 billion. There was an increasing rise in BC

emissions as the quantity of natural gas flared intensified from 1965 to 2013. BC contributes

significantly to global warming (Akinyemi et al., 2014).

Furthermore, there was a reduction in the trend of global natural gas flaring between 2005

and 2010 by 22% from 172 to 134 billion cubic meters. A significant part of the decrease

was from Nigeria 29% and Russia 40%. Details of the reduction in natural gas flaring in

Nigeria showed 2/3 of the reduction was from natural gas utilization projects while 1/3 was

attributed to the shutdown of oil production forced by protest in the NDR against

environmental pollution by IOCs (World Bank, 2011). The effect of natural gas flaring on

life expectancy using data from United Nations Common Database, NNPC and CBN was

examined by Effiong and Etowa (2012). They found no direct significant negative effect of

natural gas flaring on the life expectancy of the Niger Delta residents for the period of the

study 1979-2008. Additionally, natural gas flaring was found to have significantly worsened

the incidence of poverty in the region (Svensson, 2012).

Anomohanran (2012) computed the volume of natural gas flaring to highlight the

quantity of natural gas and economic losses from natural gas flared in Nigeria between 1999

and 2009. The total volume of natural gas produced for the period was 502 million cubic

meters while the volume flared was 237 million cubic meters representing 47% valued at 17

billion dollars (2.65 trillion naira). The computation indicated natural gas flared reduced from

23 million cubic meters in 1999 to 14 million cubic meters in 2009 and the amount of carbon

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dioxide emitted for the period was 457 million metric tons representing 23.1% compared to

1979 million tons global value with a loss of about 11 billion dollars by Nigeria for the period.

Being a key player in the natural gas sector, the Nigerian Liquefied Natural Gas (NLNG)

reported US $18.2 million as the estimated daily economic loss from natural gas flaring

(NLNG, 2011).

In view of the huge economic loss and negative environmental externality associated with

flaring natural gas, with literature review, we proceed to search for the determinants of

natural gas flaring in Nigeria, thereafter, conduct an empirical investigation.

5. DETERMINANTS OF NATURAL GAS FLARING IN NIGERIA

Beginning with natural gas price, this section examines the relevant literature on factors

driving natural gas flaring in Nigeria.

5.1.1 RELATIVELY LOW NATURAL GAS PRICE

Literature abound that relatively low natural gas price compared to crude oil price impact

negatively on natural gas flaring. Demand and supply drive natural gas price and the natural

gas consumption is determined by the level of economic activity (Pirog and Ratner, 2012).

Uncompetitive natural gas pricing and limited domestic and export markets reduces

investment in the natural gas sector (Ayankola, 2008). Producers focus more on crude oil

production to the detriment of natural gas monetization because of the huge disparity between

crude oil and natural gas price in the international market. The average yearly price of natural

gas is as low as US $4.50 per 100 cubic feet relative to crude oil price which is could be

worth US$ 95 per barrel (WORC, 2014). The relatively low natural gas price compare to

crude oil reduces investment and profitability in the natural gas sector (GE, 2010). Burleson

(2013) also cited relatively low natural gas price, distance to the markets and lack of

innovative governance as major factors driving natural gas flaring in countries concerned.

This imply that relatively high natural gas price is an incentive to reduce natural gas flaring

and increase investment in natural gas marketization because of the IOCs’ inclination

towards profit maximization and quick return on capital International Conference on Fracture

(ICF), 2006 and Svensson, 2012).

Competitive natural gas pricing is important because investments in the natural gas sector

are highly capital and technology intensive which erodes profitability (GE, 2010). However,

Uhren and Doucet (2004) advised firms to invest in natural gas flaring reduction by focusing

on the long term profit in place of instant return on investment. The uncompetitive natural

gas pricing in Nigeria is highlighted in data from NNPC (2000) showing domestic natural

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gas price as being the lowest in Nigeria relative to other countries in the West Africa region.

Nigeria focus more on natural gas export because of competitive pricing regime in the

international market (Falade, 2010). Domestic natural gas price which is presently US $3.00

per 1000 standard cubic feet is considered insufficient to incentivize investment in the natural

gas sector (Eboh, 2015). In addition, lack of immediate, economic and quick return for

natural gas investment and the desire to accelerate and maximize crude oil production are

major factors contributing to natural gas flaring (GE, 2010). Producers give emphasis to fast-

tracking natural gas flaring to meet crude oil production target. Moreover, financial interest

on the part of producers increased crude oil production to the detriment of natural gas (Wells,

2014).

Subsidy on natural gas and uncompetitive electricity prices are other factors contributing

to low natural gas price (GE), 2010 and International Institute for Sustainable Development

(IISD), 2012). Nigerian-German Business Association (NGBA), 2005) recommends subsidy

removal to increase domestic and foreign investment in the natural gas sector. Therefore,

relatively low natural gas price increases natural gas flaring while a relatively high natural

gas price may incentivize investment in the natural gas sector to reduce natural gas flaring.

Policy makers would prefer an inverse relationship between natural gas price and natural gas

flared. The economic intuition is that natural gas marketization is more profitable with a

competitive natural gas price because competitive natural gas price creates the desired

economic incentive to invest in the natural gas sector.

5.1.2 RELATIVELY LOW NATURAL GAS FLARING PENALTY

Prominent policy instrument in pollution mitigation is the use of environmental taxes. The

policy advantage of environmental tax is its contribution to the implementation of polluter

pay principle, PPP i.e. the polluter is compelled to pay for the cost of polluting the

environment and the internalization of environmental negative externalities. PPP entails the

incorporation of the cost of environmental damages, services or clean up in the pricing of

goods, services or activities that degrade the environment European Environmental Agency

(EEA, 1996). The three types of environmental taxes are; cost-covering charges which is

designed to incorporate the cost of environmental services and mitigation measures,

incentive taxes which is use to induce a change in the behaviour of producers and/ or

consumers i.e. natural gas flaring firms may reduce natural gas flaring if appropriate

incentive taxes are placed on this activity and the third type is fiscal environmental taxes

which is mainly for raising revenue.

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Additionally, policymakers recommend sufficiently high environmental tax to stimulate

abatement measures (EEA, 1996). However, Smith et al. (2008) argued strongly against low

environmental tax because it could give a false impression to polluters that paying the low

tax gives polluters the legal right to pollute the environment. Also, (GE), 2010) cautioned

that high natural gas flaring penalty is not the ultimate panacea for natural gas faring, because

strict penalty is ineffective if there are institutional constraints on developing new associated

natural gas outlets. The reports recommended a balanced between suitable penalty and

institutional framework for effective reduction initiative.

A look at the various efforts by Nigeria to mitigate natural gas flaring showed that, natural

gas flaring became illegal for the first time in 1969 through an Executive Order compelling

oil companies to, within 5 years production start, mandatorily ceased natural gas flaring

(JINN, 2010). The failure of the 1969 Executive Order leads to 1979 Associated Gas Re-

injection Act No. 99 requiring oil companies to guarantee zero natural gas flaring by January

1st, 1984 and the natural gas flaring penalty was introduced with a token fee of US $0.003

per cubic feet of natural gas flared. The failure of this military law compelled the government

to issue the Associated Gas Re-injection Regulations of 1984 and Associated Gas Re-

injection Amendment Degree No. 7 of 1985 which permitted natural gas flaring only with

written consent from the Energy Minister and the permission was to be granted if companies

proved they are unable to utilize or reinject natural gas and with a payment of a paltry natural

gas flaring penalty of 0.50 Naira per million cubic feet. According to Justice in Nigeria Now

(JINN); 2010), this fee was raised marginally to US$ 0.07 per million cubic feet of natural

gas in 1988 because of the ineffectiveness of the 1995 degree.

Additionally, the Environmental Impact Assessment (EIA) Degree No. 86 of 1992 re-

emphasized the position of the government and the penalty was increased to 10 Naira (US$

0.12) per million cubic feet of natural gas flared in 1995 (Abba, 2012). The failure of Degree

No. 86 of 19992 necessitated a further shift in the deadline to 2003. Firms cited technical

infeasibility as the reason for the non-compliance with several the deadlines, hence,

following strong pressure from the IOCs the government rescinded the 2003 deadline. The

IOCs’ rejection of the government policy on zero natural gas flaring led to more failed

legislations mandating the IOCs not to flare natural gas beyond 2007. IOCs cited lack of

technology and market as factors limiting compliance with natural gas flaring deadlines. The

government shifted the deadline to 2008 with a marginal increment in the natural gas flaring

penalty to US $3.50 for every 1000 standard cubic feet of natural gas (Evoh, 2002).

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Natural gas flaring penalty rate is generally seen as not sufficiently high to motivate

structural and behavioral change. Lack of compliance with the 2008 deadline necessitated a

further shift to 2010 and finally to 2012 (JINN, 2010). All the deadlines failed despite several

periods of grace and shifts given by the Nigerian government. The Word Bank currently set

2030 as the year to achieve global zero routine natural gas flaring in countries concerned.

Stakeholders at various levels are mandated to minimized and achieve optimal natural gas

flaring by 2030 (World Bank, 2015). More than 40 countries including Nigeria has endorsed

this initiative according to the World Bank which represents more than 40 % of global natural

gas flaring. Evoh (2002) argued that weak implementation of several environmental laws by

the Nigerian government implied compromising environmental standard with the IOCs

which is detrimental to the economy, public and environmental health. Because of the weak

institutional framework in Nigeria, data from the World Bank showed Nigeria being among

the leading nations that flares the most natural gas as indicated by Figure 1 below:

Source: World Bank (2014). * billion cubic meters

As shown in Figure 1 above, Russia, Nigeria, Iraq and Iran accounts for the country that flare

the most natural gas globally with Nigeria being next to Russia while Norway and Canada

are the countries with global best practices in natural gas flaring. With the failure of

successive governments to achieve optimal natural gas flaring, communities in the Niger

Delta region accused the Nigerian government of sanctioning environmental degradation by

the IOCs. The inability of the Nigerian government to enforced environmental laws is a major

cause of environmental pollution and pervasive poverty in the NDR (Oviasuyi and Uwadiae,

2010). Studies that unanimously agreed that the low rate of gas flaring penalty in Nigeria has

made it inefficient to impact on flaring abatement includes inter alia World Bank (2002),

0

10

20

30

40

50

Figure 1: Gas flaring 2008 to 2013 (bcm*)

2008 2009 2010 2011 2012 2013

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Aghalino (2009), Madueme (2010), Matuin et al. (2012), Egila et al. (2013), Odedairo et al.

(2013) and Okenabirhie (2008).

Nigerian Government made natural gas flaring cheap for the IOCs by setting the penalty

less than 10 American cents relative to over 10 dollars in developed countries (Evoh, 2002).

Tax (flaring penalty) has the potential to mitigate natural gas flaring, however, there is no

significant structural change in the volume of natural gas flared induced by its introduction

since 1984 till date (Matuin et al., 2012). Atoyebi and Olatunbosun (2012) in their empirical

analysis argued that low natural gas flaring tax lead to increase flaring thereby causing

socioeconomic hardship in Niger Delta region. Therefore, emission tax in Nigeria has failed

to increase innovation and emission reduction typically associated with environmental tax.

A relatively high environmental tax is positive for environmental performance (Brännlund et

al., 2011).

5.1.3 CRUDE OIL PRODUCTION

Natural gas flaring and venting is permitted as a safety measure during crude oil

exploration, in periods of emergencies, power and equipment failures, and in conditions

hazardous to workers or residents (World Bank, 2011). However, as crude oil production

increases so also have been natural gas flaring in countries where flaring is pervasive

(FNI/ECON, 2001 and FOE, 2004). Evidence in Nigeria indicated a direct relationship

between crude oil production and quantity of natural gas flared. ERA/FOE (2005) found the

level of crude oil production determines the quantity of associated natural gas produced and

by extension the quantity of natural gas flared. According to the report, an estimated 1000

standard cubic feet of natural gas is produced in Nigeria from each barrel of crude oil

produced. There is correlation between crude oil production and natural gas flaring in Nigeria

(Howden, 2010). The direct relationship between crude oil and natural gas production in

Nigeria contradicts the practice in Norway where crude oil production is 50% larger than

Nigeria but Norway flares only 3% of its total natural gas production. Pertinently, the

Norwegian natural gas flaring rate is considered the best globally (FNI/ECON, 2001). Also

in Alberta data by Energy and Utilities Board in Canada showed that about 92% of natural

gas produced during crude oil production was conserved or utilized (Evoh, 2002). Russia

flared three times Nigeria´s natural gas and produced 4.5 times more oil than Nigeria, in per

liter terms of oil produced, Nigeria flares more natural gas than Russia. Reduction of natural

gas flaring associated with crude oil production minimizes the resource waste and contributes

to the reduction in greenhouse gas emissions (UNDP, 2011).

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5.1.4 RELATIVELY LOW NATURAL GAS UTILIZATION / MARKETIZATION

Excessive focus on crude oil and the neglect of natural gas sector are responsible for the

diminished natural gas utilization thereby natural gas flaring in Nigeria (Madueke et al.,

2013). Nigeria undertook major step towards natural gas marketization and utilization to

mitigate natural gas flaring with the establishment of the Nigerian LNG which commenced

natural gas export in 1999. From 1999 to 2015, US$ 85 billion was earned by Nigeria from

natural gas export (Vanguard, 2015). In 2012, Nigeria LNG exported 950 billion cubic feet

of natural gas representing 8% of globally traded LNG and making Nigeria the world fourth

largest LNG exporter (EIA, 2013). Other projects to increase natural gas monetization

include proposed Brass LNG plant in Brass, West African Gas Pipeline (WAGP), and the

proposed Trans-Sahara Gas Pipeline Energy Information Administration (EIA, 2013).

According to Odedairo et al. (2013), natural gas consumption can contribute to flaring

reduction and boost the economy.

Akeredolu and Sonibare (2006) showed that local market development for natural gas

could increase domestic natural gas utilization to between 92 and 140 million cubic per day

which represents a little fraction of the domestic market. Natural gas flaring is a waste of

resource with high economic value which greatly reduced its use for electricity generation

and more so that electricity crisis in Nigeria is caused largely by a shortage of natural gas

supply to power plants (FNI/ECON, 2001). The World Bank (2014) advised Nigeria to

generate electricity from natural gas to mitigate wastage in the gas sector. The total installed

electricity generation capacity in Nigeria is 6500 MW out of which 2000 MW is idle because

of natural gas supply deficiency and inadequate infrastructure. Electricity crisis has made

Nigeria the largest consumer of household-size electricity generator in the world thereby

increasing emissions level.

Regrettably, about 13 billion cubic feet of natural gas flared in 2013 could be sufficient

for the country`s 6500 MW capacity natural gas-fired power plants which could further the

country´s development agenda (World Bank, 2014). Rightly, natural gas flaring has been

described as a waste of development opportunity by Bosetti and Colombo (2009). Indeed,

Nigeria electricity consumption per capita estimated to be 150 kWh per annum is among the

lowest in Sub-Sahara Africa (Oduneka et al., 2012 and National Bureau of Statistics (NBS),

2012). More so, in terms of electricity generation Nigeria is ranked among the lowest net

electricity generation per capita countries in the world. Electricity demand far outstripped the

supply resulting in blackouts, load shedding, and reliance on private generators (EIA, 2013).

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Reliance on private electricity generator constitutes an avoidable economic drain costing

about US $13 billion in yearly expenditure to households and businesses (GE, 2010).The

huge expenditure on the importation of electricity generator could have been channeled to

natural gas infrastructure development to supply adequate natural gas to power plants with

positive effect on flaring mitigation.

The Word Bank listed several obstacles to natural gas marketization as undeveloped

regulatory and legal framework, inefficient natural gas pricing system worsened by subsidies

on competing fuel, lack of funding for natural gas infrastructure, undeveloped domestic

natural gas market and limited access to international markets. Other obstacles according to

the World Bank are huge costs of capturing and utilizing natural gas, and poor data on flaring

volumes (World Bank, 2011). In a related report, the natural gas characteristics such as small,

scattered, declining and uncertain natural gas volume, distance to energy users and gas

infrastructure are factors that render investment in natural gas sector unattractive (World

Bank, 2014).

The World Bank (2015) claimed cessation of routine natural gas flaring by 2030 could

prevent the emission of millions of tons of CO2 into the atmosphere yearly. The cessation

will lead to improved life for people around natural gas flaring sites like the NDR, for

example, and increase the supply of natural gas for electricity generation to light up the

African continent. Electricity generation with natural gas has multiple economic merits

compare to coal. Aside from low price and carbon emission, commercial natural gas traders

could earn profitable returns on investments translating to reduced cost in consumer goods

(Pirog and Ratner, 2012).

5.1.5 WEAK INSTITUTIONAL FRAMEWORK

Weak institutional framework in the natural flaring dynamics ranges from weak

enforcement of environmental laws to low compliance by industry operators (Uhren and

Doucet, 2004). Institutional indicators according to Kuncic (2013) could be classified into

legal, political and economic. Weak legal institution means weak enforcement of

environmental laws and inefficiency of the judiciary system (Odiase, 2004,). The work of

Goel and Risto (2012) showed that corruption and shadow economy weakens government

institutions, reduces the efficiency of pollution control and environmental policies. In their

study of the Middle East and North Africa (MENA) countries which focused on the effects

of institutional quality and environmental pollution. They found corrupt and nations with

large informal sector tend to have low recorded emission level. The paper showed that

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corruption and underground economy encouraged none reporting or underreporting of

emission level. However, after controlling for geographic, economic and social factors they

found MENA countries have higher pollution level relative to the rest of the world and that

low institutional quality contributed to the increased emission level in the region.

Dimitrios and Stathopoulou (2013) examined pollution-environment nexus using

empirical models in an imperfect competitive economy. In their model, like a similar choice

faced by the IOCs in Nigeria, firms made a choice between employing dirty technology and

paying emission tax or employing clean technology with increased production costs. The role

of bureaucrats in reporting and monitoring emission levels was also examined. Their findings

revealed that corruption influenced bureaucrats to under-report emissions level, misled, and

misadvised the authorities against high emission tax. The intuition of their findings is that

corruption reduced the number of firms that employed emission reduction technology.

Specifically, because corruption incidence is high, firms have reduced fixed costs with high

emission level to the society. The main conclusion was that corruption reduces environmental

quality (Dimitrios and Stathopoulou, 2013). Weak institutional framework is responsible for

high incidence of bribery and corruption, and where these occurs, large oil-producing IOCs

are likely to be in total control of the economy of host countries. Institutional weakness also

results in ineffective environmental legislation and weakens the political will to enforce

natural gas flaring deadlines. The common observation is that environmental legislations

have been ineffective in mitigating natural gas flaring in Nigeria because of bribery and

corruption in the crude oil industry (Ukala, 2011).

5.1.6 INSUFFICIENT NATURAL GAS INFRASTRUCTURE

Commercialization of natural gas is more difficult in developing countries, particularly

where there are absence of natural gas infrastructure, local, and international markets.

Insufficient natural gas reserves and absence of long term naturals gas markets hinders the

development of the natural gas sector (GE, 2010). These imply that giving priority to building

domestic processing and transmission facilities and finding new natural gas markets certainly

add value to natural gas monetization (Leuch, 2011). Furthermore, removal of impediments to

co-developed natural gas infrastructure and natural gas markets also enhances natural gas

monetization (GE, 2010). Natural gas requires processing infrastructure for impurity removal

prior to marketization. Thus, the huge financial investment requirement in natural gas treatment

plants and infrastructure is a key obstacle confronting natural gas monetization in Nigeria.

According to Uhren and Doucet (2004 and Falade, 2010), insufficient and lack of natural gas

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infrastructure hampers investment in natural gas utilization and transportation from source to

high consumption areas via pipeline networks.

Insufficient natural gas infrastructure in Nigeria increases the wastage of an important non-

renewable natural resource and revenue loss (WORC, 2014). Investing in natural gas utilization

infrastructure requires huge financial capital which oil companies would rather avoid

particularly in developing countries (Evoh, 2002 and GE, 2010). The financial investment

required to develop the Nigerian natural gas sector has been estimated to be in the region of

between US $1 and US $2 billion per year (Asu, 2015). Relative to the US $13 billion yearly

expended by households and businesses in Nigeria on imported electricity generator.

Therefore, it makes better economic sense to invest in natural gas infrastructure to generate

electricity and mitigate natural gas flaring. The Nigerian government is nervous that rigid

implementation of natural gas flaring reduction policies could disrupt crude oil production,

revenue source and threatened budget implementation (GE, 2010).

This is more so because Nigeria economy is infected by Dutch Disease and Resource Curse

(Opeyemi, 2012). Opeyemi in his empirical analysis listed the leading evidence of Resource

Curse as high level of corruption, poor level of science and technology policy implementation

and infrastructural development and the economy being susceptible to volatilities in the global

crude oil price. While Dutch Disease is manifested through the nation´s economy over

dependency on crude oil, insufficient investment in education, weak institutionalized states and

lack of transparency in the management of crude oil and natural gas resource (Opeyemi, 2012).

5.1.7 NEGATIVE IMPACT OF NATURAL GAS FLARING

To underscore the importance of this work and to better understand the need for natural gas

flaring mitigation this section examines the negative externalities from natural gas flaring.

According to Oni and Oyewo (2011), natural gas flaring in the NDR produces multiple

negative effects on the vegetation, human and micro climate. The argument is that burning

natural gas has led to massive environmental pollution followed by the destruction of the

ecosystem. Pollution of the ecosystem weakens fishing, farming, and other agricultural

activities and the impact is low crop yield, output and increased poverty level in the Niger Delta

region. A related study using soil and rainwater samples from areas and communities in close

proximity to natural gas flaring platforms, Ubani and Onyejekwe (2013) found flaring has led

to higher soil temperature and rainwater acidification. The unusual soil temperature and

rainwater acidity level is believed to be responsible for aquatic life destruction and water-borne

diseases prevalent in the region.

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Ubani and Onyejekwe (2013) observed that rainwater acidification also increased the rate

of corrosion and depreciation of metal roofing sheet in buildings leading to reduced life span

and increased cost of building maintenance in the region. According to Jideani et al. (2012),

natural gas flaring advances the risk of respiratory diseases, asthma, cancer and premature

death. Because residues from natural gas flaring contain a mixture of highly toxic substances

such as carbon dioxide, methane, oxides of nitrogen and sulfide discharged into the

environment together with carcinogenic substances such as benz(a)pyrene and dioxin. Jideani

et al. (2012) averred that incomplete combustion of natural gas is made up of benzene, toluene,

xylene and hydrogen sulfide. These compounds are considered toxic to human health.

Emissions from burnt natural gas contain about 250 toxins proven to be dangerous and

poisonous to the ecosystem and human habitat. Besides, reports revealed that direct leakage of

natural gas into the atmosphere caused several days of bush fire heating up the atmospheric air

and destruction of plants and animals in the NDR (Zabbey, 2004).

Light pollution is another negative externality from natural gas flaring in the NDR. Light

pollution is described as a constant huge flame with endless brightness from natural gas flaring

stacks subjecting residents, plants and living organism to constant unnatural daylight. The

negative effect of light pollution forced animals to migrate from their natural habitats leading

to reduced reproduction and high mortality rate (Agbebi, 2011; Uhren and Doucet, 2004).

Madueke et al. (2013) mentioned rising pipeline vandalization, kidnapping of foreign and

indigenous oil workers, disruptions of crude oil production, political violence and armed

conflicts in the Niger Delta region as method communities protest against natural gas flaring.

There is correlation between militancy, reduced oil production and reduction natural gas flaring

in the NDR (Howden, 2010). Indeed, violence in the Niger Delta region driven by natural gas

flaring is a manifestation of Resource curse (Opeyemi, 2012). Resource Curse theory posits

that natural resource abundance in less developed countries seems to manifest in negative

development outcomes relative to countries with less natural resource endowment. Indicators

of Resource Curse include poor growth performances, growth collapses, and high level of

corruption. Included are ineffective governance and greater political violence (Drexhage and

Murphy, 2010). Indeed, natural resource abundance, in this case, turns out to be a “curse” rather

than a “blessing”. Meaning that natural gas endowment has become a “curse” to the people of

the NDR instead of being a “blessing”.

Emphasizing on the negative impact of natural gas flaring on the environment and people,

Aghalino (2009) pointed to the destruction of predominant botanical forest plants with

economic and pharmaceutical values by natural gas flaring in the NDR. Natural gas flaring

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produces roaring noise from flare stacks which forced people of the region to communicate in

an unusual high pitch tone because of prolong exposure to intense noise and vibrations from

natural gas flaring stacks (Ikelegbe, 1993), (Agbebi, 2011) and (Uhren and Doucet, 2004). The

World Health Organization (WHO),1999) listed the negative effects of noise pollution to

include sleep and mental disturbance, spoken communication interference, hearing

impairment, cardiovascular disturbance and other negative health hazards.

Sunday and Ubi (2012) listed the negative impact of natural gas flaring as reduced life

expectancy and increased poverty in the resource-rich Niger Delta region. This is a classic

example of “resource curse”. With further negative impact on farm outputs, income, assets

(buildings), health, migration, and diversification of labor from farming (Esu and Dominic,

2013). Additional reports showed prevalence of respiratory illness, high infant mortality rate

and childbirth problems. Two popular fishing lakes (Ovie and Eni lakes) which were once the

sources of employment and food to the community became toxic and extinct mainly due to

evaporation because of excessive heat from flaring platforms (Tell, 1997).

5.1.8 LESSONS FROM OTHER COUNTRIES ON NATURAL GAS FLARING

We look at examples from two countries regarded as the global best in natural gas flaring

practices and the features of their success in natural gas flaring abatement.

NORWAY

Norway flares the least quantity of natural gas relative to other crude oil producing nations

in the world. Available data showed Norwegian crude oil output is 50 % more than Nigeria and

the country produces twice Nigeria’s natural gas output. However, Norway flares only 0.44

billion standard cubic meters of natural gas and re-injects about 30-40% of the product to

enhance crude oil recovery (FNI/ECON, 2001). Carbon tax was introduced in 1991 with a high

rate of US $51 per metric ton of CO2 (Wikipedia, 2015). In 2007, the tax rate of CO2 emissions

from the Norwegian continental shelf was US $61.22 (Smith et al., 2009).

There are plausible reasons for minimal natural gas flaring in the Norwegian oil industry

worthy of emulation by Nigeria: First, only for safety reasons, natural gas flaring is permitted

in Norway which is granted with written consent from the Norwegian Ministry of Petroleum

and Energy (MPE). Secondly, with a combination of stringent legislations, implementation of

emission reduction technologies and comparatively high emission tax regime, natural gas

flaring account for as low as 10% of CO2 emissions in 2012. Thirdly, Norway is the third largest

natural gas exporter in the world with a small fraction consumed locally (MPE, 2014). These

implies that the country has a high level of natural gas monetization. Fourthly, there is climate

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and energy fund established by the government for continuous research and technological

development that reduces greenhouse gas emissions. The country has high transparency in the

operation of the oil and natural gas industry coupled with the MPE guiding policy of generating

the greatest possible value from the oil and natural gas resources (MPE, 2014).

Additional reasons Norway flares the least natural gas is because the country is ranked

among the least corrupt in the world by Transparent International (TI, 2014), an indication of

strong institutional governance. Report by Smith et al. (2009) confirmed Norwegian carbon tax

has spurred technological innovation in form of carbon sequestration thereby yielding high

emission reductions. Importantly, there are huge investments in natural gas infrastructure

comprising extensive network of pipelines for natural gas evacuation from source to gas-

processing plants facilitating natural gas export. Indigenous participation in the upstream and

downstream oil and natural gas industry dominant foreign multinationals contrary to the

practice in Nigeria.

Periodic and regular review of carbon tax rate is a constant feature of the Norwegian oil and

natural gas sector. The last increase to carbon tax rate was in 2014 (MPE, 2014 and Institute

for European Environmental Policy (IEEP), 2013). Minimizing natural gas flaring is included

in crude oil production contract between the state and oil companies. Companies are mandated

to ensure the necessary natural gas infrastructure are in place for natural gas utilization and

evacuation prior to the commencement of crude oil production (Abba, 2012).These features

drive high efficiency in the Norwegian oil industry and sustained optimal natural gas flaring.

CANADA

Canada is another global leader in terms of best practices in natural gas flaring (World Bank,

2008). Legislative actions against natural gas flaring has been in existence and implemented

for several decades in Canada. In 2007, the average natural gas utilization in Canada was 93.6%

of the total associated gas production of 23.7 billion cubic meters of natural gas. The expansive

natural gas consumption is for domestic heating, power generation, oilfield operations, oil

sands processing and re-injection. Moreover, Canada exports large quantity of natural gas

implying high natural gas monetization. There are continuous expansion and development of

pipelines and gas infrastructure coupled with effective legislation (World Bank, 2008). These

factors have placed Canada among the least natural gas flaring nations in the world. Like its

Norwegian counterpart, Canada has low corruption incidence as reflected in the annual

publication by Transparent International (TI), 2014).

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There is also a robust emission tax regime in operation, specifically natural gas flaring tax

rate in British Columbia which started in 2008 with US $10 per ton has been stringently raised

to US $30 as at 2012. Despite the relatively high emission tax, plan is on for an upward review

to about US $50 per ton in 2016 (Lee, 2012) and Clean Energy Canada (CEC), 2014). However,

for a carbon tax to succeed the following are recommended: (1) strong political leadership and

public concern about climate change, (2) simplicity, easy to administer and with minimal

exemptions and broad coverage, (3) start from relatively low price and maintained scheduled

price increase, (4) revenue neutrality to address private sector concern and carbon tax should

be combined with other policies for effective emissions reduction (CEC), 2014). In British

Columbia, carbon tax is expected to be the key mechanism for emissions reduction by at least

33% below 2007 levels by 2020. In Norway, carbon tax is viewed as essential in onshore

emissions reduction of about 1.5% and total emission reduction of 2.3% from 1990-1999.

Nigeria should collaborate with both countries to reduce natural gas flaring with a view to

meeting the World Bank 2030 deadline on zero routine natural gas flaring.

What are the key drivers of natural gas flaring in Nigeria? We identified the following

factors as determinants of natural gas flaring based on the literature review: (1) Natural gas

flaring penalty (2) Quantity of oil produced, (3) Technology, (4) Quantity of natural gas

utilized, (5) price of natural gas, and (6) institutional quality. However, institutional quality has

been omitted as explanatory variable due to insufficient data. We should take particular note

that this work is only interested in the long run effect of determinants of flaring natural gas in

Nigeria and these will be the focus in the proceeding empirical section.

The starting point of the application of the ARDL cointegration bounds test approach is to

analyze the stationarity properties of the variables to ensure none of the series is l (2). In this

paper, we use the Augmented Dickey-Fuller (ADF) to test for the presence of unit root. A

rejection of the null hypothesis implies the absence of a unit root which means that none of the

variables are integrated of order l (2). With the bounds test technique developed by Pesaran et

al. (2001), we shall conduct cointegration test between natural gas flaring and its determinants.

In the cointegration test, the null hypothesis shall test for the absence of cointegration between

the variables of interest. Thus, the absence of cointegration implies there is no long run

relationship between the dependent and independent variables under investigation. The

acceptance of the null hypothesis of no cointegration implies the absence of cointegration.

Therefore, a rejection of the null hypothesis in the cointegration test signals the presence of

cointegration which implies the existence of long run relationship between the estimated

parameters and a confirmation of the suitability of the ARDL methodology for this work.

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The decision rule for cointegration test is; if the computed F-statistic (or W-statistic) is

greater than the upper bound value, I (1), we reject the null hypothesis of no cointegration and

accept the alternative hypothesis that there is cointegration which implies the existence of a

long run relationship between the estimated parameters. But if the computed F-statistic (or W-

statistic) falls below the lower bound value, I(0), we accept the null hypothesis of no

cointegration which implies the absence of a long run relationship between the parameters in

our analysis. Lastly, should the computed F-statistic (or W-statistic) lie between both bounds

the result is interpreted as being inconclusive (Pesaran et al., 2001). We shall continue with the

estimation of our parameters only after confirming that the order of integration in the unit root

test is 1(l), l (0) or mixture of both and the variables are cointegrated.

6. MODEL SPECIFICATION AND VARIABLE EXPLANATION

6.1.1: DETERMINANTS OF NATURAL GAS FLARING

The literature review revealed natural gas flaring penalty (Gfp), natural gas utilization/

marketization (Ngu), price of natural gas (Prg) and crude oil (oil) as determinants of natural

gas flaring in Nigeria. We add a trend variable (T) to proxy technology infrastructure.

Following the works of Oduneka et al. (2012), Adu (2013) and Pesaran et al. (2001) and given

the key variables driving natural gas flaring in Nigeria the following model emerged:

Ngft = f (Gfpt, Ngut, Prgt, Oilt, Tt) (1)

Where; t indicates time covering the period 1984-2013, f denotes the natural gas flaring

function, Ngft represents natural gas flared (in million standard cubic feet) in period t, Gfpt

denotes natural Gas Flaring Penalty (in naira) is the amount paid as emission tax by the IOCs

for flaring natural gas in period t, Prgt represents price of natural gas (in naira) in period t, Oilt

denotes crude oil produced (in barrel) in time t, while Ngut is natural gas utilized or marketed

(in million standard cubic feet) in time t and Tt is a trend variable that proxy the effect of

technology infrastructure in time t on flaring.

The function above states that natural gas flared in time t is a function of natural gas flaring

penalty (Gfpt) in time t, price of natural gas (Prgt) in time t, natural gas utilized/marketed (Ngut)

in time t, crude oil production (Oilt) in time t and effect of technology infrastructure (Tt) in time

t on flaring. If we impose a multiplicative functional form on equation (1), a transformed

econometric model of (1) base on logarithm transformation which shall be estimated

empirically becomes:

lnNgft = λ0+ λ 1lnGfpt + λ2lnNgut + λ3lnPrgt+ λ4lnOilt + λ5lnTt + Ɛt (2)

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Where: Ɛt represents the error term while other variables remained as previously defined and

λ0 – λ5 is the coefficient of explanatory variables are the parameters to be estimated. Revert to

section 3.1 for a brief explanation about our model specification. Therefore, the ARDL

formulation of (2) is as follows:

∆ ln Ngft = β0 + ∑ πip1i=1 Δ ln Ngft−i + ∑ ςi

p2i=0 Δ ln Gfpt−i + ∑ ξi

p3i=1 Δ ln Ngut−i +

∑ θip4i=1 Δ ln Prgt−i + ∑ Γi

p5i=1 Δ ln Oilt−i + λ0 ln Ngft−1 +

λ1 ln Gfpt−1 + +λ2 ln Ngut−1 + +λ3 ln Prgt−1 +

λ4 ln Oilt−1 + λ5 ln Tt−1 + εt (3)

Where: 𝑝i represents the optimal lag length, ∆ denotes the difference operator while other

variables remained as previously defined. The long run relationship among the relevant

variables shall be conducted using the F- test (or W-test) in (3) by imposing restrictions on the

estimated long run coefficients of one period lagged level of the variables equals zero,

specifically, we test the null hypothesis:

𝐻𝑜: λ0 = λ1 = λ2 = λ3 = λ4 = λ5 = 0 (There is no long run relationship) against the

alternative hypothesis;

H1: λ0 ≠ λ1 ≠ λ2 ≠ λ3 ≠ λ4 ≠ λ5 ≠ 0 (There is long run relationship)

The next step is to compare the F-statistic (or W-statistic) with the critical values tabulated in

(Pesaran et al., 2001). The upper bound values assumed the explanatory variables are integrated

of order 1 i.e. I (1), while the lower bound assumed they are integrated of order 0 i.e. I (0). The

decision rule is; if the computed F- statistic is greater than the upper bound value, I (1), we

reject the null hypothesis of no long run relationship and accept the alternative hypothesis of

there is a long run relationship which implies that natural gas flaring and its determinants are

cointegrated and approach a long run equilibrium. On the other hand, if the computed F-statistic

is less than the lower bound value, I(0), we accept the null hypothesis of no long run

relationship implying that natural gas flaring and its determinants are not cointegrated and

therefore do not approach a long run equilibrium. However, if the test statistic lies between the

upper and the lower bounds, the result is interpreted as being inconclusive. Upon confirming

our model is cointegrated and by extension approach a long run relationship equilibrium, we

shall proceed to estimate the long run relationship using the following equation:

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ln 𝑁𝑔𝑓𝑡 = 𝛽0 + ∑ 𝜈1𝑞𝑖=1 ln 𝑁𝑔𝑓𝑡−𝑖 + ∑ 𝜈2

𝑟𝑖=0 ln 𝐺𝑓𝑝𝑡−𝑖 + ∑ 𝜈3

𝑠𝑖=0 ln 𝑁𝑔𝑢𝑡−𝑖 +

∑ 𝜈4𝑡𝑖=0 ln 𝑃𝑟𝑔𝑡−𝑖 + ∑ 𝜈5

𝑢𝑖=0 ln 𝑂𝑖𝑙𝑡−𝑖 + ∑ 𝜈6

𝑊𝑖=0 ln 𝑇𝑡−𝑖 + 𝑒𝑡 (4)

Where: q, . . . . , w are the appropriate lags for each of the respective variables in the model.

The long run relationship is investigated using the F-statistic (or W-statistic) by imposing

restrictions on the estimated long run coefficients and setting the one period lagged level of

the variables equals zero, specifically, the null hypothesis is stated as follows:

𝐻𝑜:: 𝛽0 = 𝛽1 = 𝛽2 = 𝛽3 = 𝛽4 = 𝛽5 = 𝛽6 = 𝛽7 = 0 (There is no long run relationship)

𝐻1: 𝛽0 ≠ 𝛽1 ≠ 𝛽2 ≠ 𝛽3 ≠ 𝛽4 ≠ 𝛽5 ≠ 𝛽6 ≠ 𝛽7 ≠ 0 (There is long run relationship)

Results starting with the unit root test are presented in the next section.

6.1.2 PRESENTATION OF RESULTS AND DISCUSSION

6.1.3 Unit root test

The econometric approach is, first, to test for the time series properties of the variables

using Augmented Dickey-Fuller (ADF) unit root test. We confirm our variables are

stationary if the order of integration are I (0), (1) or mixed for the variables in the data set

before we utilize the bounds testing approach to test for cointegration within the ARDL

framework. The reason for this choice is that bounds testing technique is suitable for a set of

variables that are I(1), I(0) or of mixed integration and the ARDL technique is also

appropriate for the analysis of relatively small sample size as we have in this work. Therefore,

the suitability of the ARDL technique in the analysis of long run relationship between

estimates can be confirmed by pre-testing for unit root to ensure the absence of I (2) series

since the presence of I (2) series could produce spurious result in a model designed for I (1),

I (0) or of mixed integration as we have in this paper. Note that all computations in this work

were done with Micro fit software. The unit root test results are presented in Table 1 below;

Table 1. Unit Root Tests

Variable Levels First difference

lnGfp -1.46 -6.65**

lnNgf -2.41 -0.14*

lnNgu -0.11 -4.75*

lnOil -1.87 -7.61**

lnPrg -1.37 -4.27* Notes: *, ** denotes statistical significance at 5% and 1% significant

levels respectively. The P-values are reported in parenthesis.

In the Augmented Dickey-Fuller (ADF) unit root test, the null hypothesis states that the series

has a unit root and a rejection of the null hypothesis implies the absence of a unit root which

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means the series is stationary, and, therefore appropriate for our analysis. As observed in Table

1 all variables were nonstationary at level but became stationary after the first difference.

Hence, the null hypothesis which tests for the presence of unit root in our series is rejected at

5% significant level for the parameters which implies our variables are stationary after first

difference given the acceptance of the alternative hypothesis of no unit root.

6.1.4 WHAT ARE THE DETERMINANTS OF NATURAL GAS FLARING IN NIGERIA?

To provide the answer to the research question, we shall investigate the existence of a long

run relationship in the parameters in equation (4) using cointegration test as recommended by

(Pesaran and Shin, 1999). Given the result, the optimal lag length of 3 was selected based on

the Schwarz-Bayesian Criterion (SBC). The SBC is the preferred criterion because it provides

a valid and consistent explanation of our variables. The result of the bounds testing for

cointegration is presented in Table 2 below:

Table 2: Bounds test for cointegration relationship

F-statistic I(0)Bound I(1)Bound

8.50* 4.27 5.69

If the statistic lies between the bounds, the test is inconclusive.

If it is above the upper bound I(1), the null hypothesis of no level effect is rejected.

If it is below the lower bound I(0), the null hypothesis of no level effect can't be

rejected. The critical value bounds are computed by stochastic simulations

using 20000 replications.

We test for the existence of a long run relationship using the F-test statistic. Given the

cointegration test result in Table 2 above and base on the null hypothesis, the computed F-test

statistic (8.50) is greater than the upper bound values (5.69) at 5% significant level. Thus, the

F-test statistic confirm the existence of a long run relationship between natural gas flaring and

its determinants. The long run results for the determinants of natural gas flaring is presented in

Table 3 with the diagnostic test. However, before we interpret the long run result, we first

interpret the diagnostics test to avoid the interpretation of an unreliable result by testing for

serial correlation, functional form, normality, and heteroscedasticity.

Given the diagnostic test presented in Table 3, the result indicates the model could not reject

the no serial correlation, the RESET and normality test at the 5% significant level test. The

model, however, could not pass the heteroscedasticity test, implying we have to use the robust

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standard errors that correct for serial correlation and heteroscedasticity in order to make valid

inferences. Noteworthy is that the diagnostic tests follow a chi-square distribution which is an

indication that the series takes into account the effects we seek to investigate thereby providing

reliable estimates.

We proceed with the analysis while acknowledging our relatively small sample size could

lead to potential bias in our inferences. However, the application of the ARDL methodology

being suitable for small sample size validate our finding (Pesaran et al., 2001). We turn to Table

3 base on (4) to provide answers to the research question with a focus on the long run only. All

variables are expressed in logarithm.

Table 3. Estimated Long Run Coefficients using the ARDL Approach

Variable Coefficient

lnGfp -0.18

(0.08)*

lnOil 6.66

(2.49)**

lnNgu -3.37

(1.04)**

lnPrg 1.84

(0.07)**

lnT 0.16

(0.08)*

Constant -74.15*

(34.37)

Regression and diagnostic statistics

R2 0.94 DW-stat. 2.98

2Auto

(1) 5.12[0.05]

2Resert (1) 1.18[0.31]

2 Norm (2) 0.07[0.97]

2 Hetero (1) 4.59[0.04]

Notes: Dependent variable is lnNgf.

**, *denotes statistical significance at 5% and 10%

levels respectively. The standard error is reported in

parenthesis. ARDL (3,0,3,3,3) selected based on

Schwarz Bayesian Criterion.

The long run result starting from gas flaring penalty (lnGfp) indicates the coefficient of log

natural Gas Flaring Penalty (-0.18) to be negative and statistically significant at 10%

significance level. Therefore, 1% rise in the natural gas flaring penalty leads to a reduction in

natural gas flared (lnNgf) by 0.18%, in the long run. The implication is that in the long run,

natural gas flaring penalty could be an important policy instrument in natural gas flaring

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abatement. Therefore, increasing natural gas flaring penalty has the potential to mitigate natural

gas flaring in the long run. The statistical significance of the natural gas flaring penalty at 10

% significant level which induces natural gas flaring reduction in the long run concurred with

Matuin et al. (2012), Aghalino (2009) and Atoyebi and Olatunbosun (2012,). These studies

agreed that natural gas flaring penalty which has been operated in Nigeria for more than 30

years, though, has the potential to minimized natural gas flaring but failed because of its

relatively low rate. The second explanation flaring natural gas persist is because of profit

maximization objective of firms, hence, the benefits from paying a relatively low natural gas

flaring tax far outweigh the cost of investing in natural gas flare reduction technology.

Therefore, the rate of natural gas flaring tax is not sufficiently high to stimulate innovation

usually associated with emission tax to induce optimal natural gas flaring reduction by IOCs.

The third perspective to the ineffectiveness of the natural gas flaring penalty is because of

the effect of Dutch Disease on the Nigerian economy. With the Dutch Disease, the Nigerian

economy overly depend on crude oil as a source of revenue to the detriment of the non-oil

sector, thus, the government is in a disadvantageous position to effectively implement stringent

and sufficiently high rate of natural gas flaring penalty (ERA/FOE Nigeria and OWA, 2012

and Sustainable Prosperity, 2012). The centralization of Nigerian economy on crude oil

embolden the IOCs to threaten the government with the suspension of crude oil production

should the government insist on rigid enforcement of environmental legislations on natural gas

flaring abatement. The IOCs justified their endless procrastination on meeting natural gas

flaring deadlines by citing lack of flare reduction technology. Another explanation for the

multiple shifts in the deadline on natural gas flaring cessation according to Opeyemi (2012) is

because of weak institutions. Weak institution is responsible for the weak implementation,

enforcement of environmental legislations and low rate of the natural gas flaring penalty.

Table 3 indicates the coefficient (6.66) quantity of crude oil (lnOil) produced is positive

and statistically significant at 5% significance level. This implies that in the long run, 1 % rise

in crude oil production increases natural gas flaring by 6.66 %. The implication of this finding

is that natural gas flaring and oil production are “tightly coupled”. This is consistent with the

literature review, exponential rise in natural gas flaring results from crude oil production, and

crude oil sales is the leading revenue source in Nigeria. Specifically, ERA/FOE (2005) states

that the quantity of oil produced determines the volume of natural gas flared, increase in crude

oil production raises the level of natural gas flaring. An observation is that an estimated 1000

standard cubic feet of natural gas is produced for every barrel of oil production and there is

correlation between oil production, militancy and natural gas flaring (Howden, 2010).

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According to Ayoola (2011), Nigeria flares over 80% its natural gas production during oil

production. Given this result, crude oil production is the most important factor that stimulates

the greatest increase on natural gas flaring in Nigeria. This is a surprising outcome when

compared to the practice in countries like Norway and Canada which produced 50% more

crude oil and natural gas but flared less than 3% of natural gas its production compared to

Nigeria that flares more than 80% (FNI/ECON, 2001 and Ayoola, 2011).

An important natural gas flaring reduction factor is natural gas utilization and marketization

(lnNgu). The coefficient (-3.37) of log natural gas utilization in Table 3 indicates that in the

long run, an increase in natural gas utilization by 1% reduce the quantity of natural gas flared

by 3.37%. This result is statistically significant at 5% significance level. The finding is

consistent with the work of Akeredolu and Sonibare (2006). Thus, investing in natural gas

marketization has the potential to “force” reduction in natural gas flaring in the long run.

Nigeria experiences shortage in electricity supply which natural gas could be the needed

panacea (NBS, 2012 and Oduneka et al., 2012). Indeed, Nigeria is currently blighted with huge

electricity crisis, over 60 % of the population are without access to reliable electricity supply.

Therefore, increasing investment in natural gas-fired power plants could significantly meet the

electricity demand, reduce natural gas flaring and save the country about the US $13 billion

yearly expenditure on electricity generator importation (GE, 2010). This excludes other

domestic natural gas use which could further add to natural gas flaring mitigation.

A third factor having a major effect on natural gas flaring in Nigeria is the price of natural

gas (lnPrg). The coefficient (0.70) of log natural gas price is positive and statistically significant

at 5% significance level. The implication is that in the long run, an increase in the natural gas

price by 1% could increase natural gas flaring by 0.70 %. The implication of the result is that

natural gas price, at least for the period our study, is an important contributing factor to the

increase in natural gas flaring. Specifically, policymakers consider low natural gas price

relative to crude oil as a key factor dampening natural gas marketization in Nigeria and other

nations (WORC, 2014; GE, 2010 and Burleson, 2013). There are particular reasons for the

counter intuitive finding on natural gas price (for Nigeria) in relation to the literature. One

possible explanation could be that prices of crude oil are higher than those of natural gas in

Nigeria and international market, which tends to favor crude oil production relative to natural

gas in line with oil firms’ profitability goals due to factors such as inadequate natural gas

infrastructure in Nigeria.

Moreover, a more careful examination of the natural gas price data relative to crude oil

price (see OPEC website) for the period of our study in conjunction with the literature review

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indicates, a marginal increase in natural gas price relative to crude oil price which increases at

a significantly higher rate. This means that concurrent increases in both oil and natural gas

prices will tend to lead to a higher natural gas flaring level, as long as the price increases in

crude oil is significantly higher than that of natural gas to make a reduction in natural gas

flaring a profitable venture. Another possible explanation is that, the lack of sufficient natural

gas infrastructure that could reduce the cost of less natural gas flaring to make natural gas

production a profitable option could be partly due to relatively high subsidy on natural gas and

competing energy source and inefficient natural gas pricing system that has kept natural gas

price artificially low. These tends to discourage investment in the natural gas sector and

increase natural gas flaring (NGBA), 2005), World Bank (2011) and (GE), 2010).

Lastly, the coefficient (0.16) of log of technology (lnT), a trend variable taking into account

technology, is positive and statistically significant at 10 % significance level. The implication

is that increasing the use of technology by 1% increases natural gas flaring by 0.16%. This is

a surprising outcome considering that technology is indispensable for emission mitigation. One

possible explanation for this strange result is that the time trend could be picking the technical

progress associated with other economic activities such as crude oil exploration and production

rather than in natural gas related technology. The second possible explanation is that, the result

could be an indication of the failure of firms to use natural gas flaring reduction technologies

in crude oil exploration which, consequently, led to the raising level of natural gas flaring

despite several legislations to this effect as manifested in multiple shifts in natural gas flaring

reduction deadlines (Dimitrios and Stathopoulou, 2013). The last likely reason increasing the

use of technology raised the level of natural gas flaring could be that the result confirms the

IOCs´s inclination to utilize technologies that increases natural gas flaring, for example, the

construction of over 1000 natural gas flaring platforms for natural gas flaring across the NDR

and the minimal utilization of natural gas reinjection technology (see Jideani et al., 2012) which

increased level of flaring, at least, for the period of this study.

Finally, we examine some measures of fit. The coefficient of determination, R –squared

statistic of 0.94 indicates about 94% of the variation in the natural gas flaring (lnNgf) can be

explained by the variation in the explanatory variables which is a reasonable good fit. While

the remaining 6% represents factors that contribute to the variation in natural gas flaring which

are unaccounted for by the independent variables but has been captured in the error term. The

high explanatory power of the coefficient of determination give room to be apprehensive about

spurious result but since the DW statistic (2.98) is also high, we need not worry about serial

correlation. The fairly high DW-statistic (2.98) indicates we need not be concerned about the

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problem of serial correlation in our model estimates. Finally, the (3,0,3,3,3) is the selected

optimal lag length for each of the 5 respective independent variables in our model based on the

Schwarz Bayesian Criterion.

7. CONCLUSIONS AND POLICY IMPLICATIONS

CONCLUSIONS

The objective of this paper is to empirically search for the fundamental determinants of

natural gas flaring in Nigeria with a specific focus on the long run. This was examined using

autoregressive distributed lag model with time series data from 1984 to 2013. We have robust

evidence that natural gas flaring penalty, natural gas utilization/marketization, crude oil

production, natural gas price, and technology are key determinants of natural gas flaring in

Nigeria. Specifically, we found uncompetitive natural gas pricing owing to the subsidy on

natural gas, crude oil production because of the failure of the IOCs to acquire the requisite

natural gas flaring reduction technology and lack of natural gas infrastructure as factors that

contributes significantly to the exponential increase in natural gas flaring. The reason why

crude oil production plays the most significant role in increasing natural gas flaring relative to

other variables is because of weak institutional governance. Weak institutional framework

manifests in several forms including lack of political will to enforce environmental legislations

and endemic corruption, for example. The weakness of this work is that our sample size is too

small which reduces the confidence level repose in the findings. However, the application of

the autoregressive distributed lag methodology, which has been proven to be suitable for small

observations, compensates for the shortcoming in the sample size.

We found certain aspects of our finding surprising particularly crude oil and technology,

unlike is obtainable in Norway and Canada, for example, contributed significantly to the natural

gas flaring in Nigeria. Another striking finding in this paper is that increase in natural gas price

could not trigger the desired reduction in natural gas flaring which is contrary to a priory

expectation. However, despite the shortcomings and the strange results, the strength of this

paper is in its detailed analysis of factors contributing to natural gas flaring and its salient policy

implications which are vital for the prudent management of the Nigerian natural gas sector.

The key conclusion from this paper is that the implementation of policies targeting optimal

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natural gas flaring can result in natural gas flaring mitigation in the long run and can thrust

Nigeria on the path towards meeting the 2030 World Bank deadline on cessation of routine

natural gas flaring.

POLICY IMPLICATIONS

The findings in this paper have important policy implications which can reform the natural

gas reduction policy in Nigeria and in countries with similar challenge thereby contributing to

global pollution mitigation. Based on our result, relatively low Natural Gas Flaring Penalty is

generally seen as being responsible for the high level of natural gas flaring in Nigeria, the

policy suggestion is to increase and set the natural Gas Flaring Penalty sufficiently high to

achieve the desired policy goal. Relatively high natural gas flaring penalty could become the

game changer in natural gas flaring reduction if implemented in combination with stringent

environmental laws enforcement, increased investment in natural gas infrastructure and

acquisition of flare reduction technology to incentivize natural gas marketization/utilization.

An important aspect of the finding in this paper is that natural gas marketization/utilization

contributed significantly to natural gas flaring mitigation. The policy recommendation is for

Nigeria to invest in natural gas consumption particularly for domestic cooking and electricity

generation to expand the natural gas market and reduce natural gas flaring. Furthermore, one

of the surprising findings in this work is the effect of natural gas price on natural gas flaring,

the paper shows that low natural gas price relative to crude oil price and subsidy on natural gas

increases the level of natural gas flaring. The policy recommendation is subsidy removal on

natural gas to boost returns and investments in the natural gas sector.

With respect to crude oil, we found crude oil production “is tightly coupled” to natural gas

flaring thereby proving to be the most important determinant of natural gas flaring in Nigeria.

The reasons are minimum natural gas re-injection and lack of application of natural gas flaring

reduction technology in crude oil production. To “decoupled” crude oil production from natural

gas flaring, the policy options available to Nigeria is for the country to institute natural gas

reinjection and the acquisition of natural gas flaring reduction technology as a precondition in

new and subsequent crude oil production contracts with the IOCs. Also, appropriate incentives,

in the form of a tax rebate, for example, should be created for subsequent and existing contract

holders that have been confirmed by a third party to have achieved a measurable natural gas

flaring reduction through increased use of either natural gas reinjection or flaring reduction

technologies or both in crude oil production.

lnTech (T) which is a trend variable accounting for the effect of technology over time on

natural gas flaring. Technology variable shows a lack of application of natural gas flaring

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reduction technology in crude oil production, as demonstrated in the high numbers of natural

gas flaring platforms across the NDR which intensified the level of natural gas flaring. The

policy suggestion is for Nigeria to increase investment in natural gas flaring reduction

technology with the prohibition of further construction of natural gas flaring platforms and a

timeline should be created for the removal of flaring platforms in the region. Lastly, in order

to keep to the terms of the several environmental Protocols signed by Nigeria, the country

should focus on the implementation of natural gas flaring reduction policies and strengthen the

competency of the regulatory authority for natural gas flaring mitigation. Finally, the counter

intuitive result of the effect natural gas price on natural gas flaring deserve more research to

unravel and validate the nature of the relationship between natural gas price and natural gas

flaring. We call on interested researcher(s) to take up this challenge.

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