…Warn of economic, contractual risks of regulatory force
As Nigeria’s oil sector grapples with the challenge of inadequate crude production supply to domestic refineries, the Independent Petroleum Producers Group (IPPG) has used the federal government not to compel them to meet this need in the short term.
Warning of potential economic fallout of the mandatory supply of crude oil to local refineries, the IPPG urged the NNPC to redirect its 445,000 barrels per day (bpd) allocated crude oil volumes to the Dangote Refinery and other local refineries to alleviate the ongoing crude supply shortage, which is affecting the availability of petroleum products across various regions of Nigeria.
In a letter dated August 16, 2024, addressed to the NUPRC chief executive, Gbenga Komolafe, IPPG chairman Abdulrazak Isa warned that failure to comply with these guidelines could jeopardise production levels, increase operational costs, and worsen Nigeria’s credit rating, ultimately impacting the economy.
The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) mandated producers to allocate crude to domestic markets under the Domestic Crude Oil Supply Obligations (DCSO), raising concerns about contractual conflicts and the viability of existing agreements with international buyers.
The producers emphasised that using this allocation could enhance local supply and reduce reliance on imports, amid ongoing challenges in the oil market and declining production rates.
Isa noted that some IPPG members already own or supply crude oil to local refineries but emphasised that the NNPC is well-positioned to address the crude supply shortage faced by local refiners by utilising its statutory crude allocation to meet domestic consumption needs.
It read: “Historically, NNPC has always had an intervention crude oil volume (445kbopd) meant to satisfy the nation’s domestic consumption. This volume has always been used, under various swap mechanisms, to import refined products for domestic consumption.
“Since there is now domestic refining capacity to meet consumption, this dedicated volume should be reserved for all domestic refineries under a price hedge mechanism that can be provided by a suitable financial institution such as Afrexim Bank,’’ he stated.
Isa, however, maintained that “Any national production above this allocated volume should be treated strictly as export volumes, adhering to the willing buyer, willing seller framework of the international market especially since the refiners will need to export excess products that surpass domestic demand thus boosting FX earnings.’’
The group voiced concerns about recent developments, such as the domestic crude oil refining requirements and the crude oil production forecast for the second half of 2024, as announced by the NUPRC. They also raised issues with the request made to all producing companies to submit their monthly crude oil supply quotations to licensed refineries in Nigeria.
In particular, the IPPG highlighted that some of its members had received letters from the Dangote Refinery requesting crude supply nominations for October. The group criticised this approach, arguing that it imposed an obligation on them, which conflicted with the willing-buyer, willing-seller principle outlined in the Petroleum Industry Act of 2021.
The group emphasised that efforts to enhance the country’s petroleum value chain should adhere to legal frameworks and existing obligations.
They expressed confidence that all stakeholders could reach a mutually beneficial solution without compromising existing commercial agreements, economic interests, or business models within the oil and gas sector.
“While we fully support and commend the efforts of Nigerian entrepreneurs to enhance domestic refining capacity, it is important that no private sector business is unduly pressured into arrangements that may effectively subsidise another within the oil and gas value chain under any guise whatsoever.
“Under this willing-buyer, willing-seller framework, it is essential for refiners to negotiate and execute long-term crude oil Sales and Purchase Agreements with producers and their marketing agents. These agreements should follow industry best practices, with typical tenures ranging from one to five years,’’ the IPPG chairman said.
He mentioned that several participants had been issued allocation letters from the NUPRC for supplying certain quantities of crude oil to the domestic market in the second half of 2024.
He also expressed worries about the possible effects on the economy, particularly regarding foreign exchange earnings from royalties and taxes.
The group noted, “We understand that the current allocation methodology appears to be based on a matrix of production forecasts by producers, issued technical allowable rates as well as crude oil requirements of domestic refineries, rather than actual local consumption needs.
“This raises significant concerns as it suggests that allocations are being determined based on the demands of refiners, which may exceed what is needed for domestic consumption.
“Such an approach could lead to inefficiencies and unfairly disadvantage producers. Therefore, refineries with excess capacity beyond local consumption mustn’t exploit the Domestic Crude Oil Supply Obligations to the detriment of oil producers and other stakeholders, including the government.’’
Isa called for transparency in how the allocations to oil producers were determined and requested NUPRC to provide clear details on the allocation criteria and methodology, while he sought an opportunity for IPPG to make input into the production forecast to ensure it accurately reflects operational realities.
They propose solutions including long-term sales agreements and a transparent allocation process to enhance domestic refining capabilities and attract foreign investment.
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