By Gideon Osaka
Inadequate domestic supplies of crude oil for refineries in Nigeria are increasingly becoming a significant challenge as the refineries are now being constrained to operate below capacity or import crude. This situation has further heightened the call on President Bola Tinubu to declare a state of emergency on crude oil production in the country.
The shortage of feedstock for the domestic refineries comes despite the Nigerian National Petroleum Company Limited (NNPC) declaring war on the challenges confronting oil production and efforts by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) to enforce the domestic crude supply obligation; a new regulation that compels oil producers in the country to sell crude to domestic refineries before export.
Data from the NUPRC show that of the 483,000 barrels required in the first six months of 2024 for the domestic refineries, only about 177,777 bpd was secured from oil producers for the period, which is significantly less than the refineries’ requests. For the second half of the year, domestic refineries would witness a surge in their requirements, climbing to 597,700 barrels per day from 483,000 bpd in the first half of the year under review.
The increasing crude demands from the refineries, coupled with oil producers’ inability to meet these demands, recently led to a dispute between the 650,000-bpd Dangote Refinery and the NUPRC. The Dangote refinery continues to struggle in securing domestically sourced crude oil for its operations.
In an August 7 statement by a spokesperson for the Dangote Group, the official said the refinery required 15 cargoes of crude oil to operate in September but has failed to source the necessary volume from either NNPC or international oil companies (IOCs) active in Nigeria.
“For September, our requirement is 15 cargoes, of which NNPC allocated six. Despite appealing to NUPRC, we have been unable to secure the remaining cargoes,” the company said in the statement.
It added that IOCs have demanded a premium of $3-$4/b from the refinery for sales of Nigerian crude oil or claimed that cargoes were already committed to other buyers and unavailable for sale.
Dangote blamed feedstock shortages on lax enforcement by the NUPRC of the domestic crude supply obligation, a measure that commits producers to meeting demand from Nigeria’s refineries before exporting supplies.
“Our concern has always been NUPRC’s reluctance to enforce the domestic crude supply obligation and ensure that we receive our full crude requirement from NNPC and the IOCs,” the Dangote spokesperson said in the statement.
Valuechain reports that under the domestic crude supply obligation regulation, producers are only entitled to export crude after meeting domestic supply. The regulation mandates that all oil companies in Nigeria must supply crude to domestic refineries and only after fulfilling these domestic supply commitments are producers permitted to export crude. The NUPRC will serve as a middleman between local refiners and producers when agreements on crude supply cannot be finalized, helping to arrange a sales purchase agreement based on a willing buyer, willing-seller model.
As part of the fulfillment of the obligation, the NUPRC in January, mandated oil producers in the country to allocate around 483,000 barrels per day (bpd) to local refineries with the 650,000-barrel capacity Dangote refinery receiving the bulk share at 325,000 bpd.
Additional refineries expected to benefit from the crude oil supply were the Warri and Port-Harcourt refineries, which were projected to receive 75,000 and 54,000 barrels of crude oil per day, respectively.
Also, modular refineries such as Waltersmith, OPAC, and Niger Delta Petroleum Refinery, among others, were slated to receive up to 10,000 barrels per day.
However, NNPC, which was expected to be one of the Dangote plant’s largest suppliers, has underdelivered relative to its expected crude deliveries, leaving uncertainty around supply channels for the newly commissioned plant. NNPC was originally expected to supply Dangote with 300,000 b/d of discounted crude but has delivered closer to 82,000 b/d since the refinery’s inauguration, according to S&P Global Commodities at Sea data.
While the regulation is good on paper, its implementation in reality has become very challenging. In response to the allegation of non-enforcement of the domestic crude supply obligation raised by the Dangote refinery and other local refiners, the NURPC through a statement, asserted that it has consistently exercised its regulatory oversight to ensure that Dangote Refinery, along with other domestic refineries, receive a fair share of crude oil allocations, which is part of the Commission’s commitment to supporting the growth and success of the domestic refining sector in Nigeria.
The Commission said it facilitated the supply of 32,088,122 million barrels of crude oil to nine local refiners within the first half of 2024. Dangote Refinery alone had 29,047,098 million barrels of that volume.
NUPRC however, admitted that in strictly exercising its mandate on crude supply, it encountered some challenges. The explanation given was that, in attempting to enforce the regulation, pre-existing commitments of operators must be considered because some operators are constrained by their financing arrangements and are already committed to entities that have provided funding for their operations and are entitled to recover through crude supply. And this is not peculiar to Nigeria; it is an industry practice.
“Much as the NUPRC has tried to ensure the enforcement of the provisions of Section 109 of PIA, 2021, the producers have equally responded to the regulator saying that conventionally oil production is funded through pre-export financing.”
Although the law mandates the withdrawal of a license from an operator who fails to comply with industry regulations, the Commission insisted such power must not be used presumptuously and arbitrarily because of its negative implications on the country’s investment climate, oil production, revenue, and the oil and gas sector. It would lead to a substantial reduction in royalties and taxes going to the federation account.
However, in a move aimed at rescuing the $20 billion Dangote Refinery and other local oil refineries from an impending collapse due to crude shortage, the recent directive of President Bola Tinubu to the NNPCL to henceforth sell crude oil to Dangote and other local refineries in naira, instead of dollars, may have offered a lifeline to the refineries. The presidential order is the first leg of the measures to end the ongoing misunderstanding among players in the downstream sector.
The Government’s committee set up to ensure the implementation of the Presidential directives reportedly reached an agreement with the Dangote Petroleum Refinery for the rollout of petrol, in September with the sale of crude oil to Dangote Refinery and other local refineries to commence on October 1, 2024.
Oil production challenges
At the heart of crude shortage to refineries is the problem of crude oil under production in Nigeria.
Nigeria is currently faced with under-capacity crude production (excluding condensates) at just below 1.5 million barrels per day (bpd). Oil producers believe that Nigeria should be producing about 2 mbpd to meet the demand of local refineries as well as exports.
Despite Nigeria’s world-class hydrocarbon resource base, with over 37 billion barrels of proven crude oil reserves and 207 tcf (trillion cubic feet) and 600 tcf of proven and contingent gas reserves respectively, the country finds itself in a situation where its daily production has significantly dropped and lies at about 1.5 million barrels of oil and 8.5 bcf (billion cubic feet) of gas.
According to the Chairman of the Independent Petroleum Producers Group (IPPG), Abdulrazaq Isa, the current production is way below the country’s capacity as a nation and by all globally acceptable standards, this reserves-to-production ratio is extremely low and a clear indicator that the industry is in a dire situation. In addition, the country now runs the risk of partial implementation of the national budget considering an estimated deficit of 400,000bpd from the forecasted 1.78 million bpd.
IPPG is the association of Nigerian indigenous upstream exploration production companies with 28 members that include Oando Plc, Aiteo, Seplat, Energia, Eroton, First E&P, Frontier Oil, Green Energy, among others.
“This trend in production portends another frightening dimension when we consider that in the not-too-distant future our overall installed domestic refining capacity, currently closing in on about 1.2 million barrels per day, may soon outstrip our current crude oil production level with the risk of Nigeria finding itself in a position where it is unable to meet its domestic refinery crude demand or even become a net importer of crude oil, God forbid!” Abdulrazaq said during a recent oil and gas conference in Abuja.
Way out
Although the NUPRC is pushing to enforce the domestic crude supply obligation, experts are of the opinion that to ensure sustainability and consistency of feedstock supply to Dangote Refinery and other local refineries, the president should also direct immediate crackdown on oil thieves and vandals to ramp up production and increase feedstock availability for local refining.
Unless the federal government succeeds in its ongoing war to curb oil theft, the reality is that there won’t be enough crude to sell to the Dangote Refinery and other local refineries. Nigeria must upscale production for things to work according to plan. Addressing the issues of oil theft and vandalism through better security measures and community engagement is critical. Enhancing pipeline surveillance and involving local communities in safeguarding infrastructure could reduce these losses. Addressing these shortages is crucial for the country’s extensive energy security and economic stability.