Glimmer of Hope for Local Refining
By Ese Ufuoma
The new regulations requiring oil producers in Nigeria to sell crude oil to domestic refineries are expected to foster healthy competition in the domestic market, thereby resuscitating the country’s economy.
According to analysts familiar with the situation, this development will attract Dangote refinery and modular refinery operators. These modular operators have previously voiced concerns to the federal government about shortages in crude supply and foreign exchange.
In October 2023, the refinery owners, under the aegis of Crude Oil Refinery-owners Association of Nigeria (CORAN) asked Heineken Lokpobiri, the Minister of State, Petroleum Resources (Oil), in Abuja, to help them facilitate access to crude oil under the domestic crude obligation as stipulated by the PIA to serve as feedstock for their refineries.
Momoh Jimah Oyarekhua, Chairman of CORAN, who made their request known during a courtesy visit to the minister in Abuja, said that the lack of crude guarantees has held back investors who are considering financing the operations of modular refineries. “Investors see this as a disadvantage and are unwilling to invest.” He advocated the establishment of a kick called for the establishment of a Refinery Intervention Fund to assist local refineries expand their capacity from the current 27,000 barrels per day to about 400,000 barrels per day.
“We need intervention to boost crude oil supply to members of the association and also help them reduce the fees they pay to the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) for every litre of product they refine in-country.”
Oyarekhua said that the modular refineries that are currently producing are starved of crude and even when the crude is available, the local producers want them to pay for it in US dollars.
“We have met with the NUPRC, on the issue, because the matter is captured under the domestic crude oil supply obligation which is stipulated in the PIA, we have intimated them with the production capacity of local refiners and also sought their commitment on domestic crude obligation to all modular refiners”.
On 16th April 2024, the federal government through the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) introduced new regulations requiring its oil producers to sell crude oil to local refineries in a move to reduce the country’s dependence on imported refined products. Under the new regulations, all oil companies operating in Nigeria must prioritise supplying crude to domestic refineries unable to source it locally. Exportation of crude is permitted only after fulfilling these domestic supply obligations.
For Jide Pratt, Chief Operating Officer of Aiona and Country Manager of TradeGrid, this development is long overdue, citing that it is not something that compels out of nowhere as the Petroleum Industry Act (PIA) in Section 109 has a portion for Domestic Crude Supply Obligation (DCSO).
He said that the new regulation was so that refineries are not ignored for export alone, “modular refineries have been hampering on this for a while but not enough attention was given to them. Now that the Dangote refinery is up, it is now a topic as she is ‘too big to fail’.
“The government wasn’t enforcing it due to her inability to meet the Organization of the Petroleum Exporting Countries (OPEC) quota. So we must curb oil theft or rather eliminate it no matter whose ox is gored and then with 1.7 – 1.8 million barrels per day crude production we can meet this obligation for domestic crude supply.
“I also think this should be sold in Naira or rather Naira equivalent if the price must be quoted in USD. It will sort of help the Balance of payment and pressure on the Naira for local product sales. What we then export across Sub-Saharan Africa gives the required FX inflow alongside zoning in on Executive Order 40 which should bring in funding for the development of non-associated gas development,” he added.
According to the regulation, the NUPRC will act as an intermediary between local refiners and producers in cases where agreements on crude supply cannot be reached. It will facilitate sales purchase agreements based on a willing-buyer, willing-seller model. “Payments for crude to domestic refiners can be made in dollars, Naira, or a combination of both,” the regulations revealed.
The regulator aims to implement the Domestic Crude Oil Supply Obligation initiative in the latter half of the year. However, the specific quantity of crude each refinery must procure has not yet been determined.
What does section 109 of the PIA say?
The Petroleum Industry Act was enacted to provide legal, governance, regulatory, and fiscal framework for the Nigerian Petroleum Industry.
Section 109 (1) The supply of crude oil and condensates for the domestic market shall, subject to subsection (2), be on a willing supplier and willing buyer basis.
(2) The Commission may issue regulations or guidelines on the mechanism for the imposition of a domestic crude oil supply obligation on lessees of upstream petroleum operations, including applicable penalties.
(3) The Authority shall supply the Commission on a regular basis with the crude oil requirements of refineries in operation and where shortages or inadequate supply conditions occur report such conditions to the Commission.
(4) The Commission shall ensure that the domestic crude oil supply obligation contains the following, that-
(a) Crude oil may only be sold to holders of crude oil refining licences, whose refineries are in operation;
(b) the supply of crude oil shall be commercially negotiated between the lessee and the crude oil refining licensee, having regard to the prevailing international market price for similar grades of crude oil; and
(c) holders of crude oil refining licences shall provide payment guarantees as required by the applicable lessee, and payment for crude oil purchased pursuant to obligations shall be in US dollars or Naira, as may be agreed between the lessees or suppliers and the licensee of the refining licence.
