The Independent Petroleum Producers Group (IPPG) has warned Nigeria not to be forced to sell crude oil to Dangote Refinery and other local refineries.
The IPPG also called on the Nigerian National Petroleum Corporation (NNPC) to divert allocated crude oil volumes to Dangote Refinery and other local refineries to mitigate the ongoing crude oil shortage affecting the availability of petroleum products in various parts of Nigeria.
In a letter dated August 16, 2024, addressed to Mr. Gbenga Komolafe, Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), IPPG Chairman Abdulrazak Isa suggested that NNPC should use the allocated 445,000 barrels per day of crude oil to meet its crude oil demand and solve the supply problem as it has done several times in the past.
Isa noted that some IPPG member states already own crude oil or supply crude oil to local refineries, but stressed that NNPC is in a favorable position to address the crude oil shortage faced by local refineries by increasing its statutory crude oil allocation to cover domestic consumption requirements.
“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.
He explained that “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,”
However, Isa 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 expressed concern over recent developments such as the country’s crude refining needs and the crude oil production forecast for the second half of 2024 released by NUPRC. They also expressed concern over the requirement that all producing companies submit monthly crude oil supply offers to licensed refineries in Nigeria.
In particular, the IPPG highlighted that some members had received a letter from Dangote Refinery seeking nominations for October crude oil shipments. The group criticized the approach as it would impose obligations that run counter to the willing buyer and willing seller principle enshrined in the Petroleum Industry Act, 2021.
The group stressed that efforts to improve the country’s oil value chain should be consistent with legal frameworks and existing obligations. The leaders expressed confidence that all parties involved can reach a mutually beneficial solution without affecting existing trade agreements, economic interests, and business models in 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 subsidize 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 said several participants have received allocation letters from NUPRC to supply certain volumes of crude oil to the domestic market in the second half of 2024.
He also expressed concern about the possible impact on the economy, especially on foreign exchange earnings from royalties and taxes.
The group said, “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 allocation decisions for oil producers and urged the NUPRC to clarify allocation criteria and methodology while seeking an opportunity for the IPPG to influence production forecasts to ensure they accurately reflect operational realities.
