The Independent Petroleum Producers Group (IPPG) has raised concerns over recent attempts to compel oil producers to supply crude to the Dangote Refinery and other local refineries.
In a strongly worded letter addressed to the Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Gbenga Komolafe, IPPG Chairman Abdulrazak Isa urged authorities to allow producers to operate under the willing-buyer, willing-seller principle outlined in the Petroleum Industry Act (PIA) of 2021.
The letter, dated August 16, 2024, calls on the Nigerian National Petroleum Company (NNPC) Limited to redirect its statutory crude oil allocation of 445,000 barrels per day to local refineries to address the ongoing crude supply shortage.
This shortage has contributed to a significant reduction in the availability of petroleum products across various regions of Nigeria, adding pressure on local markets.
The IPPG, a collective of Nigerian independent oil producers, expressed discontent with the current situation, in which its members are being asked to supply crude oil to domestic refineries, including the newly inaugurated Dangote Refinery.
The group believes that these demands go against the market-driven policies set by the PIA and could disrupt existing commercial agreements and business models within Nigeria’s oil and gas sector.
“Historically, the NNPC has always had an intervention crude oil volume of 445,000 barrels per day meant to satisfy the nation’s domestic consumption,” Isa stated.
“This volume has always been used, under various swap mechanisms, to import refined products for domestic use. 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 facilitated by financial institutions like Afrexim Bank.”
Isa emphasized that while IPPG members understand the need to increase domestic refining capacity, they should not be forced into arrangements that effectively subsidize private businesses under the guise of national interest.
The group reiterated that any national crude production beyond the allocated volume should be treated strictly as export volumes and sold under market-driven conditions to willing buyers.
The excess refined products from local refineries should be exported to boost Nigeria’s foreign exchange (FX) earnings, Isa suggested.
The issue has taken on greater urgency following recent developments in Nigeria’s oil sector. In July, the NUPRC released a crude oil production forecast for the second half of 2024 and requested all oil-producing companies to submit their monthly crude oil supply quotations to licensed domestic refineries.
IPPG members, in particular, have received direct requests from the Dangote Refinery for crude supply nominations starting in October.
The IPPG criticized this approach, arguing that it conflicts with the willing-buyer, willing-seller principle of the PIA and undermines the autonomy of oil producers.
“While we fully support and commend the efforts of Nigerian entrepreneurs to enhance domestic refining capacity, no private sector business should be unduly pressured into arrangements that may effectively subsidize another within the oil and gas value chain,” Isa said.
“Refiners should negotiate and execute long-term crude oil Sales and Purchase Agreements with producers and their marketing agents. These agreements must follow industry best practices, with typical tenures ranging from one to five years.”
The IPPG also expressed concerns over the transparency of the current crude allocation process, noting that it appears to be based on refiners’ demands rather than actual local consumption needs.
This could lead to inefficiencies, Isa warned, adding that refineries with capacity beyond domestic demand should not exploit the Domestic Crude Oil Supply Obligations to the detriment of producers and other stakeholders, including the government.
“Allocations determined solely by refiners’ demands may exceed what is needed for domestic consumption, creating potential inefficiencies and disadvantaging producers,” Isa wrote. “We urge transparency in how these allocations are made, and we call on the NUPRC to provide clear details on the allocation criteria and methodology.”
The IPPG’s position underscores the delicate balancing act between supporting local refining capacity and ensuring that the country’s oil and gas sector operates in a free-market environment that encourages investment, job creation, and economic growth.
The group stressed the need for continued dialogue between all stakeholders to find a solution that benefits both domestic refiners and oil producers while safeguarding Nigeria’s foreign exchange earnings and economic interests.
