The Independent Petroleum Producers Group (IPPG), representing indigenous oil and gas-producing firms in Nigeria, has rejected President Bola Tinubu’s directive mandating the sale of crude oil to Dangote Refinery and other local refineries in naira.
The group is calling for market-driven solutions, urging the Nigerian National Petroleum Company Limited (NNPCL) to use its allocated crude oil volumes to address the current supply shortage affecting local refiners, which has led to a scarcity of petroleum products across the country.
In a letter dated August 16, 2024, addressed to the Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Mr. Gbenga Komolafe, the Chairman of IPPG, Mr. Abdulrazak Isa, articulated the group’s position.
He suggested that the NNPCL should leverage its allocated 445,000 barrels per day of crude oil—historically used to ensure domestic consumption—to alleviate the current supply issues. “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,” Isa stated.
He further emphasized 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.”
Isa also maintained that any national production exceeding this allocated volume should be treated strictly as export volumes, following 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.”
He raised concerns about recent developments, including the domestic crude oil refining requirements and the crude oil production forecast for the second half of 2024, announced by the NUPRC.
The IPPG is also uneasy about requests from NUPRC for monthly crude oil supply quotations to licensed refineries in Nigeria, as well as the letters some members received from Dangote Refinery for crude supply nominations for October.
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The IPPG views this approach as contrary to the “willing-buyer, willing-seller framework prescribed by the Petroleum Industry Act (PIA) 2021.”
Isa argued that while the goal of enhancing the country’s petroleum value chain is commendable, it must be achieved within the confines of the law and existing commercial obligations. “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,” he asserted.
Isa further stated that, “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.”
He expressed concern that some IPPG members have received allocation letters from NUPRC for crude oil supply to the domestic market for the second half of 2024, raising potential economic implications, particularly in terms of foreign exchange earnings from royalties and taxes.
The group also highlighted concerns about the current allocation methodology, noting that it seems to be based on production forecasts, technical allowable rates, and the 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,” the group noted. Isa cautioned that such an approach could lead to inefficiencies and unfairly disadvantage producers.
He called for transparency in how allocations are determined and requested that NUPRC provide clear details on the criteria and methodology used, as well as allow IPPG to contribute to the production forecast to ensure it accurately reflects operational realities.
