• Concerns Over Refineries’ Approval Process, Weak Enforcement Of DCSO By NUPRC
• Accusing IOCs Of Sabotage Is Misplaced Priority Amid Divestment, Fawibe Warns
• Regulatory Agencies Should Ward Off Threats Against Dangote Refinery — Ajibola
With over 1.2 million barrels per day of oil refinery capacity expected in the country, the loggerheads between oil producers and refinery owners in the nation, especially Dangote Refinery, over crude supply will go from bad to worst amid lack of due diligence by refinery owners and the inability of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) to enforce Domestic Crude Oil Supply Obligations (DCSO).
With the recent outcry by Dangote Refinery, backed by Crude Oil Refinery Owners Association of Nigeria (CORAN), that International Oil Companies (IOCs) operating in the country were frustrating local operators, stakeholders are beginning to raise concerns over the approval process of refineries in Nigeria, especially the contractual agreement that should have existed for a guaranteed feedstock before refineries are completed considering that the oil sector operates with a future business model.
They also questioned why the Federal Government permitted the Nigerian National Petroleum Company Limited (NNPCL) to take the African Export-Import Bank (Afreximbank) syndicated $3.3 billion crude oil loan where the state oil company would pay back a total of 164.25 million barrels of crude oil, which is worth $14.6 billion going by the price of Nigeria’s Brass River and Qua Iboe grade of crude, which sold at $89.49 per barrel yesterday.
While Nigeria’s crude oil was about two million barrels per day in 2013 when Dangote was announcing financial facilities to build its refinery, the nation’s oil production declined to a meagre 1.2 million bpd, of which if NNPC alone takes out the 445,000 bpd meant for its refineries, which are being repaired, the nation would not guarantee 650,000 bpd to Dangote not to mention the upcoming BUA Refinery and other modular refiners.
The Vice President of Oil and Gas at Dangote Group, Devakumar Edwin, had said the IOCs were struggling to give crude to the refinery.
Speaking to S&P Global Commodity Insights on June 24, Edwin alleged that the IOCs active in Nigeria want extra $6 on every barrel compared to market price.
“The IOCs are deliberately and willfully frustrating our efforts to buy the local crude. They are either asking for ridiculous/humongous premium (s), or they simply state that crude is not available,” he said.
Edwin’s assertion came barely three weeks after the chairman of Dangote Group, Aliko Dangote, voiced out the company’s frustration in getting crude oil from the IOCs during a programme on CNN.
“The NNPC is doing its best, but some of the IOCs are struggling to give us crude; everybody is used to exporting and nobody wants to stop exporting,” he said.
Renowned energy companies expert, Ademola Adigun, however said there were indications that the IOCs were not frustrating refining locally.
“The issue is that Nigeria’s crude is insufficient to meet needs at the moment. The simple solution is to produce more crude,” Adigun said, adding that while the DCSO in the Petroleum Industry Act (PIA) is robust, the NUPRC needs to properly implement it.
While Nigeria produces one of the best grades of crude oil, mainly light, which is better than the heavy crude from the U.S., Nigeria’s grade is usually about $10 higher than U.S.’ WTI and slightly higher than the UK’s Brent. Most stakeholders, however, believe that Dangote’s modern refinery with configuration for different crude would prioritise price optimisation and profitability even as the imported heavier crude could be cheaper than Brass River and Qua Iboe or Bonny Light.
Yesterday, while Brent was trading under the OPEC quoting for about $93 per barrel, some U.S. crude was going for $68 per barrel; a difference of $25.
Currently, Dangote Refinery with 650, 000 per day refinery is relying on imported crude, especially from the U.S., BUA Refinery within the South South region would need about 200,000 barrels per day of crude oil when it comes on stream. NNPC is also looking to bring back its 445,000 barrels per day refineries while existing modular refineries require 27,000 barrel per day.
Although the NUPRC had moved to enforce Section 109 of the PIA, which introduced Domestic Crude Supply Obligation (DCSO) to Nigeria’s oil industry in an attempt to ensure domestic refineries are not starved of crude oil supply, it appears that the prevailing situation may not allow the regulation to work.
NUPRC was expected to fine defaulting IOCs and other violators $10,000, a penalty of 50 per cent of their fiscal price per barrel of crude oil not delivered to refineries; and denial of export permits. But a clause in the regulations allows the producers to offer cogent reasons why they could not comply with the regulation.
Most oil producers had said there were unresolved commercial issues affecting the supply of crude to local refineries. They had also openly told the NUPRC that the logistics side of supply and safety of their data had not been addressed; even as they claim that local refiners would need to convince them that the off-takers have dollars to pay for crude oil not just on the immediate but sustainably.
Currently, about 18 per cent of Nigeria’s oil reserve is in the deepwater, where the IOCs operate; 25 per cent is in the offshore, 26 per cent in swamp and 31 per cent on land. In terms of production, 30 per cent is produced in the deep water, 29 per cent on land, 26 per cent offshore and 15 per cent in the swamp. Governed mainly by Joint Venture Agreements and Production Sharing Contracts (PSC), NNPCL has over 50 per cent share of oil production across the joint ventures. The joint venture accounts for about 70 per cent of the entire operation while the PSC, which is predominantly operated by the IOCs, accounts for about 30 per cent going by statistics from NUPRC.
Sadly, production from the deepwater where the IOCs spend their money for exploration and production and then recover their cost before paying Petroleum Profit Tax (PPT), Royalty and other bonuses/levies to the government has been under threat.
The Nigeria Extractive Industries Transparency Initiative (NEITI) report covering 2021 showed that only 12 of the PSC blocks recorded production, while 23 other blocks, representing 66 per cent of the total number of PSC blocks, had no output.
The last major investment from the IOCs also came over 10 years ago with TotalEnergies’ Egina except for the $550 million Ubeta Final Investment Decision (FID) that was taken last month.
Country Chairman and Managing Director, TotalEnergies Nigeria, Matthieu Bouyer, had said while Nigeria has large deepwater assets, all significant deepwater projects in the country were developed with past contractual and fiscal conditions, adding that increased levy and changes in fiscal terms and the lack of contractors’ competition, which were pushing costs high, were affecting the segment.
Besides, most of the producers are divesting as investing into the oil sector continues to cripple the nation’s oil production on the backdrop of crude oil theft, insecurity in the Niger Delta region and other problems bedeviling the oil and gas sector.
Group Chairman/CEO at International Energy Services Limited, Dr. Diran Fawibe, said it remained surprising why Dangote did not properly address the feedstock plan when the refinery was being built.
According to him, the country needs to be very careful in giving bad names to the IOCs, who are already on their way out for Nigerian independent oil producers.
“There must be a serious error of omission in the development of refineries in Nigeria either Dangote or any other if the feedstock becomes a problem. It is a fundamental requirement that when a refinery is being planned, the refinery owners must consider the issue of feedstock. As a matter of fact, it should be a critical part of the feasibility study or viability analysis,” he said.
Fawibe said there must have been agreement with producers as well as analysis of the different crude that would be produced immediately the refinery is being planned, adding that it is not enough to build refineries because the country produces crude oil.
The challenge of crude oil, according to him, should not ordinarily happen where proper planning was done, stressing that refiners, especially in the country, must have been following the trend regarding oil production as well as the uniqueness of the oil market.
Fawibe noted that there is a need to have a market that would guarantee dollar supply to the oil producers as well as a pricing structure that won’t shortchange the producers.
He urged NNPCL to step in to address the differences between the refiners and producers, noting that the state oil firm has the larger share of the crude and has a level of control over its other partners.
“If Dangote wants crude oil, the bulk of it must come from NNPCL, not even the IOCs. This could be complemented with crude from Nigerian companies. NNPCL, the national oil company, should be able to manage the situation. There must be a guaranteed level of crude supply to the local refineries between NNPCL and all the oil companies,” Fawibe said.
Former President, Chartered Institute of Bankers of Nigeria and Professor of Economics, Prof. Segun Ajibola, said if all the public refineries are operational and more private ones debut, the current local crude production would be overstretched.
Stressing that Nigeria has the capacity to produce close to three million bpd if the challenges confronting the upstream operations are nipped in the bud, Ajibola said this could go a long way to meet the local demand for crude and for export.
While Nigeria’s capacity to improve production has been impaired due to product import, which cripples resources for cash that would have been reinvested, Ajibola said if the refineries are working effectively, it would save the country the humongous amount of scarce foreign exchange being deployed to import refined products.
He said: “The regulatory agencies in the oil and gas sector of the Nigerian economy should rise up to the occasion and ward off the seeming threats confronting Dangote Refinery, and the perpetual moribund state of the four public refineries in the country. Dangote Refinery can help change the narratives with its positive multiplier effects on the economy and should be protected from the real and imaginary predators.”
The Chief Executive of NUPRC, Gbenga Komolafe, did not immediately respond to The Guardian’s enquiry to clarify the challenge the regulator has with the implementation of DCSO and the efforts or sanctions that the commission is mandated to enforce.
