Crude oil producers in Nigeria have kicked against being forced to sell their products to Dangote Refinery and other local refineries, saying it negates the willing-buyer, willing-seller framework.
The oil producers, under the aegis of the Independent Petroleum Producers Group (IPPG) rather urged the Nigerian National Petroleum Company Limited to re-direct its allocated crude oil volumes to Dangote refinery and other local refineries to mitigate the current crude supply shortage being experienced by the local refiners that is impacting local product availability in many parts of Nigeria.
According to a letter by the Chairman of IPPG, Abdulrazak Isa dated August 16, 2024, and addressed to the Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission, Gbenga Komolafe, the group kicked against being forced to sell to Dangote Refinery and other local refineries, saying it could jeopardise the existing commercial agreements, economic interests, and business models of each segment of the oil and gas sector.
He expressed confidence that an amicable solution could be reached by all stakeholders.
He added that some of them had also received allocation letters from NUPRC for the supply of specific volumes of crude oil to the domestic market for the second half of 2024, expressing concerns about its potential implications for the economy, especially the foreign exchange earnings through royalties and taxes.
“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.
“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.
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“The group further noted, “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 for the 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.’’
He further advised that NNPC should utilise its allocated 445,000 barrels per day intervention crude oil volume to salvage the current situation as it did in many instances in the past.
Isa said some IPPG members already owned and/or were supplying crude oil to local refineries.
He insisted that NNPC was in a good position to mitigate the current crude supply shortfall faced by local refiners by leveraging its statutory crude allocation to meet local domestic consumption.
“Historically, NNPC has always had an intervention crude oil volume (445,000bpd) 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.
“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,’’ he stated.
Isa, however, 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 (foreign exchange) earnings.’’
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