• Tuesday, April 23, 2024
businessday logo


Domestic crude obligation on producers can remedy local refining woes

Domestic crude obligation on producers can remedy local refining woes

Promoters of modular refineries are finding it extremely difficult to get the critical feedstock to run their operations a situation that now requires regulatory intervention in the form of extracting a commitment to supply local refineries.

For a long time, the Nigerian government developed programmes to encourage modular refineries dangling the prospect of removing petrol subsidies. Many investors heeded this call and set up refineries but are now struggling with finding enough crude to run their refineries.

This situation has worsened within the last two years when Nigeria’s oil production dipped below 1.5million barrels per day due to underinvestment and a rising spate of crude theft which has forced many operators to abandon their fields while others have scaled back production to cut losses.

Promoters of the 10,000 barrels OPAC refinery in Kwale which underwent testing under the defunct Department of Petroleum Resources (DPR) since 2021 have not been producing due to difficulty accessing crude. Bigger refiners like Waltersmith are facing the same issue. Some refinery due for commissioning like the Edo refinery is being delayed for the reason that the plant may not get the required crude supply.

The reality is that the Nigerian National Petroleum Company Limited (NNPC), is not ready to meet the demand of refiners and local oil producers are keen to sell in the international market to access dollars as their investments were made in dollars, hence lack the incentive to prioritise modular refinery operators.

Modular refineries are crude oil processing facilities with capacities of up to 30,000 barrels per day (bpd), and are being built as part of plans to curb oil theft and promote peace in the country’s main oil-producing region.

Yet the volumes of production lost to oil theft and production shut-in could make a significant dent into the required volumes for local refiners

A tale of woes

A modular refinery operator told BusinessDay that nearly all of Nigeria’s requirement for petroleum products is imported, representing a major drain on the country’s depleting foreign reserves but rather than this sparking an aggressive push by NNPC’s senior managers to support the promoters of local refineries, there is as yet no rule or protocol at NNPC for the transition.

NNPC has taken a 20 percent stake in the Dangote refinery in Lekki, Lagos and signed a crude oil supply deal with owners of the 600,000bpd plant, but operators of modular refineries say they have waited endlessly for attention from the NNPC.

Sources say some of the modular refineries have waited for more than a year to receive crude from NNPC and in the process, their plants are rotting away as they surmount one hurdle to another including a plethora of regulatory approvals they must get from the authorities.

Last month, the promoters of modular refineries under the aegis of Oil Refiners Association of Nigeria (CORAN) met with chiefs of the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) to vent their anger and frustration.

The owners of the modular refineries listed their major challenges as lack of access to feedstock, lack of access to foreign exchange (it costs about $40 million to set up a 10,000bpd reformer unit that can produce PMS), high cost of licence renewal fees, unusual difficulties in clearing their equipment at the seaports, difficulties in accessing the duty waiver for modular refineries as approved by the president as well as the absence of rules on crude oil transaction currency.

To mitigate their problems, they pleaded that the Central Bank of Nigeria and NNPC should extend all incentives and assistance given to the Dangote refinery to them.

CORAN members, led by Emmanuel Iheanacho, their Board of Trustee’s chairman, made the appeal during their visit to the leadership of the NMDPRA in Abuja.

Read also: Insurers see shipping face more cyber threats despite long-term safety trends

They urged the NNPC, NMDPRA and Nigerian Upstream Petroleum Regulatory Commission to engage with the licenced modular refineries in order to develop an appropriate commercial model that would guarantee reliable feedstock.

According to a statement by CORAN made available to BusinessDay, the meeting with the regulator which was in a bid to interact with all relevant regulatory agencies was chaired by Francis Ogaree, NMDPRA’s executive director, hydrocarbons processing plants, installation and transportation infrastructure.

Olusegun Ilori, secretary of CORAN, who presented CORAN’s position, appealed to the authority to ensure that all incentives that were given to Dangote refinery are also extended to other refineries.

CORAN also stated that NMDPRA’s renewal fee for modular refinery licence guidelines is revisited and possibly reduced by way of 50 percent waiver.

They suggested that such review should be on the company-by-company assessment, and granted to only companies with credible challenges.

CORAN further suggested that annual monitoring of modular refineries be carried out by the authority to ensure compliance with government policies.

The association requested that the NNPC should consider taking equity or grant loans to modular refineries via the provision of reformer/other requirement units to ensure adequate production of PMS based on agreed offtake conditions.

They equally suggested that the issuance of the import duty waivers for modular refinery equipment be done by the Federal Ministry of Finance after due certification of the equipment that qualified for waiver was done by the Ministry of Petroleum Resources.

Yet the volumes of production lost to oil theft and production shut-in could make a significant dent into the required volumes for local refiners. For example, the NNPC and other oil companies operating in the Niger Delta lost over $933 million in June owing to production shut-ins, a report by the corporation shows.

These production shut-ins were caused by the declaration of force majeure, fire outbreaks, industrial strike actions, and an increase in oil theft, according to the NNPC’s latest presentation to Federation Accounts Allocation Committee (FAAC).

Oil companies lost 7.6 million barrels of crude oil worth about $933 million, based on June’s average Brent price of $122.71 per barrel, BusinessDay analysis shows.

Regulatory intervention

Ayodele Oni, energy lawyer and partner at Bloomfield law firm says Nigeria already has a mechanism to deal with the problem.

“Actually, the Petroleum Industry Act empowers the Commission (NUPRC) to make regulations for crude producers to reserve some crude for the domestic market which means they will be refined locally.

“The Commission just needs to take that bold step. Some of the production of marginal fields that are not already under crude sale/ handling can also fall within this category,” he said.

Section 109 of the Petroleum Industry Act provides that the supply of crude oil and condensates for the domestic market shall, subject to subsection (2), would be on a willing supplier and willing buyer basis.

However, “the Commission may issue regulations or guidelines on the mechanism for the imposition of a domestic crude oil supply obligation on lessees of upstream petroleum operations, including applicable penalties.

The Act mandates that downstream regulator supply the Commission on a regular basis the crude oil requirements of refineries in operation and where shortages or inadequate supply conditions occur report such conditions to the Commission.

Then the Commission shall ensure that the domestic crude oil supply obligation mandates that crude oil may only be sold to holders of crude oil refining licences, whose refineries are in operation.

It further provides that the supply of crude oil shall be commercially negotiated between the lessee and the crude oil refining licensee, having regard to the prevailing international market price for similar grades of crude oil.

It also mandates that holders of crude oil refining licences shall provide payment guarantees as required by the applicable lessee, and payment for crude oil purchased pursuant to obligations shall be in US dollars or Naira, as may be agreed between the lessees or suppliers and the licensee of the relining licence.