Enforcing domestic crude obligations critical to modular refineries’ success

Rampant crude theft which has forced many local oil firms to shut operations is taking a toll on the operations of modular refinery operators and analysts say the government should consider instituting domestic crude obligations on producers.

Promoters of modular refineries are finding it extremely difficult to get critical feedstock to run their operations. A similar situation in the gas sector compelled the Nigerian government to enforce a domestic gas obligation on operators some years ago.
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 has 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 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.

Read also: How Nigeria wasted $9.5bn on decrepit refineries; Labour

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.

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 with 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.