• Friday, June 14, 2024
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BusinessDay

Modular refineries set sights on US crude to fill supply gap

Domestic crude obligation on producers can remedy local refining woes

Modular refineries in Nigeria are seeking a consistent supply of crude oil from the United States to address a supply gap, according to BusinessDay findings.

This comes amid warnings from industry experts that a significant number of planned modular refinery projects could be stalled due to the unreliable domestic crude supply.

Investors are hesitant to commit funds without a guarantee of feedstock to keep the refineries operational.

Read also: Investors pullout looms for 20 modular refineries over crude supply

Sources said modular refinery operators are now exploring the possibility of importing crude oil directly from the US, citing its abundance and potentially more favourable pricing structures.

“We’ve initiated discussions for the supply of US crude as a potential alternative source of crude,” a senior source in the modular refinery business told BusinessDay on Thursday.

“So long as international grades remain competitive to domestic supply, the refinery will continue to optimise accordingly,” he added.

Nigeria’s newly constructed Dangote refinery announced last month that it was seeking to purchase millions of barrels of US crude oil over the next year as it ramps up processing rates.

The 650,000 barrels per day refinery is taking advantage of cheaper oil imports from the United States for as much as a third of its feedstock as it starts production.

“For modular refineries, the move is to secure a longer-term offtake agreement and a commitment to more permanently diversify its crude sources, coinciding with a period of extreme demand weakness for Nigerian supply,” another source close to refinery business told BusinessDay.

Modular refineries are smaller, prefabricated facilities designed for quicker deployment and lower costs compared to traditional refineries.

While Nigeria has a significant number of licensed modular refineries, their operation has been hampered by a lack of guaranteed crude oil supplies.

Read also: NGO urges FG to license modular refineries to create jobs

In 2018, when the defunct Department of Petroleum Resources announced that it had issued 25 licences for modular refineries; only four had been completed including OPAC Refinery, Duport Edo Refinery, Walter Smith Refinery, and Niger Delta Refinery.

On Monday, BusinessDay reported that funding for the construction of 20 modular refineries in Nigeria is at risk. Foreign investors are withholding their money due to the lack of guaranteed crude oil supply for the facilities.

Sources at the villa said the ministers and top government officials are worried about the development and have summoned an emergency meeting with some operators of the modular refinery.

Last month, Nigeria released new rules that will compel its oil producers to sell crude to domestic refineries in a bid to reverse the country’s reliance on imported refined products.

Under the regulations seen by Bloomberg News, all oil firms in the West African nation will be obliged to provide crude for domestic refiners that can’t independently source supplies locally.

Producers are only entitled to export crude after meeting their domestic supply obligations, according to the Nigerian Upstream Regulatory Commission (NUPRC) measures.

The new regulations mandate that all oil companies in Nigeria must supply crude to domestic refineries that are unable to procure it locally.

Only after fulfilling these domestic supply commitments are producers permitted to export crude.

The NUPRC will serve as a middleman between local refiners and producers when agreements on crude supply cannot be finalised, helping to arrange a sales purchase agreement based on a willing buyer, willing-seller model.

According to the regulations, payments for crude to domestic refiners can be made in dollars, naira, or a combination of both.

The regulator plans to implement the Domestic Crude Oil Supply Obligation initiative in the second half of the year.

The specific quantity of crude each refinery is required to procure has not yet been determined.

Backstory

In January, the NUPRC mandated oil producers in the country to allocate around 483,000 barrels per day (bpd) to local refineries with the 650,000-barrel capacity Dangote refinery receiving the bulk share at 325,000 bpd.

Additional refineries expected to benefit from the crude oil supply are the Warri and Port-Harcourt refineries, which are projected to receive 75,000 and 54,000 barrels of crude oil per day, respectively.

Also, smaller refineries such as Waltersmith, OPAC, and Niger Delta Petroleum Refinery, among others, are slated to receive up to 10,000 barrels per day.

The initiative called the Domestic Crude Supply Obligation (DCSO) guidelines aims to reduce importation of petroleum products into the country.

The Petroleum Industry Act (PIA), passed in 2021, includes a provision that requires oil producers in Nigeria to allocate a share of their crude oil to domestic refineries to avoid shortages.