During their meeting in December 2023, the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream Petroleum Regulatory Authority (NMDPRA), two of the most notable regulators of the upstream and midstream sectors of the country’s petroleum industry, agreed to scale up action towards enforcing the domestic crude oil supply obligations as enshrined in the Petroleum Industry Act 2021. This agreement to ensure adequate supply of crude oil to domestic refineries in Nigeria came on the heels of the prevailing shortage of feedstocks for the modular refineries operating in the country.
To give teeth to this agreement, NUPRC, on 11 July 2024, ordered petroleum producers to prioritise the supply of crude oil to local refineries. The Domestic Crude Oil Supply Obligations (DCSO) guideline also mandated all oil companies in Nigeria to supply crude oil to domestic refineries first before they can export the surplus, in line with the Petroleum Industry Act (PIA) 2021.
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On the face value, the position of NUPRC seems to be a good nationalistic stance, given the immense benefits that Nigeria stands to reap from locally expanding its petroleum industry value chain. The country will save a humongous amount of foreign exchange that is expended on the importation of refined petroleum products; bring down the cost of the various crude oil derivatives; minimise, if not completely abolish, the issue of scarcity of petroleum products, especially the PMS and diesel; and create employment, among many other benefits.
Again, the position of the upstream regulator is in line with the dictates of the law, especially as enshrined in the revolutionary Petroleum Industry Act of 2021, signed into law by the then President Muhammadu Buhari.
From the above, it only seems logical for all citizens of the country, corporate and individual alike, to support the NUPRC in this quest of ensuring that our petroleum value chain is expanded locally. It is, therefore, intriguing why there seems to be a pushback by both the indigenous or local oil companies (LOCs) and international oil companies (IOCs) as regards this new DCOS guideline. From the recent news reports, the trade association of oil producers in Nigeria, under the aegis of Independent Petroleum Producers Group (IPPG), has voiced its disapproval of the guideline, noting some incongruences inherent in the new policy guideline and their possible consequences.
The group made its positions known in a letter it wrote to Gbenga Komolafe, NUPRC’s Chief Executive, dated August 16, 2024, and signed by the group’s chairman, Abdulrazaq Isa. The group expressed its inclination towards locally expanding the petroleum industry value chain, which the new DCOS guideline seeks to promote, saying:
“However, it is important to highlight certain contractual, legal, financial, and factual incongruences that exist in the increasing push and demands on petroleum producers and particularly on members of the IPPG. We are indeed constrained to say that the current position on this matter may inevitably lead to economic damage and self-sabotage of the Nigerian economy.”
On the legal implications of guidelines, it is worthy to note that NUPRC based its decision on the extant laws of the federation, in this case, the Petroleum Industry Act 2021, which confers on it the capacity to regulate the upstream sector of the petroleum industry. The regulator also hinged the DCOS guidelines on Section 109 (4) of the Petroleum Industry Act, 2021. Granted that NUPRC is empowered by the PIA 2021 to regulate the operations of the upstream sector, but that is only one side of the coin as the same act stipulates the ambit of its stipulations, especially as it concerns the trade relations between the oil producers and refineries.
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Firstly, the same Section 109 of the PIA, which creates the DCSO regime, mandates that any domestic supply obligation shall be on a willing buyer and willing seller basis. The law further provides in Sub-Section(4)(b) 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.”
Secondly, paragraph C of Sub-section 4 of Section 109(c) expressly contradicts the DCOS guideline as regards the payment for crude oil supply in Naira for crude oil, as it stipulates 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 refining licence.”
The foregoing is the position of the principal law that cannot be derogated by regulation or guideline.
Apart from the legal issues, there exist some contractual obligations that can inhibit these oil producers from supplying domestic refineries with their much-needed crude. It is a known industry reality that all producers (including NNPC Limited) are currently beholden to either fixed supply contracts or forward sale contracts to international traders who have stepped in to fill the financing gap to fund upstream investments. Disrupting these contracts at short notice, which will be the resultant effect of the new DCOS guideline, will be injurious to the businesses of both the producers and their clientele.
The consequences of this disruption are enormous, and they include a default on meeting their offtake obligations to already contracted crude oil buyers; an offtake default that would trigger a cross default on virtually all the other finance obligations held by Nigerian producers; and seriously impacting on the ability to raise the current production levels from 1.3 million barrels of oil per day to the government’s stated objective of 2.5 million barrels of oil per day as there will be tightening of available capital arising from the lack of credit worthiness.
It will also put Nigeria in an adversarial position with the international traders who finance a significant portion of upstream activity and cross defaults across IPPG members, which dry up a critical source of foreign exchange (FX) for the country.
In conclusion, while one cannot question the nationalistic intent of NUPRC or deny the immense benefits the country stands to gain in the new DCOS guidelines, one cannot, however, not acknowledge that the new guideline will have devastating effects, not only across the entire value chain of the petroleum industry but also on the Nigerian economy. The guideline is tantamount to ‘robbing Peter to pay Paul’—destabilising the businesses of the oil producers just to promote the business of refineries.
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What NUPRC should do is look for a way to address the needs of the refineries without either running afoul of the law or hampering the business of oil producers. One way of doing this is asking Nigerian National Petroleum Company Limited (NNPCL) to allocate the 445,000 bpd that are statutorily allocated to it for local consumption, which has been traded to fund the fuel importation/subsidy, to the domestic refineries since this will greatly reduce the volume of imported petroleum products.
NUPRC could also encourage the domestic refineries to meet up with the trade requirements of oil producers so they could be getting the needed supplies without hitches. Domestic refineries can enter and execute long-term crude oil sales and purchase agreements under the willing buyer, willing seller framework that is obtainable in the petroleum industry.
Olanrewaju, writes from, Effurun, Delta State
