Business

Details of how Oil Producers Challenge Directive to Supply Local Refineries

Published by admin on August 21st, 2024.

Details of how Oil Producers Challenge Directive to Supply Local Refineries

The Independent Petroleum Producers Group (IPPG) has opposed a proposed mandate requiring oil producers to supply crude oil directly to Dangote Refinery and other local refineries in Nigeria.

The IPPG has voiced its concerns and urged the Nigerian National Petroleum Company Limited (NNPC) to redirect its own allocated crude oil volumes to local refineries to address the persistent supply shortages that impact local product availability across the country.

In a letter dated August 16, 2024, addressed to Gbenga Komolafe, Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), IPPG Chairman Abdulrazak Isa recommended that the NNPC use its allocated 445,000 barrels per day for domestic supply, a practice previously utilized to manage supply gaps. Isa pointed out that while some IPPG members already supply local refineries, the NNPC is strategically positioned to meet domestic needs through its statutory allocation.

Historically, the NNPC has used its allocation to fulfill domestic demand by importing refined products through various swap arrangements. With the expansion of domestic refining capacity, Isa suggested reserving this allocation for local refineries, potentially managed through a price-hedging mechanism involving institutions such as Afrexim Bank.

The IPPG advocates for a “willing buyer, willing seller” approach for any crude production beyond the allocated volumes, consistent with international practices. This approach would enable refiners to export surplus products, thereby enhancing Nigeria’s foreign exchange reserves.

Isa emphasized, “While we support the development of domestic refining capacity, it is crucial that private sector companies are not coerced into arrangements that unfairly subsidize others within the oil and gas sector. Refiners should enter into long-term crude oil sales agreements with producers and their marketing agents, adhering to industry standards with terms ranging from one to five years.”

The IPPG also expressed concerns about recent developments, including domestic crude refining needs and the crude production forecast for the second half of 2024, as announced by NUPRC. They criticized the call for monthly crude supply quotations for local refineries, which they view as inconsistent with the Petroleum Industry Act’s market-oriented principles.

Isa called for greater transparency in crude oil allocation processes and for the inclusion of IPPG input in production forecasts to better reflect operational realities. The group stressed the need to honor existing commercial agreements and business models within the sector.

Amid tensions between local refineries and international oil companies (IOCs), Dangote Group has accused IOCs of prioritizing foreign markets and hindering crude supply to its 650,000-barrel capacity refinery.

Additionally, President Bola Tinubu has instructed the NNPC to start selling crude to local refineries in naira, with this initiative set to begin in October.