The Independent Petroleum Producers Group (IPPG) has cautioned Nigerian authorities against being compelled to sell crude oil to the Dangote Refinery and other local refineries in Nigeria.
A press statement dated July 31, 2024 by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) had unveiled the domestic crude oil refining requirements and crude oil production forecast for the second half of 2024, and the request to all producing companies for monthly quotations for crude oil supply to licensed refineries in Nigeria.
NUPRC in a letter dated August 16, 2024, addressed to the NUPRC Chief Executive stated that it was done under the provisions of s.109(4) of the Petroleum Industry Act, 2021 (PIA).
The letter was signed by the IPPG Chairman, Abdulrazaq Isa.
By the directive, petroleum producers are mandated to allocate crude volumes to the local refineries for the second half of 2024 - July to December - in line with the Domestic Crude Oil Supply Obligations (DCSO) guideline issued by the NUPRC in an ongoing effort to avoid shortage of supply to domestic refineries.
However, the IPPG said the directive from NUPRC compelling them to supply certain volumes to local refineries may "inevitably lead to economic damage and self-sabotage of the Nigerian economy".
According to the IPPG, which noted that there are contractual agreements that will make the directive problematic for them, under Nigerian law, any supply of crude oil to a refinery even under a DCSO umbrella is required to be on a willing buyer and willing seller basis.
It said, "This is the position of the principal law that cannot be derogated by regulation or guideline.
"Additionally, 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 since international finance institutions have reduced their funding positions to fossil fuels due mainly to ESG requirements.
"These contractual arrangements have become the necessary collateral obligations for producers (including NNPC Limited) and thus they currently have contractual rights to producers' barrels of crude oil.
"In addition, crude cargoes are normally sold at least three (3) months in advance and therefore your recent letters to some of our members received in August mandating DCSO volumes from July to December 2024 are not achievable, particularly as most, if not all, of the cargoes from July to October will already have been sold."
The IPPG also noted that any unilateral instruction to its members to supply the domestic refineries outside the principal law, would consequently "cause producers to default on meeting their offtake obligations to already contracted crude oil buyers".
It listed some other consequences as follows: "cause an offtake default that would trigger a cross default on virtually all the other finance obligations held by Nigerian producers, including their obligations to local banks, third party suppliers and local sub-contractors; seriously impact 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 - 2.5million barrels of oil per day as there will be tightening of available capital arising from the lack of credit worthiness of producers in the eyes of lenders of capital; put the Nigerian State in an adversarial position with the international traders who finance a significant portion of upstream activity, alongside their respective institutional investors who by extension are the same pool of investors our Country is currently courting for Foreign Direct Investment (FDI) into its economy."
It also noted that it would "cause cross defaults across IPPG members and this would dry up a critical source of FX for the country during a period of adjustment to the difficult but necessary adjustments being implemented to how our economy is run".
It said the "Foreign Exchange (FX) shortage would be acutely felt given that NNPC Limited has engaged in (and is currently marketing) a series of Forward Sale Agreements which mean future revenues are being secured against upfront funding".
"If the IPPG members cannot augment this gap with their own FX inflows, then it creates a spiral of liquidity funding that will further impair our economy on a macro level," it added.
It said the legal position is 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".
IPPG said, "Crucially, s. 109(4)(c) completely flies in the face of any Naira payment for crude oil. It provides 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 license.
"By law, the parties can agree on the currency of transaction, and one cannot be mandated over the other. This is further buttressed by the practical reality of the fact that all producers have financial obligations priced in US Dollars."