The Independent Petroleum Producers Group (IPPG) has issued a stern warning to Nigerian authorities against the forced sale of crude oil to local refineries, including the Dangote Refinery.
The group, which represents major upstream oil producers in Nigeria, expressed deep concerns that such mandates could lead to severe economic repercussions and violate existing contractual obligations.
This warning follows a directive from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC), dated July 31, 2024, which outlined domestic crude oil refining requirements and forecasted production for the second half of 2024. The directive also requested monthly quotations for crude oil supply from all producing companies to licensed refineries in Nigeria.
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In a letter addressed to the NUPRC Chief Executive, the IPPG, chaired by Abdulrazaq Isa, challenged the directive, arguing that it is both economically and legally problematic. The letter, dated August 16, 2024, invoked section 109(4) of the Petroleum Industry Act (PIA) 2021, underscoring that any supply of crude oil to a refinery under the Domestic Crude Oil Supply Obligations (DCSO) must be conducted on a willing buyer-willing seller basis.
Economic Damage and Legal Violations
The IPPG highlighted that the NUPRC’s directive could lead to “economic damage and self-sabotage of the Nigerian economy.” The group emphasized that under Nigerian law, the sale of crude oil to refineries cannot be forced by regulation or guidelines, as it must be commercially negotiated between the producer and the refinery, taking into account prevailing international market prices.
The IPPG explained that most producers, including NNPC Limited, are currently bound by fixed supply or forward sale contracts with international traders. These contracts, often established to bridge financing gaps in upstream investments, are secured by the producers’ barrels of crude oil.
Consequently, any directive mandating the diversion of crude oil to local refineries would not only breach these contracts but also expose producers to severe financial penalties and default risks.
“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,” the IPPG stated. “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.”
The group further warned that enforcing the NUPRC’s directive would cause a cascade of defaults across multiple financial obligations held by Nigerian producers. This could severely impact their ability to secure future financing, thereby hampering efforts to increase Nigeria’s crude oil production from the current level of 1.3 million barrels per day to the government’s target of 2-2.5 million barrels per day.
Impact on Nigeria’s Economic Stability
The IPPG’s letter detailed the broader economic implications of enforcing the NUPRC directive. It cautioned that compelling producers to supply crude oil to local refineries under these terms would “cause cross defaults across IPPG members” and “dry up a critical source of foreign exchange (FX) for the country.” Given that NNPC Limited has already engaged in a series of Forward Sale Agreements, which involve securing future revenues against upfront funding, any disruption in FX inflows from other producers could create a liquidity crisis, further destabilizing the Nigerian economy.
“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,” the IPPG warned. “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.”
Legal Arguments Against the Directive
In its legal argument, the IPPG pointed out that section 109(4)(c) of the Petroleum Industry Act (PIA) explicitly states that the payment for crude oil supplied to refineries should be in either US Dollars or Naira, as agreed between the producer and the refinery. The group argued that mandating the currency of transaction, or compelling producers to sell to local refineries outside of negotiated agreements, contravenes the principal law.
“Holders of crude oil refining licenses 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,” the IPPG stated, stressing that any attempt to override this provision would be legally untenable.
However, an energy expert has pointed out that the Petroleum Industry Act (PIA), sections 11 & 12 of the production regulations under the domestic crude supply obligations, mandates the NUPRC to issue a ‘request for quote’ to production lessees or licensees to mark up the shortage when there is crude oil shortage at domestic refineries – affecting national supply curve. The PIA thus empowers the NUPRC to withdraw export permits of the lessees or licensees if they fail to comply.
“Sections 11,12,14 & 15 of the production curtailment and domestic crude oil supply obligation regulations 2023 issued as a gazette pursuant to sections 109 of the PIA of 2021 — is very clear,” Kelvin Emmanuel, cofounder and CEO of Dairy Hills, said.
“Independent producers onshore and in shallow waters that sign pre-export financing contracts in forward sale agreements with international oil traders subject to stabilization clauses included in their unregistered joint venture agreements are not superior to the provisions of the PIA.”