By Akpandem James
Ever since the Dangote Refinery and Petrochemicals Company began production late last year, it has faced numerous challenges. It has been in conflict with many major players in the oil and gas industry, including the national oil company, Nigerian National Petroleum Company Limited (NNPC Ltd.), as well as the two industry regulators: the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) and the Nigerian Midstream/Downstream Petroleum Regulatory Authority (NMDPRA). The management of the facility has accused these entities of either directly sabotaging the refinery or attempting to do so by limiting its access to the required crude oil supply and penetration of the local fuel markets.
In the past two months, conflicts have been commonplace between the refinery’s management and the strategic operators and regulators. NNPC Limited and the regulators have denied all the accusations and maintained that their operations comply with the laws outlined in the provisions of the Petroleum Industry Act (PIA) 2021 and the accompanying regulations.
While Dangote Refinery’s management is presumably striving to meet its extensive demands, there is a concern among industry players that the new refinery owners are aiming to create a monopoly the sector without regard for existing rules and conventions governing global industry practice.
Observers outside the industry view the ongoing conflict between Dangote Refinery and key industry players, on the one hand, and apex regulators in the petroleum industry, on the other hand, as a recurring pattern in the Dangote conglomerate’s business strategy. This strategy appears to involve doing everything to eliminate competition and establish a monopoly, as seen in previous conflicts in the cement, sugar and consumables’ markets in the country.
But the war in the oil sector intensified with accusations flying in all directions, including toward the NNPC Ltd., NMDPRA and, more recently, the NUPRC.
It would be improper to assume that one would start such a huge venture and become complacent in the face of threats. However, there is still a debate on whether the Dangote Group adequately planned for an arrangement to guarantee steady supply of raw materials when they first thought of setting up the refinery. Did they consider the issue of adequate raw material supply during the planning stage of such a mammoth refinery, or did they just assume that everything would fall in place once they commenced production?
There have been many stories about the planning and building of the refinery. The extent of the Nigerian government’s involvement in the project is not widely known, because both the organisation and the national oil company, NNPC Ltd, have been indecisive at different stages about the issue. It is unclear whether the issue of crude oil supply, which Dangote Refinery management is insisting on, was part of the original agreement. If not, why would a private company, regardless of its importance to the national economy, try to dictate how it should be supplied the commodity?
Dangote Refinery management has complained several times about unfair competition allegedly as a result of the activities of the NMDPRA and NNPC Ltd., as well as a shortfall in the supply of crude oil from the national oil production. The organisation claims that it has not been able to obtain its full crude oil requirements from domestic production. It also claims that it has been compelled to purchase Nigerian crude oil from international traders at an additional premium of $3 to $4 per barrel.
Because of the commotion caused by the flying allegations, the Federal Executive Council (FEC) approved with the seal of the President that local refiners, including Dangote Refinery, should not only have access to Nigeria’s crude oil, but do so by paying for it in the local currency, not in the United States Dollars – a significant industry policy shift, in view of the fact that transactions involving crude oil trading at the International crude oil market are always conducted in dollars.
After the intervention, Dangote Refinery has now acknowledged that it is receiving its share of crude oil supplies from the NNPC Limited. However, it claims that the international oil companies (IOCs) are not following the crude oil supply guidelines set by the NUPRC.
Initially, Dangote Refinery urged the NUPRC to enforce the Domestic Crude Supply Obligation (DCSO) in accordance with the requirements of the Petroleum Industry Act, 2021. Later, it accused the Commission of being reluctant to enforce the provision, but the regulator strongly rejected the accusation.
In an elaborate explanation through a statement, NUPRC asserted that it has consistently exercised its regulatory oversight to ensure that Dangote Refinery, along with other domestic refineries, receives a fair share of crude oil allocations, which is part of the Commission’s commitment to supporting the growth and success of the domestic refining sector in Nigeria. Section 109 of PIA 2021 gives the Commission the mandate to develop procedures for imposing DCSO based on the crude oil needs of domestic refineries. It claimed that as part of a strategic commitment to Nigeria’s energy security, the Commission facilitated the supply of 32,088,122 million barrels of crude oil to nine local refiners within the first half of 2024. Dangote Refinery alone had 29,047,098 million barrels of that volume.
The Commission insisted that, in order to ensure smooth operations, it collaborated with industry stakeholders to establish the Production Curtailment and Domestic Crude Oil Supply Obligation (DCSO) Regulation in 2023.
Subsequently, it operationalised the PIA and the DCSO regulations to avoid shortages of crude oil supply to refineries. A tripartite committee was formed to recommend a template for the Commission’s consideration. It was the Committee’s recommendations that were used to develop guidelines for the operationalisation of the DCSO.
The Commission claimed that it not only started implementing metrics that require companies to dedicate between 29% and 34% of their production for sales to domestic refineries, but also included Dangote Refinery and other domestic refiners as observers in curtailment meetings to enable them to gain firsthand information about available cargoes before they are released to the market.
The Commission also claimed that it engaged Dangote Refinery management and other local refiners on several occasions to ensure their supply quota was met in line with the provisions of the PIA. It insisted that the operators have been kept informed throughout the process, so there was no question of reluctance to enforce crude supply against presumed erring operators.
NUPRC, however, admitted that in strictly exercising its mandate on crude supply, it countered some challenges, including the Mode of Crude Oil Production, the Doctrine of Sanctity of Contracts, and Pricing of Crude to Domestic Refineries. These have to do largely with the capital-intensive nature of petroleum upstream operations, which require companies going into various financing arrangements, with pre-export financing obligations, resulting in production encumbrances.
The Commission’s position is that while the law mandates all stakeholders in the upstream petroleum sector to supply crude to domestic refineries, there is also a disagreement regarding the pricing of the volume transferred to local refineries. As a consequence, the Commission is responsible for facilitating willing-buyer and willing-seller transactions without price control as well as ensuring that supplies to the refineries are not overpriced. It explained that while the Commission has capped the Federation Crude Equity (FCE) by the trading arm of the NNPC Ltd, the same cannot be done for the Private Equity Crude (PEC), which belongs to other operators because of exsiting obligations.
The explanation given was that, in attempting to enforce the Direct Crude Swap Offtake (DCSO) pre-existing commitments of operators must be considered, because some operators are constrained by their financing arrangements and are already committed to entities that have provided funding for their operations, and are entitled to recover through crude supply. And this is not peculiar to Nigeria. It is an industry practice. “Much as the NUPRC (as the apex regulatory authority in the petroleum industry) has tried to ensure the enforcement of the provisions of Section 109 of PIA, 2021, the producers have equally responded to the regulator, saying that conventionally oil production is funded through pre-export financing.”
Although the law mandates the withdrawal of a license from an operator who fails to comply with industry regulations, the Commission insisted such power must not be used presumptuously and arbitrarily, because of its negative implications on the country’s investment climate, oil production, revenue and the oil and gas sector. It would lead to a substantial reduction in royalties and taxes going to the federation account.
NUPRC is curious about the needs of the Dangote Refinery management, but emphasises that the Commission would continue to prioritise the development of a transparent and well-regulated upstream petroleum sector. This includes providing support to all stakeholders, including Dangote Refinery, while ensuring that the industry operates in compliance with the law and upholds the highest standards of contractual integrity. This approach aligns with Nigeria’s broader economic goals.
Akpandem James is a Fellow of the Nigerian Guild of Editors
