Nigerians’ hope for lower fuel price dashed

BY EMEKA EJERE

Oil production challenges with no end in sight is propelling a supply shortfall that is taking toll on the viability of refinery business in Africa’s largest oil producer, Business Hallmark’s analysis of activities in the sector has revealed.

It was gathered that amid Nigeria’s continued imports of refined petroleum products, its domestic refineries that would have helped refine the commodities to change the narrative are being starved of crude oil.

This is driving operators of the private local refineries into seeing importation of crude oil as an easier way of ensuring returns on their huge investments, irrespective of the implications for the nation’s foreign exchange crisis.

According to industry sources, about five more modular refineries are ready to commence the production of refined petroleum products but cannot produce the commodities because of the unavailability of crude oil.

Business Hallmark gathered that even the Nigerian National Petroleum Company Limited (NNPCL) may begin importation of 110, 000 barrels of crude oil per day from Venezuela or Saudi Arabia to operate the Kaduna Refinery due to come on stream next year.

Also, the Dangote, BUA and other refineries may be forced to import about 1.322 million barrels of crude oil per day due to oil production challenges in Nigeria, existing contracts on crude oil swap as well as other commercial issues.

Currently, the 650, 000 barrels per day Dangote Refinery in Lagos is relying on imported crude, while the BUA Refinery in the South South would need about 250,000 barrels per day of crude oil from next year. NNPCL is also looking to bring back its 445,000 barrels per day refineries between next month and next year, while the existing modular refineries will require 27,000 barrels per day.

The Dangote refinery missed the October production projection it had earlier set. The October production target miss made it the second time in 2023 that Dangote Refinery would raise hopes of Africa, especially Nigeria, of a possible end to petrol importation. The facility was initially billed to begin refining in August, as announced by the President of Dangote Group, Aliko Dangote, at the inauguration of the Ibeju-Lekki plant in May. However, the failure to begin production means that Nigeria will continue to rely on fuel importation.

Below OPEC quota

Nigeria currently records 113.52 million barrels shortfall in meeting Organisation of Petroleum Exporting Countries (OPEC) output quota, translating to a loss of about $8.9 billion in the first seven months of 2023.

While OPEC’s production quota allocated to Nigeria stands at about 1.742 million barrels per day, figures from the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) showed that output has been averaging about 1.1 million barrels. For instance, figures from the NUPRC showed that Nigeria’s crude oil was 1.35mbpd in September 2023.

Findings showed that Nigeria’s crude oil production (excluding condensates) was precisely 1,346,562 barrels per day in September, higher than the 1,181,133 bpd produced in August.

Data from the NUPRC further indicated that in January, February and March, the country’s oil outputs were 1,266,659bpd, 1,292,240bpd, and 1,266,737bpd, respectively.

In April, May, June and July, Nigeria produced 1,004,392bpd; 1,189,332bpd; 1,260,928bpd; and 1,089,089bpd, respectively. All the above crude oil production figures showed that Nigeria’s output was still lower than the OPEC quota.

Deal with Afreximbank

The NNPCL is with current obligations to supply crude to contractors, but the recent borrowing of $3 billion from African Export-Import Bank (Afreximbank) would drastically reduce the volume of crude the national oil company could provide to the local market.

The Nigerian Upstream Regulatory Commission is currently dragging oil producers in an attempt to enforce Section 109 of the Petroleum Industry Act (PIA), which introduced Domestic Crude Supply Obligation (DCSO) to Nigeria’s oil industry to ensure domestic refineries are not starved of crude oil supply.

Although the regulator is threatening a fine of $10,000, a penalty of 50 per cent of their fiscal price per barrel of crude oil not delivered to refineries and denial of export permits, many of the crude oil producers are worried over commercial issues that may come up in such a transaction.

They are concerned about the logistics side of supply and safety of their data with NUPRC. They want refiners to convince them that the off-takers have dollars to pay for crude oil sustainability. Besides, most of the producers are divesting owing to crude oil theft, insecurity in the Niger Delta region and other problems bedevilling the oil and gas sector.

On September 20, 2023, The Punch reported that the Dangote Refinery was importing crude oil and expected its first cargo in about two weeks, according to the Executive Director, Dangote Group, Devakumar Edwin.

The report stated that though the NNPCL trades crude oil on behalf of Nigeria, in an interview with S&P Global Commodity Insights at the time, Edwin revealed that the NNPCL had committed its crude to other entities.

The Dangote refinery boss did not disclose the other entities receiving the oil company’s crude, but the NNPCL had earlier disclosed in August that it had entered into a $3bn crude oil-for-loan deal with Afreximbank. The deal allowed the company to pledge future oil production to the bank as repayments for the loan.

Also, Edwin pointed out that the importation of crude by the Dangote refinery was temporary, as the firm would receive supply from NNPCL from November. Edwin further stated that the firm would begin the production of up to 370,000 barrels per day of crude that would give rise to Automotive Gas Oil, popularly called diesel, and jet fuel in October 2023. For petrol, the Dangote Group’s boss said the plant would produce it by November 30, 2023.

He said, “Right now, we are ready to receive crude. We are just waiting for the first vessel. And so as soon as it comes in, we can start.”

Ready but paralysed

Findings revealed that senior officials from the Federal Ministry of Petroleum Resources, the NUPRC, and the Crude Oil Refinery Owners Association of Nigeria (CORAN), have confirmed that five local refineries are set to commence production. According to modular refinery operators under the aegis of CORAN, feedstock supply have remained a severe bottleneck.

In an interview monitored by our correspondent, the Secretary of CORAN, Olusegun Ilori, confirmed that about five modular refineries were ready.

Ilori said, “We have a good number of our members that are ready to produce refined petroleum products, but the major problem limiting them, which is stopping their financiers, is the issue of guaranteed feedstock.

“That is, where are they going to get crude oil to refine? The Petroleum Industry Act has come, and it states that there must be a domestic supply of crude for those who want to refine.

“As I speak with you, we have about five or six more companies coming onboard and are ready to begin production. This is aside from the four modular refineries that are already producing. The four of them are facing a limited supply of crude,” Ilori stated.

Duport Edo Refinery, Walter Smith Refinery, and Niger Delta Refinery are among the modular refineries that are currently in operation. The facilities produce diesel but in limited volumes due to inadequate feedstock.

On why domestic refineries were being starved of crude, Ilori said, “It is because many of those producing the crude want to export it to earn dollars. Also, Nigeria still needs to meet the crude oil production quota approved by OPEC for export.

“So most crude oil producers don’t want to sell to local refiners because some are owing banks and have projected how to export the commodity to clear their debts.”

The Minister of State for Petroleum Resources (Oil), Heineken Lokpobiri, also confirmed the lack of crude to domestic refiners, noting that Nigeria’s inability to meet its crude oil production quota approved by OPEC was the major limiting factor.

At a recent meeting on the issue, the junior minister confirmed that domestic refineries were not getting enough crude, but assured that the government was working hard to address this.

“Today, we have cases, where we have modular refineries that can refine products, but they have no crude because our production is down. So if we don’t get the upstream right, the midstream and downstream will also not be successful.

“So all our efforts, first of all, should ensure that we resolve the problems bedeviling the upstream sector. Since we came, we have engaged the IOCs (international oil companies), and they told us their concerns.

“I’m sure you heard a short while ago when the IOCs, NNPCL, being coordinated by the Ministry of Petroleum and local content, signed an MoU that there should be timelines instead of allowing the contractual cycle in the sector to take forever.

“And so the era of doing something for two years, what could be done in one month, is gone. It is one of the innovations we have brought to the sector,” Lokpobiri stated.

He, however, noted that since the current administration came on board, “we are steadily increasing production. When we were sworn in, the President told me, ‘Lokpobiri, the sole mandate is to go and ensure that you grow our production.’

“And how do we grow our production? If we don’t grow our production, which is upstream, the midstream and downstream will also not be successful.”