The recent pronouncement from the Nigerian government, making it mandatory for the sales of crude oil to local refiners, such as the Dangote Refinery, to be done in Naira, has increasingly generated debate in the oil and gas sectors. This move has attracted a kickback from key stakeholders who include the Independent Petroleum Producers Group, which represents local oil and gas-producing companies. The IPPG is of the opinion that the said Directive contradicts provisions in the PIA 2021 and is likely to infringe on existing laws.
Background and Legal Framework
The Petroleum Industry Act 2021 was the landmark legislation instrumental to reforms in the oil and gas sector of Nigeria. Among its fundamental principles is a "willing-buyer, willing-seller" framework that permits producers to sell their crude oil to buyers under terms mutually agreed upon by the parties. It was intended to give way for proper competition and efficiency in the market and attract investment into the sector.
The recent directive of President Bola Tinubu, mandating the sale of crude oil to local refineries in naira, has really stirred up misgivings among players. According to the IPPG, this development runs totally opposite to the spirit of the PIA and could undermine the legal and commercial framework that regulates the industry.
**The Stand of the Independent Petroleum Producers Group, IPPG ***
It wrote to the Chief Executive of the Nigerian Upstream Petroleum Regulatory Commission, Gbenga Komolafe, on August 16, 2024, to that effect. The chairman, Abdulrazak Isa, said the IPPG would welcome any government move that led to a rise in domestic refining capacity, but this was to be implemented with full regard for existing laws and commercial agreements.
He said the NNPC should make available all its volumes of allocated crude oil to local refineries, including the Dangote Refinery, to complement the efforts that will alleviate the current shortages in supply. He put forward that all along, the intervention crude oil volume for the NNPC, which is normally applied for domestic consumption, has been 445,000 barrels per day. That, according to him, should be what the NNPC must use to fill up the supply shortfalls being faced by local refineries.
Concerns Over Mandatory Crude Supply
The IPPG raises a number of concerns. First, the group observed that the compulsory sale of crude oil to local refineries in Naira runs against the willing-buyer, willing-seller arrangement contained in the PIA. This framework was established to guide how crude oil producers and buyers negotiate a contract based on market dynamics without government interference. Mandating the sale of crude oil to local refineries amounts to imposing terms on producers, which is in itself a potential source of market distortion and other ills going against the principle of the PIA.
The second concern of the IPPG is that this could result in producers being made to subsidize local refineries. According to Isa, while the group will continue to support increased domestic refining capacity, no private sector business should be arm-twisted into any arrangement that will have it subsidizing another player in the oil and gas value chain. That would be an uneven playing field, which might be injurious to the commercial interests of indigenous producers.
Implications for the Oil and Gas Industry
This, as such, has very far-reaching implications for the oil and gas industry in Nigeria. For a start, it may further discourage investment in the industry. The PIA was structured in such a way as to present a very firm and stable investment regime through allowing market forces to drive the terms of sale for oil; thus, the recent directive may dent investor confidence as it brings in an element of market uncertainty and government intervention.
The implication of this directive could also affect the nation's foreign exchange earnings. IPPG said that volumes above the intervention volume allocated to any amount of national production should be strictly regarded as export volume and be exposed to the willing-buyer, willing-seller environment of the international market. This may possibly become consequential within the following context: volumes over and above those which refiners of the local industry could vend domestically could greatly contribute towards Nigeria's foreign exchange earnings. The government could be waiving export revenue by stipulating that crude oil be sold to local refineries.
The Way Forward
Against the background of such concerns, the IPPG has maintained the need for a revisit of the directive. It has asked the corporation to sell to the market at any volume above the intervention stock to alleviate the current supply shortages, while anything produced in excess of that is sold on the world market based on the principle of willing buyer, willing seller. That way, the resentment of the Group is that the current shortages could be ameliorated without necessarily breaking any existing law or commercial agreement.
With reference to this, the IPPG has called for a joint effort to find a solution. Optimistically, the group was of the opinion that the involved stakeholders would amicably find a solution without shaking the commercial agreements, economic interests, and business models of the different presentations of the oil and gas sector, not to forget the interest of the various related parties. This will include negotiation between the crudes oil producers, local refiners, and the government in finding a solution that will balance the interest of both parties.
Conclusion
The recent directive on the selling of crude oil to the local refineries in Naira has raised many concerns within the oil and gas industry in Nigeria. The IPPG, speaking on behalf of indigenous producers, said that the directive was an infringement on current laws that underpin the principles of the Petroleum Industry Act 2021. It called for a reconsideration of the directive, urging the government to respect the willing-buyer, willing-seller framework that works to ensure market efficiency and drives investment.
Given rising domestic refining by Nigeria, the same should, however be done under the rule of law and executed in the most expedient way that protects the commercial interests of the parties involved. Doing this in collaboration will help come up with a resolution that eases the current shortage, yet maintains the credibility of the legal and commercial framework that guides the oil and gas sector.
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