PIB 2020: NNPC refineries may lose crude allocation

[By Sopuruchi Onwuka]

Despite firm guarantees for crude feedstock for local refineries in the emerging Petroleum Industry Act, Nigerian National Petroleum Corporation (NNPC) may lose its traditional crude oil allocation with which it has earned parallel export income for decades.

NNPC GMD Mele Kyari

According to the provisions in the PIB 2020, the consolidated version of the bill reintroduced to the National Assembly last year, only functional refineries will be qualified for crude oil allocation under the domestic supply obligation to be imposed on producing companies in the country.

This implies that the nation’s four moribund refining plants operated by three midstream units of NNPC  will cease to have access to the traditional crude oil allocation when the new PIB comes into effect as expected in the year.

According to Group Managing Director of NNPC, Mallam Mele Kyari; regulatory officials; and industry groups collaborating with the National Assembly on the passage of the new industry legislation, the PIB has generated adequate momentum to transit into an Act in 2021.

But when in full implementation, the corporation might lose the right to daily allocation of about 445,000 barrels of crude oil per day with which it has continued to sell to earn funds for either importation of petrol or swap with foreign refineries in exchange for refined products.

According to a document at the corporate planning division of NNPC, the refineries became dysfunctional after the defunct Petroleum Special Trust Fund (PTF) managed by General Muhammadu Buhari for the administration of late dictator, General Sani Abacha.

Under the PTF arrangement, the document stated, all revenue receivables from NNPC’s operations were hijacked by the federal government, leaving the corporation with insufficient funds to manage its midstream and downstream facilities and infrastructure. And with the dilapidation of its refineries, pipelines and storage depots, the corporation resorted to importation of petroleum products as primary means of supply to the domestic market.

Crude oil allocation for the moribund refineries had since then been a source of internal management by the corporation, and has also formed the subject of all manners of product supply arrangements criticized by analysts as channel for slush funds.

From selling the crude allocation volumes to fund products imports, swapping the crude with traders for petrol and direct refining at offshore refineries to recent Direct Supply and Direct Purchase arrangements, NNPC has traded with the crude oil allocation while its refineries remained in disrepair.

Innumerable revamp arrangements, including failed privatization attempts, for the refineries have also seen billions of Naira flushed into deals that failed to rehabilitate the plants even as fuel import bills continued to deliver dents on national fiscal projections and mount pressure on the nation’s lean foreign exchange reserves. 

With visible lack of will to recover the nation’s domestic refining capacity, private players have since secured licenses to stake investments in the local midstream petroleum sector as government begins gradual withdrawal of internal price subsidy that has flowed exclusively through the NNPC.

However, concerns have been high over ability of the local refiners to secure crude oil supply from the upstream industry players whose operations and transactions are exclusively dollar denominated. With multiple rates ruling the domestic foreign exchange market, fears are high that the local market might not deliver adequate Naira returns on dollar denominated investments.

The fears of transaction failure between crude oil producers and local refiners are sustained by prevailing debt impasse in the power sector where poor returns from Naira denominated market have failed to offset dollar denominated gas bills. Despite the piling debts which have breached a trillion Naira at several times, gas has continued to flow to power generation stations because regulation has imposed domestic supply obligation on gas producers in the country.

But in the midstream oil industry, NNPC has not bothered to add value to its crude oil allocation for decades but preferred to sell the commodity, providing bad model for refinery licensees who were accused by regulators of demanding crude oil allocation ahead of breaking project grounds.

Former Director of Department of Petroleum Resources (DPR), Mr Billy Agha, had disclosed that some of the refinery licensees had advanced proposals that would enable them raise project funds by adopting the NNPC model of trading on crude allocations ahead of projects.

The failure of initial roll out of refinery licenses to translate to plant capacity led government to withdraw most of the licenses.

Among sweeping reforms in the emerging industry legislation is the requirement for upstream operators to meet domestic demand for crude oil supply, especially as new volume of proposals flood the ministry of petroleum resources for establishment of domestic refineries.

The domestic crude supply obligation captured in Section 109 of the bill compels producers to supply crude oil and condensates for the domestic market on a willing supplier and willing buyer basis.

Subsection 2 of the of the provision empowers the emerging upstream commission to also “issue regulations or guidelines on the mechanism for the imposition of a domestic crude oil supply obligation on lessees of upstream petroleum operations, where in its opinion, the domestic market results in shortages or inadequate supplies of crude oil and condensates for holders of crude oil refining licences.”

The imposition of domestic supply obligation on producers would largely be in response to requests by the midstream and downstream authority, also created by the bill, for feedstock for refineries in operation, the bill provides.

The provision of supply obligation on market led prices suggests that there might be little room for traders to hijack the opportunity as “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.”

Also, “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.”

In addition, the PIB provides that the upstream commission shall ensure that the domestic crude oil supply obligation crude oil may only be sold to holders of crude oil refining licences and “whose refineries are in operation.”

If the law comes into effect as proposed, therefore, the emerging NNPC Limited whose refineries have remained moribund commercial loss centre for over 20 years would likely cease to get crude allocation for domestic refining.

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