Introduction:

One of the main concerns of countries all over the world is the issue of energy security. Energy-rich nations must contend with issues related to energy security. For instance, Nigeria’s economy in which crude oil and natural gas are the primary economic commodities, exemplifies the country’s sensitivity to energy. Therefore, Nigeria’s inadequate and inefficient use of crude oil and gas to meet its domestic energy needs over the years, gave rise to energy instability in the country. Thus, in an attempt to address the nation’s persistent problem of inadequate energy supply, a tripartite committee was formed by the Nigerian Upstream Petroleum Regulatory Commission (“NUPRC” or “the Commission”) to tackle problems relating to the implementation of Domestic Crude Oil Supply. This committee, comprised of representatives of the Commission, NNPC Ltd, Oil Producers Trade Section (“OPTS”), Independent Petroleum Producers Group (“IPPG”) and Crude Oil Refiners-Owners Association of Nigeria (“CORAN”), and Dangote Refinery, developed a “Framework for Seamless Operationalization of the Domestic Crude Oil Supply Obligations (DCSO)” to ensure effective and efficient management of crude oil supply and likewise prevent shortages of crude oil supply to domestic refineries.

This article discusses the background and goals of the framework. It examines the framework’s provisions and further explores recommendations for strengthening the framework.

Brief Background:

 In an attempt to curtail Nigeria’s great dependency on imported petroleum liquids and product, a new obligations requiring oil producing companies to supply crude to domestic refineries before exportation has been imposed. The NUPRC has developed a regulatory template “DCSO framework” in this regard, thereby fulfilling its obligation under section 109 of the Petroleum Industry Act (PIA) 2021. The guideline was created in cooperation with relevant institutions. It guarantees that domestic crude supply commitments are fulfilled to local refineries, thereby boosting the supply of crude oil to local refineries including the recently established Dangote Refinery. The guidelines lay down responsibilities of oil producing companies, prescribes sanctions for non-compliance in accordance with section 231 of the PIA  2021 and further addresses legal, administrative, and logistical elements.

This DCSO intends to guide companies on the imposition of domestic crude supply obligations on lessees (holders of petroleum mining leases) in upstream operations including penalties.  Its provisions cover the procedure imposing domestic crude supply obligations on upstream petroleum operations, including payments, penalties, and requirements for regular allocation supply of refinery crude. This Framework ensures that crude oil will be sold only to holders of a Refining License with operational refineries in order to promote long-term sustainability in Nigeria’s oil sector as well as improve the nation’s overall economic stability. Accordingly, its ultimate goals involve minimizing shortages, promoting fairness, and guaranteeing a steady supply of crude oil to the country’s refineries.

Furthermore, the guideline seeks to prevent shortage in petroleum operations and guarantee a smooth and effective delivery of petroleum products to domestic refineries by establishing a comprehensive structure that encourages collaboration, transparency, promotes Lessees-Refiner negotiation of extra crude oil supply and guarantees the transparent distribution of expected production levels to domestic demand. The establishment of a simplified and effective domestic crude oil supply structure will provide a steady foundation for crude oil supply, ensure crude security and prevent crude oil diversion, reduce operational delays, and apply consequences of non-compliance. With the DSCO, crude supply can be commercially negotiated, considering international market prices, and license holders can make payments in United States Dollars (USD) or Naira.

Contents of the Framework:

1. Legal Framework: This framework was issued pursuant to Parts III and IV of The Production Curtailment and Domestic Crude Oil Supply Obligation Regulations 2023 and Sections 109 and 231 of PIA 2021.
2. Procedure for Implementation of Domestic Crude Oil Supply Obligations (DCSO):
   The Nigeria Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) is responsible for furnishing the NUPRC with the necessary crude oil requirements of refineries and disclosing any supply shortage to the Commission. Thus, before lessees can export any excess quantities, they must first fulfil their domestic supply obligation (DSO). The domestic crude oil refining requirements of operating refineries in Nigeria will be published bi-annually by the NUPRC on its official website and in three newspapers based on the NMDPRA data. It shall be released yearly on the 1 of January and 1 of July and will include the total number of functioning refineries, the plate crude requirement of each refinery, the actual forecasted daily crude requirement of each refinery for the publication period, the name and location of each refinery and the crude specification for each refinery. Furthermore, the NUPRC will provide information about the production forecast of each producing licensee for the corresponding period based on a daily rate, name, location and terminal stream of each producing license, name of licensee of each producing license and crude specification produced from each license.
   
   
3. Procedure for Domestic Crude Oil Requirement Allocation:
   Before a request for quotation (RFQ) will be released, the NUPRC is required to develop transparent metrics to determine how much crude oil is allocated for domestic consumption. In spite of this, lessees are allowed to negotiate with refineries for extra supplies, mutually agree on rates and take into account the monthly fiscal differences of oil prices. Additionally, where a refinery is having trouble finding crude oil, they may request assistance from the Commission before the 15 Business day of M-3.

   NUPRC then issues an RFQ for required crude oil grades and volumes to lessees on the 1 and 2 Business days of M-2 and lessees are expected to reply to the Commission’s RFQ by the fifth business day of M-2, per the standards for DCSO. The Commission then shares the bid with the refiner between the sixth and seventh business day of M-2. By the eighth or eleventh day of M-2, the refiner then signs a Sales and Purchase Agreement (SPA) with the lessee on a willing buyer, willing seller (WBWS) basis. The Commission releases the results of lessees and refineries, showcasing domestic supply records, after every six-month cycle. In assessing or determining a fair price where inappropriate pricing is causing a standoff, the Commission is to use the fiscal oil price differentials.

   The DCSO will ensure that the allotted volumes are completely discharged to the assigned refinery. On the tenth and fifteenth business days of M-2, there will be a programming meeting for stakeholders regarding the Domestic Crude Refining Requirement (DCRR). Subsequently, on the sixteenth and nineteenth business days of M-2, there will be a meeting for production curtailment and lifting programming. However, the Commission may impose a DCSO on the lessee if the deadlock continues; and it will be announced by the fourteenth working day of M-2. However, a DSCO will not be imposed if the unreasonableness is because of the refiner.

Payment Instruments:

1. Letter of Credit: The Refiner’s Bank must provide a reputable Nigerian or International bank with an acceptable irrevocable Letter of Credit (LC) to the lessee’s office within six banking days before the first day of LAYCAN and the bank must be approved by the lessee. The LC is valid for 90 days, effective from the second day of LAYCAN with a minimum rating of BBB. If the lessee and refiner have a long-term supply and purchase contract, they can use a revolving standby letter of credit (SBLC).
   
   
2. Bank Guarantee: The Lessee can accept a Bank Guarantee from refiners with smaller output capacities. The Guarantee must be irrevocable and revolving, issued by a reputable Nigerian bank for an amount that is equal to the sales value of the crude oil cargo. The guarantee must be provided seven days before the first delivery and valid for one year with its initial expiration 31 December of the year of issuance. The Guarantee must be drawable on demand without the buyer’s consent and can be replaced and extended for thirty days before its expiration.

Payment: 

Payments may be made in either USD or Naira, or both. Where payment is made in both currencies, the split shall be as agreed by the parties in the SPA.

Logistics Scheduling:

On the first day of LAYCAN, the lessee and refiner must reach an agreement on the loading or delivery window, which must not exceed the 25 of M-2.  If there are operational limitations, the lessee must inform refiners of a changed delivery window within 21 days of LAYCAN’s issuance. The Refiner must ensure proper logistics arrangements to load within the agreed delivery window to prevent tank/top production curtailment or face penalties.

Continuous Obligation:

A lessee’s obligation to sell crude is contingent upon the refinery’s operation when entering a long-term supply contract.

Crude Oil Diversion:

DSCO-allocated cargo must be discharged into the designated refinery without diversion or swapping. Accordingly, Refiners using DSCO allocations for non-domestic processing without the Commission’s approval will face suspension and penalties, and prosecution. 

Penalties Under the Framework:

1. Failure to respond to Commission’s Request for Quotation: Lessees who fail to respond to NUPRC’s RFQ or submits RFQ outside the specified time frame, is liable to an administrative fine of $10,0000 to the Commission. While lessees affected by force majeure situations must respond to the RFQ with an attached declaration of force majeure.
   
   
2. Failure to Comply with DCSO: Lessees who fail to comply with the DSCO by not entering into a contract for delivery or supply under the Framework, is liable to an administrative penalty of 15% of the fiscal price of the DSCO volume imposed and payable to the Commission. However, this penalty does not apply for defaults caused by force majeure, default of the buyer under the supply contract, or any other reason acceptable by the commission.
   
   
3. Default of Payment: Where a Refiner defaults in payment, the Commission will not allocate DCSO to that refiner for a specified period in addition to the penalty outlined in the SPA between the refiner and the lessee.
   
   
4. Failure to lift within the Scheduled LAYCAN (or delivery window): If the Refiner fails to lift within the scheduled LAYCAN, leading to tank top/production curtailment, the Commission will suspend the Refiner from DSCO allocation and impose a fine equivalent to the delayed royalties.
   
   
5. Failure to offtake Crude: Where Refiners fail to offtake the allocated DSCO, they shall face the following penalties: Take or Pay conditions, for pipeline, barging or trucking deliveries; Liquidated damages for marine deliveries under the SPA, and the lessee shall sell off the crude oil parcel as distressed cargo, and selling crude oil parcel as distressed cargo for marine deliveries with the defaulting refiner liable for liquidated damages.
   
   
6. Failure to supply Crude: A lessee who fails to supply DSCO, resulting in refinery shortage will be liable to an administrative penalty of 15% of the fiscal price of the imposed DSCO volume.
   
   

Conclusion and Recommendations:

The long-term reliability of Nigeria’s oil and gas sector will be reflected in the longevity of our domestic refineries. Thus, the goal of making Nigeria a net exporter of refined petroleum products starts by measuring how Nigeria can effectively distribute crude to its domestic refineries.  The PIA, 2021 and the NUPRC’s further formulation of DCSO is necessary in strengthening Nigeria’s domestic refining capacity and to become less dependent on imported refined products. To increase the efficiency and reliability of Nigeria’s supply of crude oil to domestic refineries, the NUPRC should ensure that the new DCSO requirements are rigorously followed for a predetermined amount of time. Thus, enforcing stringent penalties for non-compliance will deter lessees and refiners from violating the terms of the guidelines, agreements or contracts and ensure steady supplies of crude oil to domestic refineries.  Furthermore, to strengthen the connection between lessees and refiners and to ensure accountability, the NUPRC should also effectively communicate with all stakeholders involved. This includes setting up a clear framework for the transparent reporting and distribution of refinery demands and lessees’ output predictions. The committee should update the framework frequently to close gaps and quickly handle newly discovered issues. Again, important facets of petroleum operationalisation, such as implementation procedures, payment security, logistics, ongoing accountability, and fines, are covered in this thorough framework. It provides local refineries with a well-organised method for a seamless crude oil supply.