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NNPC’s Crude Supply Challenges Affect Dangote Refinery Project

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The Nigerian National Petroleum Company (NNPC) Limited is caught in the middle of growing hostilities between many International Oil Companies (IOCs) doing business in Nigeria and Dangote Industries Limited, the owner of what will soon be Africa’s largest single-train refinery. The main source of contention is the availability of crude oil feedstock, which is essential to the Dangote Refinery’s ability to operate.

NNPC Limited acquired a 20 percent stake in the Dangote Refinery in 2022 for approximately $2.76 billion. As part of the agreement, NNPC pledged to supply 300,000 barrels of crude oil per day (bpd) to the refinery to compensate for the loan. However, sources revealed to BusinessDay that NNPC has consistently failed to meet this supply commitment. This shortfall has sparked a broader debate on the responsibilities and capabilities of NNPC in fulfilling its obligations.

Kelvin Emmanuel, a Lagos-based economist, explained to BusinessDay the complexities of the situation. He pointed out that while the blame for the shortages often falls on the IOCs, which typically secure long-term contracts with European refineries, it is NNPC that has not honored its commitment to provide the agreed 300k barrels per day in feedstock. Emmanuel highlighted that, contrary to perceptions, IOCs have actually sold more oil to Dangote than NNPC has since the inception of the refinery.

The implications of these supply challenges are far-reaching. Platts, a provider of energy and commodities information, states that benchmark prices are essential for pricing physical and financial contracts. Emmanuel criticized the NNPC for its inefficiencies and lack of transparency, asserting that these shortcomings are a major contributing factor to Nigeria’s broader financial woes. He argued that failing to supply crude to commercial refiners like Dangote significantly undermines the potential economic benefits of such a large-scale refinery, which are crucial for Nigeria’s development.

A senior figure in the crude trading sector, who requested anonymity, shared that NNPC’s “cash for crude” deals are impacting the availability of crude oil for local refineries. He specifically mentioned a loan arrangement known as ‘Project Gazelle,’ which he believes places a considerable strain on Nigeria’s economy. He expressed a general disapproval of resource-backed loans and similar financial arrangements that leverage future oil and gas assets, describing them as detrimental to good statecraft.

In an effort to address some of these challenges, NNPC secured a $3.3 billion emergency crude repayment loan on August 16, 2023, aiming to support the Nigerian naira and stabilize the foreign exchange market. To manage this loan, NNPC plans to execute a forward sale of 90,000 barrels per day of Nigeria’s offshore crude oil under the production-sharing contracts (PSCs) with oil companies.

Charles Ogbeide, an energy analyst at a Lagos-based investment bank, commented on the broader impact of these strategies. He noted that local refineries, including the Dangote Refinery, suffer from a lack of crude supply due to Nigeria’s ongoing oil production challenges and the government’s decision to mortgage a significant portion of the country’s output for cash deals.

The Nigerian Upstream Petroleum Regulatory Commission (NUPRC) has attempted to intervene by announcing a new ‘Domestic Crude Oil Supply Obligation’ on March 26. This policy mandates that Nigerian crude suppliers prioritize local refineries before exporting oil. Devakumar Edwin, vice president of Dangote Industries, emphasized that while the 2021 Petroleum Industries Act supports this provision, it does not specify pricing, leaving refiners to purchase crude at international rates.

This situation is further complicated by the planned exit of several IOCs from Nigeria, including industry giants such as TotalEnergies, ExxonMobil, and Eni, all of which are in the process of divesting their onshore and shallow water assets to local entities amidst various delays and legal challenges.

Chevron continues to be actively involved in and supportive of NUPRC’s efforts to provide a transparent and economically sustainable crude supply for nearby refineries despite these changes. On June 10, a business representative reiterated Chevron’s dedication to this strategy, indicating continued industry support for initiatives to stabilize Nigeria’s oil supply situation.

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