Against the tide
The Dangote Oil Refinery has called on the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) to force producers to abide by a law…
The Dangote Oil Refinery has called on the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) to force producers to abide by a law stipulating they supply local refineries, saying that lax enforcement was raising operational costs. The 650,000-barrel-per-day capacity refinery, built for $20 billion, has struggled to get sufficient supplies from Nigeria, where vandalism and low investment impede oil production. Dangote Refinery accused the NUPRC of failing to enforce the Domestic Crude Supply Obligation (DCSO), which requires crude oil producers to supply domestic refiners with a portion of their production.
Nigerian TV and radio have been filled with commentary on the dispute between Mr Dangote and the NNPC/NMDPRA. Some accuse Mr Dangote of failing to conduct adequate feasibility studies that would have shown insufficient domestic supply for his refinery. The NNPC’s recent moves to secure USD loans using future crude sales as collateral suggest they are unwilling to provide Dangote with the required feedstock despite directives from the federal government. Many Nigerians are understandably upset, labelling NNPC/NMDPRA leaders as members of an elusive cabal that runs Nigeria’s oil and gas sector in their own interest, stifling investments that could lead to its development. However, Dangote failed to mention that the DSCO does not compel IOCs to supply crude to domestic refiners at sub-market rates or in domestic currency. If he can agree to a market-level, foreign exchange-denominated deal with the IOCs, it is likely that the Dangote Refinery will secure supply from them. The Dangote Refinery needs to avoid relying on the government to compel partners to deal with them. There were similar accusations from the NUPRC about attempts to force marketers to buy products from them instead of offering commercially favourable deals. The oil industry operates very differently from most commodity industries in which Dangote previously played. It involves powerful players with deep pockets and an international value chain that needs FX to service, selling a globally in-demand product. They will not sell to him at the opportunity cost of losing better deals elsewhere. Additionally, the DCSO that DRL quotes has caveats around when IOCs can be compelled, specifically in times of severe stress to the Nigerian state, and it would be a stretch to prove that DRL’s distress constitutes such stress.