Oil refining boom needs bigger upstream engine

Once upon a time, Nigeria had crude oil and no refineries; now Nigeria has refineries. What it increasingly lacks is enough dependable crude to feed them.

Africa’s largest oil-producing country has spent decades exporting raw crude and importing nearly all of its petrol and diesel, a paradox that has drained foreign exchange reserves and left households exposed to every swing in global fuel prices.

The start-up of the Dangote refinery in Lagos, the revival efforts at state-owned plants and a wave of small modular refineries have turned that story on its head.

Yet operators said the question now dominating the industry is whether the country can produce, move and price enough crude to keep them running.

Crude output has hovered well below the country’s OPEC quota for much of the past several years, hurt by theft, pipeline vandalism, underinvestment and ageing fields.

Much of what is produced is committed to long-term export contracts, and the volumes left for local buyers are contested. The result is an industry that has built the downstream but is fighting over the feedstock.

This conversation was the central message at the third Nigeria Oil Refining Summit in Nigeria’s commercial capital on Monday, where refiners, upstream producers and fuel marketers said the downstream success story is running into a supply problem that plants and policy alone will not fix.

Adegbite Falade, the chairman of the Independent Petroleum Producers Group (IPPG), said domestic refineries could require more than 1.5 million barrels of crude a day in the medium term, depending on rehabilitation progress, expansion activities, operating rates and the commissioning of more modular refineries.

That is close to all of Nigeria’s liquids output, which stood at 1.68 million barrels a day in August, according to the Nigerian Upstream Petroleum Regulatory Commission’s monthly production report, Falade said.

“That is not a marginal demand adjustment,” Falade said in his keynote address.

He warned that if refinery demand rises toward 1.5 million barrels a day while production stays near 1.6 million, the system will have “a very narrow margin” for export commitments, government revenue requirements, crude-backed financing, OPEC obligations and outages.

Falade said Nigeria has become a net exporter of petroleum products, ending decades of import dependence, and credited the removal of the petrol subsidy, a move toward a market-based foreign exchange regime, the Naira-for-Crude initiative and wider implementation of the Petroleum Industry Act.

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He singled out Aliko Dangote’s 650,000-barrel-per-day refinery as having “fundamentally transformed our energy landscape.”

He also pointed to the company’s initial public offering, which opened earlier this month, as a signal of the value now being created in the sector.

Momoh Oyarekhua, chairman of the Crude Oil Refiners Association of Nigeria (CORAN), which organised the summit, said the industry has rewritten a long-running story.

“For decades, Nigeria exported crude oil and imported refined products. Today, we in CORAN have changed that story,” he told delegates.

“Despite our abundant crude resources, some domestic refineries continue to face difficulties accessing crude oil on commercially viable terms,” Oyarekhua said. “At the same time, fuel imports persist while local refining capacity remains underutilised.”

Modular refiners, whose smaller plants have the least bargaining power with producers, are among those he said struggle most.

CORAN wants Naira-for-Crude fully institutionalised, with “transparent eligibility and access for qualifying domestic refineries, including modular refineries.”

CORAN laid out a long list of demands. They include a domestic crude pricing template that recognises quality, delivery point and avoided international logistics costs, and stronger enforcement of the Domestic Crude Supply Obligation under Section 109 of the Petroleum Industry Act.

The association also wants crude swaps and proximity-based supply, so that producing assets near a refinery can feed it directly “without unnecessary transportation through distant export infrastructure.”

The group also asked for a financing framework offering long-tenor loans and guarantees, shared pipelines and storage, strategic product reserves, and a national refining roadmap with targets for capacity, market share and imports. It also called for imports to be progressively reduced and “increasingly restricted to objectively determined domestic supply shortfalls and strategic-stock requirements.”

“Nigeria should not continue exporting crude, exporting jobs and importing the same petroleum products at considerable economic cost,” Oyarekhua said. “Our crude must increasingly power our refineries. Our refineries must increasingly supply our market.”

The oil producers’ response was that redistributing existing barrels will not be enough.

“Nigeria cannot refine barrels that are not produced,” Falade said. “The answer to rising domestic refining demand is not merely to redistribute a limited pool of crude. The answer is to create more barrels.”

The IPPG, an umbrella body of 34 indigenous exploration and production companies, says its members account for more than half of Nigeria’s oil and gas output.

Falade said reserves are not the constraint. The regulator’s published position as of Jan. 1 put crude and condensate reserves at about 37.01 billion barrels and natural gas at about 215.19 trillion cubic feet.

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“The challenge, therefore, is not whether the hydrocarbons exist underground,” he said. “It is whether we can convert reserves into production, production into secure supply, and secure supply into domestic refining competitiveness.”

Falade answered his own summit question, “Can Nigeria reliably feed its refineries?”, with a qualified verdict: “Geologically, yes. Technically, yes. Commercially and logistically, not yet there and certainly not by regulation alone.”

Falade said adherence to the domestic crude supply obligation rose to about 97.4 percent in the second quarter from about 41 percent in the first, citing the regulator’s figures.

He called for a shift “from mandates to bankable contracts” and “from opaque discounts to transparent market pricing.”

His four priorities were growing the production base, protecting and modernising evacuation infrastructure, building a true domestic crude market, and positioning Nigeria as a regional refining and petrochemical hub.

On the domestic market, he said aggregation, blending and swaps are essential, because “a barrel is not simply a barrel.”

A refinery needs “the right crude grade, in the right volume, of the right quality, delivered to the right location, at the right time and under the right commercial terms,” he said.

Hassan Mahmud, group chief economist at Dangote Industries Ltd., which oversees the Dangote refinery, said the largest operator is not asking for special treatment.

“This is not a call for subsidised crude,” he said. “It is a call for predictability, transparency, and commercially workable arrangement between producers and refiners.”

Mahmud argued that imported and locally refined products should compete “under equivalent transparent regulatory, quality, tax, and commercial regimes.”

He rejected the idea of swapping one form of dominance for another.