The Domestic Crude Oil Supply Obligations (DCSO) is a provision in sections 109 of the Petroleum Industry Act signed of 2021 that requires all joint venture partners in unregistered joint ventures and production sharing contract to contribute a specific percentage of royalty and cost oil to satisfy the demands of domestic refineries with active licensees producing petroleum products in Nigeria.

The Domestic Crude Oil Supply Obligation came from the thinking of creating a national oil supply curve that will provide feedstock to backwardly integrate the production of petroleum derivatives in Nigeria, and reduce to the barest minimum the importation of nine (9) products that forms the energy basket of Nigeria, costing $28bn in annual imports.

Unfortunately, even the small modular refineries operating in Nigeria that all in total have thirty-eight thousand, five hundred (38,500) barrels in daily refining capacity are unable to get crude oil feedstock within the DCSO framework. Now, some will argue that the modular refineries are not as consequential as a commercial refinery because they lack:

• Crude distillation unit
• Naphtha hydrotreating unit
• Vacuum distillation unit
• Catalytic Reforming Unit
• Fluid Catalytic Unit

For the purposes of engaging in either physical or chemical separation of larger molecules into smaller molecules that converts naphtha (which is the base chemical compound) into higher distillates like premium motor spirit et al. The reason they will argue this is because they will say, other than the fact that a modular refinery lacks a catalytic reformer that can do secondary refining, 38,500 barrels of crude oil will only produce 2.9m litres of PMS at full capacity utilization – that represents only 8.4% of Nigeria’s daily consumption (if at all it could).

It becomes clear that the petroleum regulations guidelines that forms the basis on which NUPRC issued a gazette for DCSO on sections 109 of the PIA has not fully been tested because the 210,000 barrels refining capacity of the Port-Harcourt refinery is defunct and moribund and has consumed nearly 12 trillion naira (that at the time it was exchanged for USD is equivalent to what Dangote spent building a brand-new refinery in Lagos). The question now becomes – why is Dangote importing crude oil feedstock for the refinery in Lagos from the same America that was spending up to $1bn per day as at 2008 importing crude oil, and had Nigeria has one of its major oil suppliers?

Simple answer – Over time, the issues around lack of investments in deep offshore fields, insecurity that has bedeviled the Niger delta, problems with local content contracting and how that has created a system of middle-men racketeering, issues around carried cost and carried interest and how that has delayed JV cash calls to operators has led to IOCs divesting from onshore assets, and not committing new capital to fields offshore. Then, why are the domestic refineries not getting feedstock from the share of the current production done daily in Nigeria.

1. NNPC has over the last twenty years engaged in crude oil swap deals like Oil Processing Agreements that had thirteen (13) refineries offshore collecting a fixed amount of crude, and delivering PMS, AGO and Jet A1 in exchange, to the Direct Sale, Direct Purchase arrangement that replaced the refineries with traders, and caused the country to migrate its fiscal strategy from revenue to debt.
2. NNPC has pursued forward sale agreements where it pledged future production in reserve-based lending for frontloaded cash to finance all kinds of projects from capital to recurrent, and even liquidity that the Central Bank required to contribute to clearing out outstanding non-deliverable forward of banks. The total of future production pledged for so far $12bn in FSA’s come to 250m barrels of crude oil feedstock that should normally go to either domestic refineries or export markets.
3. NNPC allocated and sold crude oil under the domestic crude oil supply obligations at a price that is not a reflection of the prevailing market conditions based on sections 109 (4)(b) of the PIA.

Question now becomes: Is the excuse of the Joint Venture operating partners in activating stabilization clauses on areas like pre-export financing to international traders (who are offtakers) superior to the law as specified in sections 11 & 12 of production regulations that governs DCSO? The answer is no! The whole idea of the national oil supply curve is to ensure that Nigeria has enough crude oil feedstock to refine and satisfy domestic demand for petroleum products (especially the transportation fuels)

If a nation like the USA that set up Energy Policy and Conservation Act of 1975 following the 1973 Saudi Oil embargo to provide for storage tanks that can hold up to 714m barrels of crude oil at any given time, is still piling up crude oil to supply the markets in times of shock and act as a catalyst for regulating prices in the international market, is still maintaining a national oil supply curve at 14.4m barrels of production per day, why are we as a country allowing operators upstream to allow pre-export financing in stabilization clauses overriding the law as specified in the guidelines that govern domestic crude oil supply obligations.

Nigeria has the largest population in Africa at 209m people growing at 3% per annum that require up to 35m litres of pms daily and about 15m liters of diesel per day. It’s imperative we migrate our national strategy from crude oil swaps, forward sale agreements and non-compliance to DCSO for ensuring that domestic refineries are provided with the feedstock they require, and that at least 75% of their exports from net export proceeds are repatriated back to originating banks for the Central Bank to use in settling balance of payment obligations.

And this is especially important because balance of payments from the balance of trade numbers put Nigeria at requiring up to $7bn per annum to meet up with what is called the Guidotti level in Central Banking – the level at which your net external reserves is equal to your balance of payment obligations for one single year.

It’s essential as the nuprc starts the process of consultations with stakeholders upstream, it will follow the provisions of sections 11 & 12 of the DCSO guidelines that requires it to collect a crude oil daily shortfall from domestic refineries and issue a request for quote to lessees or licensees upstream, to meet up such obligations, failure of which they don’t get export permits.