Nigeria is considering changes to the way crude oil is allocated and priced for domestic refiners, in a move that could reduce feedstock costs and improve the supply of crude to facilities such as the 650,000-barrel-per-day Dangote Refinery.
The proposed changes are expected to come under discussion this week as regulators review the country’s domestic crude supply obligation, which requires oil producers to make crude available to Nigerian refineries before exporting.
The review comes as refiners continue to grapple with the cost and logistics of obtaining locally produced crude, even as Nigeria seeks to expand domestic refining and reduce reliance on imported petroleum products.
Pricing seen as key obstacle
Dangote Refinery has previously said Nigeria’s existing pricing structure adds between $3 and $4 per barrel to its crude costs because purchases are often routed through trading arms associated with producers.
Industry analysts have similarly identified pricing, rather than a lack of physical crude, as one of the biggest obstacles facing domestic refiners.
The proposed reforms could therefore provide relief to refiners while making it easier for producers to meet their domestic supply obligations.
Dangote Refinery, Africa’s largest, has at times operated below its potential because of difficulties securing adequate volumes of Nigerian crude.
The Crude Oil Refinery-owners Association of Nigeria (CORAN) said several proposals are being considered as part of the regulator-led review.
Direct crude deliveries proposed
One proposal would allow a producer connected to an international oil company's network to deliver crude directly to a nearby refinery, with the volumes reconciled later at the terminal.
According to CORAN spokesperson Eche Idoko, the arrangement could reduce dependence on trunk pipelines and other transportation infrastructure while bringing crude physically closer to refineries.
A second proposal would provide refiners that collect crude directly from production facilities with a discount reflecting freight and handling costs incorporated into Brent-linked pricing but not actually incurred by the refinery.
“This could be a win-win for both the producers and refiners,” Idoko said.
The proposals are aimed at addressing the gap between the headline price of crude and the actual costs incurred when oil is delivered directly to a nearby refinery.
Domestic supply compliance improves
The review is taking place as compliance with Nigeria’s domestic crude supply framework has improved sharply.
Data released on Monday by the Nigerian Upstream Regulatory Commission (NUPRC) showed producer compliance had risen to more than 90%, compared with less than 43% in the previous quarter.
The figure measures actual crude deliveries against volumes allocated by the regulator. It does not indicate how much of refinery demand has ultimately been met.
Under the current framework, producers are required to offer allocated crude volumes to domestic refineries, with transactions conducted under a “willing-buyer, willing-seller” arrangement.
The improvement in compliance suggests producers are increasingly meeting their formal obligations, but refiners argue that the terms and economics of those transactions remain critical to ensuring that crude actually reaches processing facilities at competitive prices.
Regulator considers implementation challenges
A NUPRC official confirmed that the proposed changes “are on the table”, largely following calls from inland refiners seeking easier access to crude.
However, the official cautioned that implementing the proposals would require regulators and industry participants to resolve issues surrounding differences in crude quality and corresponding pricing adjustments.
Those considerations are important because Nigerian crude grades vary in characteristics, while refineries are designed to process particular blends and specifications. Any pricing mechanism would therefore need to account for quality differences as well as transportation and handling costs.
The outcome of the review could have wider implications for Nigeria’s effort to build a stronger domestic refining industry. Easier access to competitively priced crude would improve the economics of local refineries, potentially increase domestic fuel production and reduce pressure on the country’s reliance on imported refined petroleum products.
For producers, meanwhile, a more efficient domestic supply system could provide a clearer route to meeting regulatory obligations while maintaining commercial returns on crude sales.
With the government seeking to expand domestic refining capacity, the debate over crude pricing and supply is likely to remain central to Nigeria’s efforts to transform its oil industry from one heavily reliant on crude exports into a more integrated production and refining market.