Oil producers: Selling crude in naira to local refineries will worsen FX volatility

The Independent Petroleum Producers Group (IPPG) says the plan to sell Nigeria-denominated crude in naira will potentially worsen Nigeria’s currency volatility and foreign exchange receipts.

According to a statement on Monday, Abdulrazak Isa, chairman of IPPG, expressed the group’s concern in a letter to Gbenga Komolafe, chief executive officer (CEO), the Nigerian Upstream Petroleum Regulatory Commission (NUPRC).

On July 29, the federal executive council (FEC) approved a proposal by President Bola Tinubu directing the Nigerian National Petroleum Company (NNPC) Limited to sell crude oil to the Dangote Petroleum Refinery and other refineries in naira.

The sale of crude oil in naira will commence on October 1.

Speaking on the issue, Isa said such a move was not in tandem with the law.

He said a significant source of the government’s royalty and taxation earnings such as petroleum profit tax (PPT), company income tax (CIT), and hydrocarbon tax (HT), which are denominated in dollars, would be affected, and could further disrupt the fiscal regime.

“We are (also) aware of suggestions and proposal to sell crude in Naira, this is inconsistent with the law and will further put a materially significant strain on the efforts of the Government to manage the Naira as it will reduce Nigeria’s FX receipts from its highest FX revenue earner – the oil and gas industry, which is a significant source of the Nigerian Government’s royalty and income taxes earnings (PPT, CIT and HT) that are denominated in US Dollars,’’ Isa said. 

Isa also expressed concerns over recent industry developments, including NUPRC’s domestic crude oil refining requirements and production forecast for 2024, and the request for monthly quotations for local refineries.

“However, it is important to highlight certain contractual, legal, financial and factual incongruencies that exist in the increasing push and demands on petroleum producers and particularly on members of the IPPG,” he said.

“We are indeed constrained to say that the current position on this matter may inevitably lead to economic damage and self-sabotage of the Nigerian economy. This is simply an inescapable fact.’’

The IPPG chairman, citing a potential economic emergency, said he is aware that the group’s members are mandated to allocate crude volumes to the domestic market for the second half of 2024, in line with the NUPRC’s domestic crude oil supply obligations (DCSO) guideline.

Isa said under Nigerian law, “any supply of crude oil to a refinery even under a DCSO umbrella is required to be on a willing buyer and willing seller basis”. 

“This is the position of the principal law that cannot be derogated by regulation or guideline,” he said.

“Additionally, all producers (including NNPC Limited) are currently beholden to either fixed supply contracts or forward sale contracts to international traders who have stepped in to fill the financing gap to fund upstream investments since international finance institutions have reduced their funding positions to fossil fuels due mainly to ESG requirements.

“These contractual arrangements have become the necessary collateral obligations for producers (including NNPC Limited) and thus they currently have contractual rights to producers’ barrels of crude oil. 

“In addition, crude cargoes are normally sold at least three (3) months in advance and therefore your recent letters to some of our members received in August mandating DCSO volumes from July to December 2024 are not achievable, particularly as most, if not all, of the cargoes from July to October will already have been sold.’’

‘NIGERIA’S OIL PRODUCTION LEVEL WILL BE AFFECTED’

The IPPG chairman reaffirmed that any action that jeopardises the aforementioned funding mechanism would thereby jeopardise a substantial portion of Nigeria’s crude oil production. 

He also said that any unilateral directive to IPPG members to supply domestic refineries in violation of the primary legislation would have certain repercussions, such as producers’ failure to fulfil their offtake obligations to buyers of crude oil who have already entered into contracts.

Isa said it would also impact the ability to raise the current production levels from 1.3 million barrels of oil per day to the federal government’s projected 2-2.5 million barrels of oil per day. 

The oil producer said it could also put the country in an adversarial position with the international traders, who finance a significant portion of upstream activity, alongside their respective institutional investors. 

He said it could cause cross defaults across IPPG members and this would dry up a critical source of foreign exchange (FX) for the country.

“This FX shortage would be acutely felt given that NNPC Limited has engaged in (and is currently marketing) a series of Forward Sale Agreements which mean future revenues are being secured against upfront funding,” he said.

If IPPG members cannot augment this gap with their FX inflows, he said it creates a spiral of liquidity funding that would further impair the economy on a macro level.