The federal government’s push to sell crude oil in naira is facing a brick wall of dollar-denominated regulatory and royalty fees, senior industry, according to a source.
Oil transactions in Nigeria are often conducted in US dollars, given the international nature of the oil market and the global reliance on the dollar for such trade.
However, the Federal Executive Council recently adopted a proposal by President Bola Tinubu to sell crude to Dangote refinery and other upcoming refineries in naira.
The federal cabinet approved that the 450,000 barrels meant for domestic consumption be offered in naira to Nigerian refineries, using the Dangote refinery as a pilot. The exchange rate will be fixed for the duration of this transaction.
On paper, this looks simple. However, Nigeria has struggled to source crude to refine its crude locally and spends billions of dollars annually importing finished products, despite its status as Africa’s largest oil producer.
More than one week after the policy announcement for naira crude sale, the plan is yet to take effect as senior industry experts and government officials are grappling with the situation’s complexities.
“The reality of the oil and gas industry is that it’s heavily dollarised. International oil companies (IOCs) producing more crude oil have existing contracts that stipulate dollar payments of royalties, and abruptly changing this could lead to legal and contractual disputes,” a senior oil executive exposed to the Nigerian upstream business said in a statement.
He added, “There is no idle 450,000 bpd anywhere for local refineries.”
Findings show that the Petroleum Industry Act (PIA) introduced a price-based royalty ranging from zero to 10 percent, which is expected to be credited to the Nigerian Sovereign Investment Authority (NSIA).
This royalty is tiered, with rates increasing as the oil price rises. For oil prices below $50 per barrel, no royalty applies. At $100 per barrel, a 5 percent royalty is imposed, and this increases to 10 percent at $150 per barrel.
“The policy to sell crude in Naira is a farce. Some oil companies pay royalties that are up to 20 percent in dollars,” Kunle Ajayi, a senior financial analyst attached to one of Nigeria’s biggest consulting firms, said.
Another major challenge facing naira crude sales is the payment for several services offered by the Nigerian Upstream Regulatory Services Commission (NUPRC) to oil companies in naira.
For instance, the conversion of an oil prospecting license (OPL) to an oil mining lease (OML) requires a statutory application fee of $1,000,000.
Similarly, the assignment of interests in licenses and leases, specifically for marginal fields, demands a fee of $2,500. In the case of oil prospecting licenses (OPL), this fee rises to $5,000, and for oil mining leases (OML), it is set at $10,000.
Furthermore, the renewal of an OML involves a statutory application fee of $2,000,000.
“NUPRC has to adjust its policy on charging fees in naira. The upstream regulator should not be a revenue collection agency,” Kelvin Emmanuel, CEO of Dairy Hills said.
He added, “All government revenue collection should be centralised into the proposed Nigeria Revenue Service, to reduce the incentive for anti-ease of doing business and reduce incidence of over-invoicing of operational and capital expenses.”
Emmanuel further explained that the government does not have control over the cost operators, especially IOCs, incur.
“The government does not owe domestic refineries any right of first refusal on their feedstock. Royalty and tax oil are what the government is entitled to,” Emmanuel noted.
He advised President Tinubu to follow up with the order given by the FEC to ensure that the oil that is currently allocated to the ‘dead’ government-owned refineries at a discount in naira is re-allocated to Dangote Refinery in line with Section 109 of the PIA.
“It is essentially a policy choice between substantial naira transactions versus Nigeria’s need for foreign currency,” said Ayodele Oni, energy lawyer and partner at Bloomfield, a Lagos-based law firm.
Other experts said the federal government cannot dictate to IOCs to whom they should sell their crude and in what currency.
Aisha Mohammed, an energy analyst at the Lagos-based Centre for Development Studies, admitted that the motive for sales of crude oil in local currency is to help create a seamless approach to accessibility and supply to local refineries, noting that the fundamental challenge remains the IOCs’ autonomy in their commercial decisions.
“The government cannot compel IOCs to sell their crude oil to specific buyers or in a particular currency,” Mohammed explained. “These are commercial entities with the freedom to choose their customers and the currency of payment.”
On Wednesday, the Crude Oil Refinery-Owners Association of Nigeria (CORAN) said that none of their members has begun receiving the sales of crude oil in the local currency, naira.
“We have mentioned where we are on several fronts. As it stands right now, none of our members has started uplifting crude oil in Naira. Of course, we did mention that the pronouncement was welcoming, but there were still a few steps that had to be taken for it to become implementable,” Echie Idoko, public secretary of CORAN, said in a statement.
He added, “It was just a Federal Executive Council statement. There is a need for a regulatory framework that would enable us to access crude in Naira.
“There has to be a guideline as to how we can access. We have to know exactly what quantity is coming to us in Naira. All those details have to be worked out. We know it’s a recent pronouncement, so we will give the government the benefit of the doubt.
“We are hoping that in the coming days, they will be sitting down with us as stakeholders because you can’t shave a man’s head in his absence. We are hoping that our members should be part and parcel of the processes,” Idoko said.
Efforts to reach Olaide Shonola, head of the NUPRC’s public affairs and communications unit, did not pick up phone calls when our correspondent contacted her.
Olaitan Ibrahim