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NMDPRA should balance local content with market competition 15 Nov 2024

Last month, several media outlets reported that Dangote Refinery has sued its major industry regulator, Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA); Nigeria’s national oil company, Nigerian National Petroleum Company Limited (NNPCL); and some downstream oil and gas companies including Matrix Petroleum Services Limited, A.A. Rano Ltd., and others.

The main grouses against the regulator are two: the issuance of import licenses to NNPCL and other companies sued in the suit, and the imposition of levies (0.5% levy on wholesale buyers and off-takers as well as 0.5% levy for the Midstream and Downstream Gas Infrastructure Fund) on Dangote Refinery contrary to regulations governing the free trade zone where the refinery is located.

The refiner challenged the actions of NMDPRA in issuing the licenses when there was no evidence of product shortfalls in the country and stated that the regulatory agency neglected its statutory role of promoting local refineries. It, therefore, asked the court, among other reliefs, to nullify the import licenses of NNPCL and the other companies sued. The refinery, equally, sought a declaration that it was exempt from all federal, state, and local taxes in Nigeria by virtue of the Nigeria Export Processing Zone Act, Companies Income Tax Act, and other regulations.

But in a press statement released on 21 October 2024, signed by the Group Chief Branding and Communications Officer of Dangote Group, the petroleum refiner admitted filing the suit on 6 September 2024, and stated that upon the presidential directive through the Crude Oil and Refined Products Sales in Naira Initiative, parties have made progress in resolving their issues and parties in the suit have thus not been served with court papers.

It is clear from the press statement that the refiner intends to withdraw the suit from court.

It is certainly a welcome development that the issues surrounding the domestic crude oil supply obligations are being resolved without judicial intervention. However, it is important to dissect legal rights and obligations that inure in favour of parties. Apart from the issue relating to the levies, vis-à-vis the refinery’s location in the Lekki Free Trade Zone, which forms part of the suit, the issue surrounding the supply of refined petroleum products to the domestic market is also quite different from the issues surrounding the domestic crude oil supply obligations.

From the media reports on the suit, Dangote Refinery does not only believe that it has a right in law, or at the very least priority right in law, to Nigeria’s crude oil, but it also believes that it has the right in law to the Nigerian market to supply the refined products such that there should be no importation of refined crude unless there is a shortfall. And it was willing to test this in court.

While these issues are being determined, the concern about the refinery seeming to be a monopoly has refused to go away. Have we by law created a monopoly or is this a misinterpretation of some provisions of the Petroleum Industry Act (PIA)? It is important that these questions are settled, judicially or otherwise, in order to avoid a future disruption to agreed modus operandi when there is any change in the actors or players.

There is nothing more desirable than making Nigeria a self-sufficient nation with regard to petroleum products; to transpose her from heavy reliance on imported refined petroleum products and shift its trade balance. But how far can we control the operations of the market in order to achieve this goal? And how far can we use the instrument of legislation without disrupting the nature of our free market?

For example, Section 317 (8) of the PIA, which the suit filed by Dangote Refinery relies upon, provides that NMDPRA may apply the Backward Integration Policy (BIP) in the downstream sector to encourage investment in local refining. Subsection (9) then provides that licence to import any product shortfalls may be assigned to companies with active local refining licences or proven track records of international crude oil and petroleum products trading.

Backward integration is a corporate strategy now employed by governments to improve and promote local production. As a business concept, backward integration aids businesses in controlling more of their supply chain mostly by either outrightly purchasing their suppliers or by internally producing segments of their supply chain.

The Nigerian government has implemented the BIP in several ways. In 2002, the policy was implemented in the cement industry, such that import licences for the products were to be allocated to only importers who show proof of building factories for local cement manufacturing in Nigeria. There was increased economic activity in the sector linked to the policy, including the privatisation of the then-moribund government-owned cement plants, which has led to non-reliance on imports to meet local cement supply and now more than 95% of the raw materials used for cement production in Nigeria are sourced locally.

Backward integration has also proved beneficial in food manufacturing and processing, helping to develop the country’s agriculture. A number of organisations source their materials locally with some cultivating crop production to supply their industries. For instance, Nigerian Breweries sources its sorghum and barley from Nigerian farmers, and Flourmills and Dangote Sugar have invested in sugar cane plantations.

In the oil and gas industry, the Nigerian Oil and Gas Industry Content Development Act has been touted as having entrenched and deepened backward linkages in different parts of the sector, especially in the oil services subsector. A study published in 2017 estimated that local capacity utilisation grew by 400% in the six years following the introduction of the local content policy.

The impact of backward integration in promoting local industries, increasing tax revenue, building local capacity and technologies, reducing the demand for foreign exchange, boosting employment, and minimising capital flight is acknowledged. Without prejudice to these benefits, however, the implementation of the policy should be guided by specific industry circumstances and the impact on pricing for consumers.

The discretion given to NMDPRA to implement or apply the backward integration policy in the downstream petroleum sector, in order to encourage investment in local refining, must be balanced with its statutory responsibility as prescribed in Sections 210 and 211 of the PIA to ensure the development and maintenance of competitive markets. The PIA empowers the regulator to prevent anti-competitive behaviour with respect to midstream and downstream petroleum operations; to prevent or mitigate abuse of market power; to arrest situations of abuse of dominant power and restrictive business practices; and to prevent the continuance of any anti-competitive activity.

With such detailed provisions, it is doubtful that the intention of the lawmakers in granting the regulator discretionary powers to apply the Backward Integration Policy was to limit local supply of refined crude to a singular source.

The implementation of the policy should encourage investment and local participation in an industry to improve production and foster competitive pricing for the benefit of consumers. Where the policies provide long-term benefits for the sector and its participants while imposing higher costs on consumers, then the interest of the consumers is not being protected. A monopoly almost always leads to uncompetitive, higher prices for consumers.

The NMDPRA, given its holistic oversight of the industry, and because of its statutory powers and responsibilities, is best placed to determine the issuance of licenses, including import licenses. On one hand, the issuance of import licences promotes competition by allowing different players and minimising the risks of monopoly, short-term supply disruptions, and uncompetitive pricing. On the other hand, if domestic production does meet supply, imports could distort the market and affect domestic market players’ profitability. Only NMDPRA is statutorily and properly positioned to balance both sides.

Unless there is a clear case of abuse of its powers, the timing, mode, and extent of NMDPRA’s use of the BIP should be unfettered and definitely not be made subject to one private company’s corporate needs or expectations.

Funmilayo Odude is Partner at Commercial and Energy Law Practice (CANDELP).