Why Domestic Refineries Still Face Crude Shortages: Lessons From The Pia's Domestic Crude Supply Obligation In Q1 2026

INTRODUCTION

The supply of crude oil to domestic refineries is sacrosanct to the fulfilment of Nigeria's Domestic Supply Obligation as enshrined in the Petroleum Industry Act (PIA) 2021 and reinforced by the supporting regulatory framework. However, developments in Q1 2026 have exposed a troubling gap between the Domestic Crude Oil Supply Obligation (DCSO) framework and its practical implementation.

This article critically analyses the key provisions of the PIA 2021 on the Domestic Crude Supply Obligation, examines the regulatory mechanisms put in place to operationalise it, and highlights the persistent disconnect between statutory intent and on-ground reality in the first quarter of 2026. It concludes with actionable recommendations aimed at bridging these implementation gaps.

THE LEGAL FOUNDATION

1. THE PETROLEUM INDUSTRY ACT 2021

The Petroleum Industry Act (PIA or the Act) 2021 establishes the statutory framework for the Domestic Crude Oil Supply Obligation (DCSO). Upstream lessees are required to dedicate a portion of their crude oil production to meet the needs of operating domestic refineries. While the obligation itself is mandatory, the Act provides that the actual supply and sale of crude oil shall be governed by commercially negotiated agreements between the lessees and holders of crude oil refining licencessup>1.

The Act further empowers the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) to make regulations for the effective implementation of this obligation. The Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA) plays a complementary role by regularly supplying the NUPRC with data on the crude oil requirements of refineries in operation, including any reported shortfalls or inadequate supply conditions². Importantly, the Act restricts the purchase of domestic crude oil to holders of crude oil refining licences whose refineries are actually in operation. The commercial terms of supply, particularly pricing, must have regard to the prevailing international market price for similar grades of crude oil. Payment may be made in United States dollars or in Naira as agreed by the parties, and the use of payment guarantees, or other security arrangements is expressly contemplated³.

2. THE PRODUCTION CURTAILMENT AND DOMESTIC CRUDE OIL SUPPLY OBLIGATION REGULATIONS, 2023

This Regulation was made by the Nigerian Upstream Petroleum Regulatory Commission (NUPRC or the Commission). It provides detailed operational rules for implementing the Domestic Crude Oil Supply Obligation (DCSO) under Section 109 of the PIA 2021. The Regulation subjects all crude oil produced by a lessee to the DCSO imposed by the Commission, while allowing the lessee to export any surplus volume beyond its domestic obligation. To enforce compliance, it gives the Commission power to curtail exports by reviewing and endorsing export permit applications, ensuring that permitted export volumes respect the DCSO⁴.

Transparency is a central feature of the framework. It requires the Commission to publish, twice yearly on 1^st January and 1^st July, detailed domestic crude refining requirements of all operating refineries. This publication, which must appear on the Commission's website and in three national newspapers, includes the number of refineries, their nameplate and forecasted daily requirements, locations, and crude specifications. Corresponding production forecasts and crude quality details from each lessee are also published to facilitate direct commercial transactions between producers and refineries⁵. Sales under the DCSO are to be conducted on a commercially negotiated basis, with pricing referenced to the prevailing international market price for similar crude grades⁶.

Where a shortage or inadequate supply to operating refineries is reported by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), the Regulations set out a structured response. The Regulation requires confirmation of the shortage details, after which the Commission may issue a Request for Quotations (RFQ) to producers⁷. If voluntary negotiations fail to resolve the shortage, the Commission can impose mandatory supply obligations on selected lessees, taking into account proximity, crude quality matching, existing contracts, and production quotas⁸. Once imposed, the lessee must sell the allocated volume to the nominated refinery^9>, prioritise domestic supply over exports when production falls below quota¹⁰, and submit detailed monthly reports on its production performance, domestic deliveries, and exports¹¹. In an effort to strengthen implementation, the NUPRC issued the Guidelines for the Operationalisation of Domestic Crude Oil Supply Obligation and an Approved Framework for Seamless Operationalisation in July 2024. Minor amendments to the 2023 Regulations were also proposed in August 2024. These instruments were intended to provide clearer timelines, stakeholder coordination, and practical enforcement mechanisms.

THE REALITY OF THINGS IN Q1 2026

Recent developments in Nigeria's downstream petroleum sector reflect the ongoing tension between regulatory policy, market supply realities, and domestic refining capacity. The Dangote Petroleum Refinery reportedly raised concerns over the continued issuance of fuel import licences by the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA), warning that such imports undermine domestic refining investments. In response, the NMDPRA clarified that no new petrol import licences were issued in 2026, with only previously issued licences still valid until exhaustion.^12] Nigeria's oil sector continues to reflect a deep supply paradox. Despite domestic production averaging about 36.5 million litres per day in February 2026, imported petroleum products continue to arrive to bridge supply gaps, indicating that national consumption remains significantly higher. This is further underscored by crude oil imports valued at ₦5.734 trillion between January and December 2025, even as Nigeria maintained its position as Africa's largest crude producer. The situation persists despite the Federal Government's naira-for-crude policy aimed at prioritising local refining, with domestic refineries still constrained by feedstock shortages.¹³

The Dangote Refinery reportedly received only about five crude cargoes per month, compared to the estimated 13 required to meet optimal domestic demand, while several modular refineries fared even worse. Some modular plants, including OPAC, reportedly received little or no allocation under the DCSO framework or the naira-for-crude arrangement, leading to low-capacity utilisation and intermittent shutdowns.¹⁴ Data from the NMDPRA indicates that modular refineries supplied an average of 2.37 per cent of Nigeria's diesel demand between November 2025 and January 2026, based on about 393,000 litres per day against national consumption of approximately 17 million litres per day. Only three modular refineries—Waltersmith, Edo Refinery, and Aradel, were operational during the period, while OPAC and Duport remained inactive, underscoring limited output from the sub-sector.¹⁵ Industry stakeholders, including the Crude Oil Refineries Association of Nigeria (CORAN), maintain that modular refineries have the capacity to supply up to 10 per cent of national diesel demand but are constrained by inadequate crude feedstock. CORAN has therefore continued to advocate for the extension of the naira-for-crude policy to modular refineries to enhance production, reduce import dependence, and improve domestic diesel availability for industrial and agricultural use.¹⁶

RECOMMENDATIONS

To close the persistent gap between the DCSO framework and actual crude supply to domestic refineries, a few practical steps are necessary. First, given that the Petroleum Industry Act already provides for the Domestic Crude Supply Obligation (DCSO), enforcement should be strengthened through closer coordination between the NUPRC and the NMDPRA, including the publication of quarterly crude allocation schedules and transparent reporting on compliance and enforcement actions. This should be supported by clear penalties for upstream producers who fail to meet domestic supply obligations, as well as mechanisms to discourage diversion of crude away from domestic refining requirements.

Second, the naira-for-crude arrangement should be expanded beyond major refineries to explicitly include modular refineries under a structured and standardised allocation framework, in order to reduce feedstock exclusion and improve distributed refining capacity. Third, import licensing should be restructured as a strict last-resort mechanism, conditioned on demonstrable domestic supply shortfalls and subject to tighter time limits, in line with the policy intent of prioritising local refining under the PIA framework. Finally, the government could consider linking DCSO compliance to new upstream incentives or fast-tracking the reactivation of dormant oil assets to increase overall production available for domestic supply.

CONCLUSION

The Domestic Crude Oil Supply Obligation under Section 109 of the PIA 2021 and the 2023 Regulations represent a well-intentioned effort to guarantee feedstock for Nigeria's growing refining capacity. Yet, the experience of Q1 2026 shows that the real challenge lies not in the law itself, but in its consistent and effective implementation. Bridging this gap will require stronger enforcement, better inter-agency coordination, and greater transparency from all stakeholders. If these practical steps are taken, Nigeria can move closer to the PIA's vision of energy security, reduced product imports, and a truly vibrant domestic refining sector.

Footnotes

1. Petroleum Industry Act, S. 109(1)

2. Ibid, S.109 (2) & (3).

3. Ibid, S. 4.

4. Production Curtailment and Domestic Crude Oil Supply Obligation Regulations, 2023, Reg. 9(1) & (2).

5. Ibid, Reg. 10.

6. Ibid, Reg. 10(5)

7. Ibid, Regs. 11 & 12.

8. Ibid, Reg. 13.

9. Ibid, Reg 14.

10. Ibid, Reg. 15.

11. Ibid, Reg.16.

12. The Punch, "Fresh fuel Import Licences Trigger Dangote Export Threat", 23 March 2026. Available at: https://punchng.com/fresh-fuel-import-licences-trigger-dangote-export-threat/ Accessed 30^th March 2026.

13. The Punch, "Nigeria's Refineries Spend N5.7tn on Foreign Crude Imports", 18 March 2026. (For continued imports despite domestic capacity and feedstock constraints.) Available at: https://punchng.com/refineries-spend-n5-7tn-on-foreign-oil-despite-naira-for-crude-policy/ Acccessed 9^th April 2026.

14. Ibid.

15. The Punch, "NMDPRA Data Expose Weak Modular Refinery Contribution", 27 February 2026 (updated in March coverage). Available at: https://punchng.com/nmdpra-data-expose-weak-modular-refinery-contribution/ Accessed 8^th April 2026.

¹⁶ The Punch, "Modular Refineries can Meet Over 10% Diesel Needs – CORAN", 5 March 2026. Available at https://punchng.com/modular-refineries-can-meet-over-10-diesel-needs-coran/ Accessed 8^th April 2026.

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