The Legal and Regulatory Framework for the Establishment of Modular Refineries in
The benefits of Modular Refineries in present times have stimulated discussions on establishing
modular refineries in the Niger Delta region of Nigeria (the Region) in order to boost the
Country’s crude oil refining capacity and meet its local consumption demands. At a Stakeholders’
Workshop in 2015, the former Director of the Department of Petroleum Resources (“DPR”),
Mr George Osahon stressed the importance of investment in modular refineries to curb the
operation of illegal refineries in the Region. This importance has been reinforced by the present
administration, which has repeatedly emphasised its interest in reducing importation of refined
The Nigerian National Petroleum Corporation (NNPC) in April 2017 stated that Nigeria’s four
refineries currently operate at about 37.67 percent less of their combined capacity thereby
producing far less than their installed capacity per day. Consequently, existing refineries are
unable to meet the Country’s refined products’ demand at the current rate of performance thus
forcing the country to rely on imports.
Furthermore, the cost of repairs of the four refineries for optimal production remains
discouraging. Nearly $2 billion has been spent on ‘Turn Around Maintenance’ (TAM) of the
existing refineries between 2000 and 2016, without adequate returns. In contrast to the
conventional refineries, modular refineries with about 30,000 bpd capacity may be built within an
18 month period at a cost of about $100 - $250million. In addition, investors in modular
refineries may relatively be assured of off-takers for their output in the local and regional market.
The Legal Framework
Applicable laws in the Nigerian oil and gas sector as it relates to the building and operation of
refineries are the Petroleum Act 1969, the Hydrocarbon and Oil Refineries Act, the Petroleum
Refineries Regulation 1974, and the Department of Petroleum Resources (DPR) Guidelines for
the Establishment of Hydrocarbon Processing Plants (Petroleum Refinery and Petrochemicals).
The Petroleum Act 1969
Section 3(1) of the Petroleum Act stipulates that no refinery shall be constructed or operated in
Nigeria without a licence granted by the Minister of Petroleum Resources (the Minister). Section
3(3) of the Act further affirms the power of the Minister or other regulatory body to impose an
application fee for the licence to be granted for the construction or operation of a refinery.
In addition, Section 3(4) provides that the provisions regarding refineries (Section 3) are only in
addition to the provisions of the Hydrocarbon Oil Refineries Act thereby acknowledging that the
provisions of the Act are not all encompassing as far as the construction and operation of
refineries are concerned.
Section 9 of the Act empowers the Minister to make regulations concerning refineries and
refining operations. Furthermore, where two or more refineries are in operation, the Minister is
also empowered to specify the proportion or quantity of crude oil to be supplied to each
refinery, the share of each refinery in the total market and the price of refinery products.
The Hydrocarbon Oil Refineries Act
Section 1 of the Hydrocarbon Oil Refineries Act (HORA) provides that no person shall refine
any hydrocarbon oils save in a refinery and under a licence issued under the HORA. The licence
is referred to as "a Refiner's Licence” and it is the lack of same that accounts for the large
number of illegal refineries being run by oil vandals in the Niger Delta.
Application for the Refiner’s Licence is to be made to the Nigerian Customs Service Board (the
Board) in respect of the premises to be used for the refinery, according to Section 2 of the
HORA. The Board is to examine the premises and equipment of the prospective Licensee and
upon satisfaction issue the Refiner’s Licence after the payment of a N500 (Five Hundred Naira)
Where the Board is unsatisfied with the conditions at the proposed premises for the refinery, it
may refuse to grant the application and communicate its decision in writing to the applicant.
The Department of Petroleum Resources (DPR) Guidelines for the Establishment of
Hydrocarbon Processing Plant 2007 (“The DPR Guidelines”)
The DPR Guidelines were issued in 2007 pursuant to Regulations (2) and (3) of the Petroleum
Refining Regulations, 1974.
Section 1.3 of the DPR Guidelines describes the approval process for the issuance of licences to
construct and operate refineries in Nigeria. The process is designed to ensure that investors
adequately understand the sector as well as the technical, economic, sociological and
environmental implications of the project. In addition, maintenance provisions of the DPR
Guidelines required in protecting the health of the operating staff and safety of refinery must
also be observed.
There are three (3) stages provided by the DPR Guidelines for the construction and operation of
refineries. These are:
a) License to Establish (“LTE”);
b) Approval to Construct (“ATC”); and
c) License to Operate (“LTO”).
Only persons who have successfully met the regulatory requirements and have discharged all
obligations at the LTE stage can advance to the ATC phase and must similarly fulfil all
conditions at that stage before applying for an LTO.
License to Establish (“LTE”)
According to Section 2.1 of the DPR Guidelines, the purpose of the LTE approval stage is to
confirm general feasibility of the proposed project, market plan, products specifications, site
selection, proposed crude oil (or feedstock) supply plan and product evacuation plan, preliminary
safety and environmental impact statement, and organisational plans.
The DPR will carry out site inspections as well as review necessary documents in order to grant
the LTE to the refinery investor. Where the DPR is unconvinced about the ability of an investor
to implement the project satisfactorily, show reasonable plans for sourcing crude oil to be
processed at the refinery or exhibit the capacity to comply with environmental safety demands
for instance, the application shall not be recommended to the Minster for a grant of the LTE.
In addition, Section 2.1.1 of the DPR Guidelines provides for the application and statutory
payments to be made by applicants for a refinery licence which includes a statutory application
fee of $50,000 (Fifty Thousand Dollars) for the LTE stage and a DPR service charge of
N500,000 (Five Hundred Thousand Naira).
It is noteworthy that a note in the DPR Guidelines stipulates that the requirement for the
payment of a refundable deposit of One million dollars only (US $1,000,000) for every 10,000
bpsd refinery capacity for LTE, Plant Relocations and ATC Revalidation had ceased to be
effective since 2009. As at May 2015 however, the DPR at a ‘Workshop on the Guidelines for
Establishing Modular Refineries in Nigeria’ appeared to have made reference to the $1million
refundable fee. In addition, the DPR was quoted to have stated that it reduced the licensing fee
for modular refineries from $1million to $500,000. It is therefore advisable that the DPR clarifies
the seeming inconsistency between the provisions of the Guidelines and statements credited to
At the LTE phase, the DPR will review the Preliminary Investment and Support package to be
submitted by the refinery investor. The package is to contain a Preliminary marketing plan
indicating the target market for the output of the refinery, the location of the proposed refinery
site and proof of its acquisition, infrastructural support strategy, a preliminary organisation plan
including staff training plans and a financial plan. Applicants are also to state plans for
community development and local content input. In addition, other documents to be presented
to the DPR for review include the Basic Design presentation showing process configurations
and product specifications; a Basic Design and Concept selection Package showing the refinery
design philosophy as well as project implementation schedule; and statements on Safety, Health
Where the investor has satisfactorily complied with the above requirements, the DPR will
recommend the investor’s application to the Minister in order to be granted the LTE following
which the applicant may proceed with the Detailed Engineering. The LTE granted by the
Minister or his designate is valid for a period of two years.
Approval to Construct (“ATC”)
At this stage, a refinery investor intending to construct a refinery is required to submit a detailed
engineering of the plant/refinery to the DPR for review and approval which must comply with
the technical standards set out in Section 2.4 of the DPR guidelines. In addition, the Applicant is
also obligated to make a comprehensive presentation regarding the project design to the DPR.
The Minister may thereafter grant the Applicant the construction license upon recommendation
from the DPR following which the Applicant can proceed with the Procurement and
Construction phase of the project.
By virtue of Section 3.3 of the DPR Guidelines, the ATC granted by the Minister remains valid
for a period of twenty four (24) months. Where less than 50 (Fifty) percent of the mechanical
construction has been achieved at the refinery, the investor must apply for a revalidation of the
ATC to continue with the project.
The ATC revalidation requirements contained in the DPR Guidelines include a fresh payment of
a non-refundable application fee of $50,000 (Fifty Thousand US dollars) payable to the Federal
Government and a service charge of N500,000 (Five Hundred Thousand Naira) payable to the
Modular refineries are generally expected to be built within 18 months, consequently, the
stipulated time frame contained in the DPR Guidelines may not unduly handicap applicants
where social and environmental conditions permit smooth operations. However, considering
that the Niger Delta area is known to experience recurring cycles of sporadic violence which may
disrupt construction plans, it would occasion great financial strain on any modular refinery
investor required to pay additional ATC fees where such disruptions hinder the building of the
refineries within the initial validity period.
Licence to Operate (“LTO”)
When the refinery has been built, the investor must subsequently apply to the Minister for a
licence to operate the plant and pay the necessary fees. At this stage, the DPR carries out a
physical inspection of the plant to ascertain conformity with the approved design and
subsequently prepares a report to be presented to the Minister. The Minister thereafter grants the
approval to commission and operate the refinery upon receiving a satisfactory inspection report
from the DPR.
Once a LTE is granted, the DPR subsequently plays the role of regulator and is saddled with the
responsibility of ensuring that the operation of the refinery is in compliance with existing laws
and regulations. The refiner is also obligated to submit an annual program of activity in the form
of a presentation to the DPR at the beginning of each calendar year.
Beyond the regulatory provisions highlighted above, the DPR at the 2015 Workshop on its
sensitization programme on the Establishment of Modular Refineries in Nigeria stated a few
other conditions to be complied with. The DPR prescribed a capacity range of a module of
between 1,800 and 30,000 bpd with skid tanks mounted installation for easy mobility. While the
plant location is left to the discretion of investors, the DPR insists that the feedstock choice
must be typical Niger Delta light sweet crude oil of about 0.2 percent sulphur content. However,
a new regulation specifically for modular refineries promised by the DPR is yet to be made
available to the public.
In addition, plans by the present administration to promote investment in modular refineries in
the Niger Delta region may be able to stem the recurring tide of unrest in the area as well as
address the challenge of illegal refineries which also constitute environmental hazards in the
region. It is recommended that efforts be intensified to pass all aspects of the Petroleum
Industry Bill which has been before the National Assembly for many years. The Bill generally
provides for the liberalisation of the downstream sector and the issuance of licences to private
Related to the above is the excessive cost of the licence for the category of persons the
government seeks to attract to invest in Modular Refineries. With application fees as high as
$50,000 which amounts to about N15.7million and the DPR service charge of N500,000 among
other associated costs, building a modular refinery may remain an unattractive idea to small scale
investors and repentant illegal refinery operators.
It is understandable that marginal field operators and international oil companies may be able to
acquire the licences but the aim of local participation may be defeated and could further result in
increased vandalism. Where the latter occurs, modular refinery operators may be unable to
access feedstock and deliver on production targets thereby losing revenue and making such
refineries unattractive for financial institutions.
The Federal Government is therefore advised to formulate clear policies to govern the sourcing
of crude oil for the modular refineries and sale of the refined products when the refineries begin
production. Other incentives such as collaboration with state governments for the purpose of
land acquisition, transportation concessions, security and tax breaks should also be included in
updated regulations to be issued.