Naira crude sale ends 20-year-old opaque supply market

…FG to save $7.92bn

…Dangote to sell products in local currency

The Federal Government’s latest decision to introduce naira-denominated crude oil sales to Dangote and other local refineries is expected to bring an end to the opaque 20-year-old Domestic Crude Allocation (DCA) scheme, a development expected to positively impact the domestic fuel supply chain and enhance transparency in the sector.

For over two decades, Africa’s biggest economy has operated an arrangement that ensures that about 445,000 barrels of crude oil per day (the nameplate capacity of Nigeria’s four government-owned refineries) are set aside from the federation’s share of oil and channelled for domestic refining.

The allocation would be paid for in naira, and the defunct Petroleum Products Marketing Company would recoup proceeds via the distribution and sale of the resulting refined products within Nigeria.

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The rationale behind that was that such exclusive domestic allocation of crude oil would guarantee energy security, de-link refined petroleum product prices from volatility in exchange rates and international crude oil prices, and ensure adequate supplies of refined petroleum products in the country.

Although the scheme looks brilliant on paper, in reality, chronic financial and operational challenges in the domestic refineries often force a chunk of the 445,000 bpd to be allocated to a complex oil-for-product swap between NNPC and trading companies, an arrangement popularly called the Direct Sale Direct Purchase program.

To change the narrative, the Federal Executive Council on Monday approved a proposal by President Bola Tinubu directing the Nigerian National Petroleum Company (NNPC) Limited to sell crude oil to Dangote Petroleum Refinery and other refineries in naira.

Bayo Onanuga, special adviser on information and strategy to the president, said the African Export-Import Bank (Afreximbank) and other settlement banks in Nigeria will facilitate the trade between Dangote and NNPC.

“To ensure the stability of the pump price of refined fuel and the dollar-Naira exchange rate, the Federal Executive Council today adopted a proposal by President Tinubu to sell crude to Dangote Refinery and other upcoming refineries in Naira,” Onanuga said on his X account on Monday.

He added, “The FEC has 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.”

He said Afreximbank and other settlement banks in Nigeria will facilitate the trade between Dangote and NNPC Limited, noting that the game-changing intervention will eliminate the need for international letters of credit.

He further said that it will also save the country billions of dollars used in importing refined fuel.

“Dangote Refinery at the moment requires 15 cargoes of crude, at a cost of $13.5 billion yearly. NNPC has committed to supply four.

“But the FEC has approved that the 450,000 barrels meant for domestic consumption be offered in Naira to Nigerian refineries, using the Dangote refinery as pilot. The exchange rate will be fixed for the duration of this transaction.”

Onanuga said the intervention will eliminate the need for an international letter of credit, further saving the country of dollar payments.

Reacting to the development, Femi Soneye, communications chief at NNPC said, “Exactly what we have been advocating is that the crude be shared amongst all local refineries.”

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Dangote to sell products in naira

Zacch Adedeji, executive chairman of the Federal Inland Revenue Service (FIRS), said the sale of byproducts from Dangote refinery to distributors will also be conducted in naira.

“And what does it mean to our economy? One, the pressure on foreign exchange will be reduced,” Adedeji said.

He said as of Monday, Nigeria spends between 30 percent to 40 percent of foreign exchange on the importation of petrol consumed by the country.

According to Adedeji, “Monthly, we spend roughly $660 million in this exercise and if you analyse that will give us $7 .92 billion annually.”

“With this approval today, through the FEC led by Mr President, this has been reduced by a minimum of 90 percent. Because what we have today, the transaction will now be down in our local currency not only to Dangote Refinery but to all local refineries for all our local consumption and this will stabilise the pump price,” he said.

FG to save $7.92bn

Adedeji further said that with the new approval, the foreign exchange spent on petrol will be reduced to a maximum of $50 million per month, rounding off to $600 million annually.

“This is a total reduction of 94 percent and saving us 7.32 billion,” Adedeji said.

“So, this is a major innovation in solving Nigeria’s problem permanently. Not only will it have more employment but we will definitely be in charge of one of the mainstays of our economy.

“So, I congratulate the council members, Mr. President, and also congratulate the operator, the NNPC and Dangote refinery and also the lead arranger, Afriximbank because kudos should go to the President of the African Export-Import Bank (Afreximbank), Prof. Benedict Oramah, for Aramco for these initiatives, because these are people that work behind the scenes to make sure that what we witnessed today, happened.”

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What does this mean?

Sanusi Lamido Sanusi, former governor of the Central Bank of Nigeria (CBN), said the move is expected to curtail a longstanding practice of siphoning public funds through the NNPC.

“For decades, the NNPC has been allocated 440,000 barrels of crude oil daily under the guise of domestic supply for its non-functional refineries. This opaque system has facilitated various financial irregularities, including questionable swap deals and foreign exchange manipulations,” he said.

“The government will gain visibility into the value of the allocated crude, the revenue generated by the NNPC, and the costs incurred by private refineries like Dangote’s,” Sanusi said.

Soji Agboola, CEO of Barrel Nigeria, said Dangote Refinery will benefit from cost stability, and the CBN will not need to worry about pressure from the Dangote Refinery to source USD for buying crude oil from NNPC.

Responding to questions about foreign exchange (FX) earnings, Agboola said the fundamental thing is to strengthen the Naira to some extent and reduce pressure on the FX Reserve.

“The elephant in the room would be limited forex earnings. A solution to this would be to diversify our export base to include more than just oil. If this is well implemented, it makes a lot of sense. But given all the dynamics at play, proper execution is crucial here,” he noted.

Jide Pratt, country manager of Trade Grid, believes the President’s approval to sell crude oil in Naira will reduce Nigeria’s reliance on the dollar.

“The new system will also require NNPC to be more transparent and accountable, with potential leadership changes necessary to ensure its success,” Pratts said.

Eche Idoko, publicity secretary of Crude Oil Refiners Association of Nigeria (CORAN), believes this move will boost domestic refining capacity and ultimately reduce fuel prices for consumers. However, Idoko emphasised the need for concrete actions to back up the announcement.

He called on the government to transform the policy into an executive order or integrate it into existing regulations to ensure its implementation.

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Idoko called for more clarity on the scope of the announcement policy, particularly regarding whether it applies to all crude oil suppliers or just the NNPC.

“Regulatory bodies need to provide detailed guidelines for the policy’s implementation,” Idoko said.

Idoko anticipated that selling crude oil in the Naira will significantly reduce pressure on the local currency, as refiners would no longer need to compete for foreign exchange to purchase crude.