The federal government of Nigeria has finalized a landmark agreement with Dangote Refinery, setting the commercial terms for the supply of crude oil to the refinery and the distribution of refined products, particularly petrol and diesel.
This agreement marks a critical step in addressing Nigeria’s fuel supply challenges, with the 650,000 barrels-per-day Lagos-Lekki Free Zone-based refinery poised to significantly alter the dynamics of the country’s downstream oil market.
Under the terms of the agreement, petrol distribution from the Dangote Refinery will officially commence on Sunday, September 15, 2024, with an initial supply of 25 million liters per day. The deal, which outlines the supply of crude oil in naira, will see the Nigerian National Petroleum Company Limited (NNPC) serving as the sole off-taker of petrol from the refinery, while diesel from the $20 billion facility will be available for sale to any interested marketers.
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The Agreement’s Details
The Executive Chairman of the Federal Inland Revenue Service (FIRS), Dr. Zaccheus Adedeji, who represented Wale Edun, the Minister of Finance and Chairman of the Presidential Committee on the Sale of Crude Oil and Refined Products for Domestic Consumption in Naira, disclosed the development during a briefing in Abuja.
Adedeji revealed that all transactions involving the Dangote Refinery, from crude oil supply to the sale of refined products, would be conducted in naira. This decision is a strategic shift aimed at reducing Nigeria’s reliance on foreign exchange for oil transactions and ensuring that all financial activities tied to this agreement are conducted in the local currency.
“The supply of petrol will be handled exclusively by the Nigerian National Petroleum Company Limited (NNPCL), while diesel from the refinery will be available to any interested marketer. From October 1, 2024, NNPC will commence the supply of crude oil to Dangote Refinery, which will also be paid for in naira. In return, the refinery will supply petrol and diesel of equivalent value to the domestic market, also paid for in naira,” Adedeji stated.
The agreement is expected to stabilize Nigeria’s fuel supply, a sector long plagued by shortages and import dependency. By utilizing naira in all associated regulatory costs—such as fees to the Nigerian Ports Authority (NPA), Nigerian Maritime Administration and Safety Agency (NIMASA), and other federal regulatory bodies—the government aims to ease pressure on the country’s foreign exchange reserves.
Implications for Nigeria’s Fuel Market
For decades, Nigeria has depended heavily on importing refined petroleum products, despite being one of the largest oil producers in the world. The operational commencement of the Dangote Refinery offers a glimmer of hope that Nigeria can reverse this trend, as the facility’s massive refining capacity can meet the bulk of local demand for refined products, reducing the need for imports.
However, marketers have expressed concern over the NNPC’s role as the sole off-taker of petrol, which will likely give the company more control over the domestic fuel market. The role is expected to allow the state-owned company to streamline distribution and address the chronic supply issues that have frequently resulted in fuel shortages and long queues at petrol stations across the country.
However, diesel, another essential crude oil product, that was not subsidized along with petrol, will have a more liberalized distribution system. Dangote Refinery’s decision to sell diesel directly to any interested marketers opens the market to greater competition and ensures that industrial and commercial users have access to refined products without having to go through NNPC’s centralized distribution system.
Logistical Preparations for Distribution
As part of its preparations for the imminent loading of petrol from the Dangote Refinery, the NNPC has deployed over 300 trucks to the facility in Ibeju-Lekki, Lagos. These trucks will serve as the initial fleet to transport petrol to various parts of the country.
The Lagos State Government has also moved to address the expected surge in traffic along the Lekki-Ajah-Epe corridor by deploying additional traffic personnel to manage the influx of trucks and ease potential congestion.
The NNPC, in a statement via its X handle (formerly Twitter), confirmed the deployment of these trucks.
“In preparation for the Dangote Refinery’s scheduled petrol loading on Sunday, September 15, 2024, NNPC Ltd. has been mobilizing trucks to the refinery’s fuel loading gantry in Ibeju-Lekki. By the end of today, at least 300 trucks will be stationed at the refinery’s fuel loading gantry,” it said.
Economic Benefits of The Deal
This deal comes at a pivotal time for Nigeria’s economy. With inflation at elevated levels and foreign exchange pressures weighing on the country’s reserves, paying for crude oil in naira for local refining and distribution is expected to provide much-needed relief.
This move could significantly reduce the country’s foreign exchange exposure, especially given that fuel imports have been one of the primary drains on Nigeria’s reserves in recent years. Additionally, local refining can reduce shipping and import costs, which have contributed to the high cost of petrol and diesel in recent years.
The Dangote Refinery’s role in domestic fuel supply also aligns with the government’s broader efforts to revamp the downstream oil sector. The cessation of fuel subsidies earlier in 2023 was part of a broader strategy to deregulate the market and allow market forces to determine fuel prices.
However, the shift to market-driven pricing has come with challenges, including a sharp rise in fuel prices, which has fueled inflation and eroded consumer purchasing power.
While this agreement marks a positive step forward, the refinery’s pricing structure, particularly for petrol, remains a challenge that needs to be addressed. Market observers have speculated that Dangote Refinery’s products could be priced higher than imported products, especially given that the facility’s current stock was purchased in dollars.
Both NNPC and Dangote Refinery have yet to disclose prices for refined products.