President Bola Ahmed Tinubu has approved a directive for the Nigerian National Petroleum Corporation (NNPC) to sell crude oil to Dangote Refinery and other upcoming refineries in Naira. This move aims to stabilize fuel prices and the Naira-Dollar exchange rate, potentially saving billions of dollars annually.
This is actually a good policy if implemented well: “…NNPC to sell crude to [local refineries] in Naira. 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. 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. Afreximbank and other settlement banks in Nigeria will facilitate the trade between Dangote and NNPC Limited. The game changing intervention will eliminate the need for international letters of credit. It will also save the country of billions of dollars used in importing refined fuel.” – Bayo Onanuga, Special Adviser Information and Strategy to Nigerian President.
This is a good policy because Nigeria has agreed that something must be subsidized. This is a clever way to bring back fuel subsidies without any political risk. Simply, if the international oil companies are to sell crude oil at $80 pb and Nigeria is paying in Naira (say N1,200/$) for the local refineries, any deviation on the FX will be covered by Nigeria.
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With that, Nigeria has subsidized the price of fuel at the pumps since if Dangote Refinery gets the crude oil at this discounted price (the firm is paying in Naira, expected to be at a favourable rate), the government will likely mandate that it cannot sell as though it has paid in US dollars. Simply, Nigeria has subsidized fuel, but not at the pumps, but at the crude oil chain since local refineries will get the feedstock at below international rate.
I support this policy because Nigeria must subsidize something. It is an illusion to think market forces can work in everything. Recall in July last year when I noted that Nigeria cannot float its currency and remove fuel subsidy at the same time. Specifically, on July 28, 2023, I wrote that “Nigeria will either pause the full floating of its currency or return back to fuel subsidy” because using basic economics, Nigeria cannot handle both at the same time due to the heterogeneous nature of the economy, across regions. Today, it has subsidized the upstream of fuel and that is a brilliant policy.
Plus, it has disintermediated the use of US dollars since crude will be paid in Naira, refined locally in Naira, and bought at the pumps in Naira. Nice playbook there.
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If NNPC sells crude to Dangote Refinery in naira and Dangote Refinery sells refined products in naira too, won’t the products be smuggled out of the country like the subsidy of the old, or have we suddenly fixed that loophole? We say and do a lot of yeye things in the country, forgetting the lies told before, believing that some of us don’t keep track of events. We are still joking.
Anyway, let the 450000 barrels continuously be made available first, without stories and blames, and we will move on from there to the next demon. The same creatures that kept the oil industry in this mess are still the ones calling the shots, so nothing much will change. We will be waiting for them.
The more things change, the more they remain same.