In a decisive move aimed at stabilizing fuel pump prices and the Naira-to-dollar exchange rate, the Federal Executive Council (FEC) has greenlighted President Bola Tinubu’s proposal to sell crude oil to the Dangote Refinery and other upcoming Nigerian refineries in Naira.
This initiative marks a significant shift in Nigeria’s energy policy and aims to bolster the local economy. Zacch Adedeji, Chairman of the Federal Inland Revenue Service (FIRS), announced this development following the FEC meeting on Monday.
According to Adedeji, the decision will enable refined products from these refineries to be sold to local marketers, significantly easing the burden on Nigeria’s foreign exchange reserves. This move is expected to provide more stability in fuel supply and price levels, both of which are critical for the nation’s economic health.
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Bayo Onanuga, Special Adviser to the President on Information and Strategy, explained the strategic importance of this policy shift in a statement issued on Monday.
“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 stated.
The Dangote Refinery, currently requiring 15 cargoes of crude oil annually at a cost of $13.5 billion, is set to receive four cargoes from the Nigerian National Petroleum Company Limited (NNPC) under this new arrangement.
The plan involves offering the 450,000 barrels per day allocated for domestic consumption in Naira to Nigerian refineries, starting with the Dangote Refinery. This fixed-rate arrangement aims to provide a predictable and stable framework for refineries and the broader economy.
The African Export-Import Bank (Afreximbank) and other Nigerian financial institutions will facilitate transactions between Dangote and NNPC, eliminating the need for international letters of credit. This will potentially save Nigeria billions of dollars in foreign exchange that would otherwise be spent on importing refined fuel.
NNPC’s Crude Oil Supply Challenge
The road to this government’s intervention has been covered by undermining challenges. The NNPC was supposed to supply 20.7 million barrels of crude oil, valued at $1.7 billion, as part of its commitment to the Dangote Refinery. This supply was intended to cover the remaining 12.8% of shares in the refinery that the NNPC had forfeited. Due to the NNPC’s failure to fulfill its supply obligation, Dangote Refinery had to look elsewhere for crude oil supplies, including the United States and other international markets.
Besides the issue of insufficient crude oil supply, a significant bottleneck emerged due to the cost of crude oil provided by the NNPC, which is priced in US dollars. The company had pledged 164.25 million barrels of crude oil, valued at $13.1 billion, as collateral for a $3.4 billion loan through an Afrexim bank syndication. This left the NNPC with limited capacity to meet the domestic supply needs of the Dangote Refinery and other local refineries.
Dangote’s quest for crude also faced hurdles with International Oil Companies (IOCs). In June, Vice President of Oil and Gas at Dangote Industries Limited, Devakumar Edwin, accused IOCs of frustrating the refinery efforts to secure crude oil supplies.
Edwin said the IOCs were “deliberately and willfully frustrating” the refinery’s efforts to buy local crude by hiking the cost above the market price, thereby forcing the refinery to import crude from countries as far as the United States, with its attendant high costs
Expert Analysis
Analysts estimate that for the Dangote Refinery to operate viably under current market conditions, the price of Premium Motor Spirit (PMS), commonly known as fuel, would need to be at least N1,350 per liter. However, they note that both the Nigerian government and the Dangote Refinery recognize that this price point is unsustainable for consumers.
To address this, the government has introduced a subsidy mechanism.
Initially, Dangote proposed a cost-under-recovery method, where additional crude oil would be sold to the refinery as a form of subsidy. The government, however, opted for a different approach, agreeing to exclusively manage the local supply of crude oil between NNPC and Dangote, thereby eliminating the need for involvement from IOCs.
The crude oil price will be pegged, and transactions will be conducted in Naira, effectively subsidizing the cost for Dangote Refinery.
This arrangement is seen as a win-win scenario as it alleviates the pressure on Nigeria’s foreign reserves, stabilizes the Naira, and provides Dangote Refinery with a more predictable and manageable cost structure. Moreover, this policy is expected to set a precedent for future transactions, promoting a more self-reliant energy sector in Nigeria.
A New Era for Nigeria’s Energy Sector?
While the Federal Government’s initiative is seen as a bold step to enhance local production capacity and reduce dependency on imported refined fuels, energy experts note that the success will depend on its implementation and the willingness of all stakeholders to collaborate in the nation’s best interest.
This move is expected to herald a new era for Nigeria’s energy sector, characterized by increased local refining capacity and reduced import dependency, which will take pressure off the naira and create a more stable economic environment.
Although the full impact of these measures will only be evident in the coming months as the policy is rolled out and its effects are felt across the economy, the approval marks a significant step toward a more resilient and self-sufficient Nigerian oil sector.