As Nigerians, including myself, commend the government’s plan to sell crude oil in Naira, and subsidize the product for local refineries, I want to remind the leaders to think ahead of potential challenges this policy will trigger. Yes, Nigeria will disintermediate the US dollar, removing the US dollar element, from crude oil sales to local refineries where the oil would be refined in Naira and purchased at the pumps in Naira. It is indeed a great playbook; but we need to remember these vectors:
- When you sell in Naira, you will be expected to compensate your joint venture partners with any revenue they might have lost by not selling in US dollars in the international market. Now is the time to plan and save that money. By doing that, we avoid having to borrow to take care of that.
- If you sell in Naira, you will reduce the nation’s foreign earnings and that means the money in our foreign bank accounts will not grow at the rate it would have grown without the Naira-based crude oil sales. So, be aware of that and model the implications immediately.
- When you sell the crude oil to local refiners in Naira, the cost of the product will be lower, and that means petrol in Nigeria will be cheaper compared with Nigeria’s neigbours. Hello, petrol smuggling across the border could return because by subsiding the feedstock, you have subsidized petrol again. Plan to work the borders.
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.
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.
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Traditionally or historically, we were meant to understand that the NNPC was entitled to 450000bpd for local refineries, this was under the framework that the four refineries of the old would be refining for local consumption. For the years the local refineries weren’t refining, was the NNPC still getting the 450000bpd, if yes, is still still getting it? If that framework hasn’t been discarded or updated, I want to believe that promised 450000 barrels to local refiners should be coming from there. Again what is the share of NNPC in the joint ventures? From there, we would know if it’s entitled to above 450000bpd or below.
The present arrangement is that, NNPC will sell crude oil in dollars, and then purchase refined products in dollars, so essentially, what we account for in foreign reserves are the differentials between the selling and buying. Does NNPC sell everything and then pay JV partners their share, or each partner collects its share from source? Whatever arrangement, it should not be a complicated science. Once we break it down for everyday people to understand, we will know who is owing who. We have used technicalities and obfuscation to bamboozle people here.
Again, get daily output to 2mbpd, to reduce our confusion.