NIGERIA’S decision to sell crude oil to the Dangote Refinery and other local refiners in naira could prove a game changer for the domestic refining sector and the economy. On July 29, the Federal Executive Council directed the Nigerian National Petroleum Company Limited on this. It is a step in the right direction.
Presidential spokesman, Bayo Onanuga, pointed out that Dangote Refinery required 15 crude cargoes at $13.5 billion annually, out of which the NNPC is committed to supplying four. He said the FEC approved that the 450,000 barrels per day meant for domestic consumption be offered in naira to Nigerian refineries at a fixed exchange rate for the duration of this transaction. Afreximbank and other settlement banks in Nigeria will facilitate the deal.
This intervention will likely deliver economic benefits regarding crude availability to local refiners on affordable terms and savings of forex used to import crude.
The Chairman of the Federal Inland Revenue Service, Zacch Adedeji, estimates that about $660 million or N7.92 billion is spent to procure crude, which places pressure on the country’s forex.
Some of the benefits of the new measures are obvious. First, there will be a reduction in forex pressure as Nigeria spends between 30 per cent and 40 per cent of FX on petrol importation, amounting to $600 million per month or $9.72 billion a year, per FIRS. Nigeria will save $7.32 billion yearly selling crude oil and buying refined products from Dangote Refinery at local currency, a 94 per cent decline from the actual spending.
Another concern addressed by this measure is the stability of petrol prices. Petrol prices have fluctuated widely over the past year. The average price shot up by 223.21 per cent to approximately N770 per litre in May 2024, up from N238.11 per litre recorded in the same period of 2023 per the National Bureau of Statistics. Comparatively, the average retail price of diesel paid by consumers increased by 66.29 per cent to N1,403.96 per litre in May 2024 from N844.28 per litre recorded in May 2023.
The price of petroleum products will be stable as the arrangements are all done in naira, with no influence from external factors like FX illiquidity. Eliminating International Letters of Credit would further save $75 million in fees.
However, this deal does not solve all the problems. At 650,000bpd, the refinery’s requirements are huge when it goes full blast. It will need an average of 20.15 million barrels per month compared with Nigeria’s anticipated daily production of 1.56mbpd for 2024. Importing part of its requirements will be a challenge in fixing petrol prices comparable to current rates kept artificially low by undeclared subsidies.
Dangote has offered diesel at N1,200/l and aviation fuel at N980/l.
Some analysts have projected a petrol price crash once Dangote starts production, but those assertions will be tested.
However, this development could be explored further. If the NNPC’s four refineries resume production, they will increase local refining capacity by 445,000bpd. BUA Refinery will add another 200,000bpd capacity while other refineries, such as Midoil’s 100,000bpd facility in Lagos and the modular refineries, could bring Nigeria’s local refining capacity up to 1.5mbd.
These numbers highlight the possibility of Nigeria becoming a global refining hub. The Dangote Refinery has disrupted global crude flows with huge imports and sent European refiners into panic mode with substantial deliveries of diesel, jet fuel, naphtha, and fuel oil to domestic and export markets, according to company sources and ship tracking data.
With the transformation of the country’s midstream sector, the Tinubu administration should consider a major policy shift from crude exports to domestic refining. This will add much-needed value to the country’s oil and gas sector.