The Federal Executive Council (FEC) has directed Nigerian National Petroleum Company Limited (NNPC Ltd) to engage Dangote refinery and other local refineries with a view to resolving the dispute over the sale of crude oil to them.The FEC, presided over by President Bola Tinubu, also directed that such crude oil sales to the refineries be made in naira and that the refineries, located in Nigeria, should also sell their refined products to the Nigerian market in naira.
The Chairman of the Federal Inland Revenue Service (FIRS), Zacch Adedeji, who disclosed this on Monday in Abuja while speaking to State House correspondents at the end of the council meeting said the refinery is now approaching steady-state operations noting that it requires approximately 15 crude cargoes per month, translating to an annual supply cost of $ 13.5 billion.
He explained that the NNPC Ltd has committed to supplying four (4) crude oil cargoes monthly, leaving the remainder to be sourced from international traders.
Currently, he said, these transactions are conducted in dollars, significantly straining Nigeria’s foreign currency liquidity. He added that strategic intervention is required to leverage the Dangote Refinery to stabilise Naira exchange rates and restore price stability.
To manage the significant foreign exchange (FX) needs for local refineries and petroleum marketers, Mr Adedeji said it is proposed that “local refineries’ crude oil purchases from NNPC Ltd be denominated” in Naira at a fixed exchange rate for a minimum period of six months.
Refined product sales to approved local petroleum marketing companies be conducted in Naira at the same fixed exchange rate,” he said.“A settlement bank (e.g., Afreximbank) facilitates both trades by providing guarantees to NNPC Ltd to cover the payment risk of local refineries and to Nigerian commercial banks for the payment risk of petroleum marketing companies. This approach will eliminate the need for international letters of credit, saving Nigeria substantial amounts of USD,” he said.The proposed scenario, according to him, offers reduction in foreign exchange pressure, as the previous scenario utilized $660 million per month, totaling $7.92 billion annually
With the proposed scenario, he said expenditures are projected to decrease to $50 million per month, equating to $600 million annually.“This reduction will significantly alleviate the pressure on foreign exchange reserves, leading to an annual savings of $7.32 billion representing 94 per cent, reduced trade finance costs with annual savings of $79 million in local currency costs through Afreximbank’s payment undertakings for bilateral trades and stabilised petroleum product prices as the forward-selling of crude oil and refined products at a fixed exchange rate unaffected by exchange rate fluctuations will stabilise pump prices,” he noted.He added that stabilising petroleum prices will likely drive the appreciation of the Naira, as petroleum imports account for 30 per cent of Nigeria’s FX demand
Mr Adedeji said stable petroleum prices will lower transportation costs, reduce food price inflation and positively impact interest rates and dollar/Naira exchange rates.“This strategy will eliminate government control and drive independence of the market as it aims to eliminate government intervention in the management of domestic petroleum prices, further facilitating competitiveness and allowing for greater market predictability and stability.“This model, subject to the settlement bank’s (e.g., Afreximbank) credit approvals, can be replicated for other refineries, facilitating the trade of 445,000 barrels reserved for domestic consumption and achieving energy security. This further ensures that strategic reserves are pegged at tolerable prices driving improved economic stability.”
Background
In recent months, the Dangote Group and the petroleum regulators in Nigeria have been at loggerheads over the control of the petroleum downstream market.Last month, the Dangote Group accused some international oil companies of sabotaging the plant’s operations by either refusing to supply crude or offering oil at higher premiums compared to market prices.
It also clashed with the regulators of the Nigerian energy industry, including the Nigerian Midstream and Downstream Regulatory Authority, which claimed diesel from the refiner has sulphur content levels above the allowed threshold. The regulators also accused Dangote of seeking to be a monopoly.
In refuting the allegation, Mr Dangote took lawmakers visiting the refinery to a laboratory within the plant, where diesel from the refinery was tested alongside two different samples from imports.The results showed the sample from the refinery’s diesel had much lower sulphur than the imported ones.
