The Nigerian government recently gave the go-ahead for the Nigerian National Petroleum Corporation (NNPC) to sell crude oil in naira to the Dangote refinery.
This decision is intended to reduce pressure on foreign currency and improve oil supplies to the mega-refinery.
Background and challenges
The $20 billion Dangote refinery is Nigeria’s main oil refinery, and is billed as Africa’s largest when operating at full capacity.
Since production began in January, it has been struggling to obtain enough crude to meet its target of 650,000 barrels per day.
Until now, Dangote has had to buy oil on the international market, but has encountered obstacles, with oil majors selling crude at above-market prices or declaring it unavailable, forcing the refinery to resort to costly imports.
Government decision and economic impact
Recent government approval allows NNPC to sell crude oil to Dangote and other local refineries in naira, a move which, according to Zacch Adedeji, Chairman of Nigeria’s Federal Inland Revenue Service (FIRS), should significantly reduce demand for foreign currency.
The new arrangement relieves pressure estimated at $660 million a month, or $7.92 billion a year, and should reduce this to around $50 million a month, saving $7.32 billion annually.
Impact on the domestic market
This measure is particularly relevant for Nigeria, Africa’s most populous country, which faces chronic dollar shortages that have led the authorities to devalue the naira twice in the past year.
Analysts believe the move could reduce the need for refineries to seek new loans from foreign lenders and help cut transport costs.
Local fuel distributors, who feared they would not be able to pay for supplies from the Dangote refinery once it started producing gasoline next month if they were billed in dollars, now feel relieved.
Implications for the Nigerian oil industry
This development comes after Nigeria’s oil regulator reached an agreement with producers to allow crude oil to be sold to domestic refineries at market prices, seeking to end a supply dispute that had strained relations with the oil majors.
According to Ayodele Oni, an energy lawyer and partner at Bloomfield in Lagos, this policy represents a choice between substantial naira transactions and Nigeria’s need for foreign currency.
