The Nigerian National Petroleum Company (NNPC) Limited has suspended its naira-for-crude arrangement with Dangote Petroleum Refinery and other local refineries, raising concerns over a potential hike in petrol prices., according to The Cable.
However, industry experts have downplayed the likelihood of a significant impact on pump prices, citing the NNPC’s inconsistent crude supply under the deal.
The naira-for-crude initiative was launched on October 1, 2024, to reduce Nigeria’s dependence on costly petroleum product imports, conserve foreign exchange (FX), and bring down petrol prices. The initiative allowed local refineries to buy crude oil in naira instead of dollars, a measure aimed at stabilizing the local currency and ensuring consistent supply to domestic refiners.
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Under the scheme, the Federal Executive Council (FEC) allocated 450,000 barrels of crude per day for domestic consumption, with the Dangote Refinery as the pilot project. The NNPC was to supply at least 385,000 barrels per day (bpd) to the refinery, which has a capacity of 650,000 bpd. However, the national oil company has failed significantly.
Industry Experts Allay Fears of Price Hike
Despite concerns that ending the naira-for-crude deal might reverse recent price reductions, experts say the initiative had minimal influence on petrol pricing. They argue that since the NNPC never supplied sufficient crude under the arrangement, the impact of its suspension on pump prices will likely be negligible.
Dangote Refinery’s Vice-President, Edwin Devakumar, described the supply from the state-owned company as “peanuts.”
An oil sector analyst noted that the supply from NNPC was inconsistent, and the volume provided was not enough to influence market stability.
Indeed, the naira-for-crude arrangement struggled from the start. By November 2024, the Dangote Refinery reported that it was still unable to secure adequate crude supplies. Devakumar noted, “We need 650,000 barrels per day. NNPC agreed to give a minimum of 385,000 bpd but they are not even delivering that.”
Dashed Hopes for FX Market Relief
While the impact on petrol prices may be limited, the suspension of the naira-for-crude deal is a blow to Nigeria’s FX market. One of the primary goals of the initiative was to ease pressure on the naira by reducing the need for refineries to source dollars for crude oil purchases.
With the deal off the table until at least 2030, local refineries, including Dangote, will now need to buy crude from international markets using foreign exchange. This shift will increase demand for dollars, potentially straining Nigeria’s FX reserves and reversing recent gains in the naira’s value.
Financial analysts caution that this could lead to a volatile FX market, with negative repercussions for businesses and consumers. Financial analysts have noted that although the naira-for-crude deal had its flaws, it offered a buffer against FX volatility. With its suspension, local refineries will scramble for dollars, adding pressure to the naira and possibly affecting other sectors of the economy.
Nigeria’s Rising Oil Output
The timing of this policy change adds to the challenges. Nigeria’s oil production has recently risen to over 1.5 million barrels per day, meeting the Organization of the Petroleum Exporting Countries (OPEC) quota for the first time in a long while. The increase in production had raised hopes that local refineries could receive more crude, boosting domestic fuel supply and reducing the need for costly imports.
However, with the NNPC’s crude now forward-sold until 2030, the expected benefits of higher production may not materialize. Instead of feeding local refineries and stabilizing the domestic market, Nigeria’s increased output will primarily support export commitments, generating foreign exchange but offering limited relief to the local economy.
A Blow to Domestic Refining Aspirations
The suspension of the naira-for-crude deal is a setback for Nigeria’s ambition to achieve self-sufficiency in petroleum products. Despite the massive investment in the Dangote Refinery and efforts to revive state-owned refineries, the country remains heavily dependent on imports.
The National Bureau of Statistics (NBS) revealed that Nigeria spent over $4.3 billion on importing 6.38 billion liters of petrol and diesel in just five months, highlighting the ongoing challenges in the downstream sector. The NNPC remains a key importer of petroleum products, despite the deregulation of the sector aimed at encouraging private investment and reducing government involvement.
Market participants are bracing for potential price volatility in the fuel market. While experts downplay the immediate impact on pump prices, the long-term effects could be significant if the naira depreciates due to increased demand for foreign exchange.
The NNPC has yet to officially comment on the suspension of the naira-for-crude initiative, and there is little clarity on what led to this abrupt policy change. The decision to forward-sell all crude until 2030 suggests a strategic shift, possibly aimed at boosting export earnings. However, the lack of communication has left stakeholders uncertain about the government’s long-term strategy for the oil and gas sector.