January 21, 2025
03 30 41 PM

FEC DIRECTS NNPC TO SELL CRUDE OIL TO LOCAL REFINERIES, INCLUDING THE DANGOTE REFINERY

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FEC DIRECTS NNPC TO SELL CRUDE OIL TO LOCAL REFINERIES, INCLUDING THE DANGOTE REFINERY                                                                                                                   29-07-24

By Sadiq Aminu                                                                  The federal Executive Council has directed the NNPC to sell crude oil to local refineries, including the Dangote Refinery.

Giving reasons for that directive, the Special Adviser to the President on Revenue, Dr. Zacch Adedeji, said the Dangote Refinery was now approaching steady-state of operations.

He said the refinery would require approximately 15 crude cargoes per month, translating to an annual supply cost of 13.5 billion dollars, NNPC had made a commitment to supplying four crude oil cargoes monthly, leaving the remainder to be sourced from international traders.

“Currently, these transactions are conducted in USD, significantly straining Nigeria’s foreign currency liquidity.

Strategic intervention is required to leverage the Dangote Refinery to stabilise Naira exchange rates and restore price stability”, Dr. Adedeji said.

He explained that to manage the significant foreign exchange needs for local refineries and petroleum marketers, it was proposed that:

a. Local refineries’ crude oil purchases from NNPCL be denominated in NGN at a fixed exchange rate for a minimum period of six months.

b. Refined product sales to approve Local Petroleum Marketing Companies be conducted in NGN at the same fixed exchange rate.

c. A settlement bank (e.g., Afreximbank) facilitates both trades by providing guarantees to NNPCL to cover the payment risk of local refineries and to Nigerian commercial banks for the payment risk of Petroleum Marketing Companies.

Dr. Adedeji explained that the approach would eliminate the need for international letters of credit, saving Nigeria substantial amounts of USD.

The benefits, according to Dr. Adedeji reduce foreign exchange pressure, as the previous scenario utilised USD 660 million per month, totaling USD 7.92 billion annually.

By the proposed scenario, he said expenditures were projected to decrease to USD 50 million per month, equating to USD 600 million annually.

“This reduction will significantly alleviate the pressure on foreign exchange reserves, leading to an annual savings of USD 7.32 billion representing 94%.

” It will reduce trade finance costs with annual savings of USD 79 million in LC costs through Afreximbank’s payment undertakings for bilateral trades.

“This will stabilise 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 further explained.

According to him, stabilising petroleum prices will likely drive the appreciation of the NGN, as petroleum imports account for 30% of Nigeria’s foreign exchange demand.

He noted that stable petroleum prices would lower transportation costs, reduce food price inflation and positively impact interest rates and USD/NGN 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”, Dr. Adedeji emphasised.

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