Nigeria’s nascent refining sector, spearheaded by the Dangote Petroleum Refinery and complemented by smaller modular refineries, faces a significant financial hurdle in achieving and maintaining full operational capacity. Over the next six months, these refineries are projected to require approximately 122.4 million barrels of crude oil. With the prevailing global crude oil prices hovering around $70 per barrel, the estimated expenditure for crude oil imports could reach a staggering $8.56 billion, translating to a monthly outlay of approximately $1.43 billion. This substantial financial commitment raises concerns about the long-term viability and profitability of these refineries, particularly in the context of fluctuating global oil markets and Nigeria’s own economic challenges.
A key factor contributing to this substantial import cost is the uncertainty surrounding the naira-for-crude swap deal between the Nigerian National Petroleum Company Limited (NNPCL) and the Dangote Refinery. This arrangement, designed to facilitate local crude oil procurement and reduce reliance on foreign exchange, has encountered significant roadblocks. Scheduled meetings between the technical sub-committee overseeing the policy, representatives from the Dangote Refinery, and other government officials have been repeatedly postponed, signaling disagreements and unresolved issues. The NUPRC’s ongoing assessment of the situation further delays a resolution, leaving the refineries in a precarious position regarding their crude oil supply. The lack of a stable and reliable domestic supply mechanism forces these refineries to rely heavily on international crude oil markets, exposing them to price volatility and currency exchange risks.
The crux of the problem seems to lie in the NNPCL’s existing commitments to foreign creditors. A substantial portion of Nigeria’s crude oil production is reportedly allocated to servicing these debts, leaving a limited supply available for domestic refineries. This prioritisation of debt repayment over domestic supply obligations creates a significant obstacle for local refineries seeking to access affordable crude oil within Nigeria. Reports indicate that millions of barrels of crude oil are pledged monthly for loan repayment, leaving domestic refineries with little choice but to procure crude oil from international markets at potentially higher prices. The NNPCL’s financial obligations, coupled with a substantial forward oil sales deal, further restrict the availability of crude for domestic consumption, exacerbating the challenges faced by the refineries.
The precarious situation facing the refineries is further complicated by the government’s failure to ensure consistent product offtake under the domestic supply obligation. This lack of guaranteed offtake creates significant uncertainty for the refineries, making it challenging to plan production schedules and manage inventory. The absence of a reliable offtake agreement also undermines the financial stability of the refineries, as they cannot predict their revenue streams with certainty. This situation particularly impacts smaller, modular refineries lacking the financial resilience of the Dangote Refinery, forcing some into inactivity. The Edo Refinery, for instance, has sought alternative crude supply and offtake arrangements with a US-based supplier, highlighting the difficulties faced by domestic refineries in securing reliable sources of crude oil.
The situation has prompted strong criticism from stakeholders and industry players who express concern about the government’s handling of the refining sector. The national publicity secretary of the Crude Oil Refinery Owners Association of Nigeria (CORAN) lamented the government’s failure to provide adequate feedstock for local refineries, describing it as a setback for sector stabilization and a potential political liability. He further highlighted the detrimental impact of this situation on investors in the domestic refining sector, emphasizing that the treatment of these investors could become a significant factor in future elections. These sentiments reflect a growing sense of frustration within the industry regarding the government’s policies and their impact on the viability of domestic refining operations.
The immediate consequence of this impasse has been a temporary suspension of naira-denominated petroleum product sales by the Dangote Refinery. The refinery attributed this decision to the need to reconcile its sales revenue, received in naira, with its crude oil purchase obligations, which are denominated in US dollars. This highlights the financial strain caused by the inability to secure naira-priced crude oil through the swap deal. The refinery’s subsequent importation of a significant quantity of crude oil further underscores its reliance on international markets in the absence of a reliable domestic supply. The ripple effect of this situation has been felt at the retail level, with petrol stations across the country increasing pump prices, adding to the economic burden on consumers. The failure of the naira-for-crude arrangement and the resulting reliance on dollar-denominated crude imports threaten to destabilize fuel prices and negatively impact the Nigerian economy. The situation calls for immediate government intervention to resolve the bottlenecks impeding local crude supply and ensure the sustainable operation of domestic refineries.
