The Dangote Petroleum Refinery, a $20 billion facility located in Lekki, Nigeria, has temporarily suspended the sale of petroleum products in naira, the Nigerian currency. This decision stems from the apparent breakdown of negotiations between the refinery and the Nigerian National Petroleum Company Limited (NNPCL) concerning a naira-for-crude exchange agreement. The refinery cites a mismatch between its sales proceeds in naira and its crude oil purchase obligations, which are denominated in US dollars, as the reason for the suspension. The situation has triggered an immediate surge in petrol prices at private depots in Lagos, escalating from N850/litre to N900/litre following the announcement.
Industry experts and oil marketers warn that the halt in naira sales by Dangote Refinery will likely amplify pressure on the foreign exchange market. Marketers will now be forced to acquire large sums of US dollars to purchase petroleum products, potentially driving down the value of the naira. At the heart of this issue lies the NNPCL’s practice of forward sales of crude oil, a mechanism used to secure loans from international financial institutions. This practice, according to industry sources, has depleted the NNPCL’s available crude oil reserves, making it difficult to fulfill domestic supply obligations, including the agreement with Dangote Refinery.
The Dangote Group clarifies that the suspension of naira sales is temporary and denies allegations of ticketing fraud as the cause. They assert that the suspension is purely a financial measure to align sales currency with procurement currency. The refinery pledges to resume naira sales as soon as it receives an allocation of naira-denominated crude cargoes from NNPCL. The situation highlights the fragility of the naira-for-crude arrangement and the potential consequences for Nigeria’s economy, which heavily relies on crude oil exports for foreign exchange earnings. Given Nigeria’s production capacity and pre-existing forward sales agreements, the sustainability of a naira-for-crude deal remains questionable.
The NNPCL’s official response neither confirms nor denies the halting of the naira-for-crude arrangement with Dangote Refinery. While maintaining its commitment to supplying crude for local refining based on mutually agreed terms, the NNPCL emphasizes the limited production capacity of local refineries compared to national consumption. This suggests a potential bottleneck in supply, even with the intended naira-for-crude mechanism. Although the NNPCL recently announced fresh negotiations with Dangote Refinery regarding the renewal of the agreement, the suspension of naira sales indicates a significant roadblock in these discussions. The core issue appears to be the availability of sufficient crude oil for domestic supply, potentially exacerbated by the NNPCL’s financial obligations linked to forward sales agreements.
Stakeholders in the downstream sector express concerns about the potential repercussions of the suspended naira-for-crude deal. The Independent Petroleum Marketers Association of Nigeria (IPMAN) cautions about potential pressure on the naira and a reversal of recent gains in its stability. The association urges the Federal Government to maintain the naira-for-crude agreement to stabilize petroleum product prices and maintain the downward trend witnessed in recent times. Similarly, the Petroleum Products Retail Outlet Owners Association of Nigeria (PETROAN) emphasizes the importance of the naira-for-crude arrangement for price stability and advocates for its continuation.
The situation has fueled speculation within the industry, with some suggesting that the potential termination of the naira-for-crude deal may be a deliberate attempt to curb the influence of the Dangote Refinery. Accusations of potential monopolistic tendencies by the Dangote Refinery have emerged, raising concerns about market competition. A meeting between the Minister of Finance and the President of the Dangote Group underscores the government’s awareness of the challenges surrounding the naira-for-crude deal. Meanwhile, domestic crude oil refiners express concerns that the suspension of the deal signifies a potential return to full importation of refined petroleum products, reversing the progress made towards energy security. The situation raises questions about the future of domestic refining in Nigeria and the potential impact on fuel prices and the broader economy. The immediate price increases at private depots highlight the vulnerability of the market to disruptions in the supply chain and the potential for further price escalation if a resolution is not reached swiftly.
