NNPC Suspends Naira-for-Crude Deal: Implications for Local Refineries and the Naira’s stability

The Nigerian National Petroleum Company (NNPC) Limited has terminated its naira-for-crude oil swap arrangement with domestic refineries, a decision that took effect today. This policy reversal halts a program launched on October 1, 2024, which allowed local refineries, such as the high-profile Dangote Refinery, and other private operators like Waltersmith Petroman and BUA Refinery to purchase crude oil in naira rather than U.S. dollars.

The initiative was hailed as a strategic move to bolster Nigeria’s domestic refining capacity, reduce dependence on imported petroleum, and alleviate pressure on the nation’s dwindling foreign exchange reserves. However, its suspension would have far-reaching consequences for Nigeria’s energy sector, raising the cost of production, which would translate to higher oil prices.

The Naira-for-Crude Deal: A Brief Overview

By enabling local refiners to pay for crude oil in the national currency, the NNPC aimed to address two critical challenges: the high cost of dollar-denominated crude purchases and the persistent volatility of the naira.

The arrangement was particularly beneficial for domestic players like the Dangote Refinery, a mega-facility owned by billionaire Aliko Dangote, poised to become one of Africa’s largest refining hubs.

For smaller operators like Waltersmith Petroman and BUA Refinery, it offered a cost-effective lifeline to secure crude stock and compete with international rivals.

Why the Suspension?

The NNPC’s decision to suspend the program stems from an apparent supply constraint. Sources revealed that the state-owned oil company has already committed its crude oil production to forward contracts and long-term agreements with international buyers. Leaving no surplus available for domestic refiners.

This development is arising amidst an ongoing price war between Dangote and NNPC. Dangote refinery slashed its ex-depot price from ₦890 to ₦825 per litre, leading to retail prices of ₦860 in Lagos, ₦870 in the South-West, ₦880 in the North, and ₦890 in the South-South and South-East. This move prompted the Nigerian National Petroleum Company (NNPC) Limited to reduce its retail price from ₦945 to ₦860

The suspension effectively forces local refineries to pivot to the global market, where they must now procure crude oil from international suppliers and settle payments in dollars. This shift threatens to raise the cost of production for local refineries.

Impact on Dangote Refinery

The Dangote Refinery, a flagship project designed to process 650,000 barrels per day, stands to bear the brunt of this policy change. As a key beneficiary of the naira-for-crude deal, the facility has relied heavily on locally sourced crude to ramp up its operations.

The suspension could elevate production costs. Industry analysts warn that sourcing crude internationally in dollars will erode the cost advantages the refinery enjoyed, potentially leading to higher fuel prices for Nigerian consumers.

How the Suspension Pressures FX Reserves and Weakens the Naira

With the suspension, refineries must now source crude oil from international suppliers and pay in dollars. Nigeria’s FX reserves, already strained, with a combination of declining oil revenues, refiners would have to convert naira to dollars through the CBN to settle these transactions, putting pressure on the FX reserves. This could distort the current stability in the FX markets and weaken the naira.

This increase in dollar demand to settle international suppliers will deplete FX reserves, as the CBN must supply dollars to meet legitimate trade needs. Nigeria’s reserves, reported at around $38 billion have been volatile, and a sustained increase in dollar outflows could shrink this balance, limiting the CBN’s ability to intervene in currency markets to defend the naira.

Subscribe to Notifications