The Nigerian National Petroleum Company Limited (NNPCL) and the Dangote Oil Refinery are currently negotiating an extension of their naira-based crude oil supply agreement. Initially established in October 2024 as a six-month contract, this arrangement allows the Dangote Refinery to purchase crude oil from NNPCL in naira rather than foreign currency. The agreement is set to expire at the end of March 2025, prompting discussions for its renewal.
Background of the Naira-for-Crude Agreement
Traditionally, crude oil transactions in Nigeria have been conducted in U.S. dollars. However, to mitigate pressure on the naira and ensure a stable crude supply to domestic refineries, NNPCL initiated a program allowing local refineries, including the Dangote Refinery, to pay for crude oil in naira. Under this scheme, crude prices are set in dollars, but payments are made in the naira equivalent at a discounted exchange rate.
Performance of the Initial Agreement
Since the commencement of this arrangement in October 2024, NNPCL has supplied approximately 48 million barrels of crude oil to the Dangote Refinery. In total, over 84 million barrels have been delivered since the refinery began operations in 2023. This naira-based transaction model has been credited with reducing gasoline prices, curbing national inflation, and stabilizing the naira.
Current Negotiations and Future Prospects
As the initial contract approaches its expiration, both parties are in discussions to establish a new agreement. Key aspects under negotiation include the volume of crude to be supplied, pricing mechanisms, and the duration of the renewed contract. The outcome of these negotiations will significantly impact Nigeria’s domestic fuel supply and the broader economy.
Implications for Nigeria’s Energy Sector
The Dangote Refinery, with a capacity of 650,000 barrels per day, is poised to transform Nigeria’s energy landscape by reducing dependence on imported refined petroleum products. A stable and favorable crude supply agreement is crucial for the refinery to operate at optimal capacity, which in turn could lead to more stable fuel prices and enhanced energy security for the nation.
The ongoing negotiations between NNPCL and the Dangote Refinery for a naira-based crude oil supply contract are pivotal for the future of Nigeria’s energy sector. A successful extension of this agreement could reinforce economic stability and ensure a consistent domestic fuel supply.
Key Issues Surrounding NNPCL’s Crude Supply to Dangote Refinery
- Impact of Oil-Backed Loans on Crude Availability: Nigeria’s oil-backed loans have constrained the country’s crude oil production, affecting the naira-for-crude arrangement between NNPCL and local refiners, including the Dangote Refinery. This disruption may force refineries to seek international suppliers, increasing costs due to dollar-denominated transactions.
- Concerns Over Market Monopoly: The Dangote Refinery’s significant capacity has led to reduced petrol prices, benefiting consumers. However, there are apprehensions that its dominance could lead to monopolistic practices, potentially stifling competition in Nigeria’s petroleum sector.
- Uncertainty in Contract Renewal Terms: The initial six-month naira-for-crude contract between NNPCL and Dangote Refinery is nearing expiration. Ongoing negotiations lack clarity on future terms, including pricing and supply volumes,
- NNPCL’s Financial Stability – The state-owned oil company’s ability to sustain large-scale crude supply in naira, instead of dollars, raises concerns about its financial health and ability to meet obligations to other stakeholders.
- Impact on Foreign Exchange Reserves– Selling crude oil in naira reduces Nigeria’s dollar inflows, potentially affecting foreign exchange reserves and the stability of the naira.
- Preferential Treatment Concerns– Other local refineries and oil producers argue that the deal gives Dangote Refinery an unfair advantage, as NNPCL does not extend similar naira-based crude supply arrangements to them.
- Pricing Transparency and Discount Allegations– There are concerns about how the crude price is determined in the naira-for-crude deal, with speculations that Dangote Refinery might be receiving crude at a discount.
