July 29, (THEWILL) – President Bola Tinubu has approved a new directive to promote the trade of crude oil using the local currency.
The Federal Inland Revenue Service (FIRS) Chairman, Zacchaeus Adedeji, disclosed this to State House correspondents on Monday, after the Federal Executive Council (FEC) meeting at the Presidential Villa in Abuja.
According to him, effective immediately, the Nigerian National Petroleum Company (NNPC) Limited will engage with local refineries in transactions dominated in Naira.
He said this move was also extended to the sale of crude oil to Dangote Refinery, with the subsequent sale of Dangote’s products to others also to be conducted in Naira.
Adedeji said the decision aimed to mitigate the heavy reliance on foreign exchange for crude oil imports, which currently accounts for roughly 30 to 40 per cent of Nigeria’s forex expenditure.
The FIRS boss further explained that by denominating transactions in Naira, the Federal Government expected to significantly reduce the forex burden, estimating annual savings of around $7.3 billion.
Adedeji emphasised that the shift will stabilise crude oil prices domestically by minimising the impact of forex fluctuations. He said the new policy is anticipated to ease the pressure on Nigeria’s foreign exchange reserves.
According to a memo tabled by President Tinubu and discussed at FEC, a copy of which was seen by THEWILL, the council was formally informed of the commissioning and successful test run of the Dangote Petroleum Refinery and nearing “steady-state operations.”
It further said: Dangote refinery “requires approximately 15 crude cargoes per month, translating to an annual supply cost of USD 13.5 billion. NNPC Limited (NNPCL) has committed to supplying four (4) 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.
“This strain is estimated to reach USD 660 million per month or USD 7.92 billion annually, exacerbating exchange rate pressures and macroeconomic imbalances. Over the past year, exchange rate-induced inflation has caused food prices to rise by 44% and transportation costs to surge, resulting in a headline inflation rate of 33.95% in May 2024. Strategic intervention is required to leverage the Dangote Refinery to stabilize Naira exchange rates and restore price stability.”
The memo further said: “To manage the significant foreign exchange (FX) needs for local refineries and petroleum marketers, it is proposed that:
“Local refineries’ crude oil purchases from NNPCL be denominated in NGN at a fixed exchange rate for a minimum period of six months.
“Refined product sales to approved Local Petroleum Marketing Companies be conducted in NGN at the same fixed exchange rate.
“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. This approach will eliminate the need for international letters of credit, saving Nigeria substantial amounts of USD. This proposal is depicted Benefits of the Proposed Scenario.”
The President told the council that if the policy is approved, it would offer the following macroeconomic benefits:
“Reduction in foreign exchange pressure, as the previous scenario utilized USD 660 million per month, totaling USD 7.92 billion annually. With the proposed scenario, expenditures are 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%.
“Reduced trade finance costs with annual savings of USD 79 million in LC costs through Afreximbank’s payment undertakings for bilateral trades.
“Stabilized petroleum product prices as the forward-selling of crude oil and refined products at a fixed exchange rate unaffected by exchange rate fluctuations will stabilize pump prices.
“Stabilizing petroleum prices will likely drive the appreciation of the NGN, as petroleum imports account for 30% of Nigeria’s FX demand.
“Stable petroleum prices will lower transportation costs, reducing food price inflation and positively impacting 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.”
In seeking council’s approval, the president further noted that the “NNPCL is unlikely to face significant issues with this strategy as the crude cargoes involved are allocated for domestic refining. Potential smuggling risks due to lower NGN petroleum product prices can be mitigated by strengthening the NGN against major foreign currencies.”
The memo urged the council to “Note that the Dangote Refinery and other new refineries provide a unique opportunity for Nigeria to export a significant portion of its crude oil production as petroleum products, boosting foreign exchange earnings and positioning Nigeria as a refining hub.”
THEWILL understands that after extensive deliberations, approval was given for the “payment for crude oil dedicated to domestic consumption in Naira, as well as the payment for the refined products thereof in Naira.”
It also approved the “US Dollar/Naira (USD/NGN) exchange rates for the payment of crude oil and petroleum products for domestic consumption, to be fixed for a minimum of six (6) months and reviewed at a minimum of the same period.”
Approval was also given for the refining of 445,000 barrels per day of crude oil dedicated to domestic consumption at the current local refining capacity of 650,000 barrels per day, to be increased as the refining capacity in the country expands.
FEC also approved that the “piloting of this initiative with Dangote Petroleum Refinery and Petrochemicals FZE, Nigerian National Petroleum Corporation Limited (NNPCL), and any other refinery that is ready and meets the risk acceptance criteria of the settlement bank (e.g., Afreximbank).”
Approval was also obtained to “Direct that Afreximbank leads the advisory work of structuring and arranging this initiative and the associated trade finance facility in collaboration with the Central Bank of Nigeria (CBN), Nigerian National Petroleum Corporation Limited (NNPCL), Federal Ministry of Finance, and other critical agencies.”
