The Federal Executive Council (FEC) meeting, presided over by President Bola Tinubu, has approved the sale of crude oil to indigenous refineries, including Dangote Refinery, in local currency, the Naira.
Special Adviser to the President on Revenue, who doubles as the Executive Chairman of the Federal Inland Revenue Service (FIRS), Zacch Adedeji, gave the indication when he joined other Ministers to brief newsmen at the end of the Council meeting on Monday.
He said President Bola Tinubu directed the Nigeria National Petroleum Corporation (NNPC) Limited to ensure this is done with immediate effect.
“Today, at the Federal Executive Council, there was a memo by Mr. President, which is to promote the sale of crude oil within local refineries and Nigeria National Petroleum Corporation (NNPC) to deal in our local currency.
“The attitude of Mr. President is thinking outside the box to solve Nigeria’s problem and actually to localize the solutions to Nigeria’s problem.
“He has approved through the Council that, effective immediately, NNPC engage with local refineries, starting with Dangote Refinery. That the sales of crude oil to Dangote Refinery be denominated in Naira and also the sales of by-products from Dangote Refinery to distributors also be conducted in Naira.
“And what does it mean to our economy? One, the pressure on foreign exchange will be reduced.”
Adedeji said, “Today Nigeria spends between 30% to 40% of foreign exchange on the importation of PMS that it consumes.
According to the tax man, “Monthly, we spend roughly $660 million in these exercises and if you analyze that, it will give us $7.92 billion annually.”
The FIRS boss said, “With this approval today through FEC led by Mr. President, this has reduced by a minimum of 90 percent. Because what we have today, the transaction will now be done in our local currency, not only to Dangote Refinery but to all local refineries for all our local consumption, and this will actually stabilize the pump price.
“This will also make economic stability a reality because we will no longer rely on the fluctuation in forex. Once again, this is an innovation of solving our problem as a country today.
“Just to be specific, in terms of benefits, one which is major is the reduction in foreign exchange pressure, utilizing $660 million per month, totaling $7.92 billion annually. With the new approval that we have, this will reduce to a maximum of $50 million per month, which is annualized to be only $600 million. This is a total reduction of 94% and saving us $7.32 billion.
“This will also reduce finance costs, which today stands at $79 million, when you consider opening a letter of credit between those local refineries and what happens.
“And also, Council has approved the settling bank to be Afreximbank. It will be the lead arranger between NNPC and Dangote Refinery.
“So, this is a major innovation in solving Nigeria’s problem permanently. Not only will we have more employment, but we will definitely be in charge of one of the mainstays of our economy.
“So, I congratulate the council members, Mr. President, and also congratulate the operator, the NNPC and Dangote Refinery, and also the lead arranger, Afreximbank, because kudos should go to the President of the African Export-Import Bank (Afreximbank), Prof. Benedict Oramah, for these initiatives because these are people that work behind the scenes to make sure that what we witnessed today happened.”
His words: “The refinery is now approaching steady-state operations. It 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.
“Strategic intervention is required to leverage the Dangote Refinery to stabilize Naira exchange rates and restore price stability.
“To manage the significant foreign exchange (FX) needs for local refineries and petroleum marketers, it is proposed that:
a. Local refineries’ crude oil purchases from NNPCL be denominated in NGN at a fixed exchange rate for a minimum period of six months.
b. Refined product sales to approved Local Petroleum Marketing Companies be conducted in NGN at the same fixed exchange rate.
c. 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 in the schematics shown below:
——The proposed scenario offers 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.
Corroborating, Special Adviser to President Tinubu on Communication and Strategy, Bayo Onanuga, took to his verified X handle where he tweeted:
“To ensure the stability of the pump price of refined fuel and the dollar-Naira exchange rate, the Federal Executive Council today adopted a proposal by President Tinubu to sell crude to Dangote Refinery and other upcoming refineries in Naira.
“Dangote Refinery at the moment requires 15 cargoes of crude, at a cost of $13.5 billion yearly. NNPC has committed to supply four.
“But the FEC has approved that the 450,000 barrels meant for domestic consumption be offered in Naira to Nigerian refineries, using the Dangote refinery as a pilot. The exchange rate will be fixed for the duration of this transaction.
“Afreximbank and other settlement banks in Nigeria will facilitate the trade between Dangote and NNPC Limited. The game-changing intervention will eliminate the need for international letters of credit. It will also save the country billions of dollars used in importing refined fuel.”
