FEC approves crude oil sale to Dangote Refinery by NNPC

 

 

***Refinery to receive four cargoes monthly

 

***Intervention to stabilise Naira exchange rate, commodity prices

 

By Egena Sunday Ode

 

The Federal Executive Council (FEC) on Monday approved the sale of crude oil to Dangote Refinery by the Nigerian National Petroleum Corporation Limited, NNPCL.

 

The transactions will be denominated in naira for both the crude oil supply by the NNPCL and the sale of refined products by Dangote Refinery.

 

Others local refineries are also expected to benefit from this approval by FEC.

 

Special Adviser to the President on Revenue, Zach Adedeji, who disclosed this to newsmen after the FEC meeting, said that the new arrangement will save the country’s foreign exchange pressure by at least 90 percent.

 

He said the deal will also reduce finance cost.

 

To that extent, he said, a settlement bank, Afrexim, has been appointed to fine tune the arrangement with Dangote and other local refineries.

 

Recall that a controversy has been raging across the country over the alleged refusal of the NNPC to supply the needed crude to Dangote which is reputed as one of the biggest refinerues across the globe.

 

Adedeji said though the Dangote Refinery would be needing no fewer than 15 crude cargoes in a month, NNPC will be supplying it only four crude oil cargoes, leaving it to sources the rest from the international traders.

 

The Special Adviser said: “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:

 

“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.”

 

According to Adedeji, the

benefits 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.”