The Federal Government of Nigeria’s recent decision to introduce naira-denominated crude oil sales to Dangote and other local refineries starting on October 1 marks a significant shift in the country’s energy and economic policies.
This move is set to end the opaque and long-standing Domestic Crude Allocation (DCA) scheme that has been in place for more than 20 years. The reform is expected to bring increased transparency to the domestic fuel supply chain, improve the efficiency of refining operations, and ensure more consistent fuel availability within the country.
For over two decades, Nigeria, Africa’s largest economy, has maintained a system in which approximately 445,000 barrels of crude oil per day—the combined nameplate capacity of the country’s four government-owned refineries—were reserved for domestic refining.
This allocation was drawn from Nigeria’s share of oil revenues and was meant to ensure a stable and secure supply of refined petroleum products to meet the country’s domestic needs.
Under the original DCA scheme, the crude oil allocated for domestic consumption was paid for in naira, with the now-defunct Petroleum Products Marketing Company (PPMC) responsible for collecting the proceeds from the sale and distribution of the refined products.
The rationale behind this arrangement was that by earmarking crude for domestic refining, Nigeria would achieve energy security, mitigate the impact of fluctuating international oil prices and exchange rates, and guarantee a steady supply of refined petroleum products.
However, despite the scheme’s promising design on paper, in practice, it has been plagued by chronic financial and operational challenges.
The inefficiencies in Nigeria’s domestic refineries, coupled with their poor performance, have often led to the need for significant portions of the 445,000 barrels per day to be diverted into an alternative arrangement known as the Direct Sale Direct Purchase (DSDP) program.
This complex oil-for-product swap between the Nigerian National Petroleum Corporation (NNPC) and trading companies has been a key component of the DCA, but it has also contributed to the lack of transparency and accountability that has long characterized Nigeria’s oil sector.
The new policy shift, which involves the sale of crude oil in naira to Dangote Refinery and other upcoming local refineries, aims to change that.
Bayo Onanuga, the special adviser to the president on information and strategy, announced that the African Export-Import Bank (Afreximbank) and other settlement banks in Nigeria would play a crucial role in facilitating the trade between Dangote Refinery and the NNPC.
He explained that this new approach was designed to help stabilize the price of refined fuel and address fluctuations in the dollar-naira exchange rate.
“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,” Onanuga shared on his X account (formerly Twitter) on Monday.
He further clarified that the new framework approved by the Federal Executive Council (FEC) would see the 450,000 barrels meant for domestic consumption offered in naira to Nigerian refineries, with Dangote Refinery being used as a pilot.
The exchange rate for the transaction would be fixed for the duration of the deal, removing the volatility that has often plagued previous arrangements.
Zacch Adedeji, the executive chairman of the Federal Inland Revenue Service (FIRS), also weighed in on the policy shift, highlighting the broader economic implications of the move.
He noted that the sale of refined byproducts from Dangote Refinery to distributors would also be conducted in naira, further reducing Nigeria’s reliance on foreign exchange for the procurement of petroleum products.
“The pressure on foreign exchange will be reduced,” Adedeji said, underlining the financial benefits that the new arrangement is expected to bring to the Nigerian economy.
The government’s new strategy is expected to lead to significant cost savings. Adedeji emphasized that, under the new policy, the amount of foreign exchange spent on importing petrol would be cut down to a maximum of $50 million per month, or around $600 million annually.
This represents a dramatic reduction of 94 percent in the amount of foreign exchange spent on petrol imports, translating into savings of approximately $7.32 billion per year.
“This is a major innovation in solving Nigeria’s problem permanently. Not only will it generate more employment opportunities, but we will also be in control of one of the mainstays of our economy,” Adedeji said, highlighting the potential long-term benefits of this reform.
The move to naira-denominated crude sales to local refineries is a part of the broader efforts by the Federal Government to ensure energy security, strengthen domestic refining capacity, and reduce the country’s dependence on imported refined products.
By keeping more of the revenue generated from oil within the country, Nigeria aims to boost local industries, create jobs, and ultimately reduce the foreign exchange pressures that have been a constant challenge for the economy.
This transition represents a pivotal moment for Nigeria’s oil and gas sector, one that could usher in greater transparency, efficiency, and sustainability.
It also promises to empower local refineries such as Dangote’s to take on a more significant role in the domestic energy market, which, in turn, could have far-reaching economic benefits for the country.
