The recent decision by the Federal Government to initiate naira-denominated crude oil sales to Dangote and other local refineries, effective October 1, marks a significant shift aimed at terminating the long-standing Domestic Crude Allocation (DCA) scheme that has been in place for 20 years. This change is anticipated to enhance transparency within the sector and improve the domestic fuel supply chain.

For over twenty years, Nigeria, Africa's largest economy, has maintained a system that allocates approximately 445,000 barrels of crude oil per day—corresponding to the total capacity of the nation’s four government-owned refineries—from the federation’s oil share for local refining.

Payments for this allocation will be made in naira, with the now-defunct Petroleum Products Marketing Company recovering funds through the distribution and sale of the refined products within Nigeria.

The underlying purpose of this exclusive domestic crude oil allocation was to ensure energy security, mitigate the impact of exchange rate fluctuations and international crude oil price volatility on refined petroleum product prices, and guarantee a steady supply of refined products in the country.

While the scheme appears advantageous in theory, persistent financial and operational difficulties faced by domestic refineries often lead to a significant portion of the 445,000 bpd being diverted to a complicated oil-for-product swap arrangement between NNPC and trading companies, known as the Direct Sale Direct Purchase program.

Bayo Onanuga, the special adviser on information and strategy to the president, indicated that the African Export-Import Bank (Afreximbank) and other settlement banks in Nigeria will facilitate transactions between Dangote and NNPC.

“To maintain stable pump prices for refined fuel and ensure a consistent dollar-Naira exchange rate, the Federal Executive Council has approved President Tinubu's proposal to sell crude to Dangote Refinery and other emerging refineries in naira,” Onanuga stated on his X account on Monday.

The Federal Election Commission (FEC) has sanctioned the sale of 450,000 barrels intended for domestic use in Naira to Nigerian refineries, with the Dangote refinery serving as a test case. The exchange rate will remain constant throughout this transaction.

Zacch Adedeji, the executive chairman of the Federal Inland Revenue Service (FIRS), indicated that the sale of byproducts from the Dangote refinery to distributors will also occur in Naira.

Adedeji emphasized the positive implications for the economy, stating, "This will alleviate the pressure on foreign exchange."

The federal government is projected to save $7.92 billion.

He further explained that with this new approval, the foreign exchange expenditure on petrol will be limited to a maximum of $50 million per month, totaling approximately $600 million annually.

"This represents a significant reduction of 94 percent, resulting in savings of $7.32 billion," Adedeji noted.

"This initiative marks a significant advancement in addressing Nigeria's challenges sustainably. It will not only create more jobs but also empower us to take control of a critical sector of our economy."