Reports indicate that these four shipments were delivered to the refinery over the past three weeks, coinciding with the government's initiation of crude sales to local refineries in the national currency. Sources familiar with the local crude sale arrangement have informed our correspondent that the refinery is anticipating additional shipments of crude oil from NNPCL, the entity responsible for managing the nation’s hydrocarbon resources.
Furthermore, it has been confirmed that the $20 billion Lekki-based facility is now prepared to commence the direct sale of refined Premium Motor Spirit, commonly known as petrol, to domestic distributors.
A source associated with the Technical Subcommittee on Domestic Sale of Crude Oil in Local Currency, who requested anonymity due to restrictions on speaking to the media, indicated that "more cargoes of crude will be delivered to the Dangote refinery in the upcoming weeks."
The official noted that the program initially commenced with the Dangote refinery as the sole petrol-producing facility in Nigeria at this time. In a conversation with our correspondent, a senior official from the refinery acknowledged this development, stating that the first phase of the naira-crude sale agreement is set to last for six months, subject to renewal by the Federal Government.
However, the official was unable to disclose the price of the crude oil per barrel.
The naira-for-crude agreement has commenced, with the Dangote refinery having received four shipments to date, and additional deliveries anticipated. These four shipments were delivered over the last three weeks, and more are expected in the upcoming week.
It is important to note that this initial phase of the naira-crude transaction is limited to six months. The government may choose to extend this arrangement after the initial period, but the outcome remains uncertain.
The refinery, which has a capacity of 650,000 barrels per day, faced challenges with crude supply upon its launch several months ago. Alhaji Aliko Dangote, President of the Dangote Group, expressed concerns that certain international oil companies were attempting to undermine the investment by withholding crude supplies.
The Dangote Group claimed that these companies insisted on selling crude oil to the refinery through their foreign intermediaries. They also noted that the local price of crude is likely to rise, as trading arms are offering cargoes at prices $2 to $4 per barrel above the official rate. Furthermore, the group alleged that foreign oil producers appear to be favoring Asian markets for their Nigerian crude.
Despite the intervention of the Nigerian Upstream Petroleum Regulatory Commission in July, the group maintained that the international oil companies continued to obstruct the refinery's operations.
Mr. Devakumar Edwin, Vice President of Oil & Gas at Dangote Industries Limited, stated that if the Domestic Crude Supply Obligation guidelines were properly enforced, it would facilitate direct dealings with local crude producers, as outlined in the Petroleum Industry Act.
Edwin emphasized that the international oil companies in Nigeria have persistently hindered the company's efforts to secure locally-sourced crude for its refining needs.
He pointed out that when trading arms presented cargoes to the oil company, they were occasionally priced at a premium of $2 to $4 per barrel above the official rate established by the NUPRC.
“For instance, in April, we acquired a cargo of Bonga crude at $96.23 per barrel (excluding transportation costs). This price included a dated Brent price of $90.15, a premium of $5.08 from NNPC, and an additional $1 trader premium. In the same month, we purchased WTI at a dated Brent price of $90.15 plus a $0.93 trader premium, which included transport. After the Nigerian National Petroleum Company Limited reduced its premium in response to market feedback indicating it was excessive, some traders began requesting premiums of up to $4 million over the NSP for a cargo of Bonny Light.
“Data from platforms such as Platts and Argus indicates that the prices offered to us are significantly higher than the market rates reported by these sources. We recently escalated this matter to the NUPRC,” Edwin stated in July, urging the commission to reassess the pricing issue.
In light of the ongoing controversies, President Bola Tinubu proposed during a Federal Executive Council meeting on July 29 that crude be sold to local refineries in naira. The Federal Executive Council approved Tinubu's proposal to sell crude to the Dangote refinery and other emerging refineries in the local currency.
The FEC sanctioned that the 450,000 barrels designated for domestic use be offered in naira to Nigerian refineries, with the Dangote refinery serving as a pilot project. A media aide to the President, Bayo Onanuga, mentioned in July that “the exchange rate will be fixed for the duration of this transaction.”
It remains unconfirmed whether the Federal Government has established the exchange rate for this current transaction with Dangote.
Operators have indicated that the current price of Premium Motor Spirit (PMS) could plummet if the government proceeds with selling crude oil to local refineries, establishing the exchange rate at N1,000 per dollar instead of N1,600.
Our correspondent noted that the implementation committee, led by Edun, confirmed that the sale of crude oil in naira began on October 1, as planned.
On September 13, 2024, the committee revealed that the Federal Executive Council had sanctioned the sale of crude to local refineries in naira, along with the corresponding purchase of petroleum products in the same currency.
“Starting October 1, NNPC will initiate the supply of approximately 385,000 barrels of crude oil daily to the Dangote refinery, with payments made in naira,” the committee announced.
This arrangement means that NNPC is set to deliver around 11.5 million barrels of crude oil to the Dangote refinery each month, and in return, the facility will provide equivalent amounts of refined diesel and petrol to the domestic market, also priced in naira.
With four shipments already received, the refinery is anticipated to sell petrol, diesel, and aviation fuel to marketers in naira.
Reactions from marketers have been positive. Chinedu Ukadike, the National Publicity Secretary of the Independent Petroleum Marketers Association of Nigeria, stated that supplying crude to the Dangote refinery would alleviate concerns regarding PMS supply shortages for NNPC and other marketers.
“It is a commendable move to ensure Dangote has sufficient crude to refine petroleum products for us. I understand that NNPC has expressed concerns about Dangote's production levels. Now that four cargoes have been supplied to Dangote, we can expect that PMS and other refined products will be sufficiently available, eliminating complaints about supply shortages. A lack of crude oil supply directly impacts the availability of refined products,” Ukadike commented.
Regarding pricing, he suggested that market dynamics of demand and supply will ultimately dictate the price of PMS over time.
The IPMAN spokesman stated, "We should let the forces of demand and supply dictate the pricing. I am confident that there will come a time when the prices of these products will begin to decrease rather than increase."
PMS import declines
According to ship-tracking data from S&P Global Commodity Insights, petrol shipments to Nigeria experienced a significant drop in the first two weeks of October, with the influx of domestic supply from the Dangote refinery seemingly reducing the demand for imports.
S&P Global Commodities at Sea reported that only 280,400 barrels of gasoline and blendstock were sent to Nigeria in the first week of October, a stark decline from the weekly average of 1.3 million barrels recorded in August.
In the week ending October 13, only one product tanker was reported to have delivered gasoline to Nigeria, with a mere 290,567 barrels shipped from Antwerp to Lagos. This represents a considerable decrease compared to the 12 shipments made in the first half of August and September, according to S&P Global.
The decline in export activity marks a disruption to a previously stable supply chain, primarily from Northwest Europe to West Africa, coinciding with the emergence of Nigeria's own refining capabilities.
Historically, Nigeria, as Africa's largest fuel consumer, has relied on imports of approximately 200,000-300,000 barrels per day to meet its fuel needs. This dependency was targeted for change with the launch of the Dangote refinery in January, led by Africa's wealthiest individual, Aliko Dangote.
However, with shipments to Lagos showing a downward trend, traders have raised concerns about a potential shortfall in supply, as domestic production is currently inadequate to meet the consumption demand exceeding 300,000 barrels per day. A document titled ‘Summary of Volume Loading’ from the state oil company indicated that the Dangote refinery managed to supply only 317 million liters out of the 1.065 billion liters it had requested between September 15 and October.
An official has indicated that the refinery is increasing its production capacity, currently holding approximately 245 million liters in its storage tanks, while aiming for a daily output of 30 million liters of PMS.
A quicker-than-anticipated increase in production could put additional pressure on global gasoline prices in the Atlantic Basin as soon as the first quarter of 2025. However, as a large single-train refinery, the facility remains vulnerable to potential outages and disruptions.
According to S&P Global, Commodity Insights predicts that by 2026, the refinery will shift about 260,000 barrels per day of gasoline flows from Europe to West Africa. Additionally, it is unlikely that sweet hydrocracking margins will see significant recovery from an expected average of minus $1.50 per barrel through the fourth quarter of 2024 into the first quarter of 2025.
In light of the ongoing crude supply crisis, oil producers, represented by the Independent Petroleum Producers Group (IPPG), have expressed concerns about being compelled to sell crude oil to the Dangote Refinery and other local facilities in Nigeria.
The IPPG has urged the NNPC to redirect its allocated crude oil volumes to the Dangote Refinery and other local refineries to alleviate the current supply shortage affecting local refiners, which in turn impacts product availability across various regions in Nigeria.
Abdulrazak Isa, the chairman of IPPG, conveyed in a letter dated August 16, 2024, addressed to NUPRC Chief Executive Gbenga Komolafe, that the NNPC should utilize its allocated intervention crude oil volume of 445,000 barrels per day to address the current challenges, as it has successfully done in the past.
Isa indicated that some members of the IPPG already possess or are supplying crude oil to local refineries. He emphasized that the NNPC is well-positioned to address the current shortfall in crude supply for local refiners by utilizing its statutory crude allocation to meet domestic consumption needs.
“Historically, the NNPC has maintained an intervention crude oil volume of 445,000 barrels per day, designated to fulfill the nation’s domestic consumption requirements. This volume has consistently been utilized through various swap mechanisms to import refined products for local use.
“With the current domestic refining capacity now able to meet consumption demands, this dedicated volume should be allocated exclusively to domestic refineries, supported by a price hedge mechanism from a suitable financial institution like Afrexim Bank,” he stated.
Isa further asserted that any national production exceeding this allocated volume should be classified strictly as export volumes, adhering to the willing buyer, willing seller principle of the international market. This is particularly important as refiners will need to export surplus products that exceed domestic demand, thereby enhancing foreign exchange earnings.
Specifically, the IPPG noted that some of its members had received requests from the Dangote Refinery for crude supply nominations for October. They criticized this approach as creating an obligation, which contradicts the willing buyer, willing seller framework established by the Petroleum Industry Act 2021.
He stressed that the goal of improving the country’s petroleum value chain should be pursued within the legal framework and existing obligations. He expressed confidence that a mutually agreeable solution could be achieved among all stakeholders without compromising existing commercial agreements, economic interests, and the business models of various segments within the oil and gas sector.
While we wholeheartedly endorse and applaud the initiatives of Nigerian entrepreneurs aimed at improving domestic refining capabilities, it is crucial that no private sector entity faces undue pressure to enter into agreements that may inadvertently subsidize another entity within the oil and gas value chain under any pretext.
In this willing-buyer, willing-seller framework, it is vital for refiners to engage in negotiations and establish long-term Sales and Purchase Agreements for crude oil with producers and their marketing representatives. These agreements should adhere to industry best practices, typically spanning one to five years, as stated by the IPPG chairman.
He further mentioned that some refiners have received allocation letters from NUPRC for the provision of specific crude oil volumes to the domestic market for the latter half of 2024, voicing concerns regarding the potential economic implications, particularly concerning foreign exchange earnings through royalties and taxes.
The group observed, “We recognize that the current allocation methodology seems to rely on a matrix of production forecasts from producers, issued technical allowable rates, and the crude oil needs of domestic refineries, rather than actual local consumption requirements. This raises significant concerns as it implies that allocations are being set based on refiners' demands, which may surpass what is necessary for domestic use.
“This strategy could result in inefficiencies and unfairly disadvantage producers. Consequently, refineries with surplus capacity beyond local consumption should not take advantage of the Domestic Crude Oil Supply Obligations to the detriment of oil producers and other stakeholders, including the Government,” he remarked in August.