Tag: crude

• ‘It’s a win-win for investors, marketers, users’ •Less pressure on domestic currency

The momentous takeoff of crude sales in naira to refineries will have positive impacts across key economic sectors, experts said at the weekend.

According to them, the action will usher in a new era of stability and growth.

Following the Federal Executive Council (FEC) approval, Minister of Finance and Coordinating Minister of the Economy Mr. Wale Edun at the weekend confirmed the commencement of the “naira-for-crude, naira-for-products” transaction arrangement.

The Nigerian National Petroleum Company (NNPCL) Limited is now selling crude to local refineries in naira, using Dangote Petroleum Refinery as the pilot.

Economic and finance experts were unanimous yesterday that the commencement of the “naira-for-crude, naira-for-products” arrangement would have significant positive impacts on the country’s foreign exchange (forex) position, currency value, energy security and inclusive development of several sectors of the economy.

Chief Executive Officer of the Centre for the Promotion of Private Enterprise (CPPE), Dr Muda Yusuf, described the domestic currency transaction arrangement as a “very good policy” that will have several multiplier effects across the sectors.

According to him, with the takeoff, Nigerians should expect reasonable stability in energy security and pricing as well as a reduction in naira volatility.

“First, it makes it easier for the government to ensure some level of influence on petrol pricing.

“The exposure of the sector to foreign exchange challenges, such as liquidity and volatility in foreign exchange (forex) for acquiring crude, has been very challenging.

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“By taking this out of the equation, we provide an opportunity for domestic refiners to buy in naira, making the process much more seamless and enabling better management of product prices for social reasons.

“It may not sound well in the context of the economic conversation, but we need to consider the social context of our policies in the oil and gas sector, particularly as they relate to energy prices.

“The flexibility required to manage our energy prices, while being sensitive to the social environment, will be much easier with this arrangement. This is a major advantage.

“Secondly, this will ease the pressure on our foreign exchange market.

“If products are sold in foreign currency, the refineries would need to source their foreign exchange, which would exert enormous pressure on the foreign exchange market.

“If crude oil can be sold in naira, and we can ensure that all oil marketers buy refined petroleum products produced domestically, we are likely to see a significant easing of pressure on our foreign exchange markets.

“This could help strengthen the naira and improve our overall economic situation.

“With the introduction of naira transactions, we are likely to see increased investment in naira.

“The better our results, the more capacity the Central Bank of Nigeria (CBN) will have to support the naira, thus inspiring greater confidence in the country.

“From the standpoint of macroeconomic stability and the strength of our reserves, I believe this is a very good step,” Yusuf said.

He noted that while some may argue that if crude had been sold in dollars, the NNPCL would have received dollars, it makes better economic sense to localise the transactions and make the process work.

According to him, as the country’s capacity to produce locally increases, with the refineries, Nigeria can export refined petroleum products, which would yield more foreign exchange and provide better local value addition than simply exporting crude.

Said he: “Overall, I think this development is very positive for the economy. Our hope is that the NNPC can supply the desired amount of crude required by domestic refineries.”

Former President of Chartered Institute of Stockbrokers (CIS) and Managing Director, Arthur Steven Asset Management, Mr. Olatunde Amolegbe, said one of the immediate benefits of the transaction arrangement would be to reduce pressure on the foreign exchange market as the refiners and marketers will now produce and sell in the local currency.

According to him, the multiplier effects would ultimately have a positive impact on inflation as forex market stability reduces currency input to inflation.

Said he: “The general citizenry should also benefit from lower energy cost as forex volatility is removed from price that ultimately gets to the pump.

“An additional benefit from selling crude to local refineries in naira is that it serves as an incentive for other players to come into the industry and for present players to increase their capacity knowing that forex volatility risk has been removed from the supply chain through the ability to buy crude in local currency.

“We should expect more investments and significant competition in that space in the medium term and this could very well bring down local energy costs further.”

He noted that the possible pitfall of gap in forex accretion to reserves could be mitigated with a ramp-up in crude production.

The government has set a December 2024 target to increase crude production from the current average level of 1.52 million barrels per day (mbpd) to 2.0 mbpd, and subsequently to 3.0 mbpd.

Managing Director, APT Securities & Fund, Mallam Kasimu Kurfi, said the new arrangement would help in the development of the value-chain sectors, including pharmaceuticals, paints, chemicals and packaging, thus boosting economic prosperity and mass employment.

According to him, the country could channel forex saved from the transaction arrangement into other demands and stabilise the exchange rate.

“Once the exchange rate is stable, there will be more inflow of foreign direct investments (FDIs) into the country and the economy will be better for it,” Kurfi said.

He noted the need to further tighten regulatory measures to prevent corrupt officials from forex laundering, calling for a designated evaluation framework to track funds allocation to governments and utilisation.

He added that the government should also ensure thorough regulation for both the midstream and downstream segments of the oil industry to ensure compliance with national priorities and standards.

Managing Director, HighCap Securities, Mr. David Adonri, believes the use of naira for domestic transactions along the value chain of the petroleum industry is economically wise.

According to him, it is a misnomer for any local raw material to be bought by any user in Nigeria, in any currency other than the naira.

Adonri said: “Settlement of domestic trade with foreign currency puts pressure on foreign exchange and constrains access to domestic raw materials if the user cannot find foreign currency to buy at the right price.

“The entire process of first converting from domestic currency to foreign currency and subsequently converting to domestic currency for costing increases the cost of doing business.

“The user will also be unnecessarily exposed to foreign currency risk. 

“Transacting domestic business with foreign currency is also a contravention of the rule of law which prohibits such a practice.”

Oil producers under Independent Petroleum Producers Group (IPPG) have called on Nigerian National Petroleum Company Limited (NNPCL) to re-direct its crude oil volumes to Dangote Petrochemical Refinery and others to mitigate crude supply shortage experienced by local refiners.

Chairman of IPPG, Abdulrazak Isa, in a letter to Chief Executive Officer of Nigerian Upstream Petroleum Regulatory Commission (NUPRC), Gbenga Komolafe, said NNPCL should utilise its 445,000 barrels of oil per day (445kbopd) to salvage the situation.

Affirming the group’s commitment to enhancing efficiency, Isa said some IPPG members were supplying crude to local refineries but insisted NNPCL was in a good position to mitigate the crude supply shortfall faced by local refiners by leveraging its statutory crude allocation.

“Historically, NNPC had an intervention crude oil volume (445kbopd) to satisfy domestic consumption. This has always been used under swap mechanisms to import refined products. Since there is domestic refining capacity to meet consumption, this dedicated volume should be reserved for domestic refineries under a price hedge mechanism provided by a suitable financial institution, such as Afrexim Bank,’’ he said.

Isa maintained: “Any national production above this allocated volume should be treated as export volumes, adhering to the  willing buyer, willing seller framework of the international market, especially since the refiners will need to export excess products that surpass domestic demand, thus boosting FX earnings.’’

The group expressed concerns about developments, including domestic crude oil refining requirements and crude oil production forecast for second half of 2024, announced by NUPRC, as well as request to producing companies for monthly quotations for crude supply to licensed refineries.

  IPPG noted some of its members received letters from Dangote Refinery for crude supply nominations for October, and faulted the approach as bringing them under an obligation, saying it was in conflict with the willing-buyer, willing-seller framework prescribed by Petroleum Industry Act (PIA 2021).

He noted the objective of enhancing the country’s petroleum value chain should be done within confines of the law, expressing confidence that an amicable solution could be reached by stakeholders without jeopardising existing commercial agreements, economic interests and business models of each segment of the sector.

The IPPG chair said: “While we support and commend Nigerian entrepreneurs to enhance domestic refining capacity, it is important no private sector business is pressured into arrangements that may subsidise another in the value chain under any guise whatsoever.

“Under this willing-buyer, willing-seller framework, it is refiners negotiate and execute long-term crude oil Sales and Purchase Agreements with producers and their marketing agents. These agreements should follow industry best practice, with typical tenures ranging from one to five years.’’

The independent companies added some of them had received allocation letters from NUPRC for supply of volumes of crude oil to the domestic market for second half of 2024, expressing concerns about its implications, especially foreign exchange earnings through royalties and taxes.

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The group noted: “We understand that the allocation methodology appears to be based on a matrix of production forecasts by producers, issued technical allowable rates as well as crude oil requirements of domestic refineries, rather than actual local consumption needs. This raises concerns as it suggests that allocations are determined based on demands of refiners, which may exceed what is needed for domestic consumption.

“Such an approach could lead to inefficiencies and unfairly disadvantage producers. Therefore, it is crucial refineries with excess capacity beyond local consumption do not exploit the Domestic Crude Oil Supply Obligations (DCSO) to the detriment of oil producers and other, including the government.’’

Isa called for transparency in how allocations were determined and requested NUPRC to provide details on the criteria, while he sought opportunity for IPPG to make input into production forecast to ensure it reflects operational realities.

IPPG said execution of long-term crude oil Sales and Purchase Agreements under willing buyer, willing seller framework was sacrosanct and no regulatory fiat could set it aside, urging that refiners be allowed to negotiate crude oil Sales and Purchase Agreements with producers and their marketing agents in line with industry best practice.