Emmanuel OchayiNigeria is on the verge of a significant transformation in its energy sector with the launch of the Naira-for-Crude deal. The Federal Government’s plan to begin selling crude oil in naira to domestic refineries, including the Dangote Refinery, will start on October 1.
This initiative is expected to end the long-standing Domestic Crude Allocation (DCA) scheme, which has faced criticism for a lack of transparency and inefficiency over the past two decades. By shifting to a naira-denominated arrangement, Nigeria could save up to $7.32 billion annually, easing the pressure on its foreign exchange reserves and improving the country’s economic outlook.
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For over 20 years, Nigeria has operated under the Domestic Crude Allocation (DCA) system, in which approximately 445,000 barrels of crude oil per day were allocated to local refineries. These refineries, most of them government-owned, were expected to pay for the crude in naira. The proceeds from selling the resulting refined products were then used to support the country’s energy supply. On paper, the arrangement was meant to guarantee energy security, stabilize fuel prices, and shield the country from fluctuations in the global crude oil market and currency volatility.
However, chronic financial and operational challenges in these refineries led to inefficiencies, with a large portion of the crude being diverted to international oil-for-product swap programs. This arrangement, known as Direct Sale Direct Purchase (DSDP), was meant to address refining gaps but became a burden on the economy.
The new Naira-for-Crude policy aims to overhaul this system by offering crude oil to Nigerian refineries in naira instead of foreign currency, starting with the Dangote refinery as the pilot project. The Federal Government expects this move to reduce the demand for foreign exchange and improve domestic fuel supply.
A Shift Toward Transparency
This new approach represents a bold effort to increase transparency and efficiency in Nigeria’s oil industry. For years, the DCA scheme has been criticized for its opacity and inefficiency. The Naira-for-Crude deal signals a shift toward clearer and more accountable operations.
Bayo Onanuga, special adviser on information and strategy to President Bola Tinubu, emphasised that the African Export-Import Bank (Afreximbank) and Nigerian settlement banks will facilitate the trade between the Nigerian National Petroleum Corporation (NNPC) and domestic refineries like Dangote. According to Onanuga, “The Federal Executive Council has adopted a proposal to sell crude oil in naira to local refineries to stabilise both the pump price of refined fuel and the dollar-naira exchange rate.”
Reducing Pressure on Foreign Exchange
One of the most significant impacts of the Naira-for-Crude deal is the anticipated reduction in the demand for foreign exchange. Currently, Nigeria spends billions of dollars annually to import refined petroleum products due to the country’s inability to refine all its crude oil locally. The Naira-for-Crude deal aims to reduce this financial burden by ensuring that payments for crude oil are made in naira, effectively cutting down the need for foreign currency.
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Zacch Adedeji, executive chairman of the Federal Inland Revenue Service (FIRS), highlighted the economic benefits of this policy. “The pressure on foreign exchange will be reduced,” Adedeji said, adding that the move could save Nigeria approximately $7.32 billion annually. He further explained that the foreign exchange expenditure on importing petrol could fall to as low as $50 million per month, resulting in annual savings of over 90 percent.
Long-Term Economic Benefits
The Naira-for-Crude deal could bring multiple long-term benefits to Nigeria’s economy. By reducing the country’s reliance on foreign exchange for fuel imports, it will help stabilize the naira, which has been under immense pressure due to fluctuating oil prices and declining reserves. In addition, by increasing local refining capacity, Nigeria could become more self-sufficient in meeting its energy needs.
“The sale of byproducts from Dangote refinery to distributors will also be conducted in naira,” Adedeji noted. This means that more of the transactions within Nigeria’s oil industry will be conducted in the local currency, creating a more stable economic environment. Moreover, it will reduce the risks associated with fluctuating international crude oil prices and exchange rate volatility.
Another key benefit of the Naira-for-Crude deal is the potential for job creation. As local refineries ramp up production to meet the demands of the new arrangement, the need for skilled labor is expected to increase. This could help reduce unemployment and stimulate economic growth.
Challenges Ahead
Despite the optimism surrounding the Naira-for-Crude deal, challenges remain. Nigeria’s refineries, including the Dangote refinery, must operate efficiently and at full capacity to ensure that the benefits of the policy are realized. Any operational hiccups could delay the expected savings and hinder fuel supply. Additionally, the exchange rate used in the transactions must be carefully managed to avoid distortions in the market.
Another concern is the ability of the government to maintain transparency throughout the process. While the Naira-for-Crude deal is a step toward increasing accountability, the sector’s long history of corruption and mismanagement means that stakeholders must be vigilant to ensure that the new system delivers the promised results.
The Naira-for-Crude deal marks a turning point in Nigeria’s approach to managing its energy resources. By selling crude oil to domestic refineries in naira, the government hopes to improve fuel supply, reduce foreign exchange pressure, and save billions of dollars annually. If successful, this policy could usher in a new era of transparency and efficiency in Nigeria’s oil sector. However, the success of the initiative will depend on the efficient operation of local refineries and the government’s ability to maintain accountability throughout the process.
Emmanuel Ochayi is a journalist. He is a graduate of the University of Lagos, School of first choice and the nations pride. Emmanuel is keen on exploring writing angles in different areas, including Business, climate change, politics, Education, and others.
