Dangote’s Dollar Fuel Sales Raise FX Demand, Spark Fresh Concerns Over Naira

Dangote Petroleum Refinery’s decision to switch the sale of Premium Motor Spirit (PMS), Automotive Gas Oil (AGO) and Aviation Turbine Kerosene (ATK) from naira to United States dollar payments has triggered concerns among industry analysts over its potential impact on Nigeria’s foreign exchange market, fuel pricing and the value of the naira.

The new policy, which takes immediate effect, applies to both gantry and coastal product sales, marking a significant shift for one of Nigeria’s largest suppliers of refined petroleum products.

Oil and gas industry analyst, Otunba Tunji Oyebanji, said the development could increase demand for the U.S. dollar, placing additional pressure on the naira.

According to him, the decision suggests that the existing crude supply arrangement may no longer be working as expected.

“This means he’s not getting the crude or the arrangement is not working as expected. We’ve said it from the beginning that this is a tall order. Nigeria was not producing enough crude to start with. Then they have already pledged some of that crude to third parties,” Oyebanji said.

He explained that Nigeria’s previous crude supply commitments had reduced the volume available for local refining.

“They took some advanced money from some of the buyers and then they are paying them back with crude oil. That limits the amount of crude available to sell either to Dangote or the international market.”

Oyebanji stressed that crude oil remains Nigeria’s biggest source of export earnings and noted that the country’s production constraints may have contributed to the refinery’s latest decision.

“I’m not standing in for NNPC. I’m just saying this might be the challenge that has made it not to work,” he said.

He added that the refinery may now be sourcing more crude from the international market, where transactions are dollar-denominated.

“The implication is that more Dangote crude has to be bought from other sources outside Nigeria and, of course, he has to pay dollars. So I think that’s why he said he is going to start selling in dollars. The implication of this, of course, is that it is going to increase demand for dollars and that means the naira may weaken.”

BUSINESSINSIDERNG.COM gathered that the refinery’s decision was driven largely by increasing foreign exchange exposure arising from its crude procurement structure and persistent volatility in the foreign exchange market.

Industry sources familiar with the refinery’s operations disclosed that a larger proportion of crude oil supplied to the refinery by the Nigerian National Petroleum Company Limited (NNPCL) is now priced in dollars, while a significant portion of refined products has continued to be sold in naira.

A senior industry source said the growing mismatch between dollar-denominated crude purchases and naira-based product sales had exposed the refinery to considerable exchange rate risks.

“The decision takes effect immediately. All PMS, AGO and ATK sales, both gantry and coastal, are now dollar-based,” the source said.

It was further learnt that marketers lifting products from the refinery have already been notified of the new payment arrangement through an official memo.

Another official explained that continued fluctuations in international crude oil prices and uncertainties in Nigeria’s foreign exchange market also influenced the policy shift.

The official disclosed that the refinery now receives fewer crude cargoes under the naira-for-crude arrangement than it requires for efficient operations.

“While we require more than 15 cargoes of crude monthly for our operations, the NNPCL is struggling to supply three cargoes in naira under the naira-for-crude arrangement,” the official said.

Analysts believe the move could have wider implications for the downstream petroleum sector, as marketers may have to source more foreign exchange to purchase products from the refinery. They warned that the development could increase distribution costs, intensify demand for dollars and ultimately exert fresh pressure on the naira if the imbalance between crude procurement and domestic fuel sales persists.