Dapo Olusegun:Crude-for-naira Deal Will Ease Pressure on Forex 

The Executive Vice President, Downstream, Nigerian National Petroleum Company Limited, Mr. Dapo Olusegun, speaks to Peter Uzoho on recent developments in the oil and gas sector, especially on the partnership between the national oil company and the Dangote Refinery

What does the crude-for-naira deal initiative that was recently approved by the federal government entail?

The Federal Executive Council’s (FEC) directive on the sale of products in naira is a brilliant idea which is basically to help reduce the intensity in the chase of the United States dollars. What used to happen before this came into being was that the refinery would go out to chase dollars to pay for the crude and when we want to buy the refined products from the refinery, we would also go out and chase dollars in the same market for the refined products. We are transacting here in Nigeria, but then we’re putting pressure on the forex market at different points in time. This is simply a payment solution. The transactions are still in US dollars. Crude sales have always been in US dollars, and are still in US dollars. Bulk product sales are also in US dollars. That is because if the crude, from which the refined products are derived, is sold in dollars, the refinery would need dollars to pay for the crude. Refineries typically sell the products in dollars. But what this does is create a payment solution that takes out that need to go out to the market and chase dollars.

That is, the refinery going out in the market and chasing dollars to buy crude, marketers going out in the market and chasing dollars to buy products. So, it will create a situation where there’s some less volatility in that space, all things being equal. I said it’s a payment solution. What do I mean? The transactions are still going to be in the natural currency, which is the US dollar, but payment now will be done in naira. So, let’s give an example of the refinery buying a barrel of crude for $80, it’s still $80. When the payment is due, that payment will be converted on that due date to Naira, and it will paid in naira. Marketers, of which NNPC is one, go to the refinery, and buy products in bulk, in dollars when that payment is due, instead of NNPC going to chase dollars in the market, the NNPC pays for that product in naira. So, that’s what it says. It’s a simple payment solution, no more, no less. I must say also that today NNPC is the sole provider of petrol to the markets, and we understand why that is so. NNPC is a sole provider, not because NNPC wants to be, but because all the marketers are not playing in that space for reasons that we understand.

One, the paucity of US dollars and the volatility that was experienced in the foreign exchange rates. These marketers always want to make profits. They’re not set up to make losses. Where they cannot predict, they don’t want to play. For example, if you buy products you want to sell, and the currency moves against you, a loss crystallises immediately. When the exchange rates move; and you know, sometime last year, after the new government came in, it became obvious immediately that there was no provision for subsidy for the second half of the year and prices reflected in the market. But towards the end of the end to the beginning of this year, the exchange rates moved significantly, and it created a situation where the naira price being paid for petrol did not cover the cost of providing it. So, whatever you call that situation, petrol was not being sold at market price. And when you have a situation where you have a situation where a commodity is not being sold at markets, somebody has to pay for the difference.

So, that creates some sort of issues. But that issue cannot be solved by the crude-for-naira or product-for-naira solution, because it is simply a payment solution. I would like to add here that there was a false expectation that when the Dangote Refinery starts to produce, there would be a price drop or that it would be sold cheaply. Every business is set up to make a profit and every business must cover its cost for it to be sustainable. The crude was bought for a particular price and the refined product has to be sold for a particular price. So, with the crude-for-naira, there would be less scramble for dollars in the local forex markets, because the refinery is not chasing dollars, NNPC is not chasing dollars and with the installed capacity of the refinery, we should have some stability in product supply as long as the refinery runs well.

 There were allegations before the take-off of the Dangote Refinery that some agencies of government and the NNPC were frustrating the process by delaying its crude vessels unnecessarily, what can you say about that?

The NNPC has a stake of 7.25 percent in Dangote Refinery. It wouldn’t make sense for a shareholder to seek to frustrate a company that it has equity participation in. I can tell you that the NNPC has not at any time done anything to frustrate Dangote Refinery.  The reverse is the case. NNPC has gone out of its way to support Dangote Refinery, which is what we expect a shareholder to do. So, when you talk about delaying Dangote crude cargoes, all of these are business transactions. Some terms and conditions guide every type of transaction and the trade of crude oil and the trade of refined products is a global business. The terms and conditions are global terms and conditions and so there are conditions to be met before a cargo of crude can be released. If those conditions are not met, then it’s just normal business to wait until those conditions are met before you can release the cargo. So, that’s basically what it is. So it’s not anything. It’s not anything personal, we’re running a business and Dangote is running a business. All of the marketers and all companies are running businesses. You have terms and conditions that we all sign off to. It’s just us keeping to the terms and conditions of our business transactions. I can tell you, there’s nothing unfair going on. Everything that’s going on is according to the terms and conditions signed by both parties, and that is the way business should be done. It’s important to emphasise that the NNPC, with the Petroleum Industry Act (PIA), is now a for-profit company. It’s no longer the corporation of government under the NNPC Act. So, if the NNPC, for whatever reason, is unable to pay its bills, if, for whatever reason, NNPC is making a loss, the government cannot help the NNPC as they used to be in the past. When it was a corporation, if it makes a loss, the government bails it out. But today, as I mean, immediately, the PIA was enacted that became history. If NNPC fails to cover its cost today, the government cannot bail out NNPC. Do you know why? Because it will be illegal and the PIA does not allow it. So, the NNPC is operating purely as any other for-profit organisation. So, we have signed a contract and we will keep to the terms and conditions of the contract.

But what is the philosophy behind NNPC being the sole supplier of PMS?

NNPC being the sole off-taker is not different from what is happening. Why did the NNPC become the  sole supplier of petrol? That was because nobody else was going to do it. I need to let you know that nobody precluded any marketer from bringing in PMS. When the marketers go to NMDPRA to get the permit or licence to import, typically they will say, X amount of AGO, X amount of ATK and some of them include PMS.NMDPRA has been approving that. But they then go to the market, check the market indices, and say to themselves, ‘PMS is still being sold below cost, If I bring it in, I will make a loss.’ So, now they have approval to bring in AGO, ATK, and PMS. What do they end up doing? They’re bringing only AGO and ATK, they don’t bring in PMS because the market is still not right for them. So, it’s not because NNPC wants to be the sole provider or supplier of PMS, it’s because the other marketers won’t do it until it is profitable. If it’s not profitable, they won’t do it. That’s the same thing that’s happening with Dangote. I said earlier that the Dangote is a company. It’s going to sell at market price. The market price is still higher. I mean, the market value of PMS is still higher than the N766/litre or N765.99/litre that NNPC was selling previously offshore. As soon as the price allows for it, you will see other marketers go to Dangote to buy. Nobody is precluding them from buying. There is still this impression that the NNPC is a regulator. NNPC is not a regulator. The NMDPRA is the regulator and it is headed by a Chief Executive. They are the regulator for the mid-stream and downstream. The NUPRC is headed by a Chief Executive, they regulate upstream.

Where is the NNPC on the Port Harcourt Refinery?

When you give a projection, it depends on what kind of person you are. Are you an optimist or you are a pessimist? If you are an optimist, when you give a projection, it is usually based on a range. Nobody can see tomorrow and nobody can say exactly what is going to happen tomorrow. Even the best Wall Street Analysts, when they make their projections, still point out that it is subject to change. There is always a caveat. In your projection, some situations can occur. Port Harcourt Refinery achieved mechanical completion in December 2023. Anytime after that, it is expected to go into commissioning and eventually start to produce. But the issue is that it is not something that you can give an exact date. There is a process you have to go through and until you get to that place where things are operating as they should operate, you cannot say you have done it.  But you can always give your projection like I said. Laying out the facts on Port Harcourt Refinery, it achieved mechanical completion in December. By August, we fired up the burners. So if you want to ask id Port Harcourt Refinery has started the distillation process? The answer is yes, it has. Is it producing products to tanks now? No. So what happens in this process is that you ignite the burners and the distillation process starts. Remember that you’re going way above 300 degrees. You raise the temperature over time. If anything goes wrong, because at 300 degrees, a lot can go wrong, you have to bring it down.

You can’t intervene when at 300 degrees. We’ve done that four times since August on Port Harcourt Refinery and each time a different thing comes up we have to bring it down to fix it. We’re at that point now where I’m very confident and I had said earlier that before the end of September, we should see Port Harcourt Refinery running.  It actually started running in August, when we leaked the burners. The issue now is when will we get products out, because, as far as Nigerians are concerned is the product out? To them, that would mean the refinery is working. Now, let’s compare like for like. Dangote Refinery achieved mechanical completion in May last year, and that was when the commissioning was done. Dangote Refinery started producing AGO in March this year, which is about 11 months later. Port Harcourt Refinery, a brownfield refinery that we have rehabilitated, not a brand new refinery like Dangote refinery, achieved mechanical completion in December, and this is September, and we’re hoping to start producing middle distillates; same middle distillates that Dangote refinery started producing between March and April, we’re working towards producing it in September. Have we been inefficient? That’s the question we need to ask ourselves. Nigerians, there’s a need to be fair in our expectations. We can set the range of when we think it will happen, there is an optimistic end as well as a pessimistic end of that. But this is a process that has to go through. You cannot jump any of the processes, you must follow through. We’re optimistic and we believe that Port Harcourt Refinery will start producing middle distillates to tank this month and we’ve said that before.