LOCAL REFINING VS. FOREX EARNINGS
TEMIDAYO AKENROYE writes on supply
chain trade-offs for Nigeria’s premium crude
Nigeria’s oil sector is at a turning point. The government’s drive to expand local refinery capacity, led by the Dangote Refinery, is an ambitious step toward strengthening energy security and reducing the country’s dependence on imported petroleum products. However, this shift also brings complex trade-offs, particularly in allocating crude oil, a cornerstone of Nigeria’s economy. At the center of the challenge is Nigeria’s Bonny Light crude, a premium-quality oil that fetches high prices on international markets. Exporting this crude brings in vital foreign exchange, critical for stabilizing the naira and funding essential public services. On the other hand, diverting it to local refineries raises important questions. Can these refineries handle high-cost feedstock and still produce competitively priced products for domestic and international markets? These are the tough decisions policymakers must grapple with to achieve a balance that works for the country’s economy.
Nigeria faces a critical decision in managing its crude oil: should it prioritize exports to generate foreign exchange or focus on refining locally to strengthen domestic production? Each choice comes with trade-offs that ripple through the economy. Exporting crude oil brings in much-needed forex, vital for stabilizing the naira and funding public services. However, it reduces the supply available for local refining. On the other hand, prioritizing local refining creates jobs, reduces reliance on imported refined products, and could lower consumer costs, but it limits forex earnings and strains public finances.
The recent removal of petrol subsidies has made these trade-offs even more pressing. Higher fuel prices have pressured households while the government attempts to balance economic stability with energy security. Further complicating this dilemma are OPEC production quotas, which cap Nigeria’s crude output. Even at full capacity, the country cannot meet both its export and refining demands, forcing policymakers to make tough choices.
Currently, Nigeria’s crude supply relies heavily on the Nigerian National Petroleum Corporation (NNPC) as a single source. Diversifying this supply chain by blending Bonny Light crude with more affordable imported grades could lower production costs and make Nigerian products more competitive in export markets. The Dangote Refinery has already adopted this model, sourcing crude locally and internationally to ensure consistent operations. However, public opinion on such strategies is divided, with critics arguing that importing crude undermines the priority of using local resources for national benefit.
Importing crude to supplement local production raises a difficult trade-off. Exchange rate volatility affects the cost of imported inputs, posing a choice: Should Nigeria produce lower-octane or midgrade petroleum products using blended crude, which may align better with global market standards but could remain costly due to currency fluctuations? Or should it focus on high-grade gasoline made solely from Bonny Light crude, which may be more affordable domestically because refineries purchase it in naira? While the latter option supports local consumption, its expected premium price might limit competitiveness in export markets.
Both options come with challenges. High-grade products made entirely from Bonny Light crude may be cost-effective for local use if refineries purchase the feedstock in naira. However, selling these products internationally at premium prices could deter buyers, as they would compete with cheaper alternatives in the global market. If Nigeria lowers the prices to attract international customers, it effectively subsidizes foreign markets, which undermines its economic goals. On the other hand, blended lower-octane products may find success globally due to their competitive pricing but could remain costly for Nigerians, especially if the naira weakens and import costs rise.
In addition to supply chain diversification, Nigeria’s refinery ambitions depend on strong infrastructure. Pipelines, storage facilities, and transport networks are essential for efficient operations. However, the current infrastructure is aging and vulnerable to vandalism and theft, forcing reliance on road and rail transport, which are often unsafe, inefficient, and expensive. Investing in modern infrastructure would reduce costs, improve safety, and support domestic and export goals. Yet, this investment introduces another trade-off. Should Nigeria sell more crude to stabilize its economy through forex earnings, or should it redirect revenues toward infrastructure to boost long-term refining capacity? While selling crude provides immediate benefits, neglecting infrastructure risks undermines the refinery sector’s self-sufficiency. Conversely, investing in infrastructure strengthens domestic refining and reduces reliance on imports but strains forex reserves in the short term.
Navigating these trade-offs requires careful planning and bold decisions.
Charting the Path Forward: Nigeria’s refinery ambitions demand a systems-thinking approach that considers the country’s interconnected challenges. Supply chain trade-offs, currency stability, infrastructure development, and environmental sustainability are deeply interwoven, and addressing one issue in isolation risks creating unforeseen problems. A holistic framework is essential; one that ensures each decision strengthens a balanced and sustainable oil sector. By adopting this perspective and leveraging its unique strengths, Nigeria can transform trade-offs into sustainable growth and global competitiveness opportunities. A strategy that integrates economic, social, and environmental priorities will address today’s challenges and build future resilience.
Decisions about how to allocate crude oil must consider their far-reaching economic ripple effects. Exporting crude generates the foreign exchange necessary to stabilize the naira and fund essential public services. At the same time, prioritizing local refining can enhance energy security and reduce reliance on imported petroleum products. Balancing these competing demands is critical, as crude oil allocation affects the oil sector, the broader economy, and public welfare. Policymakers must ensure these decisions align with Nigeria’s long-term national objectives.
Diversifying the feedstock supply chain for local refineries is another critical piece of the puzzle. When strategically managed, importing crude oil for blending can improve the global competitiveness of Nigeria’s refined petroleum products. This flexibility would enable the oil sector to adapt to market realities while maintaining fiscal discipline. However, it is vital to ensure this does not become a gateway for reintroducing harmful subsidies. Unlike subsidies that previously supported consumption, which drained public funds, this approach would aim to support efficient production and market competitiveness. Allowing refineries to manage input costs independently while avoiding government intervention will encourage a more market-driven approach.
Nigeria can also draw valuable lessons from countries like Singapore and India, which have successfully leveraged their refining sectors to achieve global competitiveness. India, for example, imports a variety of crude oil grades, blending them to achieve cost-efficient outputs for both domestic and international markets. Nigeria could explore a similar approach, blending its high-quality Bonny Light crude with more affordable imported varieties to produce competitively priced refined products for export. However, blending must be seen as part of a broader strategy, not a one-size-fits-all solution. It should complement other efforts to enhance operational efficiency and align with market demands.
A strong and stable naira is crucial to making this strategy viable. If part of the feedstock is purchased in dollars, a weak currency could make the final refined products prohibitively expensive, undermining their competitiveness. This highlights the importance of prioritizing currency stability within Nigeria’s broader economic framework. At the same time, diversifying the economy to reduce reliance on oil exports is essential. By investing in agriculture, services, and ICT, Nigeria can generate alternative sources of foreign exchange, easing the pressure to prioritize crude exports over domestic refining. A robust non-oil export sector would better position the country to manage competing demands for crude oil while maintaining forex stability and addressing local energy needs.
Akenroye is a professor of Supply Chain Management at the University of Missouri-St Louis in the United States, a Visiting Professor at the University of South Africa, and a Senior Visiting Fellow at the Lagos Business School
