Dangote Refinery Moves Local Fuel Pricing to Dollars as Crude Supply Falls Short

Nigeria’s downstream petroleum market is facing renewed foreign-exchange pressure after the Dangote Petroleum Refinery introduced dollar-denominated prices for petrol, diesel and aviation fuel sold to local marketers.

The 700,000-barrel-per-day refinery adopted the new pricing structure after struggling to obtain sufficient Nigerian crude through the federal government’s naira-for-crude programme.

Under the pricing template circulated to marketers, petrol has been set at an ex-depot price of $0.779 per litre, while diesel and aviation fuel are priced at $1.087 and $0.942 per litre, respectively.

The development represents a significant change in the domestic fuel market because marketers must now consider prevailing exchange rates when calculating the naira cost of products purchased from the refinery.

Crude Supply Gap Weakens Naira-for-Crude Arrangement

The naira-for-crude programme was introduced in October 2024 to allow domestic refineries to purchase Nigerian crude oil in naira instead of dollars.

The arrangement was designed to reduce foreign-exchange demand, strengthen local refining and limit the exposure of domestic fuel prices to fluctuations in the naira-dollar exchange rate.

However, insufficient crude allocation has made it increasingly difficult for the Dangote refinery to maintain naira-based pricing.

The Nigerian National Petroleum Company increased its allocation to the refinery from about five cargoes to seven cargoes in May. Dangote, however, requires between 13 and 15 cargoes every month to support its refining operations.

The latest allocation therefore represents only about 47 percent to 54 percent of the refinery’s stated monthly requirement. The remaining crude must be sourced from international suppliers and settled in dollars at prevailing global prices.

Dangote Group Vice President Devakumar Edwin said the refinery was buying much of its crude oil in dollars but selling fuel in naira. As the naira weakened, the refinery’s sales revenue became insufficient to replace the dollars spent on crude, forcing the company to bear the exchange-rate loss.

The combination of limited domestic crude supply and rising international oil prices eventually made the arrangement commercially difficult to sustain.

Currency Risk Shifts to Fuel Marketers

Dollar pricing does not eliminate the currency mismatch within the downstream sector. Instead, it transfers a greater proportion of the exchange-rate exposure from the refinery to fuel marketers and ultimately consumers.

Marketers purchasing petrol at $0.779 per litre will have to convert the dollar price into naira using the applicable exchange rate.

Consequently, any depreciation of the naira will automatically raise the local acquisition cost of petrol, even if the dollar-denominated price remains unchanged.

For every ₦10 decline in the value of the naira against the dollar, the local cost of petrol would rise by approximately ₦7.79 per litre before logistics, financing and retail margins are added.

The corresponding increase would be about ₦10.87 per litre for diesel and ₦9.42 per litre for aviation fuel.

This structure could make domestic fuel prices more responsive to daily movements in the foreign-exchange market and increase pressure on marketers to adjust retail prices whenever the naira weakens.

Fresh Pressure on Foreign-Exchange Demand

The decision could also increase demand for dollars from petroleum marketers, depending on the settlement arrangements adopted by the refinery.

One of the original benefits of the naira-for-crude programme was its potential to reduce the amount of foreign currency required to finance Nigeria’s downstream petroleum supply.

Before the Dangote refinery began supplying petrol locally, Nigerian marketers depended heavily on imported products and required dollars to pay international refiners and traders.

Local refining reduced part of that import requirement. However, if domestic petroleum products are now priced and settled in dollars, some of the foreign-exchange pressure previously associated with fuel imports could return through another channel.

The impact on the naira will depend on whether marketers are required to make direct dollar payments or are permitted to pay the naira equivalent at an agreed exchange rate.

Higher Crude Prices Compound the Problem

The pricing adjustment comes as international crude oil prices rise following renewed disruptions in the Middle East.

Brent crude climbed towards $87 per barrel on Wednesday as escalating hostilities between the United States and Iran affected shipments through the Strait of Hormuz.

For the Dangote refinery, higher international prices raise the cost of imported feedstock. The effect is particularly significant when crude purchases are made in dollars while domestic product sales and operating expenses are partly denominated in naira.

Even though Nigeria is a major crude producer, domestic refiners remain exposed to international market conditions when local production is not made available to them in sufficient quantities.

This creates a policy contradiction in which Nigeria exports crude oil but its largest refinery must import part of its feedstock at international prices and with foreign currency.

Implications for Domestic Fuel Prices

The immediate consequence is greater uncertainty for petrol, diesel and aviation fuel prices.

Petrol marketers must now account for the dollar price, the exchange rate, transportation costs, financing expenses and retail margins when determining pump prices.

Diesel users, including manufacturers, logistics companies and businesses dependent on generators, could face similar pressure. Any sustained increase in diesel costs would raise operating and transportation expenses across the economy.

Dollar-based aviation fuel prices could also increase the cost burden on domestic airlines, which already earn most of their revenue in naira while paying for several critical expenses in foreign currency.

The wider inflationary effect will depend on the direction of the naira and global oil prices. A stronger naira or decline in crude prices could lower the local cost of Dangote products, while simultaneous naira depreciation and higher crude prices would amplify the pressure.

A Test for Nigeria’s Domestic Refining Policy

Dangote’s decision underscores the importance of reliable crude supply to the success of Nigeria’s domestic refining strategy.

Building refining capacity is only one part of the equation. Local refineries must also receive predictable feedstock volumes under commercially workable terms if they are expected to stabilise fuel supply and reduce foreign-exchange demand.

The refinery has already helped Nigeria reduce its dependence on imported petrol and strengthened the country’s position in the regional petroleum market. However, its ability to deliver lasting price and currency benefits depends on access to adequate domestic crude.

Dollar pricing may protect the refinery from further currency losses, but it weakens one of the principal objectives of the naira-for-crude arrangement.

Unless crude allocations improve, Nigeria risks maintaining local refining capacity without fully insulating the domestic fuel market from foreign-exchange volatility.