It was meant to be an arrangement by which Nigeria swapped crude oil for refined petroleum products but now it has emerged the country has accumulated up to $3 billion in debts owed to trading houses such as Vitol and oil majors like BP for fuel supplies.
Nigeria will likely take months to clear the debt, which will complicate reforms by new President Bola Tinubu aimed at weaning Africa’s largest economy and most populous nation off costly fuel subsidies that have contributed to growing debt and foreign exchange shortages.
In his first two weeks in office, Tinubu removed petrol price caps and restrictions on the naira currency – liberalisation changes that investors have been awaiting for more than a decade.
As part of those reforms, Nigeria, Africa’s top oil producer, plans to scrap an old scheme by which it swaps its crude for gasoline imports.
Nigeria for years sold the gasoline, bought at the open market price, to its population at a discount, and the government paid the difference.
The subsidy costs about $10 billion last year. The last time the government tried to end the scheme, the move led to protests. Nigeria needs imports because it lacks the refinery capacity necessary to meet domestic demand.
The head of Nigeria’s state oil firm NNPC, Mele Kyari, said earlier this month it was ending the swaps – known as Direct Purchase Direct Sale (DSDP) – after years of criticism by civil society groups including the Nigerian Extractive Transparency Initiative for a lack of transparency and corruption.
Kyari said payments would be now made in cash but traders say NNPC is still importing gasoline via swaps for July delivery and has to pay for those cargoes in crude as well as the pending payments for previous months of swaps.
The arrangement has for years involved more than a dozen foreign and local trading consortia and backpayments are expected to continue until at least October 2023, according to the four traders involved in business with NNPC.
NPPC, which claims the government owes it $6 billion for subsidised fuel sales, declined to comment.
The government declined to comment. Swaps participants including Vitol, Mercuria, BP and TotalEnergies also declined to comment.
“Swaps will ultimately stop but not yet. We are getting our swaps crude cargo in October at the earliest,” one major player said.
NNPC had made a rare cash payment in May to some partners of around $200 million, two trading sources said, but no further payment has taken place since amid the government’s cash struggles.
Nigeria’s falling oil production has exacerbated the country’s fiscal problems, because it reduces the revenue that could be used to repay debt.
Nigeria used to produce 1.8 million barrels per day of crude but output has fallen in recent years to as little as 1.1 million during due to lack of investment.
Paying for fuel deliveries with crude cargoes means there is less crude for Nigeria and NNPC’s to export, and so less revenue.
NNPC’s contribution to state coffers went from a peak of more than $30 billion a year in 2011 to zero in 2022 as it retained revenues to cover gasoline sale losses.
International monetary experts have long suggested Nigeria remove fuel subsidies and liberalise its foreign exchange to address its fiscal crisis.
In recent years, Nigeria’s central bank kept the naira fixed at an artificially high rate that gradually rose from 200 to 450 naira to the dollar that only a few players, including the NNPC, could access. That shut out potential private gasoline importers from the market.
President Tinubu allowed the naira to fall steeply in recent weeks, and eliminated preferential naira rates, a move that means all potential importers get the same forex costs and could compete in fuel imports.
But the naira volatility, which makes it tough to calculate potential profits, and uncertainty over whether firms will be able to get money out of the country due to continued dollar shortages, has for now deterred private firms from importing fuel.
Besides private importers, Nigeria will also depend on businessman Aliko Dangote’s refinery to cover fuel demand in the future. Nigeria’s first major oil plant is unlikely to start full-scale operations before next year.