Nigeria Plans Broadening Crude Swap Initiative To Cut Local Petroleum Refining Cost

The federal government is strengthening an initiative that will boost oil and gas swap plan, embedded with a regulator-mandated netting mechanism, the first of its kind around the world, to enable refiners to bring down refining costs.

The broader details of this complicated swap mechanism, pitched forward by the present administration, are being worked out by the various stakeholders

The spur is volatility in retail petrol prices, which have rocketed more than sixfold since President Bola Tinubu terminated decades-old fuel subsidies on his inauguration day in May 2023, and the promise the move holds for the affordability of the product, and other fuels.

Retail petrol has been defenceless against external pressures that have driven it to extreme price levels in Nigeria, since the US-Iran war started in February, up by 22.7 per cent.

This has continued to weigh on consumer budgets so profoundly that regulators are now stepping up consultations more tenaciously to introduce reforms to ease the pressure on businesses and households.

In August, the idea of a crude oil and gas swap system that pairs domestic producers up with refineries with a view to compressing input costs and delivery time was discussed at a meeting between the midstream sector’s top watchdog and the Nigerian Upstream Petroleum Regulatory Commission (NUPRC) in Abuja.

“How the swap works is that I have an obligation somewhere and I am close to an export facility. Somebody else has an obligation inland and his own (facility) is close to a domestic offtaker,” said Oritsemeyiwa Eyesan, the CEO of NUPRC, which is leading the course.

“So, instead of trying to move from one end to the other, we just agree on a swap arrangement, and there is a mechanism for them netting off,” she explained.

The structure is in the works. The proposal is currently engaging other players, with Eyesan noting that discussions on the crude oil component of the swap are still rudimentary.
The operational asset-exchange framework of the swap allows two distant producers, who are close to each other’s delivery points (refineries in this case), to switch volumes.

This gives them ample room to leverage the proximity of their bases to such destinations to save the massive logistics expenses involved in shipping crude across the supply chain.

The volume differences, quality API differentials, as well as delivery margins, are then netted off at a proposed commercial clearing house.

Temitope Kolade, associate director in the energy, mining and maritime division of Andersen in Nigeria, said the mechanism may help remove long-haul marine shuttling, vessel chartering, and offshore ship-to-ship transfer fees, often a pressure point for landing cost of raw crude oil.

“The arrangement has the potential for eliminating long-haul marine shuttling, vessel chartering, and offshore ship-to-ship (STS) transfer fees that increase the landing cost of feedstock,” he told International Finance.

“Also, the wait times for tankers queuing at offshore terminals or jetty bottlenecks reduce, and that directly cuts down on the daily vessel demurrage fees. Moreover, shorter pipeline and marine transit routes significantly minimise transit losses, crude theft, and pipeline vandalism surcharges.”

Meanwhile, the gas element of the proposed system is a regulator-led response to the flaw in the main industry framework, called the Petroleum Industry Act (PIA), that mandates gas producers to allocate a particular quota of natural gas to the Nigerian market before export, but did not envisage a potential delivery gap when it was drafted.

A July workshop, for instance, arranged by the upstream regulator, uncovered key fundamental limitations of the Domestic Gas Delivery Obligation the provision of the PIA that guides local gas availability.

At the time, 27 of the 63 companies producing gas in the country had approved quotas to supply the market. However, just 23 of them were actively doing so.

“The YTD June 2026 data, however, shows that a broader allocation base does not automatically translate into actual delivery,” Eyesan told participants at the workshop.

The gas swap framework, on that score, permits operators unable to evacuate their gas for certain technical constraints to get a leg-up from counterparts with the facilities to supply the gas where it is needed.
Crude feedstock alone constitutes roughly 80 per cent of a refinery’s operating costs, Kolade stated.

It raises hope that the savings on logistics the swap is out to guarantee will directly impact the pump price of locally sold petrol, should the plan fly.

The scheme advances to the drafting stage, once consultation is over, where the energy sector’s technical committees will compose the credit-settlement laws, commercial netting-off guidelines and grade quality valuation standards, setting it up for adoption.

Implementation, if reasonably successful, might institutionalise a model from which oil-producing nations, especially those battling spikes in fuel costs internally, could borrow a leaf.

The netting-off feature of the scheme uniquely endows it with a luxury, which similar swap structures in other markets don’t offer.

Under the US crude location/quality swaps, which come closest, midstream operators can exchange cargoes of crude through clearing houses like ICE to avoid physical pipeline backhauls, based on mutual agreements between parties. However, regulation does not obligate such deals.

Dangote Petroleum Refinery, the continent’s largest, based in Lagos, added to the urgency to tame soaring refining costs recently when it revealed that involvement of middlemen raises feedstock costs by USD 3 to USD 4 per barrel in Nigeria.

That is so because crude pricing under Nigeria’s petroleum industry law is tied to Free-on-Board Dated Brent. Producers often claim that not factoring in international freight differentials while selling oil to the home market puts them at a disadvantage, unlike if it is exported.

Much as that is a regulation-backed practice, it unfairly leaves local refiners bearing a cost they are not actually liable for.

Beyond stretching logistics spending for refiners, the pass-on effect of the extra cost on fuel prices complicates affordability for consumers.

The refinery holds the biggest slice of the domestic fuel market, accounting, for instance, for 87.6 per cent of petrol supply in May, according to the Nigerian Midstream and Downstream Petroleum Regulatory Authority (NMDPRA).

That affirms the overpowering implications a slight rise in the refining expenses of a refinery of that scale can have on the majority of Nigeria’s 242.4 million population, the continent’s largest.

The global costs of processing crude feedstock into finished products are accelerating to unprecedented levels across regions, due to a refining shortfall.

A note by Goldman Sachs, cited by Bloomberg in a report on August 31, suggested that the trouble has been compounded by attacks on refineries in the Middle East and Russia that are driving margins to new highs.

Russia had, in the last week of July, elongated its ban on petrol and diesel exports until January of the year ahead, making the global fuel market tighter.

Diesel is projected to be worst-hit, with the New York-based investment bank anticipating the refining margins to reach $63 per barrel in the US and an average of USD 49 in the EU in 2027.

It marks a 133.3 per cent surge for US refiners and 157.9 per cent for their EU peers from previous forecasts.

As of August 26, the daily time rates of chartering a tanker from the Middle East to China had surpassed USD 600,000, the second time in history that has happened, Reuters stated, citing LSEG data, pressuring refining costs.

In India, a shortage of physical oil supply is pointing refiners to the expensive spot market as traders request premiums of USD 3 to USD 4 per barrel amid a narrow supply condition that shows no signal of improving soon.

The risk factor of transporting cargoes through troubled maritime routes is giving traders grounds to price crude higher.

Brazil’s state-owned oil company Petrobras, the largest in South America, reported in its half-year 2026 corporate results that average refining cost rose 15.1 per cent to USD 3.21 per barrel, compared to a year ago.