Raising Local Content in NNPC’s Oil Swaps

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ENERGY ANALYSIS

The involvement of more Nigerian companies in the $6 billion deals signed by the NNPC and oil traders to exchange about 330,000 barrels per day of crude oil for imported petroleum products has deepened indigenous participation in the oil and gas industry, writes Ejiofor Alike

The emergence of more Nigerian indigenous downstream companies in the latest Direct Sale-Direct Purchase (DSDP) arrangement by the Nigerian National Petroleum Corporation (NNPC) and oil traders to exchange crude oil for refined products is a strong indication that indigenous manpower and facilities are increasingly deepening their participation in complex oil and gas deals.

Like in the yearly lifting of Nigerian crude for the NNPC, indigenous downstream companies have also been given a chance under the new dispensation to prove their mettle in the crude-for-product swaps, which only a handful of local companies had handled under arrangements shrouded in secrecy, during the past administrations.
Though the previous administrations demonstrated commitment to Nigerian Content in the oil and gas sector, the area of focus was in the provision of services for the upstream sector.

Instead of allowing Nigerian companies to dominate the crude lifting contracts and oil swap deals to compensate for their low participation in the E&P sector, the previous administrations anointed only few downstream companies to participate in these areas under opaque arrangements that allegedly shortchanged the country.
Before this new dispensation, the NNPC had over the years split the crude lifting contract almost 50:50 between Nigerian companies and foreign players.

Local participation in the NNPC yearly contracts later improved, but feelers from the industry showed that only local companies should have handled the multi-billion dollar deals, given foreign dominance in other sub-sectors of the industry, especially in crude oil production.
But the participation of indigenous companies in the oil-for-product swap deals was even more abysmally poor as the various probes conducted by the federal government revealed that the previous administrations used only few Nigerian companies to connive with foreign oil traders that took Nigerian crude without supplying equivalent value of refined products.

Direct sale, direct purchase
When he was combining the portfolios of the Minister of State for Petroleum Resources and Group Managing Director of the Nigerian National Petroleum Corporation (NNPC), Dr. Ibe Kachikwu, had early last year disclosed that the crude-for-products exchange arrangement, popularly referred to as crude swap, under which few Nigerian downstream companies and Swiss traders shortchanged Nigeria, would be replaced by a Direct-Sale–Direct-Purchase (DSDP) arrangement.
Before Kachikwu became the Group Managing Director of NNPC, and later Petroleum Minister, the crude-for-products arrangement was shrouded in secrecy as only top echelons of the NNPC knew the details of the deals and the identities of the companies that benefitted between 2010 and 2015, thus fueling the massive allegations of corruption that charaterised the scheme.
Kachikwu said he adopted DSDP to replace the Crude Oil Swap initiative and the Offshore Processing Arrangement so as to introduce and entrench transparency into the crude oil for product transaction by the NNPC in line with global best practices.

During the previous administrations, crude oil was exchanged for petroleum products through third party traders at a pre-determined yield pattern.
But Kachikwu argued that the DSDP option would eliminate all the cost elements of middlemen to give the NNPC the latitude to take control of sale and purchase of the crude oil transaction with its partners and save the country $1 billion.
“When I assumed duty as the GMD (Group Managing Director) of NNPC, I met the Offshore Processing Arrangement (OPA) and like you know there is always room for improvement. I and my team came up with the DSDP initiative with the aim of throwing open the bidding process. This initiative has brought transparency into the crude-for-product exchange matrix and it is in tandem with global best practices,” Kachikwu had reportedly said.

He added that DSDP would whittle down the influence of the Petroleum Minister in the selection of bid winners as it would allow all the bidders to be assessed transparently based on their global and national track record of performance before the best companies with the requisite capacities would be selected.
Kachikwu had insisted that the new policy would reduce the gaps inherent in the OPA and the losses incurred by the NNPC under the old order.

According to him, the new arrangement would help NNPC to grow indigenous capacity in the international crude oil business and generate employment opportunities for indigenous companies that would emerge successful.
He added that the DSDP initiative would give other government agencies such as the Bureau of Public Procurement (BPP) and Nigeria Extractive Industry and Transparency Initiative (NEITI) the opportunity to be a part of the bidding process in order to engender adherence to due process.

2017 direct sale, direct purchase deals
With the country returning to the era where the NNPC assumed almost the sole responsibility for importation of petroleum products, the corporation has almost concluded the $6 billion worth of deals with local and international traders to exchange about 330,000 barrels per day of crude oil for imported petrol and diesel, as part of measures to sustain the supply of petroleum products across the country.

In line with Kachikwu’s target to ensure that the NNPC uses the DSDP arrangement to grow indigenous capacity in the international crude oil business and generate employment opportunities for indigenous companies that would emerge successful, more Nigerian companies were selected in the 2017 deals.

The signing of the deals earlier scheduled to take off by April, it was learnt, was delayed for three months to allow the NNPC and the oil traders negotiate the fuel specifications, among other issues.
This year’s beneficiaries also exceeded those of last year by three consortiums, indicating the country’s increased dependence on the NNPC for fuel importation.
Kachikwu had stated in Lagos last Wednesday that with the rise of crude oil price above $52 per barrel, the country finds itself reverting to the position it found itself in, in the first and second quarters of 2016 when NNPC was the sole importer of petrol

It was gathered that unlike the 2016 contracts, which included only companies with refineries so as to cut out middlemen, this year’s beneficiaries include international trading houses, and not just refineries.
Some of the companies that benefitted in 2016 also made this year’s list, including Varo Energy, Societe Ivorienne de Raffinage (SIR), Total and Cepsa.

However, Italy’s ENI and India’s Essar, which were in the 2016 list did not feature this year, while Socar and Mercuria, which were not in last year’s list, won this year’s contracts.
NNPC had previously said this year’s contracts would exchange up to 800,000 bpd of crude oil, but the figure, representing 40 per cent of Nigeria’s peak production, was seen to be unrealistic in view of production outages.
However, this year’s contracts are worth 330,000 barrels per day, and each of the 10 oil traders/refineries partnered local Nigerian companies to win 33,000 barrels per day allocations.

According to the list, Trafigura partnered AA Rano to clinch 33,000 barrels per day; Petrocam paired with Rainoil and Falcon Crest to win 33,000 bpd; Mocoh partnered Heyden Petroleum to get 33,000 bpd; Cepsa paired with Oando to win 33,000 bpd; while Sahara is partnering Societe Ivorienne de Raffinage (SIR) for 33,000 bpd.

Five other groups that also got 33,000 bpd each include: Mercuria and Matrix/Rahamanniya; Socar and Hyde; Litaso and MRS; Vitol and Varo; and Total, which is partnering its Nigerian subsidiary.
It was also gathered that the 2016 contracts, which were initially planned to begin in April, were delayed as the 2016 deals were extended at least twice, in order to give NNPC more time for negotiations with the traders.
The fuel specifications in the final agreements were not immediately clear, but the July 1 take off date for the importation of higher grade, lower sulfur fuels have been shifted to September 1.

Sulphur levels were said to have been a major sticking point in the negotiations, as the Ministry of Environment and Standards Organisation of Nigeria (SON) have pushed for a reduction in the sulfur content of imported petrol and diesel with effect from July 1.
However, with the participation of more Nigerian companies in the new DSDP arrangement, which is also perceived to be transparent, local content is seen to be working for the downstream players.