Examining NNPC’s Plan to Dominate Crude Lifting Deals

0

The plan by the Nigerian National Petroleum Corporation to handle 80 per cent of Nigeria’s crude oil lifting contracts will have adverse effect on indigenous operators, which have over the years demonstrated huge capacity to competitively participate in the area previously dominated by foreign oil traders and refineries. Alike Ejiofor reports

Nigerian companies operating in the oil and gas sector have in recent years demonstrated increasing capacity, buoyed by the enactment of the Nigerian Oil and Gas Industry Content Development (NOGICD) Act of 2010. Having invested heavily in local capacity development, indigenous manpower and facilities are increasingly involved in complex projects, which were the exclusive preserve of the foreign services providers.

The yearly lifting of Nigerian crude for the Nigerian National Petroleum Corporation is an area where indigenous downstream companies have demonstrated huge capacity to compete favourably with foreign oil traders and refineries. Industry operators had expected the corporation to allow only Nigerian companies to play in this area to compensate for their low participation in the exploration and production (E&P) sector of the oil and gas industry.

But over the years, NNPC has split the contract almost 50:50 between Nigerian companies and foreign players.

 

Breach 

However, local participation in the NNPC yearly contracts has improved over the years, even though operators had expected that the entire deals would be handled by only indigenous players, given foreign dominance in other sub-sectors of the industry, especially crude oil production.

In the 2013 exercise, for instance, NNPC awarded the lifting contracts worth about $40 billion to both Nigerian and foreign companies. NNPC allocated the contracts to 28 companies, as against about 50 in 2012 term contracts. Though the corporation broke with tradition, as no contracts were given directly to foreign traders, such as Glencore, Trafigura, and Vitol, with only Switzerland’s Mercuria winning a contract, NNPC initially made a failed attempt to exclude Nigerian companies.

Before NNPC decided to favour local entities in the 2013 term contracts, the corporation had attempted to exclude local players from the contracts through stringent guidelines that could have favoured only foreign companies.

In flagrant breach of the Nigerian content law, NNPC had  deliberately issued 2012/2013 guidelines for crude oil lifting contracts to favour foreign contractors, prompting the intervention of the Nigerian Content Development and Monitoring Board (NCDMB) and the Presidency.

 

Improving Local Content

Following a THISDAY report, which prompted the intervention of the NCDMB and the Presidency, NNPC had issued new guidelines to conform with the Nigerian Content Act.

The 2014/2015 contracts were expanded to about $52 billion worth of crude oil, up from $40 billion, while 38 companies were awarded contracts to lift crude oil from June 1, 2014 to May 31, 2015. The list comprised 21 indigenous companies; eight international oil traders; two foreign refineries; two subsidiaries of the NNPC, and three countries, represented by their state-owned national oil companies (NOCs).

According to the list, 21 indigenous companies were awarded contracts to lift a total of 630,000 barrels per day of crude oil during the one-year period, representing 57 per cent of the 1,179,000 barrels per day awarded to the 38 beneficiaries. The list also showed that eight international oil traders got an allocation of 240,000 barrels per day, representing 20.5 per cent of the whole allocations, while two foreign refineries got 60,000 barrels per day, or 5.1per cent of the allocations.

Two subsidiaries of the NNPC were awarded contracts to lift 90,000 barrels per day, which translated to 7.7 per cent, while three countries, represented by their NOCs, also got 90,000 barrels per day.

A breakdown of the allocations showed that each of the 21 indigenous traders, mostly downstream companies, got an allocation of 30,000 barrels per day. Also included in the list were eight international oil traders, which got an allocation of 30,000 barrels per day of crude oil each.

Two foreign refineries – Fujairah Refinery Limited and PTT Public Company Limited received an allocation of 30,000 bpd each; while two subsidiaries of the NNPC – Duke Oil and Calson were awarded 30,000 bpd each.

NNPC also entered into bilateral commitments with the Republic of Malawi, SINOPEC of China, and Indian Oil Corporation Limited, with each of these entities receiving 30,000bpd.

In summary, over 60 per cent of the 2014 to 2015 annual term contracts for the lifting of Nigeria’s crude oil were awarded to local firms.

 

Dwindling Fortunes 

In the 2016 crude oil lifting contracts, which were the first of such contracts to be awarded by the administration of President Muhammadu Buhari in December 2015, a total of 21 companies got the contracts. The administration had four months earlier revoked the term contracts awarded by the previous administration.

Under the new contracts, indigenous Nigerian firms were awarded contracts to lift 41 per cent of total crude allocation, while major trading firms got 47 per cent of the crude oil allocation. NNPC trading affiliates were awarded 12 per cent of the total allocation, bringing the total allocation to Nigerian companies to 53 per cent.

Buhari had also earlier ordered the immediate cancellation of all offshore crude oil processing agreements and crude oil swap deals for refined petroleum products between NNPC and various oil traders, in line with the recommendations of the Ahmed Joda-led Presidential Transition Committee. The government had invited fresh bids and at the expiration of the deadline for the submission of application by prospective bidders, about 278 bids were received from various indigenous and foreign firms and 21 firms emerged winners.

The companies awarded contracts to take 60,000 barrels per day of crude oil include Emirates National Oil Company (ENOC), Indian Oil Corporation, CEPSA Refinery, Madrid, and Sara SPA Refinery.

 International trading companies – Trafigura PT Ltd, Mercuria Energy Trading SA, and Vitol SA – won the contract to lift 32,000 bpd of crude.

 Affiliates of international oil companies – ENI Trading and Shipping SPA, Total Oil Trading SA (TOTSA), Exxon Sale and Supply LLC, and Shell Western Supply and Trading – also received term allocation of 32,000 bpd each, totalling 128,000 bpd, representing about 13 per cent of total volume of crude oil on offer.

Indigenous Nigerian downstream players were allocated about 405,000 bpd, representing about 41 per cent. NNPC trading company – Carlson/Hyson – was allocated contract to lift 32,000 bpd, while Duke Oil Incorporated, the NNPC affiliate, was awarded contract for 90,000 bpd, accounting for about 12 per cent of the total volume.

For the 2017/2018 term contracts, 39 winners, comprising 18 Nigerian companies, 11 international traders, five foreign refineries, three National Oil Companies (NOCs), and two NNPC trading arms, were successful.

The list of 224 bidders dropped from the 278 that applied for the contracts in 2015, because NNPC said it had introduced some new criteria that had to be met by bidders.

The contract will run for one year effective January 1, 2017 for 12 consecutive circles of crude oil allocation.

All the contracts are for 32,000 barrels per day, except for Duke Oil Limited, the oil trading arm of NNPC, which got 90,000 barrels per day.

Apart from the 16 Nigerian companies, and two NNPC subsidiaries, the international refineries that made the list included Indian refiner, Hindustan Energy, Varo Energy, Sonara Refinery, Bharat Petroleum and Cepa.

Trafigura, ENOC Trading, BP Trading, Total Trading, UCL Petro Energy, Moco Trading, Levene Energy, Glencore, Litasco Supply and Trading, and Heritage Oil are the 11 international traders that were selected.

Term contracts were also awarded to India (Indian Oil Company), China (Sinopec), and South Africa’s SacOil based on government-to-government contracts.

 

NNPC’s New Onslaught against Local Players

 The participation of indigenous companies in the NNPC crude lifting contracts has improved in recent years and this has promoted local capacity development in the industry. It has also impacted significantly On the Nigerian economy and created employment opportunities.

Despite this improvement in local participation, operators have argued that competent Nigerian companies should replace foreign companies to further deepen local participation and curb capital flight for the benefit of the economy.

Therefore, the recent revelation that NNPC was planning to allocate 80 per cent of crude lifting deals to NNPC Trading, which evolved from the merger of its trading companies, is bad news for local operators. The move would potentially kill other Nigerian companies, which have invested heavily to build capacity in crude oil lifting.

Managing Director of NNPC Trading Limited, Ibrahim Waya, reportedly, revealed this in an interview published in the corporation’s quarterly magazine.

NNPC Trading currently handles 40 per cent of the country’s oil lifting. So, after failing in 2013 to exclude local companies by setting stringent guidelines that could have favoured only foreign companies, the corporation now plans to hijack the deals to the detriment of other players.

Many believe NNPC should not implement this new policy, as it will impact negatively on the Nigerian economy and kill indigenous companies that have built capacity to lift the country’s crude.