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A legal expert Bar. Ayo Samuel noted that the “Local content Law specifies that Nigerian independent operators be given “first consideration” in the award of Oil and Gas focused contracts and Nigerian service companies be given “exclusive consideration” for contracts and services. This is the dilemma that the government is facing. Experts say that an agreeable compromise will be a scenario where Nigerian Companies are allowed to participate, along International Oil Majors”.
President Muhammadu
Buhari’s cash strapped government may have to do away with fuel subsidies in
order to channel scarce resources to capital project development in Nigeria.
This is in line with the views of Industry experts and Global Investment banks
who agreed that a solid structured and transparent swap arrangement will ensure
product availability even as NNPC refineries are operating below their plate
capacity.
“Subsidies are
expensive, accounting for an average of 2.5 percent of the gross domestic
product from 2006-2012, according to the IMF. The government set aside N914
billion ($4.6 billion) for it in 2014. Nigeria’s national oil company the NNPC
currently receives about 450,000 barrels per day for its refineries to process
for domestic crude consumption.
However Nigeria is
almost wholly reliant on imports for the 40 million litres per day of gasoline
it consumes, as most of the NNPCs four refineries produce at less than 20-60
percent of their name plate capacity. The NNPC has often had to engage in crude
for oil (swap) and offshore processing contracts and direct importation of
products to bridge about 50 percent of the supply gap.
The Managing Director
and Head – Africa Macro Global Research at Standard Chartered, Razia Khan said:
“Having contracts directly with the oil majors for refined product would be a
big win, said Razia Khan, adding, “Ultimately, the healthiest development would
be to sell the refined product to end-users at cost-reflective prices.
“Any savings from a
fuel subsidy could increase the amount that Nigeria spends on social safety
nets – so that the poorest, most vulnerable Nigerians benefit directly,” Khan
said.
This view was corroborated
by members of the Independent Petroleum Marketers Association of Nigeria
(IPMAN); they stated in recent news report that the Oil Swaps is a better
option for Government to end scarcity and keep off subsidy payment. The
association further made a case to government for IPMAN members to partake in
the Crude Oil Swap Arrangement.
While many
Nigerians may believe that the Crude Swap/ OPAs was a recent arrangement under
the immediate past administration, our source within the NNPC stated that Crude
Swap/ Offshore Processing Arrangements have been a Federal Government
initiative since 1977 in partnership with International Oil companies (IOCs).
The anonymous
source reiterated that “Nigerians must know that the supposed interim policy of
the NNPC to bridge the gap between petroleum products demand and supply was
initiated over three decades ago between 1977 and 1986 when Nigeria needed
heavy crude from Venezuela to feed the Kaduna refinery. We as a nation swapped
Venezuela heavy crude for Nigeria’s light crude”.
He further stated
that: “the scope of crude swap was later broadened specifically because our
refineries began to produce below their stipulated name plate capacity. In
addition, NNPC/PPMC from late 1990s-2010, imported Petroleum Products on an Open
Account backed by a PPMC Payment undertaking stating that payment will be made
45 days after imported vessels arrive, this payment timeline was never met with
payment delays running to 400 days late in backlogs.
Our research
findings indicated that NNPC has an outstanding debt to Importers and Bankers
of close to USD 2 Billion currently standing at 7 Years late payment.
Consequently, for any NNPC/PPMC import project to receive a nod, the financing
bank will need to see and verify a “Solid Bankable Security or Guarantee” in
order to finance such project.
NNPC/PPMC usually
rely on refineries un-utilised Crude oil barrels to fund these open account
Payment Batches. However, the foregoing challenge posed a problem to 50% of
fuel supply into Nigeria around 2009 and 2010. In order to close the supply gap
and avert scarcity crisis, NNPC/PPMC advertised in 2009 inviting for proposals
for Offshore Processing Arrangement and other proposals to guarantee fuel
supply to Nigeria.
Thus crude Swap/
OPAs concept widened to include crude for refined products, which had been in
practice with Oil Majors more than two decades; at the time, British Petroleum
and SIR refinery of Ivory Coast were engaged to swap crude for refined products
under very shadowy terms. Yet no one complained, this begs the question: why
the outrage when Nigerian companies were engaged to deliver same service to the
NNPC/PPMC?
Perhaps it is
easier to become outraged when the government of Nigeria, partners with
indigenous oil and gas companies towards promoting local content laws than be
dismayed by the many years of International Oil Companies (IOCs) under cutting
Nigerians in disguise of service to a people.
Nonetheless, the
industry is witnessing increased participation of Nigerian oil and gas companies
and expressed concerns on the direction the new administration may take while
being optimistic that our government will deepen the gains in the oil and gas
sector as a result of promoting local content development.
According to
verifiable data, Nigerian companies now control over 35% of upstream business
activities in Nigeria. This significant bump from less than 10% in 2010 is as a
result of passing the local content act into law; driven by the Nigerian
Content Development and Monitoring Board (NCDMB).
Sadly, these local
companies are faced with herculean task of dealing with various challenges
associated with doing business in Nigeria. This has been recently demonstrated
when perceived ANTI-LOCAL CONTENT AGENTS conspiring with International News and
Reporting Policy analyst, unleashed a media onslaught against indigenous
companies participating in the Crude for Products Exchange Agreement, that is
aimed to provide petroleum products to the everyday Nigerian.
It is very curious
to see all of these negative reports and also the exclusion of the names of
Foreign and International Companies that have for many years taking part in
these SWAP and Offshore Processing Contracts absent from all of these negative
reportage. These Foreign companies create wealth and employment for their
Countries, why can’t Nigeria do the same with its own people and companies?
Our findings
indicates that the Crude Swap/OPAs arrangement entails the allocation of crude
oil by NNPC for processing in a refinery, depending on the crude type and yield
pattern resultant refined petroleum products mainly Gasoline and Kerosene are
delivered by the contract operators into the country. The by-products not
required are paid in cash to NNPC. A refining fee is paid for this refining.
The Contract Operator
places a “Bank Stand by Letter of Credit” before it is allowed to lift the
crude, as a form of security. The SWAP is a very straight forward arrangement,
which simply means you load the Crude Oil and you deliver refined petroleum
products on a value to value based contract.
Approximately, for
a standard Nigerian cargo of 950,000+/- 5% Barrels (950kb) of Crude Oil loaded,
the resultant volume for refined products (PMS and DPK which formed the subject
matter of this Agreement) is 3 cargoes of 30,000mts +/- 10%.
The SWAP Agreement
stipulates that a revolving Standby Letter of Credit (SBLC) is established in
favour of PPMC, before the Supplier’s vessel is cleared to load any volume of
the crude oil nominated and programmed for this purpose. This in effect
guarantees that there is no exposure to PPMC for the Crude Oil lifted at any
point in time during the Agreement, as this SBLC can be encashed, in the event
of default.
Curiously,
verifiable facts indicated that the terms on which the Federal government engaged
local players where far more strenuous than the terms of engagement with the
International Companies that partnered with the Federal Government. This in
itself was a paradox…
It is on record tha
when foreigners were handling crude swap and delivering Petroleum Products on
Open Account for Nigeria, our government was buying refined products at PLATTS
plus $136-180/metric from these multinationals. Government was equally required
to pay interest to the multinationals on delayed receivables. Government
incurred the cost of logistics and handling.
Unlike the
arrangement where we have local players participating, only the principle of
exchanging crude for refined product remained the same. Local companies sell at
PLATTS plus $82/metric Ton. Government does not pay interest on delayed
receivables. Yet, the local players remained steadfast towards supporting the
Federal Government of Nigeria on making sure that finished products are
available and accessible by Nigerians without hassle.
Unfortunately,
instead of applauding the doggedness of local entrepreneurs, some unscrupulous
elements in Nigeria are making frantic efforts to hound and frustrate growth
driven by local companies in the sector. This is our quagmire as a people.
Accordingly, the implementation of the Local Content Law is one that must be
encouraged. Certainly without doubt, the above well documented procedure
ensures compliance and discredits the unguided and unfounded opinion of those
calling a dog a bad name in order to kill it.
