Recently, the landing cost of fuel hit the over N240 mark. Amid diminishing funds and will to sustain the subsidy of petrol, this landing cost is not a good place to be for NNPC, Nigerians, and the nation’s economy. Given the scourge of insecurity and the biting hunger and poverty in the land, it may be a challenge to get Nigerians to pay the reflexive cost of fuel at this time. But why should Nigerians empathize with the Nigerian National Petroleum Corporation (NNPC) on the cost of petroleum products in the country and agree to pay higher prices for fuel when they have never been carried along on the processes involved in the refining and logistics of bringing it to their neighborhood fuel filling stations from foreign refining facilities? In this piece, Chris Paul unearths the opaque operations in the downstream arm of Nigeria’s Oil and Gas industry.
Deliberately, information in the Downstream arm of the Nigerian hydrocarbon industry is either censored or doctored to cover up processes of how the sector works. The consequence is that when the operators get into a hitch with this manner of administration and operations, Nigerians and the economy are the ones that must be made to bear the brunt.
The major determinant of fuel price at the pump is the cost of landing the product at the Nigerian Ports.
Even though the information is hard to come by in the sector as all the players prefer to conduct their business away from the glare of public scrutiny.
But then, it is important to know how the fuel refining and the logistics of bringing the products to the Nigerian Ports; for onward distribution to the fuel filling stations across the federation.
Currently, the NNPC runs the refining of fuel and other Petroleum products using the crude swap deal; known as the Direct Sale Direct Purchase (DSDP) deal.
Thankfully, research conducted by the Natural Resource Governance Institute titled: Inside NNPC Oil Sales: A Case for Reform in Nigeria, laid bare the processes of the DSDP model adopted by the NNPC to import fuel into the country.
In analyzing the swaps, the research concentrated on three main agreements:
The 90,000 barrels per day RPEA signed in early 2011 between PPMC and Duke, NNPC’s wholly-owned trading company (“the 2011 PPMC-Duke RPEA”);
the 60,000 barrels per day OPA signed between PPMC and SIR in October 2010 (“the 2010 SIR OPA”);
and the 90,000 barrels per day OPA NNPC and Aiteo signed in October 2014 (“the Aiteo OPA”)
Full versions of these contracts are posted on NRGI’s website. 4 Along with analyzing these contracts, we reviewed relevant documentation including other contracts and subcontracts,5 NEITI reports, various NNPC documents, and market intelligence data.
The Researchers also consulted industry experts and consultants and conducted several dozen interviews between 2012 and 2015.
“As part of our research process, we wrote formal letters to the main parties involved in the swap deals, informing them of the project, asking a number of detailed questions, and indicating our openness to dialogue and to learning their perspectives. The letters were sent by email, fax, and courier. Specifically, we sent letters in April 2015 to the NNPC, PPMC, and Duke. We also sent letters to trading and refining companies that held swap contracts, including Aiteo, Ontario, Sahara, SIR, Taleveras, and Trafigura.
NNPC, PPMC, Duke, Ontario, and SIR did not respond to our communications. NNPC has answered similar questions in the past, from audiences including the media and the Nigeria Extractive Industries Transparency Initiative (NEITI). We drew on those explanations when possible so as to represent NNPC’s perspective. Aiteo officials replied and asked that we enter into a non-disclosure agreement before it shared information, given confidentiality concerns.
We declined, since the questions pertained to a report intended for public release, and asked that they nonetheless provide some information. They did not respond further.
Sahara officials wrote to us and indicated that their response was contained in press releases they issued in May and June 2015 about the swap deals.6 We reviewed these materials and cite them in this report. Trafigura and Taleveras provided written responses to some of the questions; others they did not answer, citing confidentiality constraints.
Representatives of these two companies also made themselves available for several phone conversations about the questions that we asked. Their views informed the research, and are cited in the text,” the report stated.
The swaps deserve special scrutiny and reform because
Nigeria’s ongoing fuel supply crisis makes swaps practical in the short term.
The model has helped keep gasoline and kerosene flowing into the country since the Petroleum Products Marketing Company (PPMC) open account import system collapsed in 2010 and 2011.
According to the report, this has been NNPC’s main argument in favor of the DSDP.
Unfortunately, however, the supply challenges that led Nigeria to reintroduce swaps have not notably improved; since the reintroduction.
In the report Traders and bankers interviewed claimed no bank would finance more PPMC open tender imports.
A small circle of private marketers with PPPRA import permits that usually supply around 50 percent of imports, within the period covered by the report struggled to obtain credit due to Nigeria’s foreign exchange shortage and continuing currency depreciation.
Refinery production remained very low and likely could not meet local demand for gasoline even if the plants ran at full capacity.
The swaps consume a significant portion of the crude oil NNPC has to sell.
According to NNPC data, the corporation allocated just over 79 million barrels (or roughly
218,000 barrels a day) to swaps in 2011 alone; which accounted for nearly half of the Direct Crude Allocation (DCA) and around a tenth of the country’s average daily production.
Approximately $9 billion, was the worth of oil involved in swaps, in 2011; as revealed in internal NNPC data.
So, between 2010 and 2014, NNPC channeled over 352 million barrels of oil worth a total of $35 billion into the swaps.
By 2010, the four Refineries were working at less than 25% capacity, PPMC was owing fuel importers over $3 billion under the open account system; some of the bills were close to three years
in arrears and banks were no longer willing to finance more account imports.
To avoid domestic fuel shortage, NNPC had to turn to swaps; for a more hitch-free, less complicated fuel imports format.
This was led the NNPC to engage in the two types of swap agreements.
The first is a crude oil-for-refined-product exchange agreement (RPEA). Under an RPEA, crude is allocated to a trader, and the trader is then responsible for importing specified products worth the same amount of money as the crude, minus certain agreed fees and expenses, the value of which the trader keeps.
By early 2011, the government had signed four RPEAs with commodities traders; with the NNPC represented by its subsidiaries Duke Oil and PPMC in the deals.
Offshore processing agreement (OPA) is the second type of swap.
The contract holder, under this type of deal—either a refiner or trading company—is supposed to lift a certain amount of crude, refine it abroad, and deliver the resulting products back to NNPC. The contracts lay out the expected product yields (i.e., the respective amounts of diesel, kerosene, gasoline, etc.) that the refinery will produce.
The refining company also can pay cash to NNPC for any products that Nigeria does not need.
In 2008, as fuel shortages worsened, NNPC issued a tender for an OPA and signed one with BP affiliate Nigermed late in 2009.
The following year, PPMC signed another OPA with the Ivorian state-owned refining company Société Ivoirienne de Raffinage (SIR).
The contract holders for both types of deals did not change between 2010 and 2014, with the exception of Nigermed, whose OPA ended in 2010. In late 2014, PPMC did not renew its RPEA with commodities trader Trafigura.
Duke’s contract was reduced to 30,000 barrels a day, and Duke farmed out this contract to Aiteo. Separately, NNPC awarded two new, two-year, 90,000 barrel-a-day OPAs to Sahara and Aiteo.
So, how does the DSDP or crude swap work?
To get a clearer picture of exactly how the Nigerian state oil company, through its relevant subsidiaries run the nation’s fuel imports, let us look at one of the deals as provide in the report:
PPMC signed the 90,000 barrel per day RPEA with Duke in early 2011. Duke then outsourced its activities to three Nigerian trading companies— Taleveras, Aiteo, and Ontario (collectively, “the three traders”)—each of which managed 30,000 barrels per day. The deal ended in 2014. According to the terms of the contract and other sources,29 the PPMC-Duke RPEA turned oil into fuel and money for Nigeria through the following steps:
1 NNPC allocated a cargo of crude (typically around 950,000 barrels) from the DCA to PPMC for the purpose of product exchange.
2 PPMC allocated the cargo to one of the three traders subcontracted to Duke.
3 The trader found a third-party buyer to purchase the cargo. The third-party buyer paid the trader for the cargo after lifting.
4 PPMC sent the trader a written program specifying the amounts of gasoline and kerosene it wanted to receive as payment for the crude, divided into cargoes ranging in volume from 27,000 metric tons (MT) to 38,000 MT.
The trader then purchased the cargoes from a third-party seller. The fuel could come from anywhere, so long as it met quality standards laid out in the Duke contract.
Occasionally, steps 3 and 4 would be reversed, with the company providing products before lifting crude.
- To pay PPMC in-kind for the crude cargo lifted, the trader delivered the products to one or more import points in Nigeria—some offshore but also onshore in Lagos—as ordered by PPMC.
- PPMC sold the products to private buyers, presumably in Nigeria. The buyers were a mix of wholesale marketers of fuel and retail customers at NNPC filling stations.
The buyers paid for the products into various PPMC accounts, most often in Nigerian naira.
On the products side, according to the report, 2011 NEITI and NNPC documents show that all three traders bought their gasoline and kerosene off of large mother ships, mostly anchored offshore of Togo or Benin, instead of sourcing it directly from Europe or other markets.
Foreign products traders loaded fuel aboard the mother ships and sailed them to the Gulf of Guinea. The three traders then chartered smaller ships, picked up products by ship-to-ship transfer (STS, and carried them the short distance to Nigeria for discharge.
This system built-in added layers of players and costs that gave PPMC no obvious benefit, as PPMC could have dealt directly with traders that could deliver fuel from a foreign refinery or storage facility. Interviewees doubted that Aiteo and Ontario had experienced crude or products traders on staff when they signed the agreement with Duke.
In later years, more of the vessels delivering products on behalf of the three traders sailed directly from Europe or other markets, though some of the traders still depended on foreign trading and refining companies to help organize the deliveries.
From this model, it is obvious that no cash exchanges hands or any monetary payment made or suffered by NNPC in the course of importing Petroleum products into the country.
Rather, as in the case of OPA, the REFINING COMPANY PAYS CASH to NNPC for the PETROLEUM PRODUCTS NIGERIA DOES NOT NEED!
So, logically, the question of landing cost does not and should not arise as ALL PAYMENTS IN THE TRANSACTIONS ARE DONE WITH NIGERIA’s CRUDE OIL.
Deriving from this template also, the price of Petrol and other Petroleum products should be far cheaper than what the country is getting today.
Both swap types-RPEA and OPA can virtually be said to use as a means of only outsourcing refining operations from the nation’s collapsed refineries to other Refineries outside the shores of Nigeria at little or no cost (in cash) to the country. The ONLY COST or payment as that happens in these deals is done with Nigeria’s Crude Oil.
Even the cost is not expected to hurt the economy as the quantity of oil used in these barter deals is within the domestic crude allocation (DCA) meant for the dilapidated refineries. In other words, compared to the fictional claims of the rising cost of Crude Oil making the price of Petrol go up does not hold water.
Nigeria owns the Crude Oil it allocates to the foreign refiner to refine her oil in their facilities.
The Refiner or its Trader Parties as the case may be are all paid with the oil that is Nigeria’s.
The Refiner makes his money not from collecting cash money from NNPC but by selling the derivatives he refines from the crude oil he got to refine and as payments for his refining service for NNPC.
Therefore, the issue of increasing fuel price or landing cost cannot, in this context, be justified.
The closed-door management of the downstream lends itself to much corruption.
In the period covered by the report, operations were so opaque that relevant government agencies, even departments, and divisions in NNPC were excluded from oversight of processes let alone documentation.
“This system of incomplete oversight left the parties largely free to police themselves. NNPC has argued that the reconciliation meetings ensured that “the value for value philosophy enshrined in the swap contracts is validated and tested on a regular basis.”
But Sanusi told the Senate—and the 2010 PPMC-SIR OPA and the 2011 PPMC-Duke RPEA substantiate his statement—that only PPMC and the contract holders attended the meetings.
He wrote: “This choice of a two-party, closed-door verification mechanism effectively shuts out other relevant MDAs in government, not least the Ministry of Finance, Department of Petroleum Resources, Accountant-General, CBN and others. It thus removes the swaps and offshore processing arrangements from the usual inter-agency accounting and auditing procedures to which NNPC crude oil sales are typically subject.”
PPMC certainly was not well suited to act as Nigeria’s sole agent at these meetings, as it was a party to the contracts and has a history of conflict-of-interest behavior around domestic crude oil sales,” the report stated.
In submission, evidently, all claims to some landing cost are neither correct nor is it real.
