Crude contracts and briefcase contractors
The Nigerian National Petroleum Corporation (NNPC), which is a leviathan when it comes to allocating contracts for lifting Nigeria’s crude oil.
Once a year the crude oil marketing department of NNPC awards one-year term contracts to lift crude oil on behalf of the government – in April 2012, 50 term contracts were given to lift 1.6 million barrels per day (bpd).
Nigeria is the exemption when it comes to selling exclusively to oil traders. Selling oil through a term contract is the more popular of two basic ways of selling oil; the other is through a spot contract.
For 2014, 38 contracts have been awarded, so far, to lift 1.1mbpd. These term contracts are exclusive of the 400,000bpd, originally meant for the four refineries, that NNPC exports because the refineries perpetually perform below capacity.
The 2012 list comprised four refineries, seven African countries, two NNPC trading companies and 34 trading companies. An increase in the number of indigenous companies (21) and their share of the 2012/2013 term contracts – 45 percent of 580 million barrels for the period – was seen has a marked departure from past awards.
For the 2014/2015 term contracts, the number of indigenous oil traders did not increase (there are still 21 companies, including the NNPC subsidiaries) but the number of foreign participants was whittled to two national oil companies, two refineries, eight international oil traders and one African country.
Mezcor SA and Tridax SA, the surprising newcomers in the 2012/2013 list, were awarded contracts again. Hyde Energy, Springfield Ashburton and Barbedos, a conglomerate that also provides luxury aviation services, made the list for the first time, according to Reuters.
Supporters of the rise of local oil traders say it shows that local content is working. In the past, international oil traders such as Acardia, Addax, Trafigura, Glencore, Gunvor were awarded the highest allocations e.g. 60,000bpd.
Oil trading – the business of physically moving crude oil via tankers to refineries and later storing and distributing it all over the world – is big business. Structuring the sale of oil in the export market is complex. It’s about marketing, timing, location, pricing, paperwork, payment, transportation etc.
Critics contend that few of the local companies have the capacity or will to finance, ship and sell their cargoes to refineries. Most are “briefcase contractors”, rent-seekers in a rent-thick industry, who sell their contracts to international oil traders at a premium e.g. .25-0.40 per barrel in 2013, according to Chatham House, a London-based think-tank.
(Estimated loadings of crude on behalf of Nigeria for March 2013 showed 43 percent of the total 1.09m barrels were done by three local companies: Taleveras, NNPC and Sahara).
Nigeria is the world’s most opaque oil market with copious room for favouring shadowy middlemen, say, former classmates, relatives or politically exposed persons. These briefcase contractors act as fronts for politicians. It’s reported that a growing number of such people are businessmen and elite from the Niger Delta.
Absence of transparency, “allows portions of the government’s oil share to be passed on to associates of the ruling elite, who then sell on to commodity trading companies at a margin” says Revenue Watch Institute (RWI), a non-governmental organisation that promotes transparency and accountability in managing oil, gas and mineral resources.
The crude oil market, in terms of physical production and financial market activity, is larger than any other commodity. Those familiar with oil trading in Nigeria say cash not oil is the commodity and that traders are more difficult to regulate than hedge funds.
What the new list sadly confirms is an ingrained system whereby connections surpass meritocracy; commercial or financial capacity aren’t criteria when it comes to selling Nigeria’s major source of revenue and foreign exchange.