Nigeria’s new policy on crude oil lifting will impact significantly on revenue – experts

As Nigeria struggles to shore-up her revenue base because of falling oil prices, she is now being faced with another challenge that may further worsen her revenue profile from crude oil with her latest policy as regards crude oil lifting by international oil shippers.

As part of her latest effort to combat theft, which has necessitated her to request for letter of comfort from ship owners, has brought its own challenges. This is because the action can impair its oil income lifeline, compounding the damage the crude price fall has done to its finances, access to dollars and imports.

An operator, who is an executive director in one of the oil companies but does not want his name mentioned, said the action of NNPC was meant  to sanitise the  system. He said even though this would slow down things a little bit but ultimately the industry would be better for it.

The industry is going through major changes and this will bring about some challenges, he said.

But Dolapo Oni, head of energy research with pan-African lender Ecobank, said the revenue impact of the new policy would be significant, saying due to the expensive freight, we were likely to see differentials weaken considerably, which means we could have lower revenue than normal.

However, when Ohi Alegbe, group general manager, public affairs, NNPC, was contacted, he said he had just seen the story and that BusinessDay should give him till today (Wednesday) to respond appropriately to the enquiry.

Oil traders and shipping brokers said a newly implemented “letter of comfort” requirement under which vessel owners must sign a guarantee that their ships would not be used for theft had made it more difficult and expensive to load Nigerian crude, putting some buyers off.

A copy of the letter draft seen by Reuters asked vessel owners to “guarantee to indemnify” the government and national oil company NNPC against any illicit use of their vessel, which led some owners to reject pending bookings. Traders say others are refusing future requests for now.

“Nobody is coming forward for offering the vessel and whoever is willing to go to Nigeria is asking exorbitant rates,” said K. Namdeo, head of refineries at India’s HPCL, adding they would “be cautious in future” about buying Nigerian crude.

Tanker owner Heidmar rejected an HPCL Nigerian fixture due to insurance concerns over the letter. Finding a replacement proved difficult. Provisional fixtures showed the MT Solana sailing to West Africa for HPCL, but the vessel turned away from Africa, according to tracking data, and is now en route to the Bahamas without oil.

Fixtures showed the refiner putting two Suezmax vessels on subjects for the journey, which typically adds to costs.

Some European buyers are also now treading carefully with Nigeria.

An oil trader for one Mediterranean refiner said they “will not touch a single drop of Nigeria crude until this matter on the letter of comfort is solved.”

There is little disagreement that Nigeria needs to fight oil theft, which President Muhammadu Buhari has said siphons as much as 250,000 barrels per day (bpd) of crude of its nearly 2 million bpd of production.

Industry sources said an initial effort, the banning of roughly 100 oil tankers that came from Buhari’s office in July, was too blunt an instrument. But in lifting that ban earlier this month, it added the letter of comfort with immediate effect, which sources said applied to all vessels, creating a potentially bigger problem.

Oil tanker industry association INTERTANKO said the letter as drafted would give Nigerian authorities a “blank cheque” for any perceived violations.

“NNPC’s guarantee terms would allow the Nigerian authorities to impose an arbitrary penalty for breach of local law – of which owners might be unaware – and then demand an indemnity for their losses without the need to prove any loss,” said INTERTANKO’s general counsel Michele White, adding “owners’ insurance would not respond to that.”

Shipping sources said in addition to Heidmar, Asian companies China Shipping and AMCL will not call at Nigerian ports for the time being, nor will Greece’s Chandris.

Other vessel owners are working around it with watered down language, traders said. But it has contributed to a marked rise in freight; the cost of booking a Suezmax tanker from West Africa to the United States spiked by 80 cents late last week to $2.75 per barrel, according to JBC Energy.