Nigeria’s short-term crude contracts push buyers into rival’s hands

Unlike Nigeria struggling to sell oil cargoes, Iran, despite the threat of sanctions has convinced India to buy 9million barrels worth of oil for November analysts say Africa’s top oil producer should offer generous incentives as well sell its oil on long term contracts.

“Nigeria doesn’t have any long term contract with any buyer and usually sell on a going basis. Also, Iran is in a tough situation and will probably be making significant concessions to keep its buyers and money is not bias. It is easier and cheaper for an Indian buyer to buy from Iran than take shipment from Nigeria if there is a way around the US sanctions,” said Kareem Jubril Adedayo, an energy sector research analyst at Ecobank.

In the first week of October, the Nigerian crude market saw an overhang of close to 20 unsold cargoes from the 58-strong October loading programme. Reuters further reported that there are almost 30 unsold cargoes from the August and September programmes citing discussions with traders in addition to newly released October underlining plentiful supply.

At the beginning of each year, the Nigerian National Petroleum Corporation (NNPC), announces names of oil buyers who will buy Nigerian oil in crude term contracts that usually involve both local and international companies. For nearly a decade, these contracts have lasted for only a year with volumes of around 30,000 bpd.

Analysts say this should change.

“It is also important to rework the terms and tenure of crude term oil lifting contracts to enable more strategic relationship with crude buyers,” counsels Chijioke Mama, founder and CEO of Meira Copp, an energy advisory and consultancy firm.

Mama further said, “The new framework should provide the level of supply assurance that buyers typically yearn for in the long term both from commodity price and product supply perspectives.”

Paris-based International Energy Association (IEA) says that oil producing countries like Nigeria, Venezuela, Libya, Iraq and Iran could drive a surge in global oil production but both OPEC and the IEA say oil demand growth will cool off with global consumption rising only by about 1.36 million bpd next year. Demand forecast for 2018 was put at 1.87m bpd.

Nigeria’s September production grew 26,000 bpd in September to 1.74m bpd according to OPEC figures but much of these oil is struggling to find buyers..

The United States, Russia, Saudi Arabia are all ramping production portending the competition for market share will be fierce. US sanctions on Iran expected to kick in on November 4, is a blow to the country but it is meeting the challenge by offering buyers bigger discounts and generous concessions.

To lure Asian refiners, Iran provided 90 days of credit for crude purchases, at least three times the amount of time given by other producers, it offered flexibility in terms of crude grades and loading dates to the refiners and it is catching their attention.

“Iran unlike Nigeria has always had contractual agreement with Indian buyers. While it is true that these contracts can be voided by the US sanctions, the fact the US move is not globally supported give Indian buyers the opportunity they need to continue buying as long as the companies involve don’t have any operational or financial exposure the US can use to force their compliance,” said Kareem.

The unilateral US sanctions may not have dire impact so OPEC nations may not easily snatch its market share. The European Union will not restrict insurance of Iranian oil tankers which will discourage buyers making the commodity highly risky. Asian buyers may also use other currencies apart from the dollar to rout payments through local or foreign banks to avoid the US financial system.

Mama says Nigeria should deal with increasing local refining capacity to enhance domestic utilisation of crude.

But Nigeria’s refineries are still performing less than 10 percent of their capacity as Dangote Refinery looks to hold the promise of local refining.

Meanwhile, Nigeria’s cash-strapped economy needs all the oil income it can get. The country is looking to raise $2.86billion Eurobond pushing its external debt stock to $24.9billion from the current $22.16billion to fund the budget and fulfil government obligations.

ISAAC ANYAOGU