Pressure from high freight rates add to dampen Nigerian crude demand

Nigeria’s government in July this year through the state oil company, Nigerian National Petroleum Corporation (NNPC) banned 113 Very Large Crude Carriers (VLCC) from engaging in crude and gas loading activities in any of the terminals within Nigerian territorial waters.

The document giving the order was signed by Gbenga Komolafe, the group general manager of NNPC’s crude oil marketing division.

It stated that NNPC has prohibited 113 tankers “from engaging in crude oil/gas loading activities in any of the terminals within the Nigerian territorial waters until further notice.” The letter dated July 15 was addressed to terminal operators in Nigeria. The tankers were listed in an attached spreadsheet.

“The affected vessels have also been barred from movements within the Nigerian territorial waters forthwith,” it said.

The Nigeria National Petroleum Corporation (NNPC) defended its action, saying it was ordered by President Muhammadu Buhari with the ban of curbing the theft of the Nigerian crude oil.

Vessel owners, through International Association of Independent Tanker Owners (INTERTANCO) protested the ban, saying the Nigerian authorities failed to substantiate the allegation of crude oil theft against the vessels.

“Intertanko protests in the strongest possible way that these bans should be lifted with immediate effect until grounds and evidence for the ban have been given to each vessel and vessel owner/operator, and the owner/operator has had an opportunity to respond,” said Intertanko general counsel Michael White in a letter addressed to Gbenga Komolafe, the Group General Manager (GGM) of NNPC’s crude oil marketing division.

However, the government later lifted the ban after over one month, with a caveat requiring vessels owners to provide Letter of Comfort to guarantee that the ships will not be involved in illegal activities while in Nigeria. The ship owners, however, described the condition as unfavourable.

The move by the government to curb crude oil theft by imposing strict conditions on vessels wishing to lift Nigeria’s crude is threatening the exports of the country’s crude oil, as many vessels, especially those from Asia are now beginning to shunned the country’s territorial waters. The vessels owners described the condition as unfavourable.

Experts now urged the federal government to use the opportunity to change crude trade policy from Free On Board (FOB) to Cost Insurance and Freight (CIF)

Under CIF policy, Nigeria will be required to deliver crude to all her customers, using own or chartered vessels, unlike the present arrangement when the buyers provide their own vessel to lift crude from the country. Trade experts said CIF is the modern trade policy, adding that Nigeria remains the only country in the world still adopting FOB as a trade policy, especially for wet cargoes, like crude.

Ship owners eye premium for Nigeria crude oil loadings

Ship owners now ask for a premium on freight rates for ships loading crude oil out of Nigeria following the NNPC requirement that all oil tankers loading in Nigeria would need to sign a “letter of comfort” to contain a spate of crude oil thefts.

NNPC released two versions of their template for the letter, which caused uncertainty and raised eyebrows among ship owners and charterers because it exposed both parties to legal responsibilities outside their control.

“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,” Michael White said.

It has complicated operations for Nigerian crude oil buyers, although loadings are continuing as normal, with some companies and ship owners signing amended versions of a letter.

However, it has emerged that two ship owners have started charging a premium of up to Worldscale 10 for ships loading from Nigeria because of the requirement. The SCF Altai, owned by Sovcomflot, was placed on subjects to Repsol for November 12 loading dates at Worldscale 87.5 on a West Africa to Spain route.

At the time other fixtures for a Suezmax on a West Africa to Mediterranean route were being done at around Worldscale 77.5 and 80. A representative of Sovcomflot said the ship was still on subjects at w87.50 but he declined to comment on the letter of comfort obligations it had agreed to.

According to the shipowner, the agreement was still under discussion, and could not set a precedent for ships calling from Nigeria, as there is no fixed rule.

Sources said a premium was also charged on the Suezmax Delta Kanaris chartered by Petrobras at Worldscale 87.5 on a Nigeria-Brazil voyage for November 8 loading.

The market had now accepted the letter of comfort, but it was causing unnecessary complications to an already oversupplied Nigerian crude market; Nigerian crude differentials have declined steadily over the past month.

“The premium is not widespread but some owners are using the issue to make gains,” a trader said. “People are signing it but it is hurting Nigerian crude differentials.”

Ships loading out West Africa load not only out of Nigeria, but also from Angola, and other countries like Gabon, Cameroon, Equatorial Guinea and Ghana, but the premium is only being sought for loading out of Nigeria because of the request to sign a letter of comfort.

Nigerian crude oil differentials at multi-month lows

The differentials for Nigerian crude oil grades against benchmark Dated Brent have been steadily dropping over the past two weeks as November cargoes fail to attract major buyers, with more than a third of the month’s program still unsold, even as December’s programs begin to be released.

Flagship Nigerian grade Qua Iboe was assessed at a premium to Dated Brent of $0.65/b, the lowest since July 13.

Levels have dropped 60 cents from highs at the start of October, when the grade was assessed at Dated Brent plus $1.25/b.

Premium Nigerian grades Bonny Light and Forcados have also dropped 50 cents since the beginning of October.

Bonny Light is currently assessed at Dated Brent plus $0.60/b and Forcados also at Dated Brent plus $0.60/b, the lowest since mid-August.

The brief parity of all three grades at the end of last week has since disappeared, said traders, with Qua Iboe retaining a small premium over the other two.

Differentials for Bonga grade have dropped 50 cents since the beginning of October to Dated Brent plus $0.50/b, while Escravos has dipped 40 cents to Dated Brent flat.

Other Nigerian grades Brass River, Erha, Usan, Agbami and Akpo have also had narrowing differentials.

The falls can be attributed to a number of factors: pressure from high freight rates, dampened European demand due to low refinery margins and competing Mediterranean grades.

West African VLCC flows slump in September

High regional inventories combined with rising freight rates also compounded the wider trend and helped drive West African VLCC sailings to 15-month lows. VLCC sailings from West Africa, at 24, a drop of six, were at lows not seen since June 2014.

Angola sent nine tankers to China, marking a five-month low, as softer margins and run cuts of 10-15 percent announced for October dented Chinese refinery demand.

The West African producer’s crude is heavily dependent on China, which typically takes 40-60 percent of its exports every month, and Unipec, the trading arm of Chines state-owned Sinopec, is the largest buyer of Angolan crude, often taking 35-40 percent of the monthly export program.

Volumes leaving West Africa stumbled to their weakest levels in 15-months, with 24 VLCCs heading out of the region. Angolan sailings dropped to their lowest count in six months, at 14, while the number of ships departing Nigeria eased to six, last lower in June.

FRANK UZUEGBUNAM