Questions over Nigeria’s use of middlemen to market crude

Nigeria, Africa’s top oil producer, exports a big chunk of its crude oil mostly through intermediaries who are awarded contracts to lift the oil and sell to buyers, a practice which industry analysts see as creating celebrated traders, elite capture mentality, capital flight, and resulting in loss of revenue to the country.

“The idea of using intermediaries to find markets for Nigerian crude leaves much to be desired, more so when it is a policy considered in the recent past to add no significant value to the local content’s noble objective to create entrepreneurs in the petroleum business, rather than promoting the celebrated trader mentality that has pervaded the Nigerian society with minimal value added to its economy,” Wumi Iledare, president, International Association for Energy Economics, said in an email response to questions from BusinessDay.

BusinessDay investigations reveal that prior to the advent of this practice about three decades ago, international oil companies (IOCs) operating in the country had long-term purchase contracts with the Nigerian National Petroleum Corporation (NNPC), which enabled them to purchase NNPC crude oil share.

According to the 2014 Oil and Gas Industry Report recently released by BusinessDay Research and Intelligence Unit (BRIU), in the last 10 years allocation to oil companies has been on the average of 53 percent of the total crude oil lifted for both domestic use and export.

A total of 340.46 million barrels was lifted by NNPC for both domestic use and export in 2013, representing a shortfall of 40.92 million barrels when compared with 2012, due to 6 percent drop in production in 2013, the report said, adding that 78 percent of the total NNPC lifting for 2013 was exported for Federation Account.

It was gathered that around 1984/85, NNPC introduced the yearly crude oil lifting contracts in which global oil traders and the IOCs had to compete for the award of contracts. Up until recently, contracts were mostly given directly to global trading houses such as Glencore, Vitol, Trafigura or Gunvor, Mercuria and IOCs.

In its requirements for marketing the Nigerian crude oil, the Crude Oil Marketing Division of NNPC said that those who wished to buy and sell Nigerian crude oil must demonstrate their commitment to the oil industry through allocation of adequate resources of capital, equipment and manpower to the general business of prospecting, exploration and production of crude oil.

“Lack of transparency of the criteria used to determine eligibility makes the policy seem driven by personal interest at the expense of national interest,” Iledare said, noting that the policy seemed to be an ad hoc response to a structural change in the global oil market.

“In the long run, such ad hoc policy creates nothing of value than the promotion of elitism and the promotion of capital flight,” he said.

In what is a break with tradition, in the latest list of yearly crude oil lifting term contracts for 2014/2015, no contracts were issued directly to global traders Glencore, Vitol, Trafigura or Gunvor, with only Switzerland’s Mercuria awarded a deal.

The list, entitled ‘Recommended List of NNPC 2014-2015 Crude Oil Term Contracts’, shows 28 Nigerian firms among the winners, up from 21 in the last round. It comprises a total of 43 companies. The total contracted volume is expected to be around 1.32 million bpd, or about 70 percent of Nigeria’s total crude oil exports.

“The noble objectives of the local content law are creating entrepreneurs, skilled and unskilled jobs, equipment and patent, and grow the economy. On the other hand, what awarding lifting contracts to individuals does is the opposite. It creates celebrated traders, elite capture mentality, and capital flight,” the professor of Petroleum Economics said.

Noting that it was the work of the crude oil marketing division of the NNPC to find markets for Nigerian crude, he said: “The London office can be useful as well. Perhaps NNPC can open a sales office in Singapore. Another option is for the government to not take its royalty and tax payments in kind, but in cash. Then they will have less oil to sell, which would just be the equity oil.”

In most countries, crude oil is sold directly by producers and registered commodity traders and not through elites with only connections to and perhaps no registered business records in oil trading, Iledare said.

“Nigeria is the only major oil producing country that sells its crude oil through intermediaries, and Nigeria is the one that loses money by selling its crude oil through intermediaries. We know what is right, but we have not done it. That is the issue of governance that we are talking about,” said Dayo Ayoade, senior lecturer, Energy Law at the Faculty of Law, University of Lagos, adding that the middlemen are offered an opportunity to make margins through reselling the crude.

“It is not that the NNPC crude marketing division cannot sell directly to the world market, but the system does not allow them. The current practice is what the powers that be in the country use to compensate their members. It is seen as the incentives in government,” said another industry analyst.

Emmanuel Usanga, a senior industry professional, said, “Intermediaries are good, but they also quickly evolve into racketeering and corruption. Seeking and promoting direct access in a diversified and transparent domestic market will be the preferred direction to go.

“If Nigeria had adopted the policy of making Nigeria a market-driven regional crude oil trading hub in the Gulf of Guinea in a similar way to Rotterdam being a hub in Europe, in other words, set up a Petroleum Exchange within a port-city in the Niger Delta to service the Gulf of Guinea, we would not have had to search far or carry our crude oil to Europe before we can sell them.”

A deregulated access to crude oil purchase rather than the NNPC monopoly as sole exporter would open up the competitiveness in the market and, as always, fair competition produces internal efficiencies that prevent or minimise corruption, according to Usanga.

Nigeria’s system for selling its own oil attracts many shadowy middlemen, creating a confusing, high-risk marketplace, Chatham House said in its report last year.

FEMI ASU