Generous to a fault

Due to absence of functional refineries, Nigeria’s crude oil swap/sale arrangements amounts to huge loss of revenue as by products are ignored writes ISAAC ANYAOGU

Nigeria is losing a pile of money by literally giving away other crude oil derivatives such as naphtha, propane, sulphur and mercury to mention a few when it batters its oil for kerosene and petrol in arrangements such as Offshore Processing Agreement (OPA) and Direct Sales Direct Purchase (DSDS).

The OPA is an agreement entered between Pipelines and Products Marketing Company Limited (PPMC) and a contracted refiner abroad who agrees to take Nigeria’s crude oil in consideration for delivering refined products to PPMC in accordance with contractually defined processing yields applicable to the relevant grade of crude oil.

As far as the contractual yields are concerned, these were defined following detailed commercial negotiations which took into account a large number of factors including the value on the international market of the different grades of crude oil that could be made available by PPMC, the yields that could be achieved from refining those grades of crude oil at various refineries as well as the yield that is achievable by the refiners, the cost of the refining process and the cost of transportation to and from the refinery.

In February 2016, Ibe Kachikwu’s then NNPC GMD and minster of state for petroleum resources invited by the national assembly and he disclosed that the crude-for-products exchange arrangement popularly referred to as crude swap will be replaced by a Direct-Sale–Direct-Purchase (DSDP) arrangement which would take off the next month.

A release by the NNPC stated that the DSDP was adopted to replace the Crude Oil Swap initiative and the Offshore Processing Arrangement so as to introduce and entrench transparency into the crude oil for product transaction by the Corporation in line with global best practices.

Under the old order, crude oil was exchanged for petroleum products through third party traders at a pre-determined yield pattern.

Kachikwu said that the DSDP option eliminates all the cost elements of middlemen and gives the NNPC the latitude to take control of sale and purchase of the crude oil transaction with its partners adding that the initiative would save one billion dollars for the Federal Government.

“When I assumed duty as the GMD of NNPC, I met the Offshore Processing Arrangement (OPA) and like you know there is always room for improvement. I and my team came up with the DSDP initiative with the aim of throwing open the bidding process. This initiative has brought transparency into the crude-for-product exchange matrix and it is in tandem with global best practices,” Dr. Kachikwu informed.

Mele Kyari, general manager, Crude Oil Marketing Department of the NNPC at an industry conference last year in Abuja, said that the NNPC was already netting off good value from the introduction of DSDP.

Kyari said that the problem with other arrangements such as crude swap and OPA was the national oil company was literally giving refiners $100 crude and asked them to bring $90 worth of refined product, but with the DSDP, NNPC is giving them $100 crude and demanding $110 worth of product.

However operators say both methods leaves the country short-changed. “I have always said there is a need for government to sit down with the right people and fashion out clear policy for the sector,” Uju… Chairman of Brittania-U, during a panel session at the recently held WAIPEC conference.

She added, “For the crude oil Nigeria gives refiners abroad, they only give us Petrol and Kerosene or diesel, what happens to other products? What happens to other products like naphtha, sulphur and mercury, who is accounting for those ones? Are they not useful too?”

According to NNPC’s monthly operations report for December 2016, 722.94 million litres of white products was supplied into the country through the DSDP arrangements while 1,003.28 million litres was supplied in the month of November 2016; 683.15 million litres of PMS and 39.79 million litres of DPK were supplied through DSDP in December 2016.

In November 2016, NNPC lifted 13,584,651.00 barrels of Crude Oil for domestic utilization translating to an average volume of 452,821.70 barrels of oil per day in terms of performance.

In order to meet domestic product supply requirement for the month of November, 2016 about 9,493,640 barrels was processed under the Direct-Sales-Direct Purchase (DSDP) scheme while 3,142,176 barrels was delivered to the domestic refineries for processing and the balance of 948,835 barrels was exported as unutilized, the reports say.

NNPC report did not mention any of the other derivatives from millions of barrels of crude, preferring to treat them as inconsequential commodities. There is no information on the OPA contracts that refiners abroad were required to give accounts of the other derivatives.

It can be inferred from the introduction of the DSDP arrangement that questions about derivatives would not arise because Nigeria simply sold its crude at international prices and used the proceeds to import what derivatives it needs.

However, it leaves unanswered what best option to stop the tragic waste of crude oil derivatives in an economy where they are becoming highly sought after commodities.

Platts calculated the correlation between ICE Brent crude futures and CFR Japan naphtha at 0.99 over 2012-2015, indicating the price of naphtha closely followed the movement in crude oil prices.

Crude oil derivative propylene is also earning a ton of money for countries that refine their products. Data from data from the American Fuel and Petrochemical Manufacturers indicated that US propylene inventories at the end of Q1 2016 were 1.841 billion lb (834,894 mt), reaching their highest levels since Q4 2008 quoting

Spot polymer-grade propylene, the basis for monthly domestic contract pricing, averaged 32.56 cents/lb ($717.82/mt) on a free-delivered USG basis through mid-December, according to S&P Global Platts data.

While sulphur is seeing a beat back due to environmental concerns that will see a global 0.5% sulphur cap to be introduced in 2020, and up to 70,000 ships may be affected by the regulation according to International Marine Organisation estimates. This gives a rough idea of the value lost to lack of refining capacity for sulphur to power these ships.

A cap on sulphur meanwhile will be a boast for LNG as marine fuel. “LNG as fuel is now a technically proven solution, and LNG bunkering infrastructure is developing rapidly. While conventional oil-based fuels will remain the main fuel option for most existing vessels in the near future, the commercial opportunities of LNG are interesting mainly for new builds, but in some cases also for conversion projects,” said Ioannis Chiotopoulos, Regional Manager South East Europe & Middle East with DNV GL in an interview with Hellenicshippingnews.

However, Nigeria has only just articulated a gas policy after many of years of flaring gas in the atmosphere.

A necessity to wean the Nigeria off exporting its crude oil without adding value is indicated by the fact that Nigeria spent an average of US$21 million every day importing fuel in 2016 according to figures released on 20 January by the National Bureau of Statistics (NBS).

The country imported 18.8 billion litres of premium motor spirit in 2016 at a cost of N2.019 trillion, which comes to approximately US$8 billion using the average import exchange rate of N255 to the US$ for fuel imports in 2016.

The average exchange rate was arrived using the N199 to the US$ exchange rate used for the period up to May 2016 and the N305 to the dollar exchange rate used for the rest of 2016. In naira terms, Nigerian spent the equivalent of N5.5 billion daily to import petrol in 2016.

Nigeria imports more than 90% of the petrol consumed locally because the country’s four refineries have been operating at less than 10% of their installed capacity despite billions spent in turnaround maintenance that has failed to turn them around.

Expert advice to sell the refineries has largely been ignored. Increased importation of refined products into Nigeria is helping petroleum refining margins in Asia and Europe and depleting scarce foreign exchange in Nigeria.

But the chickens may soon come home to roost as Nigeria’s refineries will not command high values even if government agrees to sell them after Dangote refinery comes on stream.

“With 650,000 Dangote refinery capacity set to come on stream in 2019 and if all goes according to plans, Nigeria will literarily pay someone to take those refineries,” said a top oil and gas sector industry player.

Aliko Dangote, president of Dangote Group is building an oil refinery in Lagos at the cost of $12 billion, a fertilizer plant at the cost of $2 billion, and a subsea pipeline at the cost of $3 billion.

 

ISAAC ANYAOGU