Nigeria’s oil revenue at risk as NNPC changes cargo prices

…cargoes will be less competitive – Traders

A cloud of uncertainty hangs over Nigeria’s oil sector as the state-owned Nigerian National Petroleum Corporation (NNPC) implements a controversial shift in how it prices its crude cargoes, according to findings by BusinessDay.

The move, effective next month, has sent shockwaves through the trading community and raised concerns about potential erosion of the country’s oil revenue.

At the heart of the issue lies NNPC’s decision to abandon the established practice of basing cargo prices on the five-day average of Dated Brent settlements after loading. Instead, the company will adopt a system that anchors prices to the entire month’s average of Dated Brent, a broader and potentially more volatile benchmark.

Traders who spoke to Bloomberg said the switch will make Nigerian cargoes more prone to the kind of volatility that besets wider oil markets.

“The new approach may require increased use of hedging because of the less precise timeframe that’ll be applied to cargo pricing,” one trader said.

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He added, “Knowing when to hedge can also be challenging since loadings are sometimes deferred from late in the month to early the following month”.

According to the circular, NNPC plans to stick with the initial nominated loading dates for pricing purposes.

The traders said it will be more difficult to compare the price of NNPC’s shipments to Europe with cargoes from the Mediterranean and North Sea, as well as WTI Midland — most of which are priced using the five-day system.

“That may make the nation’s barrels less competitive,” traders told Bloomberg.

This seemingly subtle change has traders spooked. The wider timeframe for price determination injects an element of unpredictability, making it trickier to hedge against potential losses. This, in turn, could discourage traders from snapping up Nigerian barrels, potentially leading to a decline in export volumes and, consequently, government coffers.

“The new pricing system adds a layer of complexity and risk that wasn’t there before,” lamented one trader, speaking on condition of anonymity. “It’s going to make Nigerian oil less attractive, especially compared to other options with more stable pricing.”

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Compounding the anxiety is the lack of transparency surrounding NNPC’s rationale. The company has yet to offer a clear explanation for this abrupt departure from the established system, further fueling speculation and unease.

An NNPC spokesman didn’t immediately respond to requests for comment. The circular didn’t give a reason for the decision.

Some analysts suggest NNPC might be aiming to capture a larger slice of the pie during periods of high oil prices, when a monthly average could swing in their favour. Others speculate it could be a power play, asserting greater control over the pricing narrative.

Whatever the motive, the potential consequences are worrisome. Lower export volumes could translate to billions of dollars in lost revenue for a nation heavily reliant on oil income. The impact could ripple through the already fragile Nigerian economy, especially the country’s volatile FX markets.

Data from Nigeria’s budget office revealed Nigeria’s oil revenue stood at N813 billion in the first seven months of 2023, recording a shortfall of N487 billion gap from a target of N1.3 trillion.