BusinessDay
Nigeria's leading finance and market intelligence news report.

Big business, low profile: opaque oil contracts keeping Nigerians hooked on cheap petrol

The decision of the Nigerian National Petroleum Corporation (NNPC) to award the Direct Sale, Direct Purchase (DSDP) contracts whereby crude oil is swapped for petroleum products using middlemen has exposed the extent to the corporation is going to ensure Nigerians remain hooked on cheap fuel.

The contracts, known as DSDP are coveted since they are used to supply nearly all of Nigeria’s petrol needs as well as cover some of its diesel and jet fuel consumption.

This arrangement is possible because Africa’s biggest oil-producing country allocates roughly 445,000 barrels per day (bpd) to Domestic Crude Allocation (DCA).

In theory, DCA is supposed to be sold on an inter-company basis to the Pipelines and Product Marketing Company (PPMC), NNPC’s main downstream subsidiary. The PPMC is then supposed to process this oil in the country’s four NNPC-owned domestic refineries.

However, due to chronic financial and operational challenges in the domestic refineries, a large chunk of this 445,000 bpd are allocated to a complex oil-for-product swap between NNPC and trading companies, an arrangement popularly called DSDP program.

These trading companies buy the oil from the NNPC but do not refine it themselves. Instead, they sell it, through intermediaries, to other companies, who refine it, a development which is a distinctive feature of Nigeria’s oil industry.

Although the scheme looks brilliant on paper, however in reality, experts say the way NNPC organises the programme is overly complex and this, combined with a lack of transparency and oversight in the sector, has made the process conducive to fraud.

Read Also: Getting to First Oil: Cost Optimization opportunities for New marginal field Operators

The 2021 DSDP winners announced for the crude oil lifting contracts had the names of ‘who is who’ in the oil and gas sector in the country as well as top players in the international oil and gas industry who are compelled to partner with the local players.

According to sources, each consortium would receive 20,000 barrels per day of crude oil in exchange for products, making the combined total 320,000 barrels per day of Nigeria’s output.

The 2021 winners have popular international trading companies such as major Swiss trading firms Trafigura, Vitol, and Mercuria, oil major Total as well as experienced Nigerian trading companies such as large Nigerian traders Sahara Energy, Oando, MRS Oil, and other so-called ‘briefcase companies.’

“Briefcase companies are a ‘small entity that routinely re-sells the cargoes it gets to another intermediary. For example, a larger, more experienced commodities trading firm, which then re-sells the cargo to a third party buyer,” a report by Netherland based independent center for research on multinational corporations (SOMO) and Nigeria based Civil Society Legislative Advocacy Centre (CSLAC) said.

According to the report written by Saskia van Drunen, Ilona Hartlief, Chinedu Bassey, and Ken Henshaw, “these briefcase companies are often inexperienced companies with no track record of selling and refining crude oil, and appear to be more politically motivated than commercially driven.”

“They are often inexperienced and lacking financial and commercial capacity,” SOMO and CISLAC report explained.

Another report by the Natural Resource Governance Institute (NRGI) which analysed this phenomenon in Nigeria extensively has argued that these briefcase companies appear to be more politically motivated than commercially driven.

NRGI was critical of how the NNPC organises its crude oil sales, and has repeatedly advocated for reform over the years. It criticised the system of selling oil to intermediaries who can earn significant margins, but add little or no value to NNPC, especially when the buyers are unqualified, such as the so-called briefcase companies.

“The prevalence of politically connected briefcase companies contributes to the perception that Nigeria’s petroleum sector is pervasively corrupt, frightening off some investors,” NRGI said.

Although there is a general consensus that allowing contract holders to trade the crude they receive is not in itself problematic, it can become so, as NRGI puts it, “when intermediaries are chosen for political or patronage reasons.”

“What remains problematic is the lack of explanation from the NNPC as to how it selects the contract winners from among over a hundred submissions usually received in each bidding round,” NRGI said.

In its 2015 study on NNPC oil sales, NRGI stated that between 2010 and 2015, the management of NNPC’s oil sales had worsened, becoming ‘overly discretionary and complex, as political and patronage agendas surpassed the importance of maximising returns’.

“These makeshift systems, the roots of which lie in NNPCs broader structural and financial difficulties, are particularly prone to abuse,” NRGI said.

The NRGI is not the only institution raising red flags about procedures for DSDP contracts. The Nigeria Extractive Industries Transparency Initiative (NEITI) has also been highlighting in reports for a long time, significant leakages in the sector, particularly with regard to transfers within government and relating to crude oil sales.

While NEITI has been successful in some areas, its efforts to enhance transparency have met with strong resistance from key players in the industry.

“Indeed, despite efforts to reform the sector, the Nigerian oil industry continues to be plagued by ineffectiveness and maladministration, with corruption a recurrent problem,” SOMO and CISLAC Report said.

The report also raised red flags about the Nigerian operations of Vitol, one of the largest energy traders in the world, with annual revenues comparable to Apple.

Like other oil traders, Vitol has in the past been associated with several controversies, including allegations of corruption and fraud, a development the company has repeatedly denied.

“The company fails to communicate how it addresses specific risks and impacts in challenging business environments and sectors like the oil industry in Nigeria,” a report by SOMO and CISLAC Report said.

It added, “despite Vitol’s stakes in Nigeria, the company is not very visible in the country. Vitol’s offices in Lagos and Abuja are in the buildings of two partner companies, Hyson Nigeria Ltd. and Mansel Commercial Services (Vitol’s commercial tanker shipping arm).”

The report urges for more transparency and has established a case for publishing petroleum contracts and reform of the NNPCs oil system in general.

Similarly, a Chatham House report of 2013 on oil theft in Nigeria, stated that the NNPC contract system ‘attracts many shadowy middlemen and “politically exposed persons” which in turn, creates a crowded, confusing, ‘high-risk marketplace.’

In March 2021, the House of Representatives said Nigeria lost about $5 billion to discrepancies in crude oil production data between the NNPC and other agencies of government, especially the Department of Petroleum Resources (DPR).

“This variance range from figures on offshore processing of crude oil, DSDP swap, processed crude oil by the three refineries, conversion of crude oil to export, FIRS borrowing crude oil to non-remittance of funds amounting to about $5 billion into the federation account,” Chairman of the Ad-hoc Committee investigating crude oil theft in the country, Peter Akpatason, said.

In order to solve this problem, NRGI asked NNPC to consider important reforms such as publish the full legal names of winning bidders for DSDP contracts, publicly explain how and why they chose the particular DSDP contract holders, and consider including a description of respective roles and responsibilities for the different parties, especially for any three-party contracts signed to advance local capacity, rather than allowing the contract holders to work out details in separate subcontracts.

“Develop stronger anti-corruption due diligence systems for vetting bidders as part of the selection process, commit to collecting and disclosing beneficial ownership data in future DSDP and other contract awards, publicly explain the process for allocating oil among new contract holders and publish per-cargo oil sales data on a regular basis in 2017, to show which contract holders are receiving oil,” said Aaron Sayne, a senior governance officer at the Natural Resource Governance Institute.

Support for this report was provided by the Premium Times Centre for Investigative Journalism (PTCIJ) through its Natural Resource and Extractive Programme.

Whatsapp mobile

Get real time updates directly on you device, subscribe now.