Safely figuring out how to buy crude oil from Nigeria is one of the most daunting tasks crude oil buyers from many parts of the world face.
The Nigerian market is highly volatile, too many people masquerade themselves as crude oil sellers, and after a long series of engagements, both the crude oil buyer and seller’s time gets wasted.
This article focuses on the concerns, highlights what’s real and what isn’t, and shows crude oil buyers what to do to close a successful transaction.
Before Anything…
There’s a lot to understand when it comes to knowing how to buy crude oil from Nigeria. First, the NNPC (Nigerian National Petroleum Corporation) on its website says that:
- NNPC does not employ the Services of any Agent (s) or third parties for the Sale and Purchase of Nigerian Crude Oil, Natural Gas Liquids (Domestic & Export) and LPG mix
- NNPC does not introduce or recommend its potential Term contract holders to any third party or Agent (s)
- NNPC does not have any Off-OPEC Allocation (s)
- NNPC does not require Companies to pay any money into individual’s Personal/Companies Account (s) or any Account that is not Designated by the Government for Crude Oil, Natural Gas Liquids (Domestic & Export) and LPG mix
- NNPC does not issue any Authority to Sell to individuals or Companies
Why This Statement?
First, the NNPC is an OPEC registered nation, and so, abides by OPEC rules and regulations. Meaning that if a crude oil buyer wants to get Nigeria’s crude oil, they’d have to come down to Nigeria to have a talk with the NNPC, after which they can go on to purchase the quantity of crude oil they want at the full OPEC price.
So Who Are Off-Takers?
Every year, the NNPC puts out an advert for companies that meet a minimum critical requirement, to bid for crude oil lifting and marketing contracts. These organizations undergo a technical and financial evaluation to prove they are fully fit to lift and market Nigeria’s crude oil.
Those awarded the contract usually get a year-long allocation/contract to sell Nigeria’s crude oil to refineries around the world, and this is done based on thorough OPEC practices.
The discounts here can be as ridiculously low as $2 or mostly none at all, which never favours crude oil buyers who primarily look to buy Nigeria’s crude oil for resale purposes.
So What Are OFF-OPEC Sales
Since OPEC (Organization of the Petroleum Exporting Countries), the world’s foremost body for regulating the price of crude oil, imposes strict practices for its member countries to follow, this limits the production capacity and sales of crude oil worldwide.
Nigeria, for instance, as at July 2017, officially produces about 2.2 million barrels of crude oil a day. These figures are merely official numbers, but what is rumored to be generated is said to be over 3 to 4 million barrels of crude oil a day.
These excess crude oil generated are then in-turn sold through organizations who have the financial capacity to execute in what are commonly called Off-OPEC transactions. Here, the companies buy the crude oil from the NNPC on Provisional Lifting Right (PLR) FOB terms, and then go on to resell to crude oil buyers on CIF terms. Here, no OFF-OPEC allocations are given. Everything is simply done on PLR basis.
Several companies operate on OFF-OPEC / PLR terms, and this is why their names never appear on the list of off-takers the NNPC releases every year, which are only meant to be companies that strictly operate with OPEC practices on behalf of the Nigerian government.
How Do You Verify An OFF-OPEC Allocation In Nigeria
The NNPC does not give OFF-OPEC allocations, and so, taking a company’s ATS (Authority To Sell) letter to the NNPC tower in Abuja for a verification would either get you a straight denial or arrested. No official in the building will admit to any OFF-OPEC allocations because they really do not exist, but on your way out, some people may try to lure you to use a seller “they claim” is a real seller, whose name isn’t even on the off-takers list published yearly by the NNPC. They mostly do this in a bid to broker a crude oil transaction since they cannot officially own allocations or issue allocations to any of their family members.
The crude oil sellers you may be referred to in this instance are those lifting on PLR basis, where they buy from the NNPC on FOB and resell to the buyer on CIF. Technically, this is the OFF-OPEC transaction that happens, and the Laycan that is issued to the crude oil seller is verified at the NNPC.
If you want to verify an OFF-OPEC allocation or ATS (Authority To Sell) letter of any potential crude oil seller in Nigeria, you simply cannot. All those documents are all simply fake! The only verifiable thing is the Laycan that would be issued to the crude oil seller to load their vessel. If the Laycan is not verifiable, then the crude oil is of highly questionable origin.
If you walk into the NNPC flashing documents and demanding answers to questions, they’d tell you the only approved sellers are the published off-takers.
Why Then Does The NNPC Deny Having Crude Oil Sellers With OFF-OPEC Allocations?
As stated earlier, OFF-OPEC allocations do not exist. The NNPC doesn’t simply give OFF-OPEC allocations. Another thing is OPEC constantly sends spies to try to identify wrong practices done by its member countries in a bid to impose heavy sanctions on those found wanting. As a result, every official at the NNPC towers are always on the alert and would deny any knowledge of any OFF-OPEC allocations, because they really do not exist.
OFF-OPEC transactions in the right description now are done by the crude oil sellers who are buying from the NNPC on FOB terms based on the Provisional Lifting Right and selling to their buyers on CIF terms. These sellers are not verifiable, but the Laycan is verifiable and their trade processes could be negotiated to be secure for both parties.
If the Laycan is not verifiable and the trade process is not reasonably negotiable, then there’s a problem.
Why Are Crude Oil Buyers Demanding For OFF-OPEC Crude Oil?
Crude oil buyers in Nigeria are always looking out for good deals on the price of the crude oil sold. On OPEC allocations, they purchase at the full Brent price, or sometimes with a $2 discount per barrel, but with OFF-OPEC purchases, they can get up to a $6 NET discount per barrel for exports to Europe and up to an $8 discount per barrel for exports to West African countries.
When they do this, they usually pay a commission of $4 to the brokers involved, where both the buyer and seller’s side gets to share it equally.
For instance, a crude oil export to China could come at a cost of $10 gross Less $6 net ($10/$6). Where $6 is the NET discount the buyer is getting per barrel, and $4 is the commission the buyer is paying, which is to be split by all the parties involved per barrel. This way, if the current Brent price of crude oil is $72 per barrel, the full amount the buyer would have to pay would be $66 per barrel, saving them $6 million Dollars for every 1 million barrels purchased.
So How Does A Crude Oil Buyer Buy Crude Oil From The Nigerian OFF-OPEC Market?
The first step is to find a credible crude oil seller who doesn’t just have experience trading OFF-OPEC, but is willing to complete a transaction on reasonable terms, discounts, and procedures. Since the sellers are usually difficult to find, you’d have to communicate directly with their mandates or facilitators.
The NNPC only sells crude oil on FOB terms for both OPEC and OFF-OPEC (PLR) transactions. After which the crude oil seller goes on to cover the insurance, clearance, and transportation costs to enable them to ship crude oil to their buyers on CIF terms. Although, OFF-OPEC crude oil sellers can still do FOB (Free On Board), CIF (Cost, insurance, and Freight), TTT (Tanker to Tanker Transfer), and TTO (Tanker Take Over) procedures for any crude oil buyer that requests it.
Next, the crude oil buyer’s bank would need to show a proof of finance to the crude oil seller’s bank, after which the seller’s bank would go to show their financial capability and readiness to post a 2% performance bond upon the placing of a financial instrument by the crude oil buyer.
In some cases, the crude oil seller can post an upfront performance bond for the crude oil buyer to provide comfort.
After the crude oil buyer’s financial instrument is in place, the crude oil seller will then go on to secure Laycan, load the vessel, and then present all the vessel documents and more to the crude oil buyer for verification before the cargo is shipped.
Procedures could widely vary, and an inexperienced OFF-OPEC crude oil seller could make dire mistakes in choosing the type of financial instrument or procedure, which occasionally leads to distressed vessels.
What If The Crude Oil Buyer Can’t Verify The Crude Oil Seller’s ATS And Partial Proof Of Product?
NNPC does not give OFF-OPEC allocations and so any ATS (Authority To Sell) and PPOP (Partial Proof Of Product) showing that the seller has been given a bulk allocation is fake. This is why it is important to ensure the crude oil seller is made to post a performance bond, possibly upfront after the buyer has proven he has the money. This ensures a financial commitment from the crude oil seller in the transaction.
But essentially, there are many ways the procedure could go, depending on the crude oil seller the crude oil buyer is dealing with.
To Sum It Up
While this article may be a small peek into how to buy crude oil from Nigeria in the OFF-OPEC market, there’s a whole lot more information to learn and this would require a detailed research on the part of the crude oil buyer looking to purchase BLCO (Bonny Light Crude Oil) at a discount from the OFF-OPEC market.
An Important Point
Trying to buy crude oil from Nigeria through genuine OFF-OPEC sellers can lead to a lot of wasted time and efforts on the part of the crude oil buyers. They spend a lot of time vetting crude oil sellers in Nigeria, doubting their results even if positive, and going back and forth too many times than they can count, only to end up either cancelling their decision to buy or making a purchase after months or years have passed.
Since finding genuine crude oil sellers in Nigeria is a problem, it is always wise for a crude oil buyer to use a Nigerian organisation as its buyer mandate, so they can be on the ground, meet with several crude oil sellers, and help the crude oil buyer make better calculative decisions.
