Mixed reactions have continued to trail the allocation of 445, 000 barrels of crude oil per day to the Nigerian National Petroleum Corporation (NNPC). According to the Federal Government, about 25 per cent of this is supposed to be refined at home while the balance is swapped offshore. Assistant Editor EMEKA UGWUANYI examines the issue.
When the Federal Government allocated 445,000 barrels per day (bpd) of crude oil to the Nigerian National Petroleum Corporation (NNPC) some years back, it probably never envisaged that the refineries for which the allotment was made would be run down
The four state-run refineries built between 1965 and 1988 – two in Port Harcourt and one each in Kaduna and Warri, have a combined installed capacity of 445,000 bpd. There is also a network of pipelines and depots strategically located throughout Nigeria, which are linked to these refineries to move products to depots.
Due to negligence and perhaps lack of maintenance of these refineries over the years, the refineries got dilapidated and their capacities utilisation dropped abysmally. Efforts to ensure sustainable turnaround maintenance (TAM) of the refineries despite the huge sums sunk into them proved unsuccessful.
Because the four refineries have been down and their output insufficient to meet domestic fuel requirements, the introduction of product importation became imperative, which was later followed by NNPC’s offshore processing/swap arrangements (OPA/Swap arrangement) to ensure adequate products supply.
However, the allocation has not gone down well with stakeholders in the oil and gas industry and the economy generally. Some stakeholders wonder why government continues to allocate the same quantity of crude to NNPC, when the existing four refineries currently operate at less than 25 per cent capacity utilisation, thereby forcing NNPC to adopt the OPA/Swap arrangement models. With the arrangement, some quantities of the allocation are swapped for petroleum products, while the balance is taken to offshore refineries for refining.
The Nigeria Extractive Industries Transparency Initiative (NEITI), has been strident in its criticism of the arrangement. For instance, in its report on domestic crude oil utilisation by NNPC between 2009 and 2011, NEITI said the corporation in 2009, got 161,914,000 barrels while only 19,363,000 barrels were refined locally and 142,551,000 exported. In 2010 alone, the Corporation, according to NEITI, got 166,523,000 barrels, refined 34,703,000 barrels, exported 97,792,000 barrels, while 27,336,000 barrels went for offshore processing; 950,000 barrels for crude exchange and 5,742,000 barrels for product exchange.
Similarly, in 2011, the NNPC got 164,455,000 barrels allocation, refined 45,394,000 barrels, exported 39,341,000 barrels, processed 23,688,000 barrels offshore, while 56,032,000 barrels were exchanged for product, the agency added.
The NEITI report said that from its computation, only about 20.2 per cent of the domestic crude oil allocation was delivered to local refineries, the balance was either exported by NNPC and proceeds paid into its accounts or utilised for offshore processing, crude oil exchange and product exchange. The report therefore, showed that the country depends mainly on imported refined products for local consumption resulting in avoidable high payment of fuel subsidies. This also reduces the revenue accruable to the federation from crude oil sales on pricing, volume utilisation and exchange rate differentials.
Reports such as NEITI’s must have given rise to arguments by stakeholders and experts in the oil and gas industry that there is no justification for the continued allocation of 445,000 bpd to NNPC when more than 75 per cent of that quantity is not refined in-country. Their argument is that such allocation is another window for corruption as such allocations cannot be properly accounted for. The thinking, therefore, is that government should at any time give the NNPC only the quantity of crude local refineries would be able to refine, and sell the remaining alongside the normal export.
The NEITI report summarised it: “The Federal Government should consider a review of the daily allocation of 445,000bpd to the level of available local refining capacity to obviate the gaps in the process. Besides, the derived average conversion rate by NNPC differs from the annual average Central Bank of Nigeria (CBN) rate and therefore results to apparent losses of N98.3billion during the years under review (that is 2009 and 2011). “Domestic crude oil sales proceeds should be paid into CBN in the currency of sales, where it should be converted at the appropriate rate by CBN and paid to the Federation Account. This will forestall the exchange rate shortfalls,” the agency said.
The agency also noted that the review of the domestic crude oil utilisation by NNPC, as contained in the lifting profile shows that NNPC utilised below the quota for the year 2009 by 1,000bpd and above the daily quota in the years 2010 and 2011 by 11,000bpd and 6,000bpd, respectively. This implies that NNPC does not effectively monitor domestic crude lifting in accordance with expected guidelines. NEITI also frowned at NNPC’s drawing of subsidy from the proceeds of domestic crude oil sales before the net proceeds are put into the federation account.
It said: “The Federal Government makes payment on subsidy to oil marketing companies based on the volume of imported products sold in Nigeria in order to guarantee the availability of petroleum products. Subsidies are normally claimed from the Petroleum Support Fund (PSF) through the Petroleum Products Pricing Regulatory Agency (PPPRA) by all qualifying oil marketing companies. In contrast NNPC draws subsidy payments directly from domestic crude sales proceeds prior to remitting to the Federation Account.
The Chairman of NEITI, Mr. Ledum Mitee told The Nation that if the government and all the stakeholders involved in the extractive industry had given NEITI its required recognition, all the controversies surrounding the non-remittances by oil firms including the NNPC into the Federation Account, utilisation of the 445,000 bpd allocation to NNPC, could not have arisen. He said that NEITI’s core responsibility is to find out receipts, payments and ensure proper reconciliation independently.
“I hope that one useful outcome of the current controversy over allegations of unremitted funds would be the realisation of the need by all relevant agencies and institutions to give NEITI and its audit recommendations the deserved seriousness and support. A properly resourced NEITI, whose audit recommendations are promptly addressed remains vital not only to our economic well-being, but also to enabling citizens derive needed benefits from our extractive resources,” he said.
Major Oil Marketers Association of Nigeria (MOMAN) also canvassed a similar position. The Executive Secretary of MOMAN, Mr. Obafemi Olawore, opined that NNPC should be allocated only the quantity that can be refined in-country. This, he argued, would make room for both accountability and transparency. He said that government should give NNPC what the refineries can take at any given time and export the remaining quantity alongside other production.
He said: “Although, I do not operate in the upstream sector but as a stakeholder in the oil and gas industry, I would say that NNPC or any other organisation should not be given more than it can refine in Nigeria.” What is the sense behind giving NNPC more than the refineries can take?” he asked, insisting that it does not make business sense to allocate crude to the corporation only for it (NNPC) to export it to other countries for refining or swap it for petroleum products brought to Nigeria by foreign or local companies.”
But the NNPC holds a different position. Its Group Executive Director, Exploration and Production, Abiye Membere, told The Nation that the security situation, which led to vandalism of the pipeline that supplies crude to the refineries as well as the inability of the refineries to produce enough products for national consumption even if they operate at installed capacities, is the major reason for crude swap and offshore processing. He disclosed that the NNP pays for the 445,000 barrels daily allocation at international market price.
He explained: “There are security issues, which prevent the supply of crude to the refineries. For instance, Port Harcourt refinery currently gets less than what it can refine. The refineries produce less than national demand. Therefore, we exploit all possible avenues to ensure that Nigerians get fuel while avoiding recurrence of what happened in 2011 where marketers took undue advantage of fuel import. We take the quantity that couldn’t be processed in-country for lack of capacity to offshore refineries for processing and swap. But of course, we pay for the crude at international price.”
Similarly, Spokesman of NNPC, Dr. Omar Farouk Ibrahim, absolved the corporation of blames in the crude swap saga. He noted that the corporation pays for the crude it receives at international price,
NNPC started off OPA/Swap arrangements by appointing international commodity traders such as Vitol, Trafigura and Addax, among others, to lift Nigeria’s crude oil and import petroleum products. Later, some Nigerian companies such as Sahara Energy, Aiteo Oil and Gas, and Ontario Oil and Gas were added to lift crude for NNPC especially the allocation meant for Duke Oil, UK-based subsidiary of NNPC and in turn bring back products.
However, the swap deals, according to stakeholders, have become increasingly opaque and have been blamed for the revenue shortfalls experienced by the Federation Account. Stakeholders say that the country is short-changed through the swaps as commodity traders appointed by NNPC to lift the crude under the swap programme allegedly found avenues to make billions of naira through dishonest means. Responding to the allegations of lack of transparency in the OPA/Swap arrangements, NNPC said that over the years, the operations of the domestic refineries have been very epileptic due to un-planned equipment failures as well as consistent acts of vandalism on the crude oil supply pipeline to the refineries.
It said that even when the refineries are fully operational, they cannot meet up with the petroleum products requirements of the domestic market, especially premium motor spirit (PMS), whose domestic daily requirement is now put at 40 million litres. The domestic refineries at full capacity can only produce about 19 million litres of PMS while the balance of 21 million litres is sourced through import.
“Therefore, in order to guard against products shortages and guarantee steady availability of petroleum products for domestic consumption all year round, NNPC engages in the importation of petroleum products to augment local refineries production.
“The importation of petroleum products by NNPC, which started in the 90s, was carried out under the open account system, through open tender process from reputable oil trading companies with proven track record of good performance and strong capital base.
“However, along the line, NNPC started witnessing default in deliveries where most of the supply companies failed to perform, especially around the winter period. The trading companies’ perennially gave the reasons of high cost of products and high cost of vessels freight, for their non-performance hence the demand for increased premium. Rather than deliver cargoes based on their allocations from NNPC, they would insist on spot cargo offers. This resulted in severe scarcity of petroleum products witnessed especially around years 2009 and 2010 with the attendant negative consequences to the Nigerian populace and economy.
“The open account import exposed NNPC to certain variable market conditions, especially the demand for high premium by the suppliers. This demand in most cases was predicated on NNPC’s inability to fulfil its payment obligations as at when due. The delay in making payments for the cargoes delivered deteriorated to over 1,000 days in default. The debt owed by NNPC at the same point in time was about $3.2 billion.
“In view of the long delay in making payments, and the huge outstanding debt, most International financial institutions became reluctant to cover NNPC imports. Even where the banks were willing to finance NNPC imports, the finance risk cover became very expensive there by making deliveries by trading companies almost impossible.
“Therefore, the cost of finance risk cover on NNPC imports in addition to the high interest on delayed payment for cargoes delivered by the suppliers increased the exposure of NNPC as additional costs that are not covered under the subsidy template.”
The corporation said that the open account import provided for it to pay interest to suppliers in default of payment after forty five (45) days of cargo arrival as a contractual provision, regardless of any operational exigency that may arise or prevent payment. Sustainability of products supplies almost became impossible occasioned by periodic interruption in supplies with the attendant scarcity around the country due to the vagaries of the open account regime, it added.
To mitigate the open account import challenges of price vulnerability, supply disruptions and also guarantee steady supply of petroleum products to the market, NNPC explored the option of offshore processing of the refineries’ unutilised crude oil, as well as the exchange of same crude oil for petroleum products.
NNPC said it was in view of the aforementioned challenges that it sought and obtained the approval of late President Umaru Yar’adua to enter into this arrangement pending when the refineries would be turned around for optimal performance.
The Offshore Processing and Crude Oil/Products Exchanges provided NNPC the opportunity and flexibility to control the supply and availability of petroleum products into the market; it said adding that the arrangements also liberated the corporation from the necessity of making monetary payments to the suppliers as required in the open account import regime and interest on delayed payments.
The economics also provided more volume of products delivered in comparison with the open account regime, it said.
It was learnt that under the Offshore Processing Agreement, NNPC delivers crude Oil to a refinery for processing at a contractually agreed yield pattern and processing fee. In return, NNPC evacuates the refined products that are needed most. The OPA provides NNPC the opportunity and flexibility to exchange products grades based on domestic need and immediate requirements. As a result, NNPC can request the refinery to make available for evacuation more of premium motor spirit (PMS) and Kerosene that are required most in exchange for automotive gas oil (AGO) out of the products yield.
The corporation explained that in the OPA/Swap arrangements all other products such as propane, butane, vacuum gas oil (VGO) and fuel oil that are not necessarily needed for consumption in Nigeria are sold by the refinery on behalf of NNPC at the prevailing market price and proceeds remitted to NNPC.
The process, The Nation learnt, allows NNPC to request for pre-delivery of petroleum products in the event of tight supply situation in the market or due to the inability to lift crude oil as result of operational constraints at the crude oil terminals or in the event of declarationof force majeure. Such pre-deliveries help NNPC bridge the gap in supply situation and forestall products scarcity in the country. In return, an equivalent value of crude oil will be allocated at a later date for the products pre-delivered.
“Under Swap/Crude exchange arrangement, NNPC allocates crude oil to reputable oil trading companies in exchange for the delivery of PMS, dual purpose kerosene (DPK) or any other petroleum product as may be required by PPMC. The contract is based on the international market value of the petroleum products against the prevailing international market value of the crude oil. This is value for value arrangement; crude oil lifted versus products supplied. The value for value philosophy enshrined in the Swap contracts is validated and tested on a regular basis when reconciliation meetings are held between NNPC and the trading companies.
“In the Crude Oil/Products Exchanges, PPMC can also request for pre-delivery of petroleum products where tightness in the supply is anticipated in order to forestall scarcity or as a result of any operational constraint that may hinder the loading of the crude oil at the terminals. The equivalent crude oil will be made available to the supplier at a later date to cover the products delivered.
“The OPA/Swap arrangements enjoy presidential approval and their operations are governed by contractual agreement. Furthermore, the entire activities under OPA/Swap were recently subjected to scrutiny by the House of Representatives Committee on Downstream with a verdict of clean bill of health returned.
“OPA/ Swap has availed NNPC the opportunity to sustain the market, guarantee the security of supplies and keep the entire country wet with petroleum products even when other marketers were reluctant to perform due to the non-payment and or delayed payment of subsidy by the government.
“The process also reduces the cost of NNPC’s importation by way of reducing and stabilizing the premium paid under the open account regime. Also, the situation whereby traders will gang up and decide on the premium to be paid by NNPC for the deliveries has been eliminated,” the corporation said.
A document obtained by The Nation from a top official of NNPC, showed that the average premium paid per metric tonne (MT) on PMS under the swap/crude exchange arrangement has remained stable at $81.28 through 2010 to 2013 while under the open account regime PMS average premium paid per metric tonne has continued to increase. Under the open account regime, PMS average premium paid per metric tonne in 2007 was $70.02, which rose to $85.14 in 2008 and in 2009 to $87.50 and further to $116.50 in 2010.
The data showed that in 2010, $141,266,580.77 was saved from products import through swap/crude exchange arrangement. Under the open account regime, the premium was systematically growing every year due mainly to the variable market conditions that NNPC was exposed to. It showed that within the last four years, the OPA/Swap arrangement has saved the government over $565,066,320.
It is also noteworthy that the most common means of pricing petroleum products internationally is by Platts European Marketscan Oil Publication. NNPC procures petroleum products cargoes mainly on free on board (FOB) basis; as a result, the supplier provides all necessary logistics for loading and delivery of the product on behalf of NNPC. Also the basic components that are taken into consideration in deciding the premium are as follows: freight, insurance, financing (letter of credit L/C administration charges), port dues, interest, demurrage, trader’s margin.
