Crude Oil Lifting: Time for Enhanced Local Participation By Dirisu Chester Yakubu

After more than five decades of crude oil exploration and production in Nigeria by International Oil Companies, IOCs, Nigeria’s indigenous companies are yet to build sufficient technical and financial capacity to play a dominant role in the exploration and production (E&P) business.

Findings by the Orient Energy Review (OER) show that only a paltry 10 per cent of Nigeria’s daily production of over two million barrels of crude oil is produced by the Nigerian independent companies, while the rest is produced by the deep pocket multinationals and other foreign players.

Though the oil and gas sector is an international business, indigenous companies and National Oil Companies (NOCs) are showing increasing appetite to participate in the business that is currently dominated by the multinationals.

               The consequence of this is that the country’s economy is exposed to a potential risk of collapse in the event of any international sanctions that will require the IOCs to pull out of the country or significantly reduce the volume of their investment in the oil sub-sector.

Unlike Iran, which survived international sanctions as a result of the deep involvement of the country’s local capacity in the oil and gas business, Nigeria stands no chance of economic survival in the event of any diplomatic confrontation with the western countries.

Though Iran lost its place at the summit as the second-largest producer among the member countries of the Organization of Petroleum Exporting Countries (OPEC) when the west ostracized her in 2012, the country’s economy did not collapse because local content involvement in E &P was able to shoulder the shock considerably.

Iran has ramped up its daily output to pre-sanction level, producing over 3.8 million barrels per day, less than a year upon the lifting of the international sanctions, with a target to hit 4.28 million barrels per day of crude oil and one million barrels of condensates per day in the next four years, according to National Iranian Oil Company. Iran, currently OPEC’s third-biggest producer, was pumping 4.085 million barrels per day prior to the imposition of the sanctions

It is, therefore, imperative that with their minimal participation in the E&P sub-sector, Nigerian companies should be encouraged to deepen participation in other sub-sectors where they have built the required capacity, particularly in crude oil lifting.

The yearly lifting of Nigerian crude for the Nigerian National Petroleum Corporation, NNPC is an area where Nigerian downstream companies have demonstrated enough capacity to compete favorably with foreign oil traders and refineries. But instead of allowing only Nigerian companies to play in this area to compensate for their low participation in the E&P and other sub-sectors of the oil and gas industry, the NNPC has, over the years, split the contract almost in a ratio of 50:50 between Nigerian companies and foreign players.

For example, in 2013, the NNPC awarded the lifting contracts worth about $40 billion to both Nigerian and foreign companies.

The NNPC allocated the contracts to 28 companies, as against the 50 in 2012 term contracts.

Though it broke with tradition as no contracts were given directly to foreign traders such as Glencore, Trafigura and Vitol, with only Switzerland’s Mercuria winning a contract; yet the Corporation initially made a failed attempt to exclude Nigerian companies.

Before the NNPC looked in the direction of local entities in the 2013 term contracts, the Corporation had attempted to exclude local players from the contracts through stringent guidelines that could have favoured only foreign companies.

In what appeared a breach of the Nigerian Content Law, the NNPC had deliberately issued 2012/2013 guidelines for crude oil lifting contracts to favour foreign contractors culminating in the intervention of the Nigerian Content Development and Monitoring Board (NCDMB) and the Presidency.

Though there has been increasing local participation in the NNPC yearly contracts after that initial setback, the entire deals are supposed to be the exclusive preserve of indigenous players, given foreign dominance in other sub-sectors of the industry, especially in crude oil production.

The 2014/2015 contracts were expanded to about $52 billion worth of crude oil, up from $40 billion, while 38 companies were awarded contracts to lift crude oil from June 1, 2014 to May 31, 2015.

The list comprises 21 indigenous companies; eight international oil traders; two foreign refineries; two subsidiaries of the NNPC and three countries, represented by their state-owned National Oil Companies (NOCs).

According to the list, 21 indigenous companies were awarded contracts to lift a total of 630,000 barrels per day of crude oil during the one-year period, representing 57 per cent of the 1,179,000 barrels per day awarded to the 38 beneficiaries.

The list also revealed that 8 international oil traders got an allocation of 240,000 barrels per day, representing 20.5per cent of the whole allocations, while two foreign refineries got 60,000 barrels per day, or 5.1per cent of the allocations.

Two subsidiaries of the corporation were awarded contracts to lift 90,000 barrels per day, which translated to 7.7per cent, while three countries, represented by their NOCs also got 90,000barrels per day.

A breakdown of the allocations showed that each of the 21 indigenous traders, operating in the downstream sector, got an allocation of 30,000 barrels per day.

Two foreign refineries – Fujairah Refinery Limited and PTT Public Company Limited received an allocation of 30,000 bpd each; while two subsidiaries of the NNPC – Duke Oil and Calson were awarded 30,000 bpd apiece. 

The NNPC also entered into bilateral agreements with the Republic of Malawi; SINOPEC of China and Indian Oil Corporation Limited, with each of these entities receiving 30,000bpd.

Summarily, over 60 per cent of the 2014 to 2015 annual term contracts for the lifting of Nigeria’s crude oil were awarded to local firms.

In the 2016 crude oil lifting contracts, which were the first of such contracts to be awarded by the administration of President Muhammadu Buhari in December 2015, a total of 21 companies got the contracts.

This administration had four months earlier revoked the term contracts awarded by the previous administration headed by Dr. Goodluck Ebele Jonathan.

Under the new contracts, indigenous Nigerian firms were awarded contracts to lift 41 per cent of total crude allocation, while major trading firms got 47 per cent of the crude oil allocation. NNPC trading affiliates were awarded 12 per cent of the total allocation, bringing the total allocation to Nigerian companies to 53 per cent.

President Buhari had earlier directed the immediate cancellation of all offshore crude oil processing agreements and crude oil swap deals for refined petroleum products between the NNPC and various oil traders, in line with the recommendations of the Ahmed Joda-led Presidential Transition Committee.

The government had invited fresh bids and at the expiration of the deadline for the submission of application by prospective bidders, about 278 bids were received from various indigenous and foreign firms and 21 firms had emerged winners. 

The companies awarded contracts to take 60,000 barrels per day of crude oil include Emirates National Oil Company (ENOC), Indian Oil Corporation, CEPSA Refinery Madrid and Sara SPA Refinery.

International trading companies – Trafigura PT Limited, Mercuria Energy Trading SA and Vitol SA won the contract to lift 32,000 bpd of crude.

Affiliates of international oil companies – ENI Trading and Shipping SPA, Total Oil Trading SA (TOTSA), Exxon Sale and Supply LLC and Shell Western Supply and Trading also got term allocation of 32,000 bpd each, totaling 128,000 bpd, representing about 13 per cent of total volume of crude oil on offer.

Indigenous Nigerian downstream players were allocated about 405,000 bpd, representing about 41 per cent.

NNPC trading companies – Carlson/Hyson was allocated contract to lift 32,000 bpd, while Duke Oil Incorporated, the NNPC affiliate was awarded contract for 90,000 bpd, accounting for about 12 per cent of total volume.

For the 2017/2018 term contracts, 39 winners comprising 18 Nigerian companies, 11 international traders, five foreign refineries, three National Oil Companies (NOCs), and two NNPC trading arms were successful. The list of 224 bidders dropped from the 278 that applied for the contracts in 2015, because the NNPC said it had introduced some new criteria that had to be met by bidders.

The contract will run for one year effective January 1, 2017 for twelve consecutive circles of crude oil allocation.

All the contracts are for 32,000 barrels per day except for Duke Oil Limited, the oil trading arm of NNPC, which has 90,000 barrels per day.

Apart from the 16 Nigerian companies, and two NNPC subsidiaries, the international refineries that made the list include Indian refiner, Hindustan Energy, Varo Energy, Sonara Refinery, Bharat Petroleum and Cepa.

               Trafigura, ENOC Trading, BP Trading, Total Trading, UCL Petro Energy, Moco Trading, Levene Energy, Glencore, Litasco Supply and Trading and Heritage Oil are the 11 international traders that were selected.

Although the oil and gas industry is a global business, but competent Nigerian companies that submit bids should be used to substitute foreign companies to deepen local participation in the industry, boost employment generation and curb capital flight for the benefit of the Nigerian economy, provided they are armed with the requisite capacity. .