Thursday, July 22, 2010

HOW THE DEAL WAS DONE: What Does Latest Nigeria Oil Deal Mean for Liberia

By Rodney D. Sieh

Source: FrontPage Africa
WHAT'S IN A DEAL: The “catch”, according to government sources is that Liberia does not get 20,000 barrels a day at $76.00 (price of oil) per barrels as many are leaning to believe. “The executing company get the “daily” price per day (20,000) and they have to sell that 20,000 at whatever margin or spread. And THEY have to take the risk,” said the government source.

Monrovia –

When the management of the Liberian Petroleum Refinery Corporation(LPRC) signed, sealed and delivered the news that it has entered into a purchase and sale contract with the Government of the Federal Republic of Nigeria for an allocation of 20,000 barrels per day of Nigerian crude oil from the Nigerian National Petroleum Corporation (NNPC) this week, keen followers of the activities of the LPRC were quick to draw similarities of a previous deal which dogged the previous managing Director Harry A.Greaves.

That Liberia, in the new deal would be getting 20 cents on a barrel compared to 14 cents during the Greaves era, industry watchers saw very little difference in what Liberia is getting now than what it received during the Greaves era and for good reasons.

Just last year, the powerful NNPC terminated a multi-million dollar crude oil contract it signed with Kenya Ministry of Energy over "ripples" which the lucrative deal was causing between the state-owned National Oil Corporation of Kenya (NOCK) and the Kenya Energy Ministry.

The Nigerian newspaper THISDAY reported that in the deal sealed by the parties in 1999, NNPC had been supplying Kenya with crude oil at below-market prices, which was then being sold on Kenya's behalf by international oil traders, who remitted the money to Kenya.

In the case of Liberia, the market prices have been a concern for many, going as far back as the Greaves era at LPRC.
The manifestation of the the new deal agreed to this week with the Nigerian National Petroleum Refinery Corporation(NNPC) will enable the Liberian Government accrue about US$120,000 per month at 20 cents per barrel, six cents more than Greaves' controversial deal signed with the Isles of Man-based Addax Ltd. for the purchase of 10,000 barrels of crude oil per day.

In contrast to the Greaves era, the terms and spot market values were different.

At the time, Greaves told FrontPageAfrica that the range of offers on the table was from nine cents a barrel to fourteen cents a barrel. That was the range. I think fourteen is better than nine. We had an offer of nine cents, we had another offer for twelve cents and fourteen was the best. People have to understand, the whole misconception started when Blamo Nelson who doesn’t know better and Cletus Wotorson who should know better, cause he has been in the oil business made the assertion that Nigeria had given this oil to Liberia free of charge. Well if you believe that then you have to believe in the tooth fairy. Nigeria does not give its oil away for free; Liberia does not away our rubber for free, why in the world anybody should think that Nigeria takes its oil from which it generates ninety percent of its foreign exchange earnings and give it away free. I can’t imagine.”

Fast forward to the current deal, as of Tuesday, July 20, 2010, the price for light crude was selling at $77.55 cents a barrel. Assuming that there is a one percent discount, the monthly receipt or gross income on that rate should be $462,000. Assuming a discount of two and a half percent, it would sell at a dollar ninety four on a barrel. The monthly gross income from that would be $ 1.162, 800(one million, one hundred, sixty two thousand, eight hundred dollars. At a half percent discount, it would be 39 cents a barrel. The gross monthly income of that would $232,652 at current prices. But economists say depending on the fluidity of the prices, it could be significantly higher or lower. But even at five percent discount, economists say the gross income should be $2,255,000(two million, two hundred fifty five thousand dollars. But even if the crude is purchased at the spot price, experts say, it could be sold at a premium minimally at one dollar barrel because Nigeria oil is in high demand.

Judging from the explanation here, many Liberians and industry watchers feel Liberia may have gotten the raw end of the deal. But a senior administration official who spoke on condition of anonymity, shortly after the deal was signed told FrontPageAfrica this week that the Government of oil producing countries has a two-fold interest in “donating” oil. Firstly, they basically want to “help” their neighbors. “All the oil producing nations donate oil to their African brethrens. This is done as “helping hand.” Angola and Nigeria as the big two producers donate oil in the millions of barreled yearly to other Africans nations. Almost everyone in the sub-region follow stand to benefit unless the countries are at odds. For example, the government source notes, “Ghana receives both from Nigeria (somewhere in the range of 40,000 barrel a day) and from Equatorial Guinea (60,000 per day). The late President Yar Dua wanted to help Liberia “jumpstart” it’s infrastructure, so his successor Jonathan Goodluck eventually approved 20,000 per day.

As it stands, the source notes, the President of Nigeria directs the Nigerian National Petroleum Corporation (NNPC) to give the “oil contract.”

This contract was effective for July 15 to June 30 2011. But the “donation” only works for the calendar year. So on December 31 2010, the benefiting country would have to reapply for the next 6 months.

Liberia is required to “present” to the NNPC a liability company (liability because they-the company has to take “market risk.” Market risk is the price the NNPC gives the buying country in this case, Liberia. Liberia then give the company the power of attorney to execute on behalf of an Liberian entity (LPRC).

Thus, LPRC chooses the company in this case, Sahara, to execute the contract. BuT before that begins they negotiate with the company, Sahara, on a “fixed margin or spread” That margin/spread equate to a certain amount. In this case, the deal was set at .20 cents (after the executing company expenses). This number, FPA has learned was negotiated by the Minister of Justice Christiana Tah and T. Nelson Williams, Managing Director of the Liberia Petroleum Refinery Corporation(LPRC).

The “catch”, according to government sources is that Liberia does not get 20,000 barrels a day at $76.00 (price of oil) per barrels as many are leaning to believe. “The executing company get the “daily” price per day (20,000) and they have to sell that 20,000 at whatever margin or spread. And THEY have to take the risk,” said the government source.

The source continues: “So when the NNPC give them the oil that day (am) at in this example $76.00 they have to “trade” that oil on the open market, taking/assuming all the risk. Liberia is locked in at .20 cents. Oil trades by the “penny.” Like 76.01 then 76.02, 76.03 etc. So they better make $ and pay LPRC their .20 cents. Now if oil goes to $80 that day, they’re good. They only pay the same .20cent, but what would happen if oil when to $60.00 they have to STILL pay the .20 cents, but they take a whopping loss.”

International price market keys deal

But critics of the deal counter that countries are not given oil allocation and allowed to take market risks. That is these countries receive oil at a small discount in bilateral oil allocation agreements. Oil is not sold at a fixed price. The discount is negotiated at the time of the contract. There has to be a provision in the contract on the basis for the sales price. The cost to Liberia for each shipment is based upon market prices at the time of lifting prearranged between NNPC and the intermediary company, which has a legal power of attorney to act on behalf of LPRC. If for example, Nigeria agrees to sell 20,000 barrels a day to LPRC in the month of September, there will be an agreement on the forward price. Usually, Nigerian oil is sold at international market prices, either Brent, New York Mercantile Exchange, or others on the resale market. The discount is based upon market price, minus the special discount, which are usually expressed in percentages, no matter how small the percentages are.

According to industry analysts, the only way one can determine the true value of the oil deal is to look at specific conditions in both contracts, the oil allocation from NNPC to the LPRC, and the one between LPRC and Sahara. At what prices will LPRC receive the oil, and at what costs to LPRC from Sahara. If these two questions are adequately answered, it would lay speculations to rest. Until then, this oil deal smells like the old deal, in secrecy, with little transparency and an uninformed public.

With the deal now set in stone, the availability of fuel on the Liberian market is not a done deal or is it a slam dunk by any means as per NNPC requirement all is subject to availability of crude on the Nigerian markets.

The availability of fuel was a key reason, the Nigerian government entered into an exchange investment with China this year. As per agreement, China will invest $4bn (£2.25bn) in oil and infrastructure projects in Nigeria. China will buy a controlling stake in Nigeria's 110,000 barrel-a-day Kaduna oil refinery and build a railroad system and power stations.

Potential shortage on the Nigerian market is also troubled by tension in the Delta region. Petroleum Industry is the backbone of the Nigerian economy, accounting for over 90% of Nigeria’s total foreign exchange revenue. Nigeria is the seventh largest producer in the world and the largest in Africa. Current daily production of crude oil in Nigeria is over 2 million barrels; most of it is produced from the prolific Niger Delta Region.

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If Liberia must move forward in order to claim its place as a civilized nation amongst world community of nations, come 2017 elections, Liberians must critically review the events of the past with honesty and objectivity. They must make a new commitment to seek lasting solutions. The track records of those who are presenting themselves as candidates for the position of "President of the Republic of Liberia" must be well examined. Liberians must be fair to themselves because results from the 2011 elections will determine the future of Liberia’s unborn generations to come - Bernard Gbayee Goah

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