How Crude Oil Swaps, OPAs Stalled NNPC Refinery Operations

How Crude Oil Swaps, OPAs Stalled NNPC Refinery Operations

The Crude for Petroleum Products Exchange Agreements, better known as crude
oil swaps, and Offshore Processing Agreements (OPAs), entered into by the
Nigerian National Petroleum Corporation (NNPC) and oil traders between 2011
and 2014, are to blame for the abysmally low output from NNPC’s refineries and
the high importation of petroleum products into the country, THISDAY has learnt.

Extensive interviews with officials of NNPC and industry operators revealed that
contrary to the perception that has been created for some time that the nation’s
four refineries were operating at suboptimal capacity, thus necessitating the
massive importation of petroleum products, certain elements within the system,
with endorsement of the former Minister of Petroleum Resources, Mrs. Diezani
Alison-Madueke, ensured that the refineries were starved of crude oil.
Last Thursday, NNPC’s public affairs unit announced that its four refineries would
resume operations next month.

Spokesman of the corporation, Ohi Alegbe, said the refineries – the 210,000
barrels per day (bpd) Port Harcourt plant, 110,000 bpd Kaduna plant and the
125,000 bpd Warri plant – would commence operations after a successful
overhaul of their facilities.
He said: “The turn-around-maintenance has been on (going) for some time. We
did not just want to make any noise about it. The refineries will start production
as soon as they have delivery of crude oil for refining.
“Even when the refineries work at full capacity, they can only produce around 19
million litres of petrol per day.”
With Nigeria consuming 40 million litres daily, to make up for the remaining 21
million litres, Nigeria will still have to rely on importation, he added.
Expectedly, NNPC’s announcement aroused interest and questions were asked as
to how come the plants, which had not functioned almost two decades, were
suddenly ready to be brought back to life under the administration of President
Muhammadu Buhari.
Investigations showed that efforts to repair the refineries started when the
management of the plants, under the supervision of the former Group Managing
Director (GMD), Mr. Andrew Yakubu, and a former Group Executive Director,
Refineries and Petrochemicals (R&P), Mr. Tony Ogbuigwe, worked surreptitiously
to ensure that the plants were functional. Ogbuigwe was before his promotion to
GED R&P, the Managing Director of Port Harcourt refinery.
THISDAY learnt that after the nationwide protests over the removal of fuel
subsidy in 2012, Alison-Madueke had promised to fix the plants using the original
equipment manufacturers (OEMs) instead of awarding the contracts for their
repair to journeymen contractors.
However, after protracted negotiations with the OEMs, NNPC failed to go ahead
with the rehabilitation due to the exorbitant fees they had demanded for the
repair of the plants.
With no progress made with the OEMs, Alison-Madueke, in November 2013
announced that the refineries would be privatised under the supervision of the
National Council on Privatisation (NCP).
But the NNPC chapter of the Nigerian Union of Petroleum and Natural Gas
(NUPENG), whose members threatened to go on strike if the refineries were
privatised, resisted her push for the sale of the plants.
Frustrated with the impasse, Yakubu, using his approval limit as the NNPC boss,
but without the knowledge of Alison-Madueke, started making $2.5 million monthly
to the management of the three refineries and encouraged them to revamp the
plants with local and external engineers.
Under this arrangement, the refineries were fixed about a year ago and ready to
churn out petroleum products, which would have slashed the volume of imported
fuel by more than 50 per cent and significantly reduced pressure on the country’s
foreign reserves.
In addition, the construction of a power plant for the Port Harcourt refinery was
concluded at the beginning of the year to enhance its ability to operate
efficiently.
However, instead of ensuring that crude oil was made available to the refineries
for domestic consumption, Alison-Madueke, in conjunction with the Pipelines and
Products Marketing Company (PPMC), increased the crude oil swaps and OPAs
from some 270,000 bpd to 445,000 bpd, thus starving the refineries of crude oil.
The swaps and OPAs were awarded to Aiteo, Ontario Oil & Gas Limited, Sahara
Energy, Taleveras Petroleum Trading BV and Swiss firm, Trafigura, among other
oil traders.
When contacted on the issue, an aide of the former minister claimed that the
reason crude oil was not made available to the plants was because of frequent
crude oil theft and vandalism of the pipelines, resulting in losses of up to 30 per
cent.
“Also, when the crude oil got to the refineries, the Fluid Catalytic Cracking (FCC)
units were not working, so we were getting mainly base oils such as naphtha, low
pour fuel oil (LPFO), kerosene and diesel.
“Meanwhile, petrol, which is PPMC’s major requirement and accounts for more
than 70 per cent of all petroleum products consumed in the country, was not
being produced.
“The lack of production of petrol, which is one of the lightest distillates from the
refining process, also resulted in another loss of 30 per cent.
“This in turn impacted on NNPC’s ability to remit funds to the Federation Account
since monies from the procurement of crude oil meant for domestic refining by
NNPC is supposed to go to the federation for sharing by the three tiers of
government.
“It was based on this that the former minister called a meeting and increased the
allocation for the swaps and OPAs such that little or no crude oil was made
available to the refineries,” the aide explained.
Yet, further investigations by THISDAY revealed that even though there were
frequent cases of crude oil theft and vandalism, the crude oil swaps and OPAs
could have been largely avoided because there is a subsisting contract to move
crude oil from Chevron’s Escravos oil terminal to the Warri and Port Harcourt
refineries by marine vessels.
Despite the subsisting contract, the operator was not allowed to lift crude oil to
the refineries since last year but continues to be paid by NNPC.
An oil industry operator, conversant with the lifting contract by marine vessels,
explained that elements within the petroleum sector that preferred the swaps and
OPAs ignored this arrangement because of the loopholes that allowed traders to
lift crude oil and under-deliver petrol including the derivatives or base oils to
PPMC.
He explained that the recent probe by the Department of State Security (DSS)
into the swaps and OPAs had scared the traders into importing outstanding
cargoes, resulting in the increased arrival of fuel-laden vessels at Nigeria’s
seaports in recent weeks.
The operator, who preferred not to be named, confirmed that before the marine
vessel lifting contract was awarded, NNPC was losing up to 40 per cent of its
crude oil to theft and vandalism of the pipelines.
In order to stop the theft, a contract, he said, was awarded to an Israeli company
to lift crude oil from Escravos to the Warri refinery in February 2011 under a Proof
of Concept Agreement, but it was unable to meet the terms of the contract.
“Subsequently, a Nigerian firm, Ocean Marine Tankers (OMT) Limited founded by
Captain Hosa Okunbor, Tunde Ayeni and others, took over the job. At first, OMT
started moving crude oil from the Escravos terminal to the Warri refinery.
“OMT invested heavily in a very large crude carrier (VLCC) with the capacity to
lift 2 million barrels, then transferred the oil to smaller vessels that moved to the
refinery and offload their content at the plant.
“You would recall when OMT commissioned MT Abiola and MT Igbinosa in 2013 in
Warri to convey crude oil to the refinery.
“In spite of this arrangement with OMT to circumvent oil theft, this was stopped
with the swaps and OPAs,” he said.
Confirming the development, an official of OMT said his company had not been
allowed to convey crude oil with its tankers since last year but continues to be
paid by NNPC.
“When we took over the contract from the Israeli firm, with the ship-to-ship
transfer mechanism, we reduced losses to 0.19 per cent as opposed to the 0.5
per cent allowable under the contract.
“In fact, the former GMD of NNPC (Yakubu) was so satisfied with the
arrangement that he classified it as security contract and extended it to include
the Port Harcourt refinery.
“But since last year, we have stopped conveying crude oil to Port Harcourt and
Warri due to the swaps and OPAs,” he said.
When asked how NNPC ensured that crude oil was not diverted under the marine
lifting contract, the OMT official said a shipping letter was issued to his company,
permitting it to obtain a bill of lading to load from Escravos.
“Like all crude oil lifting contracts, officials of Chevron, Department of Petroleum
Resources (DPR), NNPC, the Navy and other security agencies must verify that
we have loaded 2 million barrels to our VLCC.
“Owing to the shallow draft at the refineries, the VLCC stays offshore and
transfers to the smaller vessels which then move to refineries to offload. Then
checks are done to verify that the quantity lifted from the terminal is the same as
the quantity of crude oil offloaded at the refineries,” he said.
The OMT official added that at the end of the month, the refineries also
undertook a reconciliation process to ascertain that the crude oil delivered was
the same as what was lifted at the terminals, “because the yield from the crude
oil that is delivered to the refinery is accountable to PPMC”.
“But like I said, this has stopped since last year because of the desire to sustain
the swaps and OPAs,” he said.
The company official also alleged that oil theft and vandalism by criminal
elements that hot-tap the pipelines have continued unimpeded while persons who
want to disrupt OMT’s marine vessel lifting contract recently attacked their
vessels.
Further enquiries from NNPC revealed that its officials are presently confident
that the FCC units at the refineries have been fixed and have the capacity to
produce petrol and other products.
One official informed THISDAY that crude oil accounts for almost 90 per cent of
refining cost, and if the refineries were allowed to function, this would
significantly reduce the federal government’s subsidy bill, because at current
crude oil prices of slightly over $60 per barrel, the plants could operate at a
profit.