NNPC Targets $5bn Cash-for-Crude Prepayments

NNPC Targets $5bn Cash-for-Crude Prepayments

  • OPEC, Russia set for oil cut extension
  • Cartel to discuss output caps for Nigeria, Libya

The Nigerian National Petroleum Corporation (NNPC) is targeting up to a $3.5-$5 billion cash-for-crude prepayments from some of the world’s top commodity traders to fund oil and gas upstream projects as well as related infrastructure.

This is coming as the Organisation of Petroleum Exporting Countries (OPEC) and Russia look set this week to prolong oil supply cuts until the end of 2018 on the condition that they may review the deal when they meet again in June 2018 if the market overheats.

Nigeria was hit hard by the sharp drop in global oil prices in 2014 and 2015 that pushed it into its first recession in 25 years.

Though the country returned to growth-mode in the second quarter, the cash-strapped NNPC, which has been weighed down by billions of dollars in old debts, has also been looking to bring in outside cash.

Reuters quoted NNPC sources as saying that Standard Chartered Bank was hired to advise on the oil prepayments and a request-for-proposal was issued a few weeks ago for a $3.5 billion to $5 billion loan to be repaid with crude over five to seven years.

But both spokespersons for Standard Chartered and the NNPC declined to comment on Reuter’s request.

However, the sources added that a decision was expected before the end of this year.

Around seven trading firms were still in the running, one added, with top trading houses including Glencore, Vitol and Trafigura being among the active contenders.

The corporation is said to be seeking three off-takers, one of the sources said, against 70,000 barrels per day of crude.

Vitol already has a major presence in Nigeria after buying petrol stations via a joint venture with Oando Plc and private equity fund Helios.

Vitol is also among a list of majors traders, including Trafigura, that participate in a swap scheme to deliver refined products in exchange for crude.

Profit margins for trading firms have been slowly eroding over the last few years as transparency in oil markets has increased, reducing arbitrage opportunities, once based on privileged information.

Increasing traded volumes is one way to raise profits and competition is fierce for prepayment deals with state oil firms.

NNPC has had cash-flow problems for years and has been chronically behind payments for its stakes in upstream joint ventures with Shell, Chevron, Total, Eni and ExxonMobil.

After project development began to stall following the collapse in oil prices, the Minister of State for Petroleum Resources, Dr. Ibe Kachikwu reached a deal last year with its major foreign oil producers to repay $5.1 billion over five years, interest-free.

NNPC has already leveraged over 300,000 barrels per day of crude to cover current fuel imports via a crude-for-product swap scheme as well as debts to traders dating back nearly a decade.

In a related development, OPEC and Russia this week, look set to prolong oil supply cuts until the end of 2018 while signalling that they may review the deal when they meet again in June if the market overheats.

But with oil prices rallying above $60 per barrel, Russia has questioned the wisdom of extending existing cuts of 1.8 million barrels per day until the end of next year as such a move could prompt a spike in U.S. production.

Russia needs much lower oil prices to balance its budget than OPEC’s leader Saudi Arabia, which is preparing a stock market listing for national energy giant Aramco next year and would hence benefit from pricier crude.

Six ministers from OPEC and non-OPEC oil producers including Saudi Arabia and Russia gathered in Vienna yesterday – one day ahead of today’s full OPEC meeting – to review recommendations by their delegates.

On Tuesday, a joint OPEC/non-OPEC committee recommended extending cuts until the end of 2018 with an option of reviewing the arrangement at the next OPEC meeting in June, three sources from the OPEC said.

Benchmark Brent and US crude prices declined yesterday for a third consecutive day although Brent remained above $63 per barrel.

United Arab Emirates Energy Minister Suhail bin Mohammed al-Mazroui said on Tuesday that cutting output through all of 2018 was still the main, but not the only scenario.

“There is a meeting today in the afternoon. And depending on all of those parameters, we will come up with what is best for the market and for the organisation,” he said yesterday.

The production cuts have been in place since the start of 2017 and helped halve an excess of global oil stocks although those remain at 140 million barrels above the five-year average, according to OPEC.

Russia has signalled it wants to understand better how producers will exit from the cuts as it needs to provide guidance to its private and state energy companies.

Some producers including Rosneft, run by an ally of President Vladimir Putin, Igor Sechin, have questioned the rationale of prolonging the cuts, saying it will lead to a loss of market share to U.S. firms, which are not reducing output.

OPEC, which comprises 14 countries, has traditionally been much less worried about exit strategies, as its members have been known for reducing compliance and cheating on their quotas towards the expiration of such deals.

At today’s meeting, OPEC will also debate whether to cap oil output from Nigeria and Libya, which have so far been excluded from supply curbs due to falling production amid unrest, two sources with knowledge of the matter said yesterday.

The sources said the idea was to cap Nigerian output at 1.8 million barrels per day and Libyan at one million bpd.

Reacting to the output cap, Kachikwu said yesterday that Nigeria was taking the pressure from OPEC member countries and their allies led by the Russian to join the crude oil production cut agreement they reached in 2016 with good posture and would be fine notwithstanding the outcome of today’s meeting of the group.

Kachikwu who spoke in Vienna ahead of today’s meeting, said so far, there was nothing extraordinary to be worried about by the group’s push.

He said even if Nigeria was compelled to cap output, the country had still not been able to reach the production level that was expected to cap her output.

According to him, the country was producing an unstable 1.7 million barrels per day of oil.

He stated that while the production numbers were not good enough for Nigeria, its current earnings from crude oil were positive and had allowed the federal government to fund the national budget.

Kachikwu, however, emphasised that it was necessary for Nigeria to maximise the current window granted her by OPEC and its allies by driving her production efficiency.

“There’s a lot of attention on Nigeria and Libya obviously but the reality is that these countries have to produce. Market behaviour has been positive and we need to build on that.

“If you look at the numbers in terms of earnings, we’re doing excellently well. What’s the essence of overproducing and selling at a giveaway price?

“In terms of our immediate concerns, we are getting more money for our budget and development, we are far positively away from where we were, but we need to refocus our attention from production volumes to efficiency,” Kachikwu said.

The minister noted that while other producers were calling for Nigeria to get off the exemption window, they must appreciate that the country had made great sacrifices to help rebalance the market either by her production challenges or the voluntary decisions it made to support the market rebalancing efforts.

Meanwhile, the Chairman of the Joint Ministerial Monitoring Committee (JMMC) for the OPEC and non-OPEC production cuts agreement and Kuwait’s oil minister, Issam Almarzooq, disclosed at the meeting of the JMMC that the co-operation has in the last one year recorded great achievements.

Almarzooq stated that since the agreement was made, producers have made sacrifices that resulted in up to 200 million barrels of crude oil decline in the first 10 months while floating storage had come down by an estimated 50 million barrels.

He said: “This positive outlook has clearly been supported by the unprecedented conformity levels to the production adjustments in the declaration of co-operation.

“These consistently high levels, at or above 100 per cent, have quietened the voices of naysayers in the industry who initially expressed doubts regarding the commitment of the 24 participating OPEC and non-OPEC producing countries to bring stability back to the oil market.”

He, however, warned that while the group could be said to be on the right path, it must remain alert to developments in the market until it achieves its final objective.


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