The stupendous and sometimes scandalous margins made from crude oil swap deals awarded by government to a closely guarded club of “Nigerian big boys” are helping to fuel the acquisition of private jets in the country, BusinessDay investigations have shown.
A typical crude swap deal involves the government granting allocation to lift a specific volume of Nigerian crude oil, in return for supplying a specific volume of refined petroleum products from abroad, to stabilise supply because government’s refineries are in disrepair and cannot meet local demand.
In most cases however, the deals do not involve a fair value or price of exchange and in the process, the well connected contractor makes inordinate profits, often over $20 million per transaction.
A knowledgeable source told our reporters that a transaction cycle could be as short as one month, or a quarter, depending on the size of the transaction.
The initial crude swap deals happened between 1977 and 1986 when Nigeria needed heavy crude from Venezuela to feed the Kaduna refinery and then it was open, and heavy crude was swapped for Nigeria’s light crude at a value and pricing internationally known and recognised.
However, when the local refineries broke down, or as some say, were made not to work, government broadened the crude swap concept to include crude for refined products.
Global oil traders like Vitol, Trafigura and Glencore were contracted. Government would give them a known amount of crude which they would refine and then bring back the needed white products, less the fuel oil, and they were allowed to deduct the cost of refining the crude abroad, as well as transportation.
Over time however, well connected Nigerians began to lobby to be involved and as more and more local players were admitted to the otherwise closed club, the award process got murkier, less transparent, and the pricing became very blurred, with a lot of hanky-panky, said one source.
He added, “conceptually there is nothing bad in this for a country like Nigeria, where the refineries have all broken down. However, the practice is problematic. Money does not change hands, only crude or products, and it is generally believed that the pricing agreed upon is skewed in favour of the contractors, to the detriment of Nigeria.”
A former top government official with knowledge of the trend said, “The system we now have has lost the basis for determining the exchange value. So the government for instance says, this is my crude oil, sell it and send me crude. You can sell forward, short and all manner of funny things are happening.
“The guys are making a kill and everybody knows this. This list of the guys is out there. And you can see the scandalous margins in the burgeoning number of private jets and their owners, with some owning two.”
Kayode Akindele, a partner at 46 Parallels, a Lagos-based investment firm, says government needs to actually conceptualise and execute a practical plan for the downstream sector.
“Where is the report of the committee set up by the Minister of Petroleum to look at the local refineries?” he asked, adding that it is long overdue and yet nothing has been heard.
He suggested that a version of PIB be passed, to set up the legal framework for a deregulated downstream sector. Thereafter, the four local refineries should be privatized, as the government has consistently shown itself unable to manage them.
“The management of the national pipeline network should also be concessioned. Then the government can look at creating an enabling environment to encourage more local refineries but should not be building them, leave it to the private sector” he said.
He however regretted that what seems to be gradually becoming the norm is a piecemeal policy where MOUs are signed at will, with a variety of parties whose ability and willingness to execute is often in doubt.
“The government must take advantage of the current over-capacity in refineries in the West and look to do more crude for petroleum product swap deals directly with these refineries, rather than using trading middle men as they do currently at opaque exchange prices,” he asserted.
Peter Esele, president of the Trade Union Congress (TUC), said the idea of a crude swap undermines the development of the country.
“It is wrong and government needs to put a halt to it as it breeds corruption in the highest order,” he said in a telephone interview.
He is of the opinion that the individuals involved should rather set up oil companies and compete for oil blocks?
He said the risk of this arrangement is that it throws free money to a certain few, who in the long run can undermine the state.
“There is no country in the world where this is done. The act does not build the right leadership and indicates that anybody or any government that supports this structure must be having a stake.”
