Professional Oil Business

 

CRUDE OIL BUSINESS TRANSACTIONS

Basic Information One Needs to Know About Crude Oil Business in Nigeria

Brief overview on crude oil business in Nigeria

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The procedures for crude oil business appears to be very straight-forward process when both the buyer and seller are genuine. There are, however, certain basic terms and procedures to know and follow to avoid problems and frauds.

The procedures involved in crude oil business varies, however, they all appear to be very simple when both the buyer and seller are genuine.

Aside of the price discounts, procedure is very important in facilitating a crude oil deal, so, sellers (and buyers) have laid down procedures.

Proof of Product( POP ) and Proof of Fund ( POF )

For crude oil business to proceed, there has to be Proof of Product on part of the seller, and Proof of Fund on part of the buyer.

To avoid unnecessary hassle, it is very logical that the seller gives what he/she has; it is either the buyer works with it, or, walks away. If the seller does not have what the buyer wants, the buyer could go to the next ‘store’. It is that simple.

 

Expectations for Crude Oil Sales ( For Example Nigeria )

The Kind of Crude Oil Produced in Nigeria

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Nigeria produces the kind of crude oil generally referred to as ‘bonny light’. It is one of the best crude oil in the world because it is easy to refine as a result of its low sulfur content. Due to this factor, a lot of buyers from around the world are always interested in Nigeria petroleum. But the main issue is knowing the right place to go and dealing with right people.

Another type is Forcados which is classified as heavier grade. The standard (grades) of crude petroleum varies and their prices vary as well.

Buyers generally prefer to buy light grades to heavy grades because the light grades are lower in sulphur content, easy to refine, produce bigger volumes of diesel and other end products of crude oil.

4 Most Important Things About Buying and Selling Crude Oil from Nigeria

There are four major things one will need in order to do this business. They are namely:

1. Funds: One will need funds to buy petroleum. One will need a minimum of $100,000,000 US. The amount of money can get up to 2 million barrels of petroleum. You will also need about 5 to 10 million USD for expenses.

2. Petroleum seller: One will need a crude oil seller or supplier where to purchase the petroleum from. This one is not a major problem as long as one has the funds.

3. Tanker: One will need a tank to store the crude oil. If you want to build a petroleum storage tank, then you may as well rent one.

4. Petroleum buyer: this is also not a major problem. The reason is because they are many buyers of crude oil aggressively searching for available crude oil to buy mainly in USA and Europe. As long as cars and factories are concerned, crude oil will always be in high demand.

 

Ways to Get Crude Oil from Nigeria

There are few ways to get petroleum from Nigeria.

Directly from NNPC: This means getting crude oil from Nigeria National Petroleum Corporation (NNPC). There are very high conditions, requirements and eligibilities buyer needs to posses before successfully be given oil allocation from NNPC. Some of which include; buyer will need:
1. Proof of up to $100,000,000
2. Performance bond of up to $1,000,000
3. Buyer will be required to own a local oil refinery, international refinery and a major oil trader.

Private Sellers: Mostly major oil conglomerate operating in Nigeria. If the buyer cannot meet the conditions set by NNPC, then he/she can buy from sellers who have already gotten oil allocation. Sellers who have gotten oil allocation from NNPC must always end up selling the petroleum they have purchased. A buyer can buy from this set of sellers.

Independent Sellers: Mostly local firms and individuals with link with government and major companies. Independent sellers either buy from NNPC and private sellers, or get their petroleum through oil allocation. Some independent sellers are compensated with oil well by the government.

It is easy to buy petroleum through this set of sellers if the buyer meets a genuine seller. Buyer will not go through the protocols required by NNPC and major oil companies. Buyer will not even need to show a minimum fund of $100,000,000. As long as you can prove that you have funds to pay for the oil; this process is easy.

Buyers should also bear in mind that there is risk involved in buying petroleum from these sellers, especially when they are not genuine.

The last option is to buy petroleum from a loaded vessel containing light crude oil either through TTO or TTT from a seller whose buyer disappointed.

Once a buyer finds a seller, the next step is to negotiate and close a deal.

 

4 Main Ways of Selling Crude Oil in Nigeria

They are namely: CIF, FOB, TTT and TTO.

Cost, Insurance and Freight (CIF): It is a method of selling petroleum where the seller does everything from loading and sending the crude oil to the place the buyer wants. This kind of method is usually hard to find and most sellers do not like dealing this way.

Freight on Board (FOB): This kind of method is usually hard to find and most sellers do not like dealing this way.

The most widely used method for selling crude oil is TTT and TTO.

Tanker Take Over (TTO): In this method, the buyer takes over the vessel to his destination, offloads the crude oil and brings it back.

Tanker To Tanker (TTT): It requires the buyer to get a vessel while the oil is transshipped and everything is settled.

 

Method of Payment for Crude Oil in Nigeria

Method of payment is usually through swift, or, wire transfer. This can either be done through bank to bank by means of MT799; irrevocable of Letter of Credit may also be used for payment, etc.

 

The Price of Crude Oil from Nigeria

One should bear in mind that Nigeria petroleum is sold in barrels. The minimum amounts of barrels most sellers are willing to supply are usually 2 to 4 millions of barrels monthly. The price is usually the same with the one set by OPEC.

 

Finding Sellers of Crude Oil and Intermediary Facilitators in Nigeria

When a buyer must have made up his/her mind to purchase light petroleum and have the funds available, then there are few genuine crude sellers to purchase from. One may need to connect with an intermediary familiar with the process to facilitate a deal. An intermediary facilitator apparently will help to navigate the process at the Nigeria National Petroleum Corporation (NNPC), which is the Nigerian federal government agency responsible for the sell of Nigerian crude oil.

It appears that some staffs of NNPC are also authorized to facilitate the sell of petroleum.

 

Tips on How to Know a Genuine Crude Oil Seller in Nigeria

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There are many genuine crude oil sellers in Nigeria but the problem is getting the real and verifiable ones. Crude Oil trade is a booming and thriving business and many people seem to want to go into it. Buyers from other countries contact sellers in Nigeria in order to buy Nigerian Crude Oil. It is a well known fact that whenever there is a mass success rate involving any kind of business, there is bound to be scammers on the prowl.

1. In Nigeria, NNPC gives allocation to genuine sellers of crude oil in Nigeria; and there is a means of confirming it. NNPC simply means Nigeria National Petroleum Corporation; it is a company owned by the federal government of Nigeria which administers the buying and selling of petroleum. There are lots of crude oil sellers in Nigeria, but the challenge there is the ability to find genuine and verifiable sellers.The first thing a buyer has to ensure is the ask the seller for their allocation details so as to be able to confirm this. If any seller cannot give you this, then that seller is a fake one. There is absolutely nothing to hide about that.

2. Any seller that asks you to pay any form of money before conducting Q & Q is said to be suspicious. Why pay for a product when you have not confirmed the specification? However, some may ask the buyer to pay Clearance Fee to move the vessel to a chosen destination for the Q & Q.

3. Buyers must make sure they establish a phone contact with the seller. That is very important because it is good to have a verbal communication with the seller. The essence of doing this is so as to be able to detect if the seller is very conversant with the business. It is very easy for someone to sit and compose a well structured email even if he is not conversant with the topic, one can always find resources on the internet. If the so-called seller can not answer simple questions asked, or, cannot give a clear description or explanation of what the buyers want; then one has to fly, friend.

4. If the seller claims that the cargo has been cleared, then he should be able to give CPA (Charter Party Agreement), ATL (Authority To Load), Q88 vessel details.

Other things to look out for:

* Seller’s Export Schedule
* Transport / delivery confirmation
* Port/Terminal confirmation of lifting schedule
* Export declaration of customs
* Seller’s Authority to re-sell

 

Terms One Should Know About Crude Oil Business in Nigeria

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1. Proof of Product (POP)

This document serves as a clear indication that the owner of the oil commodity has a true possession of the product. This document must also indicate that the seller has the commodity for sale as at the time of transaction. This document can be issued in hard copy but it is mostly delivered through electronic means (email). The buyer should make it a point of duty to carry out his due diligence by confirming the product before proceeding on any transaction with the seller.

Key requirement for a genuine deal is a letter of allocation from NNPC Crude Oil Marketing Department. The seller should be able to provide this to show the buyer he has a product for sale.

Fraud in the oil and gas business is not only committed by Nigerians, it is committed by people all over the world. Insist on a proof of allocation in the form of a letter of allocation from the relevant government ministry, or, agency in charge of petroleum in any country. Failure to do this will only waste your time and money and you will be working for international fraudsters unknowingly.

Once you have a genuine copy, it is always easy to confirm, but make sure the letter is from a genuine agency with the authority to allocate crude oil, or, its by-products.

For Nigeria, only one agency has this power and it’s the Nigeria National Petroleum Corporation Crude Oil Marketing Department (NNPC COMD). This is done in likewise manner in every country of the world to ensure that the process of lifting crude oil globally is never complicated and never inspires, or, motivates fraud in any way.

2. Proof of Fund (PF, or, POF)

Proof of Fund is a financial instrument that indicates to the seller that the buyer of the crude commodity is capable of buying the product. It shows that the buyer is financially capable to handle transactions of such huge magnitude. It is usually issued by the buyer’s bank, if the buyer is credible enough, his/her Bank should not be hesitant to issue this to the seller. Commonly acceptable instruments are:

a. Letter of Credit (L/C, or, LOC)

b. MT 799

c. Bank Guarantee (BG)

d. MT 103

3. Sales and Purchase Agreement (SPA)

The SPA serves as a legal document which is presented by the seller of a supposed crude oil commodity through the seller’s agent to the buyer ,or, his/her agent, or, mandate for the buyer to sign, seal and return back to the seller.

It is a legal document binding on both parties once signed and it incurs a penalty if one party defaults in fulfilling his side of the purchase contract. Most likely it has the terms agreed by both seller and buyer present in it. A copy of this document is given to the banks of both parties as the deal proceeds while copies are also kept for security reasons.

Since the SPA is a legal document, care should be taken before it is signed since many people defraud others with it. It is often times presented in soft copy and is printed out and filled by the other party.

Avoidable Scams Associated with SPA

It is a well known fact that people tend to perpetuate fraud through legitimate means of making money; especially when it is internet related and hence reducing trust and making it difficult to seal a deal in this industry. Buyers must be very careful with the issue of signing of an SPA. Once an agreement is reached by some parties and the SPA has been duly signed, some fraudsters fault the agreement deliberately and demand a penalty fee of $100,000 or more from the buyer thus forcing the buyer to pay for a deal that never occurred; this is usual with many desperate facilitators and agents, so one should be careful when entering any deal to avoid scammers.

4. Letter of Intent (LOI)

The LOI is a legal document that is issued by the buyer of an oil commodity. This documents indicates the buyers interest, it also specifies the specification and conditions upon which the buyer would want to transact the business.

Many a time, buyers issue LOI only to find out that the seller, or, his agent is not genuine, or, does not have the supposed product at hand. A lot of hungry facilitators do this when they are still struggling to get a supplier. They commit the buyer only to start hustling for a seller. Also note that the LOI has an expiry date but it can be re-issued.

5. Facilitator

A facilitator in the oil and gas field is more, or, less like a middleman in the world of commerce. A facilitator is someone who searches for both buyers and sellers of an oil commodity; he in many cases looking for agents to companies, or, individuals who need a particular oil product available for sale.

A facilitator spends both time and money trying to get both genuine and serious buyers and sellers. A facilitator serves as a link between the buyer and the seller, every document for initiating a deal goes through him/her and he/she forwards to appropriate party involved.

The work of a facilitator is very stressful and sometimes discouraging when he/she comes in contact with un-serious persons, sometimes the chain of facilitators and agents to a deal make everything tiring. The success key for a facilitator is patience and persistence.

The fee of a facilitator is much lower than that of an agent but it is something compared to the effort. A facilitator could earn up to 50 cents per barrel depending on the chain of people involved. So his pay is dependent on the number of barrels the buyer is willing to buy. If the buyer wants 2 million barrels of crude, multiply 50 cents by 2 million, you can do the mathematics and get the figure.

In a case whereby a facilitator is dealing with another facilitator, they come to an agreement on how to share the 50 cent. What stops most facilitators from brokering a deal is greed. Everybody wants to make it big at the first strike, they forget that they would have more deals to broker. Most times a deal never pulls through because of this, but if they have understanding, things would just flow well.

6. Mandate

A mandate could be likened to the spokesman of the seller in most cases. The seller gives him authority to act on his behalf. He gets more commission than the facilitator; say $1 in most cases.

 

Sample Procedures of Crude Oil Business in Nigeria

People broker deals on a daily basis, but the point worthy of note is; How do they do it? How do they go about it? How do the buyers get to the sellers? What makes a deal pull through?

There are different procedures and these differ depending on the seller of the crude product. You can see below some sample procedures:

Tanker Take Over (TTO) Procedure

1. Buyer and seller sign the Sales/ Purchase Contract Agreement with Banking coordinates.

2. Buyer’s bank PRE-ADVICE LETTER OF CREDIT to Seller’s bank.

3. Seller Bank posts 2% ACTIVE PERFORMANCE BOND upon receipt and confirmation of buyers PRE-ADVICED LETTER OF CREDIT.

4. Buyers bank places OPERATIVE LETTER OF CREDIT in favor of seller for total cost of cargo and commission to agents and facilitators.

5. Seller confirms OPERATIVE LETTER OF CREDIT and issues ATB to Buyer’s independent inspectors within 72 hours.

6. Buyer’s inspectors go on board vessel within 72 hours after the confirmation of the buyers LC, to conduct Q & Q, inspection report made available to Buyer.

7. Re-assignment of cargo is done in buyer’s name and CPA issued, signed by Buyer and returned to the Seller within 4 working days of receiving a positive Q & Q report. All Original documents handed over to the buyer’s bank.

8. Buyer’s Super cargo goes on board within 3 days after the re-assignment and CPA signed.

9. Payment via swift made to the various accounts in the SPA within 72 hours of Super cargo going on board and Vessel sails afterwards:

Tanker-To-Tanker (TTT) Transshipment Procedure

1. Buyer and seller sign the Sales/ Purchase Contract Agreement with Banking coordinates.

2. Buyer’s bank issues via SWIFT, a PRE-ADVICE of the Irrevocable, Transferable, Divisible and Confirmed Letter of Credit, which will be issued to seller’s bank in favour of seller.

3. Seller Bank posts 2% ACTIVE PERFORMANCE BOND upon receipt and confirmation of buyers PRE-ADVICED LETTER OF CREDIT.

4. Buyer places an Irrevocable, Transferable, Divisible and Confirmed Letter of Credit to Sellers bank in favour of seller.

5. Seller confirms Buyers Irrevocable, Transferable, Divisible and Confirmed Letter of Credit, issues NOR (NOTICE OF READINESS), LONGSIDES within 72 hours with Buyer’s Vessel and Transships the Cargo to Buyers vessel.

6. Buyer’s inspectors go on board vessel within 72 hours to conduct Q & Q, inspection report made available to Seller.

7. Payment via swift made to the various accounts in the SPA within 72 hours of Submission of Cargo Documents, Inspection Report, Discharge Certificate and Masters report to Buyers Bankers and Vessel sails afterward:

Cost, Insurance and Freight (CIF) Procedure

1. Seller signs and seals the contract and dispatches to the Buyer in form of email.

2. Buyer countersigns the contract and dispatches a duplicate copy to the Seller in form of e-mail.

3. Buyer and Seller deposit same at their respective Banks.

4. Seller’s vessel issues Notice of Readiness (NOR) to buyer’s port of discharge and copy all parties involved.

5. Buyer’s bank issues via SWIFT, a Non-Operative, Irrevocable, Transferable, Divisible and Confirmed Letter of Credit to seller’s bank in favor of seller. This is to be done within 3 banking days after the issuance of NOR.

6. Seller’s bank issues a 2% PB to buyer’s bank which automatically activates the Buyer’s LC and the Buyer’s LC becomes Operative.

Upon confirmation of the activated LC, Seller’s loaded vessel within 48 hours departs for buyer’s port of discharge.

Seller’s bank valid shipping documents which shall include the following:

A). Notarized Commercial Receipt naming Buyer, contract number, goods and quality indicating transfer of the title.

B). Shipping advice indicating,designated vessel name, loading port, estimated loading time, estimated time of departure, estimated time of arrival in destination port (FULL ETA).

C). Signed commercial invoice indicating the contract number and the name of the carrying vessel. (3 originals and 3 copies)

D). Quality and Quantity certificate issued at the loading port.

E). Charter Party Agreement and Full Set (3 originals and 3 copies) of clean on-board Bills of Lading made out to order; bank endorsed and marked “freight pre-paid”, indicating the name of the carrying vessel with the Buyer as the “Notifying party”.

7. Seller’s loaded vessel arrives at the buyer’s discharge port and Buyer conducts Q & Q inspection at buyer’s expenses.

Any seller who is willing and ready to do the above is for real.

 

Some Common Avoidable Problems

Though the Nigerian government today appear to be cracking down on all forms of bribery and corruption in the country, there are still some avoidable problems.

Genuineness and Integrity of buyer and seller

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Generally, genuine crude oil buyers seek genuine crude oil sellers; and sometimes may spend just a little time and money in research works. However, there are crooked foreign buyers that rather equally spend money to seek crooked locals for purpose of engaging in crude oil bunkering (bunkering is another name for oil theft, be it crude or refined). Crooked locals involved in Nigerian oil bunkering could be found throughout the oil supply chain, including the law enforcement. In most cases, both the foreign and local crooks in the demand-supply chain attempting to defraud Nigerian government tend to outsmart and scam one another. This, in most cases, is clearly avoidable where the buyer decides to make purchases through the right way.

Buyer-Seller Initial Bluffs with Procedure

Most problems arise when buyer wants to see POP, Q88, and CPA first and seller wants him/her to sign SPA first. This also could happen when seller do not have exactly what the buyer wants, but the seller, or, facilitator wants to commit the buyer and then start sourcing the product. So many deliberations here and there, at the end nothing comes out of it. It is simpler and very logical that the seller declares what he/she has.

Zero Bribery

Through-out our research, at no point was payment of cash to any one in person, or, into anyone’s bank account required. At no point was any money payment to any one, be it Nigerian government official, NNPC official, oil company official, the seller and facilitator, or, anyone for that, to facilitate the process, was ever required. Never. From what we learn, even the facilitator’s legitimate fee is written into the contract. They get paid at the end after the deal goes through.

Dealing with Facilitator Issues

There is no doubt crude oil business is a very lucrative business. All you need is a genuine buyer and a genuine seller. It has become very difficult for buyers to meet genuine sellers and vice versa, this is due to the fact that there are many fraud perpetrators out there trying to leverage on the information they have to brisk money out of both innocent and crooked buyers.

This could increase the doubt of genuine buyers of Nigerian crude, it could make them to think of every Nigerian who tries to facilitate a deal is a potential fraudster. But there are many genuine facilitators out there.

When these foreign prospects try to negotiate a deal, they become stiff in their bargains and would rather want the seller to work with their own procedures. The issue of the seller putting forward a 2% performance bond first comes into play, the buyer would have the seller raise a bond first and the seller on the other hand would rather want the buyer to raise a proof of fund in the form of MT 799, Letter of Credit, Bank Guarantee, MT 103.

The facilitator plays a major role in negotiating a crude oil deal in the sense that he serves as the middle man. It is not easy being a facilitator, you need to have a convincing power, you have to be clear in your understanding of the business, and you should be able to give the seller mandate every bit of information needed whether via land mail, telephone, fax, or, email.

Long Chains

This is always a problem which limits most facilitators, when there are too many people standing as facilitators before the mandate, it posses a whole lot of problem in the sense that distribution of information is slow. A buyer might need a product and require information, but because the facilitator has to go through many hands before getting the information, it may make the buyer loose trust.

Commission splitting becomes a big problem as most of these facilitators are frustrated and motivated by greed, the issue of which group takes how much sets into play and they come to no reasonable conclusion leading to waste of time and resources.

Some buyers do not like the issue of presenting an SPA with too many account details on it, they prefer only one paymaster; hence no deal because there are many groups involved in it and they all have different account details. The greed of facilitators make this business arduous, sometimes a facilitator might claim to be working with some other group of facilitators that do not exist. The account details which is supposedly meant for the other group they claim belongs to them or some colleagues of theirs, this makes it tiring.

Another point to note is this, before you proceed on any deal; ask your contact what he stands as (Facilitator or Mandate). If he is a mandate, then you can be his facilitator. If he is a facilitator, you make him understand your stand as well. You come to an agreement if he stands as seller’s facilitator or buyer’s facilitator.

Most times the seller’s side is always closed and most facilitators might want to attach themselves as a buyer’s facilitator meanwhile their contact also stands as the buyer’s facilitator. A reasonable agreement should be made as per splitting the 50 cents which is usually due to facilitators. If you do not do this then you might end up wasting your time.

Insufficient Knowledge of Product

How can you market a product you know nothing about? It is not logical to do that. When a facilitator gets in contact with a buyer, the buyer might want to place a phone call. The reason for doing this is not far from understanding. He wants to ascertain if you are knowledgeable of the business, or, product you intend to market. He wants to feel your pulse through the phone; he wants to know if you sound knowledgeable and sure.

 

Conclusion

Nigeria National Petroleum Corporation (NNPC); a company owned by the federal government of Nigeria which administers the buying and selling of petroleum has set the procedures for genuine buyers and genuine sellers of Nigeria petroleum. Genuine buyers and genuine sellers of Nigeria petroleum need to follow those guidelines.

There appear to be abundant of genuine Nigerian sellers and foreign buyers of Nigerian crude oil, just as there are abundant of fraudsters among both the Nigerian sellers and foreign buyers.

If one seeks to buy crude oil from Nigeria through proper procedures, there are abundant sellers to make that happen, just as one that seeks to obtain the crude oil through bunkering and other ‘backdoor’ methods will also find abundant crooked sellers to make those happen as well.

Local sellers and facilitators appear to have fair knowledge of individuals known to follow the normal process, as well as individuals known for backdoor sharp practices. So within their circle, those information do not appear to be secret.

The decision on the method (either normal process, or, backdoor sharp practices) to follow is one’s prerogative.

However, due diligence research may always be a good idea.

 

Further Informational Assistance

We hope these information are useful. We wish you the best in your crude oil business pursuit.

If you are a buyer (seller) and needs help to connect with a real seller (buyer) in Nigeria and other parts of Africa, you can contact us for assistance in researching that, as well.