The Nigerian Crude Oil Trading Exchange Platform
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BLCO Trading & Exchange Platform

Published: January 2019

Nigerian Oil Services

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Nigerian Crude Oil Forward Exchange Platform

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DOTS : = supply     = platform storage

DIRECTORS

Oluwakemi Kasali   Jeffrey Scott

Oluwakemi Kasali
and
Jeffrey Scott

Nigerian Oil Services

+234 805 953 5778

+1 763 898 0477

Nigerian Crude Oil Forward Exchange Platform Explanation - Click to Open

We purchase crude oil from upstream suppliers and off-OPEC sellers using FOB incoterms. We deliver the product to our storage facilities that hold the product for forward and futures contracts until those contracts are settled.  We match the terms of the futures contract in order for the platform to secure the contract and legitimize its existence.  We take the product and store it for a later date in the buyers port.  The storage facilities are all over the world in order to easily accommodate end user refineries or resellers that purchase the futures contracts or our forward contracts.

Finally, Nigerian sellers can find a real buyer that is RWA to make a purchase and own the product.

There are several impediments in order to execute and actually finish forward contracts.  These impediments have constrained the sale of crude oil, especially for the Nigerian marketplace.  This has resulted in a premium product better than Brent and WTI being sold on the physical market for less than the cost of those two benchmark products.

These “futures” are contracts where the closing date is written into the future.  Therefore almost all crude oil contracts that involve the physical sale of crude oil are really forward contracts.  They could be dated anywhere from a few days to a few months into the future.

In the crude oil finance market, a forward contract or simply a forward is an over the counter (OTC) non-standardized contract between two parties to buy or to sell crude oil at a specified future time at a price agreed upon today, making it a type of derivative instrument.  The refiner agreeing to buy the crude in the future assumes a long position, and the supplier agreeing to sell the crude oil in the future assumes a short position.  The price agreed upon is called the delivery price, which is equal to the forward price at the time the contract is entered into.

The price of the underlying forward or futures oil contract, is paid before control of the instrument changes.  This is one of the many forms of buy/sell orders where the time and date of trade is not the same as the value date where the securities themselves are exchanged.

Forwards, like other derivative securities, can be used to hedge risk (typically currency or exchange rate risk), as a means of speculation, or to allow a party to take advantage of a quality of the underlying instrument which is time-sensitive.

In most oil contracts the price is fixed to the floating price of Brent, usually fixed as a discount to the three day average of "dated Brent".  So in most cases the future cost of the contract is not fixed, as it would be in a forward contract for other commodities.  In stead the margin between Brent and BLCO or some other Nigerian Crude oil is fixed.

One of the reasons for this is that delivery of the product could take up to 60 days of on-the-water time.  So it is understood that the price of the crude oil would slide up or down to accommodate changes in the overall market conditions.  Both buyers and sellers have accepted this flexibility because refined product prices are also flexible.

Pump price changes have been accepted in the marketplace.  Forward contracts generated on a world-wide commodities exchange in the oil market are really more attached to the futures market than to the actual physical marketplace.

You may regard Nigerian Oil Services BLCO Trading and Exchange Platform as a “forward and spot” platform because of our attachment to the futures commodities market, but as you read on you will see a distinction from that idea.
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Crude Oil Forward & Futures Exchange Platform

Illustration Explanation

When futures contracts are created on international commodities platforms they are occasionally settled by executing an exchange for physical (EFP) (double ended arrow above the globe).  This notice to the platform converts a futures contract to a forward contract.  Then that forward contract is an OTC contract requiring physical delivery.  The terms of the contract are then changed to satisfy the buyers needs.

Nigerian Oil Services can create these EFPs for our clients and also fulfill these contracts for the platforms.

Nigerian Oil Services also executes forward contracts directly with refineries.

NOS has a stable of ready upstream suppliers which we purchase from on FOB incoterms, removing the supplier's risk and providing them immediate profit.

We then deliver against a refinery commitment letter to the buyers port of delivery (POD) and also provide the refinery terms, using a bank instrument, so that they can pay for the feed stock out of the profits they generate from refining and selling fuels.

This allows refineries a zero risk procurement while acquiring a premium ultra low sulfur lite crude oil with the highest first run percentage of middle distillates available on the planet.

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There is a marketplace lag in price changes.  Crude oil prices, priced off the dated Brent price, change according to world conditions.  The refineries absorb those immediate changes and then when their fuels are produced they pass those price changes on the the wholesalers.

The wholesalers then pass those prices on to the retailers and the retailers then raise the pump prices.

Though, in the petroleum marketplace there is often a vertical structure to the business.  The same company that is pumping the crude out of the ground is often the same or sister company that is selling retail.

This condition has changed some what as the refineries were sold by the majors to more local concerns but the pricing flexibility in that market is traditionally institutionalized.  Because of price time lags in product pricing, refineries make more money when the price of crude is dropping and less money when the price is rising.  Which is exactly opposite to what the public thinks.  They think they are getting gouged by price increases and believe the refiners are making more profits when the pump price is rising.

Forward Price Contracts

Getting back to forward price contracts, these forward contracts have found a place in between physical crude oil contracts and the hedging utilized in the futures market.

The futures market rarely settles contracts by delivering product.  Rather it settles futures contracts with cash at the time the paper ownership is transferred.

Exchange for Physical

If physical product is required by the buyer of the futures contract, then an Exchange for Physical is initiated by serving notice to the futures exchange platform.

When this happens there are usually new conditions that are introduced to the contract.  These new conditions could be price, specifications as to the type of product to be delivered, the date of delivery; and these changes customize the contract so that the buyer actually get their preferred product rather than Brent, WTI or some other crude.  Then if the product required by the buyer is a Nigerian ultra low sulfur light crude oil then we take the delivery responsibility.

 “  Nigerian Oil Services Manages Delivery

Nigerian Oil Services serves the commodities platform to provide contracted physical crude oil to satisfy the futures and forwards contracts that require future delivery of the physical crude oil.

What this does is to remove the stigma of off-OPEC irregularities (which keeps the off-OPEC pricing at a minimum) and replaces the irregularities with consistency of quantity, quality and secured delivery.  The end buyer will eventually pay more for the product because their risk has been removed.

The physical delivery is often initiated prior to contract origination and settlements and is made to crude oil depots that can accommodate that much product in storage until the contracts are settled.  Continued Below

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So when the contracts are settled the product is already in the buyers port.  No more guessing whether the product will arrive or if the quantity and quality is up to snuff.  The Q&Q of product has already been completed.

Nigerian Oil Services can contract for other light sweet crude oils, a list of which is available on this page of our site.  Crude Oil Specifications

Our BLCO Trading Exchange Platform is then carrying the price risk over time and the possibility that the product may not be contracted for a purchase.

We do this by taking ownership of the product and working with the international commodities platforms to secure futures contracts that are likely to need physical product delivery fulfilled.

This means there is already a market for the product and depots in place to complete distribution chain.

Now our buyers (refineries) can secure a forward contract with Nigerian Oil Services and know their product will be there prior to the settlement date.  That contract is then put on the commodities exchange platform legitimizing the transaction.  Or the contract originates there (futures) and we are assigned to fulfill it.

This also means sellers of Nigerian crude oil now have a legitimate buyer that takes delivery FOB and purchases the product as soon as the sellers inspection has been completed.

Finally Nigerian sellers can find a real buyer that is RWA to make a purchase and own the product.

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Platform Storage Locations :

A New Paradigm In crude Oil Contracting - Click to Open

Crude Oil Contracting Without Risk

The purpose of a contract is to spell out the conditions for the sale and transfer of physical ownership and documentary ownership between two consenting parties so that they agree to the terms of that transfer and come to have expectations that are supposed to be bound into the future.

But the nature of a contract is such that performance between both parties remains questionable.  Will the seller deliver a specific quality and quantity on time?  Will the buyer pay for the product as contracted?

The consequence these two questions impedes the liquidity of the marketplace, and affects price.  The traditional answer to these two questions is spelled out in two ways.  Do the parties have enough money or reputation and do they have a history of performance?

There are also certain protocols that when inserted into a contract tend to provide a more assured delivery of the product.

One such procedural feature is a performance bond.  It provides financial compensation for non performance.  These PBs are expensive and are usually not offered except where the cost two both parties has risen due to the cost of bank instruments.

Further, both parties do not always agree on the procedure of the procurement of the bank instrument.  This added level of complexity brackets the contract into two different contracts ideologically – one for the bank instruments and one for the product.

The objective in performing (settling and fulfillment) a transaction is not to increase complexity.  It should be to reduce friction and make the purchase easier.

The Nigerian Oil Services trading and exchange platform has put in place a procedure that breaks the norm.  While there are always two contracts when a reseller involved; one with the supplier and one with the end user; there is no rule that both contracts need to look similar.

What our trading and exchange platform has instituted are two transaction that remove the risk, first to the supplier and second to the end user.

For the supplier the platforms capital (SBLC) is already in place with a fiduciary organization guaranteeing payment after delivery.  The delivery location is known by our platform.  The time of the lift is known.  All of the conditions upon which the product has been transacted are known.  The contract with the supplier is really an FOB purchase.  This removes the suppliers concerns.

The product is then delivered on a forward contract to the end buyer.  The buyers financial commitment is not executed until the buyer has already had the opportunity to inspect the product in their own port, the port of delivery (POD).

In this way, all of the buyers natural resistance to contracting has been removed since he is not making a financial commitment until after he has measured the quantity and quality of the product in his own facilities.

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Further the platform offers terms to the end buyer so that he can actually pay for the product after he has refined the product and sold the resultant fuels.

All of the complexity and risk then belongs to the Nigerian Oil Services Forward and Exchange Platform, and the risk on both ends of the transaction has been removed.

 “  Institutionalized procedural consistency has replaced uncertainty.

Then the only question remaining is, can the the platform actually perform while absorbing all of the risk?

The answer to this question really gets to the money involved.  Does the platform have enough capital in order to absorb the risk and compensate service providers to do their jobs to accommodate a smooth delivery process?

The answer to this is that the platform has also provided all the necessary set-asides with their fiduciary financial institution in order to lay aside all of the concerns of the logistics supply chain about their performance compensation.  Everybody involved has been guaranteed compensation for their services through financial set-asides in the form of reserve cash accounts or bank instruments guaranteeing compensation after performance.

So when a supplier and an end buyer (refinery) contract with the Nigerian Oil Services Platform they know their written obligations will be satisfied and fulfilled.

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Four Critical Infrastructures Required of a Commodities Platform

Dependable Logistics

in 18 jurisdictions worldwide

Dependable Logistics

Criteria:

FOB Procurement Simplicity
Readibily Available Vessels
Export Authority Secured
Platform Tracking
Inspection Competency
Discharge Scheduling
Controlled Storage

Outcome: Just-in-time Delivery

Dependable on time delivery of goods. Once the feed stock has been secured by the platform delivery needs to be scheduled. Lifting dates are secured, vessel leasing completed and scheduled and maritime notices administered so that everything runs smoothly to get the product to its destination storage facility.…
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Credible Contracting

in 14 jurisdictions worldwide

Credible Contracting

Criteria:

Open Access
ICC Compliance
Contract Consistency
Standardized Execution
Margin Compliance
Flexible Terms
Professional Fulfilment

Outcome: Reliable Results

Dependable trustworthy contracting contracting including tendering offers, accepting bids, contracting those bids and document delivery all has to follow ICC rules so that every party in the transaction knows what to expect and has a transparent view of all the terms related to the contract. Product quality and quantity needs to be not only contracted but overseen by the platform administrators to be certain the contracted feed stock is delivered according to specifications.…
More Information Register

Systematized Operations

in 21 jurisdictions worldwide

Systematized Operations

Criteria:

Integrated Network
Cloud Infrastructure
Platform Connected
Transaction Control
Retainer Consistency
Agile Improvement

Outcome: IT Best Practices

A systematized operations framework that delivers information in an equitable and transparent fashion. All electronic and hard copy documentation need to be available, accessible at any time of the day (to accommodate world wide buyers operating in different time zones). Electronic and IT systems need to be secure from outside hacking while being open enough to not impede business operations.…
More Information Register

Supply Chain Finance

in 19 jurisdictions worldwide

Supply Chain Finance

Criteria:

Total Capitalized Finance of:
Compliant Export
Reliable Delivery
Bonded Performance
Dependable Fulfilment

Outcome: Trustworthy Supply

Supply chain financing requires that control or ownership rights are retained by the platform. This ends questionable ownership rights. Delivery needs to also be financed so that there is no question whether the product will arrive on time. Procurement of the feed stock must be easily accommodated so that the supplier can be confident that their product will be moved out of their inventory, being certain that their supply is paid for by the platform. …
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Understanding the Crude Oil Trading Marketplace - Click to Open

This article is the first of a series on how the oil markets actually work.  Many people want to get involved in selling or brokering crude oil because of the potential profits involved.  But then after a few years they then find out why they never made a sale.

This article is not to discourage but rather to redirect people to the most likely methods and systems in order to actually complete a transaction.

Many years ago all of the refineries were built, owned and operated by majors.  The way those majors structured their businesses was to retain as much money as possible in finding new resources of crude oil to exploit.  This is called the upstream business.

When searching for new resources potential long term assets can be found. When a company finds a new asset it does a series of exploratory measures and then announces to the world its potential reserves and its proven reserves.

By doing so investors rush in hoping to be first in buying the stock before others find out.  This causes an artificial escalation in the stock price.  Those that are already owners of the stock (usually directors of the company) experience windfall profits.

An owner of a major would want to be able to find as many new reserves as is possible.  Therefore you structure your divisions of your business so that the profits are all directed towards exploration.  Every other part of your business is designed to have really tight margins.  The other part of the business I am speaking of is the downstream business of refining.

If you are a major you know where your feed stock is coming from so you don't need profits to be part of the refining business.  Any profits the refiners make are mostly directed via accounting to the upstream part of your business.

This is important to understand because if you are attempting to sell physical feed stocks (crude oil) to refineries you need to know they do not have the margins in order to make a mistake on their supply.

Every refinery owner knows what is the best feed stock to operate his refinery at a profit.  So they require long term contracts that guarantee they get exactly what they need without any variance.

A dependable supplier to a refinery can then expect his contract to last a long time. Refineries are all different.  They have different equipment and therefore require different feed stocks to operate their equipment.  Continued Below

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So just because you may be providing the best feed stock in the world for distilling middle distillates (gasoline, diesel fuel, jet fuel) does not mean that every refinery needs your product.

Many refineries were built to handle lower cost crude oils that are thicker (lower API) and more caustic(too much sulfur).  Sulfur is the nemesis of refineries.  When you heat up crude oil that has even just a few percent of sulfur in it, that sulfur turns into sulfuric acid.  Anything it touches get burned, including to pipes in refineries.

This is where the term sweet crude came from.  When the first spurt of oil comes out of a well old-time prospectors use to taste it.  If they could taste it without burning their mouth they knew they had hit pay dirt because everybody wants crude oil without any sulfur in it.

If the oil was not sweet they knew they had to keep putting holes in the ground until they found the sweet mother load.

Now as a refinery owner you may to want to purchase some low cost junk oil like Rebco or Venezuelan crude and then mix it with some sweet oil like BLCO.   You put the two oils in a big tank and stir them together.  A lot of the Nigerian crude is actually used as a sweetener by refineries.

Refinery Margins

But getting back to the refinery profits.  If a refinery agrees to buy crude oil they can not experience any variance in the quality of the

product.

Just because the sellers inspection came up really good (what the refinery wants) does not mean after a week or more on the ocean that same product is going to arrive unchanged at the buyers port of delivery (POD).

What if the vessel captain decided he wanted to sell some of that oil to somebody he knows and then fill the void with sea water?  Then the product that arrives at the POD is going to be something different than what was ordered.

When you are spending 50 to one hundred and fifty million dollars for feed stock, it had better be what you ordered.  Further, what if the vessel never arrives?

Refineries will not place a banking instrument to guarantee payment after delivery because banking instruments that big are expensive.  Just 5% for the cost of a leased instrument is going to cost you $5 million dollars.  So if you do not get the product or it arrives tainted then the refinery is out $5 million dollars.

They have to sell a lot of product, at very small margins, to make up for the loss.  When you are in business you have to set up systems and procedures to protect your business from any loss.

So there is an industry wide barrier to doing business with the end users of your crude oil.  No refinery will be placing a bank instrument in order to guarantee payment after delivery.  Continued Below

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In fact, refineries margins are so thin that they would prefer to pay for the product from the profits they acquire AFTER refining the feed stock into petroleum fuels and selling those fuels.  So many refineries require "terms" in taking delivery of the crude oil they process.  "Terms", means they want to pay after refinery processing; paying for the feed stock after making profits by selling their refined products.

National Oil Companies (NOCs)- Suppliers

Now, on the other end of the supply chain is often a national oil company of one kind or another.  After all, crude oil is a national resource and most every country wants to make money selling their resources.

NOCs, national oil companies, do not want to see the product disappear over the horizon without having an credit instrument in place to guarantee payment after delivery.  It is a big instrument.  And it had better come from a bank that can stand behind that instrument.  If the buyer decides he wants to stall on payment, the NOC will want to have the right to draw down on the instrument, in stead of waiting for cash payment.

The Supply Chain Barrier

So now you have a clear picture of the market place ends: a buyer that will not place a bank credit instrument and a seller that will not deliver without a credit instrument.

So the entire industry requires an entity that will bridge the chasm, put up the required instrument, deliver to the end buyer and then provide terms to the end buyer so that the refinery can generate the profit to pay for the product.

For the refinery this is called "just in time delivery".  Every manufacturer does not want to inventory feed stock and therefore wants a timely guaranteed delivery and a "later payment" than the delivery date, if they can get it.

The terminology in the marketplace for that type of entity is called a reseller.  There are really big resellers and then there are invisible ones.  The big boys tend to act like they are a major (don't want to place a credit instrument with a little seller), the little ones are less dependable.

Resellers are supposed to have a "relationship" with the off-taker of the product they are delivering.  Many of them do not really have a relationship.  They just have a delivery contract.  Their contract is back dated so that they can then legally sell a product they have yet to acquire.

They often come in the door hoping to risk as little as possible, thinking mistakenly that the seller will take all the risk.  But neither the supplier or the end user have any interest in absorbing risk.

 

 “  The risk should all be shouldered by the reseller

So the big resellers pretend they are not a reseller by posing as though they are an end user.  And the small resellers pose as though it is the sellers responsibility to absorb the risk and take a weak credit instrument or no credit instrument at all (a proof of funds).  Continued Below

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Bank Instruments Used in the Oil Trade

So now it is time to talk about bank instruments because those are the instruments that are used to hold deals together and guarantee delivery.

There are credit instruments that send the credit with the instrument; MT760 SBLC / BG

There are credit instruments that really are not a credit instrument until the product has been delivered; MT700 Documentary Letter of Credit or DLC.  Those instruments do not transfer credit until all of the required documents are presented at the buyers bank.  Usually that means that an inspection report has been completed at the buyer POD by a certified inspection company.

So that instrument can not be drawn upon until after approved delivery where the quality and quantity (Q&Q) has been verified.

Then there are instruments that are not credit instruments and will never become a credit instrument.  But they tend to prove that the buyer at least has the money in his account in order to pay for the product.  They are called a proof of funds (POF) MT799 or MT199.

The MT799 is sent through SWIFT in a secure message format to the beneficiary bank.  The MT199 is sent through SWIFT as a non secure text message.

All bank instruments cost money to originate (a bank fee) and to be sent through SWIFT (a SWIFT fee).  Credit instruments also have backing costs.

You can not get a credit instrument without putting down some money to back the instrument.  There are leased instruments where the instrument is highly leveraged and the originator bank has a lien on the instrument preventing its use to be loaned against. (called monetization).  And there are owned instruments that are sold at a lower leverage and are owned by the party that has paid for them.  Those instruments can be liened against to get cash which process has been identified above as monetization.

Monetizing an instrument involves a loan to value (LTV) equation which is based on the strength of the instrument, the strength of the originating bank and the credibility of the company putting up the cash for the instrument.

This issue could be a consideration if a seller does not have the capital to finance the lift, inspection and vessel considerations.

Many sellers want to see an SBLC from a major bank because the instrument is not only more trustworthy but also can be liened against to help the seller pay the fees to get the product to the buyer.

Every seller wants the strongest bank instrument possible.  Every reseller wants as weak an instrument as possible in order to mitigate risk.

Because the numbers are so big in the oil business, everybody has a moral and often fiduciary responsibility to mitigate as much risk as possible.  Continued Below

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So, if you are entering the marketplace as a broker you really need an air tight relationship with somebody that knows you and trusts you, in order for you to be able to expect any success in the industry.

 “  The more money somebody has, the more likely they are going to want to work with others that are on their level.

You can not realistically enter any marketplace occupied with billion dollar companies when you have no shirt on your back.  You have to bring something to the table, either money or rock solid relationships.

The oil business is really an "old boys club".  If you are just now entering you should expect to pay some serious dues in time and relationships in order to have some success.

The next article will likely be about peculiarities with certain marketplaces.  Wouldn't it be nice if you knew what to expect from a business contract and how culture plays into the transaction.

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