Off-OPEC vs OPEC

As always this article speaks to the situation in Nigeria not about other OPEC nations.

This article comes in the form of an interview with a friend of mine that is a Joint Venture Operator. Those are the companies that load vessels, this one specifically at the Bonny Terminal.

First a little preliminary information.

The Organization of the Petroleum Exporting Countries (OPEC) is an intergovernmental organization of twelve oil-producing countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela.

Wikipedia puts it this way:
According to its statutes, one of the principal goals is the determination of the best means for safeguarding the organization’s interests, individually and collectively. It also pursues ways and means of ensuring the stabilization of prices in international oil markets with a view to eliminating harmful and unnecessary fluctuations; giving due regard at all times to the interests of the producing nations and to the necessity of securing a steady income to the producing countries; an efficient and regular supply of petroleum to consuming nations, and a fair return on their capital to those investing in the petroleum industry.

I put it this way; They try to fix prices. By keeping the price of crude oil high these nations make a few extra dollars per barrel on every sale.

The biggest development as far as the USA is concerned is that when President Nixon took us of the gold standard (stupid), he also made a deal with the King of Saudi Arabia to sell all of the OPEC oil for US dollars (smart). The king then convinced the rest of the member nations.

So while the Federal Reserve prints dollars at the will of whichever party is in power, screwing the American people and everyone the US owes money to, the dollar remains relatively strong because everyone in the world has to buy dollars in order to buy OPEC oil. The Petro-dollar is the USD. Without that, the US currency would have suffered greatly just like the Euro has when their governments could not stop spending money that they do not have. The jury is still out on that development.
It must be morally frustrating for those in government to realize that in order to keep their constituency happy they have to steal the value of the voter’s money.
End of Rant….

I can not resist adding in information so I will designate who is talking.

JS; What is the distinction in pricing between off-OPEC and OPEC?
JVO;

• OPEC transactions are transactions by the Nigerian government on behalf of the 65 appointed/approved companies by the Federal Government of Nigeria.

  The approval is from the NNPC Abuja and signed by the Minister of Petroleum.

  Off-OPEC is transacted at the Bonny Terminal on behalf of the government and is legal in Nigeria. Doing so breaks OPEC rules, hence we have Off-OPEC police that monitors/sanction countries that do Off-OPEC sales. As Off-OPEC prices are governed by supply and demand they are seen to be increasing the volume of oil available worldwide thereby dropping the price fixed by OPEC.

  Every country in OPEC does Off-OPEC sales, but they all do it underground through various companies (Fiduciary companies) which cannot be traced to the government, hence in Nigeria it is done at Bonny terminal NOT in the NNPC towers in Abuja.

JS: Who decides whether a transaction is going to be OPEC or off-OPEC?
JVO; Government, as all oil belongs to government.

JS; When that decision is made then the product is made available either through the Bulk Equity Account or to an allotment holder?
JVO; Every allocation or allotment outside of the 65 companies I mentioned above are Off-OPEC! Either Bulk Equity or Allotment to holder, they are all Off-OPEC.

JS; Just a little clarification here, Allotment holders receive an allotment, which is a fixed amount of oil they can sell on a quarterly basis. They receive an authority to sell (ATS) letter that defines how much oil they have to sell. When they sell that allotment they may not be able to extend the allotment to handle additional sales they have made to refineries that they have a relationship with. Their authority ends there.
NNPC approved Fiduciaries are always selling out of the Bulk Equity Account and even though they also can get an ATS it is somewhat expandable. This is because Fiduciaries are actually given authority to negotiate on behalf of the NNPC. If you have a qualified buyer you might as well sell him oil. I know this is the case because we are presently negotiating with an Allotment holder to buy oil through one of our Fiduciaries. Their allotment ran out and now they have to buy from someone that has the authority to sell but whose allotment will not run out – so to speak.

JS; Do NNPC Approved Fiduciaries (NAF) always have joint allocations that they can all sell or do they occasionally get an allocation that is solely for that NAF to sell?
JVO; NAF don’t always have joint allocations but depending on situations they can have it as the one you have seen, it depends on the transaction at hand.

JS; Is the Bulk Equity Account always there to be tapped by NAFs with a phone call and a banking instrument?
JVO; NAF don’t actually have limit on what they can sell, they can sell as much as the demand from buyers once there is a banking instrument.

JS; What is the distinction between a NNPC Approved Fiduciary and an allotment holder?
JVO; The difference is just in name, as they are all Off-OPEC!

JS; Can an Allocation Holder sell out of the Bulk Equity Account or do they need to go through a NNPC Approved Fiduciary?
JVO; They are all Off-OPEC and can sell anything.

As a clarification, the allotment holder that we are dealing with is a brokerage house so they are actually a buyer that is reselling to the Refinery. My guess is that they used their allotment to establish a relationship and then the refinery had a greater demand so they have to dip into the Bulk Equity Account as a buyer in order to meet the refinery’s increased demand.
Once they get all the documentation they have requested this will likely be an easy sale. It is nice working with pros that know how to get the job done.

Author: Jeff Scott – CFO Google