Proof of Prior Performance

There is a big difference between Proof of Prior Performance (POPP) and Proof of Product (POP).

Most of the people we are communicating with equate the two as the same thing and expect both when entering into a contract.

They expect the seller to show that he is selling to others.  They want some verifiable proof of that fact.  Those buyers because they are financially capable of buying, want to work with a seller that is known to be capable of selling.  In many cases they want to start there – who are they dealing with?

This is a rather thorny issue and I apologize in advance because in order to lay out the motivations of all the parties involved and the moral responsibility we have as the mandate and fiduciary of the sellers this article may be longer than one has time to engage in.

First of all I think it important for us to lay out the section of the oil patch that we are playing in, because that neighborhood has a different agenda than the one that is readily reported to OPEC and the IEA. (Those are the sources of public information about the oil industry).  When the Saudi’s decide that it is more important to maintain market share than it is to maintain profit, because of the prolific abundance of “new oil”, every body sees it and accusations of “price wars” become fodder of the press.

The marketplace we are playing in is the private marketplace. Countries selling off-OPEC, against the OPEC rules have two really important incentives to keep all of this private. (1) they do not want to affect the price of oil, driving it down, (2) they do not want to be caught being naughty.  So OPEC and the IEA are not given information and the public therefore does not know the true production of OPEC countries.  Recently it was found that SGS was sharing the reports of their inspections with OPEC.  They were summarily excused and replaced by the other internationally accepted inspection firm, Intertek, to do all the terminal inspections.  No one is supposed to know about this marketplace.

When someone marches into the NNPC offices in Abuja and starts waving around shipping documents proving unregistered sales, what do you expect them to do.  “Well, we have never see those documents.  You should know there is no such thing as off-OPEC.  If you really want to buy Nigeria’s premium crude oil we can register you and introduce you to real sellers.”

You can not blame them.  If all of their OPEC buyers insisted on getting discounted oil they could stand to loose a billion dollars per month in lost revenue.  No developing country is going to shoot themselves in the foot that way.  If Nigeria is anything it is at least street smart.

One of our sellers was threatened that if he was caught sending out documents, proving that he was selling, his right to sell would be terminated.  For someone that has been making an extraordinary living as a seller for many years (even by the income standards of the upper 1% of industrialized nations), it certainly stands to reason he would not take that gamble.  From the buyers standpoint, what good is proof if you can not verify it – so they are going to take whatever they get and march it into the only avenue of verification they are aware of – the offices of the NNPC in Abuja.

Furthermore, as soon as a sellers name and documents get leaked into the public sphere the 1% of the more nefarious characters in Nigeria start using that information to extract money from unsuspecting buyers in the most inventive ways.  And then you have more than one entity with the same name marketing.  One with the intent of honest business and the other without that intent.  In fact cunning is a highly admired trait in Africa.

So now you have the country of Nigeria, the NNPC and the seller all with strong incentives to keep their extra business private.

Now what about the buyers that have had the courage and good fortune to contract and actually get product delivered.  Oil is a natural resource.  It is generally believed that natural resources have an inherent diminishing return.  In plain English that means the more you sell, the less you have to sell.  Buyers do not want their documents being waved around the marketplace in order to bring in even more competition.

Every sales contract that I have seen includes verbiage such as this:

“… conditions of the present Agreement on non-circumvention and non-disclosure, and also considering aspiration of the Parties to ensure confidentiality of the above stated deal and to keep in secret  …..And further to not disclose…..  from sources or their affiliates, which sources were made available through this Agreement, without the express permission of the Party who made available the source.”

So it is not legal to send out documents proving delivery of crude oil to a party that was not involved in that transaction without permission from those parties that were involved.

Still, buyers say, “come on, just give us a taste” and we say, “NO!”.

Please look at this from your buyers perspective.

“Mr. Buyer, we intend to load the vessel in the sellers name this time.  The reason why is we would like to use these documents proving a sale to you in order to bring more buyers into our sellers so that they can raise prices by competitive bidding between multiple buyers.”

This would be the honest way to approach every prospective buyer if we were intending on giving out their successful sales documents.

When you really look at the business this way, NOBODY, not even the prospective buyer wants to raise their underwear on the flag pole in their front yard.

It is a fault of moral miss-judgement to disrespect everybody’s intent for privacy and be dishonest in order to prove your seller’s honesty.

NOW, the practical nature of this argument.

1) buyers can not verify documents – so why give them out?

2) even if they could it does not mean they are going to get product.  I have had a buyer tell me, “I am not interested in buying the product you sold last month to somebody else.  Show me MY loaded vessel!”

3) As one of our sellers aptly put it, “Nobody is putting up a bank instrument on an empty vessel.”

4) let me just make a premise that I think is valid.
It does not matter who the seller is.  Sellers in our part of the oil patch must remain invisible, and so too, their transactions.  It does not matter how many documents you get showing prior successes.

You can determine the validity of a seller by the procedure they present.

If it is a safe procedure for the buyer then your buyer has nothing to loose by moving forward.

If it is not a safe procedure then one of two things is wrong. The first is that your buyer has failed to prove that they are financially capable to make the purchase.  This does not mean that your buyer is not capable of performing, it just means that the buyer has failed to prove his ability to pay for the product. In that case the seller is forced to protect his interest and demand proof from the buyer’s bank that they are standing behind the buyer in the deal.

The second reason for a procedure that is not safe for the buyer, the seller is a crook.

It is as simple as that.

So as a buyer’s agent or as a buyer, please do not ask to see proof of prior performance.  You will not get it from us.

Aim your buyer at a loaded vessel.  The buyer has to be willing to contract to get one.

What happens then is that the seller loads the vessel and then will sends the BOL and Cargo Manifest and his ATS, all issued by the terminal on the loaded vessel, to the buyer.   The seller will also instruct the vessel captain to send NOR to the coordinates your buyer has given, as contracted.

With that information a capable buyer can completely verify the validity of the offering from multiple independent sources. This is REAL POP, not a bunch of numbers on a piece of paper.

Then it is the buyer’s responsibility to perform according to the contracted procedure.

Thank you for your patience with me.

Jeff Scott – Author – CFO

Nigerian Oil Services LLC (USA)