NNPC Introduction Letter

The acquisition of an allotment to sell Nigerian Oil is issued by the NNPC directors, usually upon request of a high ranking politician. These allotments are only given to those that have proven their capacity to perform in the oil industry.
This is highly secretive process because the allocations are issued at the top level of the government usually as a way for someone connected to receive profits in the oil business. The potential allottee is then given the nod of approval which is passed directly to the board of the NNPC. So the NNPC staff does not know who the allotment holders are. The staff have relatives in the broker business and so when you go in to verify an ATS or POP the staff then knows who the allotment holder is and quickly farms out the information to their relatives in the broker business. For this reason it is very hard to get a verification of an ATS (Authority to Sell Letter) or POP (Proof of Product letter).

There is only one reason for a seller (allotment holder) to be associated directly with a company wishing to sell their oil, and that is that the agency is connected to a buyer that may be able to perform. To stay connected requires a level of performance commensurate with the highly sought after position. The value of your service as a Allottee Mandate must be worth the time of the allotment holder to keep you around.

Nigerian Oil Services is partially publishing this letter we received from our allotment holder that was written by the NNPC to introduce potential buyers to to the allotment procedures and processes. We, the Seller’s Mandate, are including the actual content in quotes. Our commentary then follows each quote. The letter also contains information that we have left out intentionally such as contacts names, addresses, emails and phone numbers.
If you wish to know who our allotment holder is you will only find out by becoming a qualified buyer.
Here is the Letter:

NNPC Introduction

INTRODUCTION/CONFIRMATION LETTER

One of our privileged allocation holders has requested us to introduce certain features of our oil transactions and delivery processes with you in order for you to make good business decisions before getting engaged in a long term contract.
Please note that the supply and demand trends in the petrochemical industry and high quality of our Bonny Light Crude Oil (BLCO), allow us to sell it at a premium price.

You can see that this letter is written to you, the buyer, on behalf of the approved allocation holder. BLCO or NLCO is the most expensive oil next to Brent because of its low sulfur content (which means it is less corrosive). It is also a light oil. The combination of these two features makes Bonny light the least expensive oil to refine. Therefor its value is high compared to other crude oils available elsewhere. Product Specs. are provided in the contract.

Normally all NNPC sales are executed on CIF basis and every cargo has a payment guarantee (with blocked funds), associated with it before it gets loaded at the Bonny Terminal.

CIF is a shipping term which means that the seller is delivering the oil to your port. Therefor the seller has to charter a vessel and cover insurance to safely deliver the cargo.
This is an expense usually covered by the Allottee’s Financier. Contracts always require blocked funds and are advised by a top 25 bank before the vessel is even loaded.

However, NNPC has privileged allocations’ program, which allows certain key individual allocation holders receive the BLCO at a special discounted price. The benefits of such discounts are normally shared with certain buyers who qualify for such special deals by our allocation holders.

The allocation holder always has the last say at what price (discount) he is willing to sell at. A typical discount might look like this:
Gross $7 per barrel below Brent, $4 net to the Buyer. On a 7/4 deal $3 will be distributed to the Seller’s and Buyer’s sides usually equally for commissions to the agencies involved in putting the buyer and seller together and assisting in negotiating the deal.

Due to the large magnitude of the cash flow involved with aforementioned allocations, such transactions are usually undertaken by the allocation holders via their financing arm who are pre-approved by NNPC. Each allocation holder has its own financing arrangements.

The money is paid to the financier who then pays the NNPC for the oil. It may cost several million dollars to finance a shipment so the financier always receives a ROI for a transaction which is worked out in advance between the financier and the Allotment holder.

Once a contract is in execution and we have received the payment instrument for a given cargo against an allocation, we will deploy our ships to transport the subject crude directly to the destination of choice of the allocation holder.

There may be different discounts depending on where the shipment is going. This is to compensate the seller for the greater risk involved in long treks. CIF ASWP (any safe world port) will carry the lowest discount. Allocations are most often issued quarterly. So “against an allocation” means that an allottee might be issued for 25 million barrels quarterly and out of that allocation will be drawn 1 or two million barrels for a transaction.

All our such allocations are automatically renewed and rolled over if any of our allocation holders have signed a long term contract with a pre-qualified buyer, for the entire duration of the contract.

Refineries require a continuous supply of Crude Oil to work efficiently and therefor want long term contracts. The NNPC accommodates the contractual obligations of the principals. If an allotment holder can not sell the oil for the duration of his allotment it is likely that the allocation may be issued to another seller for the NNPC.

I understand your esteemed organization is in the process of contracting with one of our such privileged allocation holders listed below. We are happy to confirm that the following company and its associated financing arm, also listed below, have been approved by us, NNPC and Federal Ministry of Petroleum and Gas of Nigeria.

This is the reason that Buyers often require the actual allotment letters, ATS (Authority to Sell) because a partial POP on the contract can not be verified. We have seen contracts come across our desk that have false information in the partial POP. So the actual letter makes it worth the effort to take the time to work out an agreement, because at least the buyer knows that there is really a product involved in the transaction. If you are a buyer and can not get an ATS or a POP letter on the NNPC letterhead then it is because of one or two reasons. One, the deal is fake. Two, the agencies involved don’t have the trust from the allottee in order to acquire the letter. Long chains of agents are a particular problem because somewhere along the way there can be somebody that will not extend trust to get the deal closed and will not provide the proper documentation. We do not work with unsubstantiated sellers and will not provide empty SPAs with no POP documents.

It is also hereby confirmed that we, NNPC, have duly approved his allocations for up to 10 million barrels of BLCO per month for the current quarter which are subject to extensions and roll over’s as described above:

Notice when I said above that an allocation may be issued for 25 million barrels per quarter. That is about 6 million barrels per month. So it is evident that an allotment holder, if successful selling his entire allotment, will be given an expanded allotment up to 10M bbls to allow his continued success.

We will advice all clients to follow the procedure of our allocation holder. NNPC never bend the rule of the lifting guild line. All refinery / crude oil trader have to abide to the rules and regulation.

The biggest rule is that when Buyer says he is RWA (ready willing and able) to purchase, he is saying that he is financially able to place the banking instruments and block the millions of dollars in funds to prove that the money is there and able to be drawn down “At Sight” upon the presentation of the delivery documents.

This describes the NNPC off-OPEC process of buying Nigerian Oil through an allotment holder and a Financier.

Jeff Scott – CFO
Nigerian Oil Services LLC (USA)