05 August 2013, Lagos – As the search for ways of maximising potentials of the shipping industry continues, industry stakeholders are calling for a change in the terms of trade agreement between the government and buyers of crude oil that will make it possible for Nigerians to be involved in the affreightment of the products. Under the crude oil sales contract, the foreign companies determine the shipping lines that will transport the products to destination under the Free on board, FOB, trade terms.
But the arrangement as convenient as it is to the Nigerian National Petroleum Corporation, NNPC, is seen by indigenous shipping companies as not the best for the development of the nation’s shipping industry. This is considering the huge economic benefits that are lost under the terms. The stakeholders are calling for a change to Cost Insurance and Freight, CIF, which is seen as having multiplier effects on the economy.
Stakeholders said that the present administration may consider another look at the FOB arrangement for the adoption of CIF terms because of the gains on the economy. They argued that this should be part of the transformation agenda of the present administration.
FOB Trade Terms
Sales of crude oil has been on FOB terms over the decades. Under this, the buyer pays for the products and looks for means of delivery. This arrangement has left Nigerian indigenous shipping companies in the cold as the buyers of the products simply reach out to highly capitalised multinational shipping agencies who transport their goods. To some extent, experts argue that this saves Nigeria the risk involved in delivery of such goods. But for the local shipping companies, this has not been good news because of the trade opportunities that are lost.
The argument of top officials of NNPC is that Nigerian firms do not have such capacity to be entrusted with the responsibility of wholesome transportation of products within coastal waters not to talk of when such products are meant for foreign countries. But stakeholders argue that when such opportunity is given to them, all they require to do is to reach out to foreign partners who will provide tanker vessels that are capable of carrying 135,000 metric tonnes (MT) of wet cargoes.
CIF Trade Terms
Under CIF trade terms, the government or NNPC as the exporter of the products will determine who delivers them to the buyer. With this, Nigerian firms can be engaged for such contract, and where they do not have capacity, they can partner with foreign firms. The only disadvantage however is that government or NNPC as the supplier of the product will have to wait until the goods are delivered and everything certified okay before being paid. This is unlike FOB, where the buyer pays for his products and determines how he can take delivery. Under FOB arrangement, every risk is on the buyer, while in the case of CIF, it is the exporter that will bear all the risk until the goods are delivered to the buyer who will then pay up.
This indeed explains the position of the government on continuing on FOB term. But industry experts argue that introducing CIF trade terms will help boost the entire economy because of the huge multiplier effect. Apart from the local shipping industry that can take advantage of this, the insurance companies can also be in a position to provide coverage. Although, insurance cover for such goods is usually international, experts argue that NNPC can encourage the insurance companies to team up in partnership with foreign big names to qualify for such contracts.
Benefits of CIF by Stakeholders
Stakeholders who spoke to THISDAY believe strongly that there are so much benefits under the CIF trade terms in crude oil trade than the risk that government or NNPC may be apprehensive of.
Managing Director and Chief Executive Officer of Indiana Oil and Gas Company Limited, Chief Festus Obonna said the multiplier effect to the shipping sector and to a large extent the general economy is unquantifiable. Obonna said when introduced, both revenue base of the sector and employment generation will grow. He said such terms will mean that the freight earnings will go to Nigerians instead of foreigners.
He added that though Nigerian companies do not have the type of vessels needed for such trade now, they can always charter if given the opportunity. He also said that this will help in the training of Nigerian seafarers, adding that with more ships, seafarers can be exposed to training. Obonna urged the government to implement what he called ‘trial affreightment’ by supplying some quantity of crude oil under CIF to see how it works.
He however said the revenue that will come from such transaction should not go to the Federation Account so that government will be able to meet its obligation. Similarly, a shipping expert, Mr Augustine Otubuiro also argued that if government hopes to broaden indigenous shipping capacity for more contribution to the national economy, there is the need to find a way out of the present FOB of trade terms.
Like Obonna, Otubuiro argued that what is required to address the issue of capacity among indigenous shipping companies is to partner with foreign firms. “When we leave everything in the hands of foreigners on the argument that we don’t have the capacity, we will remain under-developed. Capacity can be imported and developed and Nigerians will benefit from such arrangement”, he said.
Executive Secretary, Nigerian Shippers Council, NSC, Mr Hassan Bello, recently expressed concerns about what Nigeria has been losing for decades as a result of the terms of trade on the exportation of crude oil. Calling for reconsideration of the terms, he said that Nigeria loses hundreds of millions of dollars every year to trading partners as a result of the FOB arrangement. He opined that such term limits the potentials of the maritime industry to contribute maximally to the nation’s economic growth.
He said : “For us to maximise our earnings from the maritime sector, the sales of our exports on Free On Board (FOB) terms must be reconsidered. We need to sell our products on Cost Insurance and Freight terms in order to earn revenue in insurance and freight from the carriage of our exports. We lose hundreds of millions of dollars every year to our trading partners as a result of selling on FOB. This limits the potentials of the maritime industry to contribute maximally to the nation’s economic growth”
– Francis Ugwoke, This Day