A Review of the Nigerian Energy Industry

‎NNPC’s “letter of comfort” issue impacting crude trading activity

*Crude oil tanker.
*Crude oil tanker.

*As Indian buyers cautious over Nigeria’s crude

Oscarline Onwuemenyi,
with agency reports

ABUJA – India’s Hindustan Petroleum Corp., HPCL, said it will be cautious in buying Nigerian oil, as the company is still scouting for a vessel to lift a cargo for early October loading after the
Nigerian National Petroleum Corporation, NNPC, demanded a “letter of comfort” from shippers.

According to the company’s head of refineries, B.K. Namdeo, who spoke to a foreign news agency,
“We are finding it difficult to book a vessel to lift Nigerian crude. We will be cautious in future while deciding about crude of Nigerian origin.”

Namdeo said his firm was unsure whether it would be able to lift a very large crude carrier of Qua Iboe crude on time.

“Nobody is coming forward to offer the vessel and whoever is willing to go to Nigeria is asking exorbitant rates,” he stated.

HPCL bought the 2 million barrels of Qua Iboe from Totsa, a trading arm of France’s Total, for Oct. 7-8 lifting on a free on board (FOB) basis, meaning the buyer pays the cost of marine freight, insurance, unloading and other costs to destination.

The Indian firm had chartered the Ridgebury Progress to lift the cargo, but the vessel owner refused to sign the “letter of comfort” sought by the Nigerian authorities.

Nigeria this month lifted a ban on certain oil tankers sailing into its territorial waters that was implemented in July. But as a condition for the ban removal, it created the “letter of comfort requirement’ in an effort to target oil theft.

However, the demand from Nigeria for shipowners to sign a “letter of comfort” before loading at Nigerian oil terminals has caused a lot of uncertainty in the global shipping and oil markets, pushing up West African Suezmax freight rates, and it is beginning to apply brakes on spot trading activity in the Nigerian crude oil market, trading sources said Monday.

Two weeks ago, state Nigerian National Petroleum Corp. put into a place a requirement that tankers entering Nigerian oil facilities sign a letter of comfort that critics said exposes vessel owners to responsibilities outside their control.

NNPC released a template of the letter of comfort earlier in the month, asking tanker owners to guarantee that they will not indulge in any illegal activity.

But shipowners and maritime lawyers have said that due to vague language and legal issues relating to “indemnity” in the letter, there was little chance they could sign it.

A lack of clarity and dialogue with the Nigerian authorities has caused this uncertainty, leading to a firming of freight rates and causing a furore amongst traders and shipowners active in the Nigerian oil market.

Some shipowners have created their own template for a letter of comfort and are in discussions between charterers, terminal and NNPC to use this version of the letter for the time being.

“It is sort of impeding spot trading- and a knock-on effect on freight. It’s a completely nonsensical proposal and the market reacts accordingly,” said a crude trader active in the Nigerian oil market. He added there had been meetings between oil majors and the Nigerian government on this issue and that there might be a grace period.

“But there might be a compromise between all of them,” the trader said. “It’s not clear on what will happen but spot trading is on hold.”

The West Africa-UK Continent route freight rates, basis 130,000 mt, have risen by more than Worldscale 10 points since September 16 and shipping sources have said a tanker was placed on subjects at an even-firmer w72.5 Monday for a voyage on the route loading October 12. This is close to a five-week high, Platts data showed.

So far, a majority of shipowners have been unwilling to sign NNPC’s letter of comfort. They say their refusal comes on the back of advice received from legal sources and Protection and Indemnity [P&I] clubs.

As uncertainty regarding the NNPC situation still persists, there is currently reluctance among many shipowners to offer their ships for Nigerian loadings, and those that do are asking for higher freight rates.

“Until we are given some sort of clearance or the OK from our P&I club we will try and avoid Nigeria,” said a shipowner with multiple Suezmaxes on the current West African position list. “No doubt money talks though so we will see owners going there, but with a premium [on the freight].”

Though shipowners refuse to sign the NNPC letter, loading in Nigeria has continued as normal, according to shipping sources.

“Vessels are being cleared [to load] without the letter; it just seems to be a procedural problem for the charterers at the moment,” said a second Suezmax owner.

Some shipping sources, however, said NNPC were beginning to accept alternative letters to the one they originally wrote last week.

“As far as I know,” said a charterer recently active in the Nigerian Suezmax market, “NNPC are now accepting the following letter from the owners: ‘Owners confirm that Master and crew will not knowingly participate in any unlawful or prohibited activity whatsoever while in Nigerian territorial waters and all activities will be carried out in compliance with orders received from Charterers.’ Progress is definitely being made.”

This issue has also begun to impact activity on the Nigerian crude markets, with some regular buyers staying away from buying on the spot market until there is further clarity.

“It is proving quite tricky – there are talks between the oil majors and NNPC, looking at mutual agreeable wording [for the letter] – it’s a question of who wants liability,” said another Nigerian crude oil trader. “In essence, what NNPC wants is agreeable but it’s a matter of legal wording that suits everyone.”
Due to this ambiguity, there has been some hesitation in buying Nigerian crude and fixing ships loading there, some traders said. One regular buyer said this could potentially become “a big issue” and that some buyers were not moving Nigerian barrels before it is resolved.

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