'Comfort letter’: NNPC, vessel owners head for showdown
The request for a ‘comfort letter’ by the Nigerian National Petroleum Corporation (NNPC) as a condition for lifting the ban it placed on 113 oil vessels seems to be creating a potentially bigger problem for the export of Nigeria’s crude, writes Daniel Adugbo.
The Nigerian National Petroleum Corporation (NNPC), in July, banned 113 oil tankers from lifting Nigerian crude, citing a directive from President Muhammadu Buhari, as part of efforts to sanitize the country's oil industry which has for many years been plagued by crude theft and massive fraud.
But after the global association of oil vessel owners, INTERTANKO, (International Association of Independent Tanker Owners) whose members own majority of the world’s tanker fleet, protested, the NNPC early September, lifted the ban but with a caveat that vessel owners "guarantee to indemnify" the government against any illicit use of their vessel.
The comfort letter seeks to guarantee the Nigerian government and NNPC that shippers’ vessels will not be utilized for any illegal activity whatsoever.
NNPC was said to be uncomfortable in the past with tanker operators over discrepancies in the volume of crude lifted and discharged at receiver destination.
But NNPC’s demand would seem to be creating a potentially greater problem for the export of Nigeria’s crude oil.
Oil traders and shipping brokers argue that a requirement under which vessel owners must sign a guarantee that their ships will not be used for theft has made it more difficult and expensive to load Nigerian crude, putting some buyers off. Some buyers are now said to be treading carefully with Nigeria.
In fact, an oil trader for one Mediterranean refiner reportedly said they "will not touch a single drop of Nigerian crude until this matter on the letter of comfort is solved."
Shipping sources were reported to have said that neither Asian nor Greek shipping companies will call at Nigerian ports for the time being.
The disagreement has contributed to a marked rise in freight rates; the cost of booking tankers from West Africa to the United States has increased and the increase could, it is feared, deter oil buyers.
Hindustan Petroleum Corp (HPCL) of India, which bought roughly two million barrels of Nigerian crude, said the company is still scouting for a vessel to lift cargo for early October loading because of the "letter of comfort" request by NNPC from shippers.
The head of refineries at HPCL, BK Namdeo, said in a Reuters interview that the company is finding it difficult to book a vessel to lift Nigerian crude, hence, it would be cautious in future in deciding about crude of Nigerian origin.
"Nobody is coming forward to offer the vessel and whoever is willing to go to Nigeria is asking exorbitant rates," Namdeo said.
The tanker operators are boycotting sailing to Nigeria partly because INTERTANKO, which is one of the largest groupings in the shipping industry with 207 full members, 285 associate members and a registered fleet of over 3,000 tankers, have cautioned members against sailing to Nigeria.
INTERTANKO, in a September 10 briefing obtained from its website, said it had advised members “against taking any vessel on Nigeria’s list of banned tankers either into Nigeria or into its EEZ, despite a recent letter from the NNPC which some are interpreting as a lifting of the ban.”
It cautioned members to resist sailing to Nigeria despite the lifting of the ban because, according to the body, “the penalties for any alleged contraventions of Nigerian law by these ships are draconian, including forfeiture of the ship and life imprisonment of the crew.”
The statement, signed by its General Counsel, Michele White said, "This latest NNPC letter does represent something of a step change and may even suggest that all ships are now welcome in Nigeria provided a ‘letter of comfort’ is received. However, the language of the letter is vague and we do not believe it can be relied on by owners to clear the vessels on the banned list for trade to Nigeria.”
INTERTANKO lamented that its letters to the various Nigerian authorities so far remain unanswered, adding it would continue to press the Nigerian authorities for information on the alleged contraventions committed by members’ banned ships.
Why possibly could the ship owners be averse to the "comfort letter" if its members engage in clean oil transport business? Could their objection to the letter be seen as an indirect admittance of guilt to the alleged contraventions?
INTERTANKO's Senior Manager Communications and External Relations, Bill Box, did not immediately reply mails the Daily Trust sent to him on their grievance with the letter and how far it has gone to clarify the point with NNPC.
Oil analysts cautioned that rather than stiffen business for the crude oil transporters, it is the responsibility of the government to capture those stealing the oil without disturbing legitimate business operations.
The President, Nigerian Association of Energy Economics (NAEE), Professor Wumi Iledare, urged the government to rather impound ships if they carry stolen crude. “If your regulations make it difficult to do business in your country, people would look elsewhere.
That is the name of the game. It is wrong to jump into the conclusion that they have something to hide,” he responded through mail.
An oil analyst and Professor of Law, Thurgood Marshall School of Law, United States of America, Emeka Duruigbo, said INTERTANKO’s challenge to the policy changes introduced by the government in Nigeria is not out of character.
Duruigbo said through mail, “Here in the United States, INTERTANKO has gone to court in the past to challenge regulations that encroached on its members’ businesses, using constitutional arguments. From a strategic perspective, it could be that INTERTANKO believes that in the absence of a national carrier, Nigeria lacks an effective alternative and, therefore, has no significant leverage in this dispute. Nigeria cannot readily call INTERTANKO’s bluff when it virtually has no other means of lifting its oil, outside of vessels owned by INTERTANKO’s members. "
He added, "INTERTANKO may have been more receptive of the changes if the government consulted the organization beforehand and introduced the changes in a more collaborative manner.”
A serious cause for concern
“Certainly, in the short run, this is a great concern. Transportation of crude to its final destination is a business sector in the petroleum value chain that is riddled with political and market power. The government in policy development must be conscious of the intertwined nature of policy development. You must have hearings with all stakeholders before putting forth any regulations at all times. Ad hoc approach to governing the institution continues to be an Achilles heel for the oil and gas industry in Nigeria over the years. Hopefully, the president recognizes this for what it is worth,” Professor Iledare, who is also the Director, Emerald Energy Institute, University of Port Harcourt said.
Prof Duruigbo noted that INTERTANKO’s objection stems from the usual industry aversion to regulation. He stated, "In addition to costs, the business sector also ideologically resists regulations on the ground of legitimacy. Thus, here INTERTANKO may consider the requirement of a letter of comfort as an illegitimate effort by the government to constrain the activities of its members when such constraints are unwarranted."
Industry watchers say Nigeria cannot afford to allow the impasse drag for long when the country is battling with revenue shortages due to the fall in oil price, and when new reforms instituted by the present NNPC management is attracting potential oil investment into the country.
ACHILLEAS- one of the vessels whose ban was lifted by NNPC.credit:marinetraffic.com