Securing Fair Value from Nigeria’s DSDP Contracts

The Nigerian National Petroleum Corporation (NNPC) is about to allocate several hundred thousand barrels per day of the country’s oil to new “direct sale of crude oil and direct purchase of products” (DSDP) contracts with private companies. The DSDP deals are a kind of swap arrangement, under which the contract holders deliver fuel—mainly gasoline and kerosene—from abroad in exchange for the oil they receive from NNPC. NNPC entered into its first DSDP contracts in 2016, to replace other types of swaps signed during the tenure of President Goodluck Jonathan.

NNPC’s swaps are complex, relatively non-transparent transactions with major public revenue implications. They were also prone to mismanagement during the Jonathan years, as NRGI’s 2015 report Inside NNPC Oil Sales showed. Since President Muhammadu Buhari took office, NNPC has made improvements to the terms of its DSDP contracts; this briefing explains the most important ones.

In this report Aaron Sayne finds three main areas in which the corporation could further strengthen the terms and management of its DSDP contracts in 2017:

1. Pricing. Fair pricing is critical to getting decent value from a barter arrangement like the DSDP, because the amount of gasoline or kerosene the contract holder has to deliver is “based on the value of the crude oil” it receives. To help ensure fair pricing, NNPC could:
   • Adopt Argus’ “Eurobob oxy” benchmark for pricing gasoline deliveries, because it seems less vulnerable to manipulation than the Platts benchmark NNPC uses now, and is more widely used in Europe, the source of most of Nigeria’s gasoline imports.
   • Consider setting gasoline price premiums once a quarter to better reflect seasonal shifts in relevant gasoline markets.
   • Publish a summary of key terms for the 2017 DSDP contracts.
   • Commit to publishing future commodity sales contracts, including all DSDP contracts.
2. Choosing parties. NNPC has not publicly explained how it will choose winners from among the 128 firms that submitted bids for DSDP contracts in 2017. To improve its chances of signing deals with capable, reputable suppliers who will manage them with care and integrity, the corporation could:
   • Publish the full legal names of winning bidders for the 2017 DSDP contracts.
   • Publicly explain how and why they chose the particular DSDP contract holders for 2017.
   • Publicly explain how requiring indigenous participation in the contracts will increase Nigerian capacity in oil and fuel sales, and the modalities for ensuring this happens.
   • Develop stronger anticorruption due diligence systems for vetting bidders as part of the selection process.
   • Commit to collecting and disclosing beneficial ownership data in future DSDP and other contract awards.
3. Allocating oil to contract holders. NNPC’s DSDP contracts do not promise holders particular grades of crude oil, give them rights to demand certain grades, or guarantee that they will get their full promised allocations. With past contracts, this open-ended system created a monthly bottleneck in which traders jockeyed to receive particular grades and volumes from key officials—a scenario that comes with high corruption risks. To minimize these, NNPC could:
   • Publicly explain the process for allocating oil among new contract holders.
   • Publish per-cargo oil sales data on a regular basis in 2017, to show which contract holders are receiving oil.