On oil theft, NOI and GEJ should stop being naive

In 1992, a Glencore oil trader got off the plane in Lagos with a briefcase filled with millions of dollars. His mission: meeting with a Niger Delta strongman who had promised a secure delivery of an endless flow of stolen sweet crude.

Late that evening, the strongman appeared at the hotel, and the drinks flowed around over the business discussion. The terms were great – the strongman will divert oil from an NNPC pipeline to a moored barge, modified to carry oil, and transfer same to Glencore tankers. The NNPC and Shell security had all been bribed, so everything is in place for a smooth deal.

For financials, the oil will be delivered to Glencore at 1/3 of market prices, making for an all round beautiful deal, cash and carry.

The oil trader paid a little over $2m in cash and the oil bunkerer left with a promise to call the next morning. He never did. The money disappeared with the strongman, and the oil trader simply became a private man who lost cash to a Nigerian 419er; at least that is the story that the authorities heard.

Following that ‘unfortunate’ incident, oil traders buying stolen crude from Nigeria have become more careful, and tried to make the transactions less risky. Startibg from 80,000 barrels a day in 1992, billions of dollars worth of stolen crude have left Nigeria in the last decade at ridiculously sub-market prices.

To fix the aberration, Nigeria’s President Goodluck Jonathan (aka GEJ) went on CNN to appeal to the international community to help break the trade in stolen crude oil. He has recently been followed on that route by Nigeria’s Finance Minister, Ngozi Okonjo-Iweala.

I see GEJ’s point. As long as people are willing to buy stolen goods, then people are going to be willing to steal and sell. But what has the Nigerian government done to fix problem of oil theft internally before trying to fix the behemoth that is the international oil black market?

Has our government for example, tried to masquerade as oil theives to sell crude in the black market? That would have allowed them to find out who the buyers are, at least at a very basic level.

A market exists for stolen crude because the product exists at cheap prices. Stolen oil is sold at about 1/3 or 1/4 the market price. Because there’s no regulatory encumbrances, taxes or loading fees, no union obstructions or levies, the product becomes even more profitable.

Once out of ‘port’, the oil traders only need to fix up the papers to regularize the product, and they could either put the product in the long market to be sold and resold hundreds of times before delivery, or just head to Ghana to refine the oil. Yes, a huge amount of Nigeria’s stolen crude heads to Ghana to be refined.

To find stolen crude, outside of the sale point, is rather difficult. But forensics could help. For one, crude is not just crude – over 200 types of oil exist, depending on where the oil was drilled, each with distinct signatures.

In order to refine a particular kind of oil, the refinery must be calibrated to match that type of oil. So a refinery setup to refine Bonny Light, one of Nigeria’s sweet crudes, cannot refine Saudi heavy oils without some heavy industrial surgery – an expensive, time consuming operation which is in no way profitable.

Hence, one could easily identify refineries where Nigerian crude is refined. Theoretically, by comparing delivered cargoes to NNPC documents, one could separate legal cargo from any extras, but the oil industry has never been straight forward, so I doubt that would work.

So we are left with one more option: police action. The price of oil, as with most commodities is set by the availability of supply, stability of the source and risk. If oil theft thrives on the availability of cheap premium crude oil, then in theory, if the risk of obtaining the oil increases, and availability is uncertain, then prices will rise.

How do you cause prices to rise? Security forces. If our navy can’t handle it, we could get help or hire private forces – Israel, US or South Africa would do, shoot down a few illegal bunkering operations, sink a ship (oh wait, that’s environmental disaster) – shoot down the ship’s crew as soon as the oil changes hands. Once it becomes too risky to supply or receive stolen crude, the market will disappear. We have seen this work with Somali pirates.

But we can now come to reality. The illegal oil trade is not controlled by rogue militants out to line their pockets and theirs alone. They pay ‘taxes’ to corrupt security agents in the army, navy and police. They bribe NNPC staff and sometimes are bankrolled by politicians. Whole ships have been known to disappear from the custody of our navy, and captured oil shippers have become subject of international diplomatic arm twisting, in which Nigerian officials always give in.

So there we are. The illegal oil market exists because supply is there. Supply exists because our government lets it exist. Our government lets it because officials are benefitting from the trade, and even when they don’t, they are too inept to understand the trade, let alone stop it.

So I have no time for Ngozi Okonjo-Iweala or Goodluck Jonathan’s tears on CNN. You can’t go asking the international community to stop the trade of illegal crude oil, when you have done nothing locally to break that market. If the international community could not stop the trade of conflict diamonds through the Kimberly Process, who says it can fix oil theft? Again, those countries have problems of their own, and shouldn’t be bothered by Nigeria’s latest troubles. Most importantly, the countries the Nigerian government is appealing to have energy needs to meet, so if illegal oil helps them solve energy problems, what is the incentive to stop the trade?

Not too long ago, Nigeria’s Federal Government signed a deal with a former militant commander to take over the security of oil installations in order to reduce oil theft. So far that has not worked out. The theft has increased. One simply cannot keep complaining about the missing cheese, while the rat stands guard over the locker.

So dear NOI and GEJ, the leak is your problem to solve. Stop whining and do your bloody jobs.

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