The Ultimate Guide To Starting A Crude Oil Brokerage Business (Crude Oil Selling) In Nigeria And Africa
The global demand for crude oil has only continued to climb over the years. From the 1800s till now, this commodity has been the major source of income for many nations, oil & gas organizations, and even crude oil brokers.
In Nigeria, it is the holy grail of the country’s economy. A shift in its global price sends the nation nose-diving into a recession. But despite this, the country has a crude oil production capacity of about 2.5 million barrels a day, leaving Nigeria as Africa’s largest producer of crude oil and the sixth largest producer in the world.
The implication of these figures shows that Nigeria’s excessive crude oil deposit and extraction activities have created a major business opportunity for people who intend to venture into the crude oil brokerage business in the country.
By far, crude oil brokerage is one of the most profitable oil and gas segments for entrepreneurs who have no money to venture into the trade. Since it involves arranging a transaction for a commission of at least $1 per barrel, it makes it an excessively lucrative venture for crude oil brokers who land major crude oil supply contracts.
According to the oecd.org, “Crude oil production is defined as the quantities of oil extracted from the ground after the removal of inert matter or impurities.”
This mineral oil is usually between yellow to black in color, contains a mixture of hydrocarbons, and has a variable density and viscosity.
Crude oil brokerage is the arrangement of a transaction between a crude oil buyer and a crude oil seller for a commission when the deal is executed. A crude oil broker who acts a seller or buyer becomes a principal party to the crude oil transaction.
Here, the broker initiates the deal between a buyer, which is mostly a refinery, and the seller, which in this case, is the Nigerian National Petroleum Corporation (NNPC), or the oil regulatory body of the country you reside in.
- You’re only brokering a transaction between a crude oil buyer (refinery) and a crude oil seller (NNPC)
- The buyer would be asked to show proof of finance before shipment is made
- The crude oil broker is paid at least $1 per barrel sold
- You can venture into crude oil brokerage by partnering with a person who has an allocation from the government
- As a broker, you can venture into this business with $0
- Nigeria produces one of the most demanded crude oil in the world: bonny light crude oil
- Some other crude oil products in Nigeria include Qua Ibo, Escravos blend, Brass River, Forcados, and Pennington Anfan
- Crude oil is measured in barrels
Business Opportunities In Crude Oil Brokerage
Before venturing into the crude oil brokerage business in Nigeria or Africa, there are some terminologies you must know, which also defines the various opportunities within the petroleum sector with respect to crude oil trading. These includes:
1). Free On Board (F.O.B):
In this situation, the seller will load the vessel with the petroleum products and cover the cost of exportation and transportation to the buyer. This is the model the Nigeria National Petroleum Corporation (NNPC) uses to handle crude oil sales from allotees.
2). Tanker Take Over (T.T.O):
In this situation, the buyer takes over the hiring of the vessel and all the products onboard.
3). Tanker to Tanker Transshipment (T.T.T):
In this situation, the buyer will hire their own vessel, then use it to buy the products from the seller.
Setting Up Your Crude Oil Brokerage Business
Step 1: Register A Company
Before you venture into the crude oil brokerage business, you should first register a company. By doing this, you form a legal structure that separates your personal liabilities from your business’s.
Step 2: Identify A Firm With Crude Oil Allocation
After registration, partner up as a broker with a company who already has a crude oil allocation from the NNPC. Having a crude oil allocation means you have a fixed allocation issued to you for a fixed amount of time. This could mean having 20 million barrels of crude oil allocated to a business for a period of one year.
The largest problem the industry faces is most allottees don’t have the funds to even fulfill their allocations, and as a result, are always welcoming crude oil brokers who are ready to trade through their allocations for a commission.
Step 3: Find A Buyer
After forming a partnership with an allottee, the next step is to find a buyer. Organizations who buy crude oil products are refineries, and as a result, are constantly on the lookout for companies that can meet up to their supply needs.
You can reach out to them via their company phone numbers, emails, or even via recommendations. Once you strike up an agreement with them for a supply, it is important you ensure they issue you an Irrevocable Confirmed Purchase Order (ICPO) before you proceed to handle the supplies. This ensures they can’t just change their minds and go with someone else unless you violate the terms of the supply contract.
Step 4: Provide Proof Of Finance To The NNPC
With your ICPO in hand, you can approach your allotted partner, who would then request a supply from the NNPC.
Here, the NNPC will require that you show a Proof Of Finance (POF). This is done because the NNPC’s vessel will not just travel across the world to a buyer, without the assurance that if the buyer refuses to pay, they’d still get paid one way or another.
Depending on the amount required for the Proof of Finance (POF), the refinery could either provide the POF or may request that you provide it, while they assist you in raising a bank guarantee for the sum, which would enable a bank to provide you with the loan, depending on how much it is. Also, the crude oil buyer may request you provide a performance bond (usually 2%) before they can buy the crude oil products supplied, because sometimes the transaction cannot be completed on time as required by the allocation’s commitment. This minimizes risks on the end of the refinery because once a contract is signed, money can be lost as a result of delays.
Once the Proof of Finance showing the complete sum is available, the NNPC would then make provision for a full allocation for the supply.
Step 5: NNPC Ships The Crude Oil To The Buyer
Now the NNPC would ship the crude oil product using their vessels to the refinery wherever they are in the world.
Step 6: NNPC Pays You A Minimum Of $1 Commission Per Barrel Sold
After shipment is complete and the NNPC has received payment, they’d then pay your partner company with the allocation, at least $1 per barrel, which the company, based on your agreement with them, would then credit your company’s bank account.
The interesting part of the crude oil brokerage business is most supplies are always in millions of barrels. So if your transaction covered 12 million barrels of crude oil, for instance, the NNPC would pay at least $12 million Dollars in commissions, since payment is priced at a minimum of $1 per barrel. Based on your agreement with the owner of the allocation, you could pay them $1 million dollars and walk away with $11 million dollars.
If you’re lucky enough, you could get a much larger contract that covers a monthly supply to the refinery for a period of time, possibly running into years.
The high returns from this venture makes it one of the most profitable oil and gas business opportunities in the world, because as a crude oil broker, you only require $0 to run your operations.
Challenges Of The Crude Oil Brokerage Business
1). Difficulty in securing allotment forces you to split revenues with someone who has.
2). Your time could be wasted as a result of long-term conversations with refineries who have no real money to pay.
3). Getting finance from a bank to serve as a Proof of Finance (POF) for the NNPC can be difficult.
4). The large pool of fraudsters posing as crude oil brokers makes it difficult for crude oil buyers to trust you.
The crude oil brokerage business is an oil and gas business where success is heavily based on having a wide network, carrying out direct marketing, and being trustworthy through the entire process. By building a strong reputation and always delivering on your promises to your clients, you’d succeed a whole lot easier.
What are your thoughts on this complete guide on how to start a crude oil brokerage business in Nigeria? Let me know by leaving a comment below.
The Reality Of The Nigerian Crude Oil Trading Industry
Buying crude oil from Nigeria can be very tricky and dangerous on the part of the refinery. The volatility of the industry and its extreme profit potential has created room for fraudsters to go on a scamming spree. This is why it is highly unadvisable for refineries to seal deals via phone calls or the internet.
The risk involved has kept a lot of refineries from making transactions pending when they can find real people with allocations or real crude oil brokers in Nigeria. After all, there are a lot of crude oil brokers in Nigeria who forcefully emphasize the buyer must make an upfront commitment, leading to wasted funds, because the brokers cannot meet up to their commitments.
Another thing to note is the purchase of OFF-OPEC oil is never achieved through official channels. Nigeria, being a part of OPEC, must always conform with the rules and regulations of the international body, and as such, has a standard limit they must always produce and sell.
But despite these restrictions, it’s largely rumored that the country produces well over 4 million barrels of crude oil a day. Leaving questions as to where the excessively produced barrels of crude oil actually goes to.
This place is called the Private Offering Market. It is a low-key market where sellers (real sellers now) are selling crude oil products to refineries and resellers located all over the world. All these sales are closely supervised, as they’re largely sold from the excess crude oil production in the country.
This excess unallocated oil is where the bulk OFF-OPEC crude oil sales are made from.
In essence, you can’t make any crude oil deal happen without involving the NNPC. The NNPC is the official organization allowed to sell crude oil in the country, but the crude oil brokerage happens on a referral note, where you earn at least a $1 referral bonus per barrel sold.
The NNPC also publishes procedures for refineries to purchase from them directly, but the politics that’s heavily involved leaves most refineries better off with using crude oil brokers in the country who have already figured it all out. In the end, the successful execution of a purchase works with a broker who has connections with people in government, and a person with an allocation or has contacts with another crude oil broker that has successfully delivered on an issued ICPO.
Also, you have to be careful with the shipments, as there are many ways to get a far shorter supply of crude oil than requested. They use various dubious methods to manipulate the volume of crude oil loaded onto the vessels, and as such, when it’s supplied, you realize you didn’t completely get what you paid for.
Lastly, time can be greatly wasted on the end of both the buyer and the seller. Sometimes a conversation will go on for so long, only for the buyer to eventually not have the money to make payments. The same also applies to the seller; they could also default on their commitments.
This means that for every truly genuine transaction that occurs, every party involved ensures they’re both protected, so they can have a fruitful business relationship over the period of the contract length.
So if you’re a refinery and are looking for means to push through a genuine crude oil supply contract, you can contact Startup Tips Daily Media to help you locate genuine crude oil sellers in Nigeria, especially for Bonny Light Crude Oil.
If you have a crude oil supply mandate and are having problems locating real crude oil sellers in Nigeria; whether in the Niger Delta region, Lagos, or Abuja, we’d be glad to help you find crude oil sellers so you can complete your transaction.
No upfront cash transactions are required in the process, and as such, every party’s interests are secured through a contract, and successful transactions are executed through established and legitimate banking channels.
You can reach out to us through the contact form below.