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Why is Nigeria not hedging its crude oil like Mexico?

Nigeria does not have any crude oil hedging programme in place. Instead, it sells its crude oil on spot prices. This has caused Nigeria to become exposed to oil market price swings.

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Following the initial oil output cut that was announced by OPEC and its allies, Mexico rejected the terms of the deal. This was much to the surprise of many stakeholders around the world. The North American country’s decision to reject the deal literally held other top oil-producing countries (including G-20 countries) to ransom.

Mexico’s secret: Some analysts have since been wondering about the secret behind Mexico’s negotiating power. Well, Nairametrics understands that Mexico has a massive Wall Street hedge which protects it from the impact of low prices.

Definition of hedging: Hedging is just a way of protecting one’s self against financial losses or adverse circumstances. It is also an investment intended to reduce the risk of adverse price movements in an asset. Crude oil producers can, therefore, hedge against crashes in oil prices by taking a position in the crude oil futures market.

(READ MORE: Crude oil prices fall to $30 as COVID-19 erases gains from oil production cuts)

Benefit of hedging: The major benefit of hedging in the oil industry is the ability of producers to reduce the impact of anticipated (and unforeseen) price slumps on its revenue.

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Mexico has a sovereign oil hedge that insures it against low prices. This is a critical factor that might have made the country less inclined to accept the deal from OPEC+. This gave the Latin American country the right to sell its oil at a predetermined price. This is generally referred to as an equivalent of an insurance policy.

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More details about Mexico’s hedge: Although the hedge comes at a $1 billion annual cost to buy the option, it has shielded Mexico from market shock over the last 20 years, helping it to make $5.1 billion when prices crashed in 2009 during the global financial crisis, $6.4 billion in 2015, and another $2.7 billion in 2016 after Saudi Arabia’s price war.

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A different story from Nigeria: However, Africa’s largest crude oil producer, Nigeria, does not have any crude oil hedging programme in place. Instead, it sells its crude oil on spot prices. These have made Nigeria exposed to oil market price swings, which in turn cause the country’s oil earnings to fluctuate.

In an emailed response to Nairametrics, Temitope Busari (CFA), the Head of Treasury in a leading financial firm in Lagos, commented on the situation thus:

“As exciting and impressive as the Mexican crude oil hedging is, it is an insurance policy that costs a small fortune. With circa 200,000 bpd of crude oil production ahead of Nigeria’s, the Latin American country has been known to spend upwards of $1billion per annum on the purchase of put options that allows her sell oil at a guaranteed future price that is agreed upfront.  

“On why Nigeria does not hedge crude oil revenues in the international markets, I would say that this is because hedging costs are prohibitive. It may be worthy to critically appraise this structure going forward.  

“The Nigerian economy takes a direct hit from oil price fluctuations and the hedge (the buffer that the payout provides when the option is in the money) could be one way to limit the impact from the uncertainty of global market events.  

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“With this in place, future cash flows would be more predictable and the entire budgeting process more efficient, which would be something of a much-needed silver bullet.” 

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(READ MORE: OPEC+ Deal: Crude oil prices rise amid volatile trading session)

In addition, Nigeria’s oil derivative markets are relatively underdeveloped. This makes the cost of hedging oil in the country to be higher than the cost of hedging in Mexico. Mexico has a developed, efficient derivative industry.

Nigeria Oil revenue, CBN, Crude Oil, Nigeria's crude oil sale in Q3 2018, Why is Nigeria not hedging its crude oil like Mexico?

Mexico also has good relationships with some of the biggest banks in the world like JP Morgan Chase and Goldman Sachs. These banks help to structure and sell these oil derivative contracts to investors, speculators, and knowledgeable policy stakeholders, thereby taking advantage of executing hedging into its crude oil production programme. According to Silas Ozoya, the President/CEO of Suba Capital:

“Nigeria does not have a crude oil hedging program because those in the front line of such policies and decisions believe the crude oil and the market will always be there. 

“Hedging in all ramifications means to protect your investment against a future occurrence in the market, whether bullish or bearish. 

“What we need are crude market analysts with anticipation of the market to be able to convince these policies and decision makers to make such policies compulsory to hedge out crude revenue against market movements. 

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“The excess crude reserves we currently have and operate are like savings accounts; we go there to dip our hands every time we have a need. That’s not a good financial plan for a huge country like Nigeria. 

However, sometimes hedging crude oil can be unnecessary and counterproductive. For instance, when crude oil prices dropped sharply in 2014 and 2015, American airlines that had hedged against their future fuel costs did not help as much as those that were unhedged.” 

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(READ MORE: Nigeria faces breaking point as India’s global crude oil demand drops by 70%)

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Bode Abolade, an Investment Professional at Africa50 Infrastructure Investments, also sent an email to Nairametrics, pointing out the difficulties Nigeria would face if it partook in crude oil hedging. He said:

“The practical reason is that there is no hedging policy or strategy in place at the NNPC (Nigerian National Petroleum Corporation). And if you think of it, it is counterintuitive if you are part of a trade organization like OPEC (Organization of the Petroleum Exporting Countries) and you are buying hedges; Nigeria being part of OPEC (supplier of c.50% of global supply).  

“If you approach the market to buy oil hedge, it sends panic to the market and hedge premiums go up. I do not think any OPEC member will want that to happen.” 

Olumide Adesina is a French-born Nigerian. He is a Certified Investment Trader, with more than 15 years of working expertise in Investment Trading. Member of the Chartered Financial Analyst Society. Behavioral Finance, Duke University. You can follow Olumide on twitter @tokunboadesina or email [email protected]

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Business

CBN launches framework for advancing women’s financial inclusion in Nigeria

The CBN in collaboration with EFInA has launched a framework to advance women’s financial inclusion.

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CBN, Aishah Ahmad,

The Central Bank of Nigeria on September 29, 2020, virtually launched the framework of advancing women’s financial inclusion. This was disclosed in an online event tagged “Access to Finance Framework for Women” and anchored by Dr Paul Olukpe.

The framework was conceptualized by the Financial Inclusion Special Intervention Working group and developed by the CBN in collaboration with EFInA and Women’s World Banking with input from over 50 stakeholder institutions.

The overarching vision of the framework is for Nigeria to be globally recognized, with an inclusive financial sector that has closed the gender gap by 2024. The framework further itemizes 8 strategic imperatives for driving improved access to finance for women in Nigeria.

In the online event monitored by Nairametrics, the Deputy Governor, Financial System Stability of the Central Bank of Nigeria, Mrs. Aisha Ahmad justified the new initiative by citing EFInA’s last report on financial inclusion in 2018 as a yardstick.

(READ MORE: Banks’ loans to private sector increase by N3.50 trillion in one year – CBN)

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Recall that EFInA 2018 Financial Inclusion report indicated gender imbalance and a clear need to attend to the issue of growing female financial exclusion. For example, the report stated that 40.9% of females were financially excluded as against 32.5% of males. Mrs. Ahmad remarked that perhaps, the figures might even be wider if unattended to especially in this period of crisis.

Mrs. Ahmad urged financial institutions to address structural issues limiting women’s access to finance by understanding and developing products that are specifically tailored to address such issues.

Why this matters

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Empirical studies have shown that supporting a stronger role or empowering women is a key enabler in reducing poverty, stimulating economic growth and ensuring sustainable development. Citing ‘’The Power Parity Report by McKinsey’’, the Director of development finance department of CBN, Mr Yusuf Philip Yila, stated that the economic consequences of pursuing gender equality include a potential addition of $28trillion to global annual GDP by 2025.

This framework is a big boost to achieving SDG’s goal of gender equality and Nigeria’s financial inclusion targets simultaneously.

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Business

HealthPlus crisis: Alta Semper directors reported to Police for trespassing

HealthPlus has made a formal complaint to the Police following its ensuing battle with Alta Semper.

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HealthPlus crisis: Alta Semper directors reported to Police for trespassing

Nigerian Pharmacy Chain, HealthPlus Ltd which is in a battle for control with private equity firm Alta Semper Capital took a new twist as Health plus reported Alta Semper directors to the police last week, as observed in a document seen by Nairametrics.

In a letter sent to the Assistant Inspector General of Police on the 25th of September, HealthPlus stated, “We had the presence of unknown persons around our head office locations.”

READ: FG apologizes, says Self-Certification directive is not for everyone

The locations stated were 4 HealthPlus branches in Lekki, Lagos.

HealthPlus stated further, “We are aware that there are unauthorized and illegal plans by certain persons to take over our company premises to steal sensitive company property and assets, and ultimately take over operations of the company”

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The 4 persons mentioned by HealthPlus are; Zachary Fond and Ivan Genadiev (both Alta Semper Directors), Ernest Eguasa, CFO of company and an unidentified middle-aged white man.

Explore the Nairametrics Research Website for Economic and Financial Data 

Niarametrics reported last week that HealthPlus Limited appointed Chidi Okoro as Chief Transformation Officer.

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However, the announcement set off a chain of allegations and counter-accusations, including online media mudslinging with both sides trying to court public sympathy for who is in control of the company.

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Economy & Politics

P&ID dispute: UK Court orders $200 million guarantee to FG

Nigeria’s Foreign Exchange Reserves was boosted after a London Court ordered the release of $200Million placed as security in the case against P&ID.

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A London Commercial Court has ordered the release of a $200 million guarantee as security to be paid to the Nigerian government in the P&ID $10 billion Arbitral Claim.

This was disclosed in a social media statement by the Central Bank of Nigeria on Tuesday.

Nairametrics reported earlier this month that The Federal Government secured a landmark victory in its bid to overturn a $10 billion arbitration judgment award against it in a case against Process and Industrial Developments (P&ID).

READ: Nigeria seeks bank documents of former President, others over $9.6 billion P&ID case

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The Court said that Nigeria has established a strong prima case that the contract was procured by bribes paid to insiders as part of a larger scheme to defraud Nigeria. He said that there is also a strong prima face case that the P&ID’s main witness in the arbitration, Mr Quinn, gave perjured evidence to the tribunal, and that contrary to that evidence, P&ID was not in the position to perform the contract.

In today’s statement, the CBN said, “Nigeria’s Foreign Exchange Reserves was this morning boosted by over $200Million when the London Commercial Court ordered the release of the $200Million guarantee put in place as security in respect of the execution of the much discredited P&ID $10 Billion Arbitral Claim.”

READ; Why the NNPC is being dragged to US courts by Exxon Mobil, Shell

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“The court also awarded a £70,000 cost in favour of Nigeria in addition to an earlier award of £1.5m.”

On January 31, 2017, an arbitration tribunal had ruled that Nigeria should pay P&ID, the sum of $6.6 billion as damages and breach of contract after a 2010 deal for a gas project in the Niger Delta part of Nigeria collapsed. The pre and post judgement accrued interest of 7% has seen the amount standing against Nigeria, rise to almost $10 billion, an amount that will be a serious dent on the country’s external reserve.

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