paddy_lo:

Who is deleting my posts, ?

@ paddy lo,

It is not a central banks duty to speculate on the price of its major export going up. It is the banks duty to protect the baseline should the price fall.

Hedging (with Options at least) does not compel you to sell your oil (at whatever strike-price agreed with the counterparty). If the price goes up to a level where it is no longer worth it to sell to the counterparty, you simply pay off the premium, and aluta continue to sell to the highest bidder.

The excess crude oil account approach is just an internal buffer and its effectiveness requires that your average oil price be above your budgeted value. If it ever falls below, you will need to borrow money or default from your budgeted expenditure, and likely end up with a budget deficit. It is even less effective if the excess of 'good' months are spent as has been agreed by the three tiers of government in Nigeria. Also the excess crude account provides no buffer against variation in oil production or opec quota changes.
Hedging is complimentary to the ECO account, and not a replacement. You want predictability and bounds on your income.

naijaking1:

@biina
You're faking ignorance of Sanusi's strong political connections with the presidency of Yar'dua. Despite being a member of the Kano/Katsina/Kaduna-K3 mafia, everybody knew that Sanusi basically worked his personal agenda into the the financial policies of this nation without interuption from either the mininster of finance, national planning, or the the president, because they were all K3 buddy buddies. Sanusi is a better politican than he is a banker.

paddy_lo:

The Central banks duty is not to protect any baseline, but to maintain price stability

paddy_lo:

why spend money hedging when u can consistently budget for spending below the spot price?

paddy_lo:

Hedging is a new word SANUSI just learnt, give me a break,

@ Paddylo,
The point of hedging is to ensure that you do achieve price stability with crude oil. Excess crude fund is exactly in keeping with Sanusis proposals. I dont see the conflict there. The question is if the $67 set is too high, and could possibly leave a black hole in the budget knowing the instability of crude oil markets.

So what is the current balance in the excess crude oil account? just $3.2billion and will likely be empty soon.

The excess crude oil account saves excess revenue (not price differential) and is managed on a monthly basis. The 3 tiers of government (and not the FG alone) have agreed to spend the excess

The decision on hedging should be based on the potential losses and the cost of the hedging.
But seems you have already concluded on how, and the associated costs of the hedging, and thus it is wrong. If hedging is as bad as you paint it, I wonder why so many people do it

paddy_lo:

True however oil is at $85 but the budget is priced at $67, so excess crude should begin to fill up for the rest of the yr
as long as there is no more sharing

True but hedging is usually based on price. . .Also with the amnesty in place,Nigeria output has room to rise,
dont forget our quota does not include condensate which alone is 600,000 barrels on top of our quota of 2million barrels
right now we actually produce a little over 2million bpd, plus our condensate production
As for the Govt,well i believe a strong federal Govt can prevail on the states to reduce Govt spending
afterall its the Fed Govt that usually produces the budget,and can equally refuse to sign any supplementary budget based on excess crude funds
click on my profile and read my post that didnt register on here(due to the spambot),and u will know why even though lots of companies do it
its not really easy to pull off and usually does blow up in such companies faces, esp commodity hedges

as for my conclusion, i only really became alarmed based on this quote below from sanusi,
"Mexico has done it, and you can hedge half of your production at $37 per barrel so that whatever happens to the price of oil you will not be hit hard".

I just believe with oil at $85, US economy expanding,Asian and BRIC countries growing again, Europe flat and Africa projected to grow this yr as well
that any talk of $37- $40 oil is misplaced.  . . . .if he really wants to hedge, he should hedge in a range of strike prices btw $70 - $100 a barrel. . .(involving a downside put @70 and an upside call @100 on oil Futures)
to put it in lay mans terms if the price falls to Zero, Nigeria would still be paid $70 a barrel for each barrel of oil entered into contract to deliver

and if oil prices rises past $100 to say $140 our gains are capped at $100, and we forfeit whatever upside there is to be had(or unwind the trade,whichever is cheaper),

However i feel all this is unnecessary, our politicians are too much of illiterates to understand it anyway
Try explaining to the NASS why oil is at $140 but u can only make $100 due to some hedging contracts u entered into?

The much simpler way like i said earlier is to stick with Excess crude and put political pressure on the politicians to cut spending,
afterall they were the ones that raised the benchmark budget from $57 TO $67 For this yr
It will make it easier for everyone to understand. . .we save whatever is above the budget,times whatever we produce for the month

biina:

I dont have the time for someone whose argument are based solely on conjectures and flase claims. Feel free to believe anything that lets you sleep at night

naijaking1:

What is the conjecture here? I'm sure you were not living on planet earth when a senator challanged and querried the appointment of a CBN governor from Kano when the ministers of finance, national planning, and economic adviser in addition to the president are all from from Katsina/Kano/Kaduna. The senator wondered whatever happened to federal character.
Lose of confidence in our financial system did not just start with this appointment, but it contiuned with the guys behaviors as a CBN governor. Almost nobody trusts the fin. minister---alh. whatever to supervise the rogue activities Sanusi.
Anyway, thanks for not asking me for evidence to show that Sanusi is really from Kano

SANUSI’S FIRST BANK: THE MAN’S HYPOCRISY AND DOUBLE STANDARDS

Apr 6th, 2010 | By Victor Shodipo | Category: Issues


The statement below is an excerpt from an Equity Research Report of StanbicIBTC Plc (StanbicIBTC is a leading investment firm and deeply involved in CBN’s reforms as Adviser) published in ThisDay of Sunday, March 21, 2010, page 31.

“Given First Bank of Nigeria’s exposure to the oil and gas company SeaWolf, the bank faces risks of oil price volatility and instability in the oil and gas sector. The bank’s credit exposure to the company is currently about 29% of its shareholders’ funds. The CBN has instructed the bank to reduce its exposure to 20% by 31 March 2010. The bank intends to sell down its exposure to 15% but we do not believe this is likely because of the current low risk appetite in the (banking) industry”.

In July 2007, First Bank provided SeaWolf a US$260m bridge facility for the following:
• To acquire 100% of the equity of Mosvold Jack up Ltd (a publicly traded offshore drilling company quoted on the Norway Oslo Exchange)

• To make scheduled payments for two rigs under construction (MSV 104 and MSV, renamed Oristetimeyin and Onome)

• Make down payments for the purchase of West Titania (now Delta Queen) from Seadrill and;

• Meet operational and administrative expenses.

The global economic crisis, which resulted in a huge dip in oil prices, had a negative effect on the quality of the loan and the bank had to convert some of it to equity and also extend the duration due to low cash flows from the project.
Source: Thisday, Sunday March 21, 2010.

This loan to a single company is currently 29% of FBN shareholders’ funds according to the Stanbic IBTC Plc equity report. As at September 2009, First Bank’s Shareholders funds stood at N309 billion. 29% of this comes to N89 billion. This means First Bank’s current exposure to just a single loan is N89 billion well above the 20% limit set by the CBN!

It is important to note that this loan is not performing as expected hence the bank’s initiative to convert part of the loan to equity and sell a portion.
The Daily Independent Newspapers, it will be recalled on January 20, 2010, had done an extensive report on the shady dealings that went into this facility which was given when Mallam Sanusi was the Chief Risk Officer of First Bank and later supervised as its MD/CEO.

Despite the fact that this loan is of doubtful recovery, the CBN under Mallam Sanusi turned a blind eye to this facility. First Bank’s total provision was N29 billion when it should not have been less than N118 billion if the provision for SeaWolf alone is added. This loan also raises more fundamental issues.

• What sort of ‘Risk Expert’ will approve the granting of an N89 billion loan to a single company that as at the time of collecting the loan was less than a year old?

• The Company was incorporated the same year (2007) it applied and got $260 million facility from First Bank of Nigeria Plc.

• Is it not hypocrisy that the same Mallam Sanusi that recommended the approval of this loan now turns round and refers to other bank MDs’ as reckless?

• What could be more reckless than risking 29% of your shareholders’ funds on a single obligor that has no track record in its industry of operation?

• Is it not the same global economic crises that torpedoed this business that also affected the Nigerian stock market for which reason Mallam Sanusi invaded the targeted banks?

The above report clearly further reveals the hypocrisy of the Mallam Sanusi’s largely personal attacks on the removed bank Managing Directors. This is a loan that has gone totally bad or at best has entered the stage of doubtful recovery.

While CBN forced its captured banks to make full and immediate provision for all facilities of doubtful recovery on its books, Mallam Sanusi has secretly given First Bank up to 31 March 2010, to “reduce its exposure to 20% of shareholders funds.”

Clearly, what is good for Sanusi at First Bank is not good for other banks.

MR. AG PRESIDENT, NIGERIANS COUNT ON YOU TO RESTORE ECONOMIC SANITY AND PROGRESS.
SIGNED

VICTOR SHODIPO
RENAISSANCE PROFESSIONALS
victorshodipo@renaissanceprofessionals.com