Litigation threatens local content, cabotage laws

by David Ogah

WHEN the 2010 Nigerian Oil and Gas Industry Content Development Act, which clocked four years a few days ago, and the 2003 Nigerian Coastal and Inland Shipping (Cabotage) Act were passed by the National Assembly and assented to by President Goodluck Jonathan and former president Olusegun Obasanjo respectively, there was tremendous excitement within the maritime, oil and gas sectors.

     Both Acts were aimed at increasing the participation of Nigerians and Nigerian companies in the oil, gas and maritime business, through systemic capacity development and by constant utilization of Nigerian human and material resources.

      The Acts were the cumulative result of various attempts, spanning decades, by the government and stakeholders, to evolve composite value in all activities in the petroleum and maritime sectors and, by extension, make Nigerians derive maximum benefits from oil and gas exploration and shipping activities within the country.

       The local content law made it mandatory for all contractors in the sector to present the Nigerian content plan before any contract could be awarded. The Act also made it compulsory for any investment in the oil and gas sector to comply in the areas of employment generation, expatriate quota and provision of facilities. The investments are exploration, exploitation and drilling activities. Others include provision of mobile drilling rigs, production platforms, supply vessels and various barges for pipe-laying and other works. 

       Also included are jack-up rig and drill ships for drilling operations, anchor handling tugs, floating petroleum storage and offloading systems. Nigerians are to participate in the lifting of the nation’s crude oil and gas, and the carriage inward and coastal trading of refined petroleum products. They are also to be engaged in the various segments of marine transportation in the oil and gas sectors.

      With the Act in place, expectations about job creation, transfer of technology and expertise, engineering and fabrication technology development, engagement of indigenous-owned vessels and equipment, and improved income per capital are high.

      The protagonists of the Act were determined to rescue the petroleum industry from strong foreign dominance that had been in place since the oil and gas were discovered in the country.

      The Nigerian Cabotage Act, promulgated 11 years ago, had the same intention as the local content Act: to ensure capacity development, that would enable indigenous players participate actively in the lucrative shipping business within the country’s coastal areas, by giving Nigerians the right to lift items, including petroleum products, from one point to another within the country.

      Fashioned after the Jones Act of the United States of America (USA), the Act however provided for a waiver, giving the Transport Minister the power to direct the award of contracts to foreigners, in areas where Nigerians have no capacity to operate. 

      The laws attempted to direct energy from previous unsuccessful efforts, which included the establishment of various research, development, training, education and support funds, and in the case of the petroleum industry, the enactment of the Petroleum Act, which made it mandatory for the employment and training of Nigerians by operators.  International oil companies were thus compelled to include technological transfer, local content utilization, recruitment and training of Nigerians as components of their contractual agreement.

       But what was initially seen as a source of hope for Nigeria, is now a subject of litigation at the Federal High Court in Lagos.

       LADOL, a Lagos based oil and gas logistic company, has dragged Samsung, a Korean company to court, over the $3.8 billion Egina FPSO contract awarded by Total Oil Company. The contract was initially lauded for being a local content milestone in the country. The Egina Project was considered as a deviation from previous total projects, which achieved less than 50 per cent of their local content targets and consequently resulted in little or no job creation in the country.

      Located at 130 km from the shore in deepwater Oil Mining Lease (OML), the $3.8 billion Egina FPSO is, no doubt, of strategic importance to Nigeria’s future economic growth, considering its projected production capacity of 200,000 barrels per day (b/d), and a storage capacity of 2.3 million barrels. The project is expected to take off in full swing at the end of 2017, in which Nigeria’s deepwater production potentials would have been reinforced.

       In all ramifications, the project is to be first of its kind in Africa. It gave the impression that the country was now ready to address the economic losses it had suffered in its over 50 years of oil exploration activities. Apart from the billions of naira that would be conserved for government, the project also gives the country the added advantages of taking technology and skill transfers to a new level, giving the country the full benefits of deep offshore experience, just as hundreds of thousands of jobs would be created through the ancillary services.

     Samsung allegedly entered into a Memorandum of Agreement (MoA) and subsequently won the contract in collaboration with the Lagos Deep Offshore Logistics (LADOL), as its local content partner. By the terms of the contract, Samsung allegedly agreed to build a $120 million fabrication yard in LADOL’s base, off Takwa Bay in Lagos, for the fabrication and other local needs of the entire project.

       The value of the local content in the contract is believed to be about $214 million. Pursuant to the local content requirement, the Nigerian Content Development and Monitoring Board (NCDMB) took up the challenge and not only spelt out the guidelines under the enabling laws, it also made it clear that the Board had no objection to the award of the main contract scope. 

     This allows Samsung to perform over 80 per cent of the EPSO work scope in Korea, including the FPSO Hull and over 20,000 MT of fabrication), provided that such could not be undertaken in Nigeria for now.

      In a memo dated June 9, 2013, the NCDMB, following the bickering that greeted the contract award, insisted that ‘‘the Nigerian Content scope must be awarded in such a way that Nigerian companies with current capabilities are utilized in the performance of the works. Samsung will be encouraged to build capabilities in Nigeria with their bidding local partners (LADOL), in such a manner that does not place the Nigerian Content commitments for the Egina project at risk.”  

     Instructively, several integration of fabrication, production, storage and off-take vessel (FPSO) projects had been undertaken on Nigeria’s behalf by multinational oil companies in many parts of the world. Unfortunately, none of the major projects was carried out within the country. All these had cost the country huge sums of money in foreign currencies and had led to large scale capital flight.

      Nigerians were only deployed to the locations where the constituent parts were being constructed in places across the globe, just to ensure that the jobs were done according to specifications. They were not sent there for training or to acquire the needed skills.

      In some cases, when some components had to be fabricated in Nigeria, they were shipped at very high costs to the yards in South Korea for integration. The implication is that Nigeria has been creating jobs for foreigners and boosting foreign economies through such projects.

      Between 1999 and 2012, deepwater fields were developed by the joint venture companies, through the PSC arrangement for Yoho, Bonga, Agbami, Akpo and now Egina. Sadly, none of them can boast of tangible and enduring legacies for a country that is saddled with a high youth unemployment rate.

     This time, the government thought it wise to award the integration of fabrication, production storage and off-take vessel (FPSO) of Egina to the joint venture of Samsung and LADOL. The intention was to create employment opportunities for Nigerians and also for them to acquire technical skills. If the contract is properly executed, it would create opportunities in the future to domesticate the construction of such projects and Nigeria could become a hub for such activities in Africa.

        The project would turn around the fortunes of the maritime, oil and gas and industries, with the attendant multiplier effects on other sectors. The facility, when completed, will also create the market for other items such as steel products.

      Unfortunately, the multi-billion dollar project is now a subject of litigation as LADOL, last month, insisted that it has legal right to undertake the local contract aspect of the job.

     The contract awarded to the two contending companies assumed litigation following alleged schemes by Samsung to exclude the indigenous firm from the juicy job.

       Counsel to LADOL, Prof. Fidelis Odiah (Queens Counsel, SAN) had earlier sought 19 reliefs against Samsung and other defendants before Justice Chukwujekwe Aneke of the Federal High Court, Ikoyi, Lagos. He is asking for the declaration that the contract awards by Total to Samsung on or about 15 March, 2013 is subject to the Nigerian Oil and Gas Industry Content Development Act 2010.

      In his submission at the hearing recently, Oditah noted that since the Nigerian Content Act 2010 was enacted for the benefit of all Nigerians, his client, being a Nigerian entity, has the right to sue for local content breaches, wherein the relevant government agency fails to do so.

    LADOL, according to him, is a local content partner to Samsung, based on the contractual relationship his client had with Samsung to construct Egina FPLO Platform for Total in 2014. The contract, he said, also involves the construction of a training school at LADOL’s base to train Nigeria Engineers and a fabrication yard, which would provide between 30,000 and 50,000 jobs. He noted that after the award by Total, Samsung decided to take the project to Korea, thereby denying LADOL the benefits of the project. Efforts to get Samsung’s comments proved abortive as at press time.

       Similarly, an indigenous firm, Polmaz Limited, had dragged the Nigerian National Petroleum Corporation (NNPC) and the Pipeline and Products Marketing Company (PPMC) to the same Federal High Court in Lagos, over their alleged breaches of the Cabotage Act. The two companies were alleged to have awarded oil-lifting contract to foreigners, in contravention of the provision of the Nigerian laws

     The company urged the court to determine whether Nigeria’s shipping laws had not restricted foreign flagged vessels, not owned or built by Nigerians and registered in Nigeria, from engaging in domestic coastal shipping trade within the country’s territorial waters. The aggrieved company also asked to court to declare that the operation of the foreign flagged vessels and their foreign owners engaged by the two oil companies in the domestic coastal operations, were in clear violation of Section 5 of the Nigerian Merchant Shipping Act and several sections of the Coastal and Inland Shipping ( Cabotage) Act of 2003. 

    However the court has since dismissed the suit for lack of evidence, even as it but it echoed the right of ship owners to challenge any violation of the Cabotage Act.

Culled from Guardian News