The recent announcement of the resolution of the long drawn legal battle between Lagos Deep Offshore Logistics Base (LADOL) and Samsung Heavy Industries Ltd brews hope for the future of local oil industries and an indication that Nigeria’s Local Content Act may be achieving some of its goals.
The companies have finally formed the joint venture company called SHI-MCI FZE expected to build a $3 billion Egina Floating Production Storage Offshore (FPSO) integration and fabrication facility at LADOL Free Zone in Lagos for Total Upstream Nigeria Limited, operator of the block, and Nigerian National Petroleum Corporation (NNPC). But this was no relaxed achievement for Ladol, as Samsung seemed defiant of the local content act and was ready to exploit the loopholes within the framework for financial gains. The South Korean company was accused of circumventing the law by attempting to exclude its partner, LADOL from the project.
In the beginning …
Total Upstream Nigeria Limited (TUPNI), which operates the Oil Mining Lease (OML) 130 block, had been given the required approval by the Nigerian National Petroleum Corporation (NNPC), regulators of the country’s oil industry, for the award of the main Engineering Procurement and Construction (EPC) contracts for the development of the multibillion-dollar Egina oil field, and Samsung, riding on the back of its partnership with LADOL, in compliance with the local content act, won the $3.1 billion contract in 2013.
Samsung within the framework of Nigerian Local Content Laws, which require that the minimum content in that contract executed within Nigeria, found a suitable partner in LADOL, the first indigenous privately owned offshore logistics base operated in Taqwa Bay, where the FPSO integration and fabrication is to be done.
“It was a joint venture in which Samsung was a senior joint venture partner and LADOL was the junior partner,” Fidelis Odita, a Senior Advocate of Nigeria (SAN) and counsel to LADOL told Ventures Africa while the suit was ongoing. “They bided for and obtained the general contract, but as soon as they got it, Samsung wanted to appropriate the entity of the benefit following from that contract to itself to the exclusion of LADOL, which to put it mildly, is a show of bad faith.”
Irked by Samsung’s ‘excuses’ following the award of the contract, Odita described the action as disgraceful, stressing, “they used LADOL to obtain what they wanted and as soon as they thought LADOL was no longer necessary for their operations, they tried to kick them out which is entirely improper and indeed disgraceful.”
Samsung was alleged to have suspended work at the LADOL yard in December 2013, barely a month after initial construction work commenced and terminated its joint venture with LADOL, fueling concerns that it plans on undertaking the modules earmarked for in-country fabrication abroad, with the $214 million sum allocated for the construction of facilities at LADOL at the mercy of the South Korean shipbuilding giants and the local content at the risk of being flouted by other foreign contractors.
The Pre Legislative Era
Prior to the enactment of the Nigerian Oil and Gas Content Development Act, promulgated on the 22nd of April, 2010, there was no legislation designed exclusively to drive local participation in the oil and gas industry despite the importance of the industry to the country’s economy. There were however provisions in the past, like the Petroleum Act of 1969, which stipulated, among other things that the holder of an OML must have within 10 years of being granted an oil field have in its employment at least 75 percent Nigerians who occupy or have held managerial, supervisory or professional positions, with the NNPC having short term temporary directives with particular legalities developed specifically for the local content. It may therefore not be wrong to say the local content act was premised partly on sections of the 169 Petroleum Act.
The Nigerian Oil and Gas Content Development Act defines Local Content as “the quantum of composite value added to or created in the Nigerian economy by a systematic development of capacity and capabilities through the deliberate utilizations of Nigerian human, material resources and services in the Nigerian Petroleum Industry.”
In other words, the law harps on basic needs of the country, which its most prized resource, petroleum, is expected to satisfy. These include value creation in the economy; development of local capacity and utilization of indigenous human, material resources and services, particularly in terms of supply of products and services and employment of Nigerians.
Decades of poor enforcement of laws and lax regulations in the oil and gas sector made a monitory board essential once the Local Content Act was introduced; the Nigerian Content Monitoring Board (NCDMB) was therefore established to monitor the achievement of local content in the industry and ensure strict compliance to the law.
Any Recorded Progress?
“I think the board (NCDMB) has done a tremendous job,” said Dr Amy Jadesimi, Managing Director of LADOL, while reviewing the regulatory body’s performance since inception when Ventures Africa spoke to her at her Lagos office during the legal battle. She noted that because of the board, no company will be able to undertake any project in the oil and gas sector without local content being a high pressing agenda in any strategy employed.
“We have seen over the past decade, a huge shift represented by increase in Nigerian participation, and passing of the local content act in 2010 saw an exponential increase in that,” said Amy, who quickly highlights the enormous task still awaiting the board. “We should not be excited. We still have a very very long way to go. Part of the reason the increase was exponential is because it started from such a low base.
“The board has had a tremendous amount of work to do and you know we all see the board when working on various projects, with members flying around the country, working really hard to try and enforce compliance,” Amy explained. “It’s a tough job.”
“That’s a big change from where we were five years ago,” says Amy. However, according to her, there remains a great deal of work left to be done, with the board’s success depending largely on a collaborative effort between the private indigenous sector investors, oil and gas participants and the board.
Professor Odita echoed similar sentiments, saying: “the Board is sometimes very proactive inn trying to protect the interest of local business.” He however describes the Board as being “a little lukewarm” at other times.
There are myriad of challenges it faces which hinders it from effectively carrying out its regulatory functions; these challenges also deny Nigeria and its citizens the benefits accruing from the local content policy.
“The first is…yes, there is insufficient capacity in Nigeria to carry out all content element and we have to acknowledge that. The second is the reluctance of major players in the oil and gas industry to allow the local content laws to be effective,” says Professor Odita. “There is some perception that many of them do not want the local content to be successful.”
The third challenge is the presence of a “weak regulatory and enforcement environment and framework in Nigeria…and so you shout as a regulator for two days and you stop. The companies know that you are not going to shout indefinitely okay,” adds the prof. “if you don’t have the local capacity to in any way do it, if you delay it, it would delay the production of oil and therefore revenues accruable to the federation. So you might say it’s some sort of blackmail.”
The Blame Game
Odita lamented how foreign companies; both multinationals and non-multinationals alike take Nigerian laws as guiding their operations for granted. “They will tell you that they know how the Nigerian system works and they know they can get what they want.”
Exonerating regulatory bodies like the NCDMB from being the usual culprits, counsel to LADOL said: “acting as a regulator in Nigeria is not a straight forward matter at all; you are under enormous pressure from every quarter. Sometimes we say a regulator has behaved inconsistently, it is not because the regulator is muddle-headed; it is often because they are responding to pressures from above as they say in this part (in Nigeria). What we should all encourage is that there should be less regulatory interference. Regulators should be allowed to do their jobs. If they allow them to do their jobs, I daresay that in many cases they would do a jolly good job.”
The weak regulatory and law enforcement environment has become evident in the LADOL-Samsung brawl as one would expect a regulatory body such as NCDMB be accorded the authority to resolve the issues of this magnitude, without the intervention of a court.
“In a system where the regulatory framework is effective, you would expect a level of dialogue between the regulator and the regulated…and then you might call the parties to an all parties meeting,” says Odita, who believes Samsung’s excuses could have been easily dismissed by the NCDMB.
The Senior Advocate of Nigeria described as laughable, “the idea that you could terminate a major local content contract on the basis of the National Ports Authority (NPA) approval when NPA is a government agency and Nigeria is saying to everyone ‘we want local participation, we want to build a local fabrication and integration facility’.
“NNPC is a government-held company, National Petroleum Investment Management Services (NAPIMS) is just the arm of NNPC responsible for this contract implementation, why would have been difficult for two government agency to interact and say well, Samsung says the problem is lease approval, you’ve given this lease, what on earth can be the objection to LADOL and Samsung building an integration and a fabrication facility here which would boost local economy, create employment and advance interest of the nation?
“You would have thought that these things are quite simple, and you would not think that two regulators from the same government should not be able to resolve this,” said Odita poignantly.
Local Marginalization
LADOL had over the past decade transformed an empty piece of swamp land allotted to it by the NPA into a fully operational facility worth $500 million, apparently one of the company’s capacities that made Samsung choose it as the ideal partner for the Egina project. It was surprising therefore that rather than focus on the project, Samsung became concerned about an NPA approval that never bothered it prior to winning the contract. While LADOL said it is working on getting an approval from the government body, Samsung remains defiant despite having filed only technical applications and “failing to engage with the substance”, in the course of the ongoing litigation. The Asian ship builders also say LADOL is not a legal entity as it operates a free zone offshore logistics base and therefore has no right to sue.
NPA had initially issued an approval, a move that didn’t go down well with Samsung, citing “technical deficiencies” in a bid to relegate LADOL to the back-end.
“Samsung is not the landlord,” fumed Odita, who described the South Korean company as opportunist. “That is how the NPA chooses to issue its approval and it has to be on its own terms, not Samsung’s terms. To the extent that Samsung is insisting that that is what it wants, it’s being entirely misguided and disrespectful,” he said.
Odita also explained that free zone companies are legal entities subject to their own regime, adding that there is nowhere in the free zone policy that described LADOL as illegal.
A commitment consensus?
One would doubt the sincerity and commitment of the government in ensuring real and sustainable local participation in the oil and gas sector, especially with the way NCDMB, NNPC and other government agencies involved handled the LADOL-Samsung lawsuit at some point. Kudos however goes to LADOL, as only few indigenous companies would toil the audacious and expensive road it plied towards ensuring multinationals like Samsung stick to agreements and comply with the local content policy.
“I think the government is very sincere about job creation and they are very sincere about reversing the resource curse which has plagued Nigeria for a long time,” says Amy. “I think the government is creating an enabling environment and as part of that, the government is trying to move away from this ‘winner takes all’ mentality and reality that we suffer from, and the government is trying to find ways to ensure that if you are a private indigenous player and you have proven yourself to be credible, you have facilities, you have the track record, and so forth; you are supported.”
Prof Odita concurred on government commitment to the four-year-old policy. “I believe that the government is trying,” he said, but quickly added, “Obviously, a government such as Nigeria is constrained in many ways and there are huge inefficiencies, not to talk about corruption that has afflicted the system.”
He maintained however that the government tries to support local players, but bias, interests and prejudices make a mess of this support. “since some of these government officials are interested in some of these companies. There is a lot of intrigue and nothing seems quite like it appears or nothing is as simple as it appears. There is a lot of politics behind the scene, but it is unfortunate.”
The eminent legal professional, who believes the LADOL’s litigation has drawn attention to the scope of local content, said he expected rulings on the ongoing suit in the next 3 – 6 months as there must have been some kind of clarity. He expressed confidence in his client’s case, while admitting however that there is always risk in litigation.
Samsung-LADOL settlement, Nigeria’s victory
Samsung must have weighed its options and opted for settlement instead of seeing the legal tussle through. Although LADOL could not have found the several months in court easy, while a contract they would have started in 2013 stalled; the settlement has however sent signals to foreign oil companies who might be looking for ways to circumvent the law and exploit the dishonesty of some workers in regulatory agencies in the country.
A statement announcing the joint venture jointly signed by KS Lee, managing director, Samsung Heavy Industries (SHI) Nigeria and Amy Jadesimi, managing director of LADOL stated that Samsung will develop SaNTA training academy with LADOL for building of human capacity required to drive the project. It will also be the Engineering Procurement and Construction (EPC) Contractor for the Egina project.
According to the statement, LADOL and Samsung wil jointly invest $300 million in the developement of the new facility to be located at LADOL FTZ.
Nigerians can now expect 50,000 jobs from the project, as well as the domestication of billions of dollars which have hitherto been exported abroad for the integration and fabrication of FPSO, with billion dollar revenues also expected to be earned from market expansion. The local content act has passed its first real efficacy test, local oil companies should welcome the new growth era and flourish.
