THE INSIDER: Samsung ‘blackmailing’ Nigeria with $1.6bn arbitration suit in London
Samsung Heavy Industries Nigeria (SHIN) Ltd is trying to force the arm of the federal government by instituting a $1.6 billion arbitration case against Total Upstream Nigeria Limited in London, oil industry insiders and top government officials have told TheCable.
Although the suit is against Total, Samsung’s action is seen as an attempt to undermine the country’s local content policy, according to government insiders, who told TheCable that the Korean company tried to derail the addition of a potential 200,000 barrels per day to Nigeria’s current oil out.
Samsung is claiming a total of $1.6 billion in additional payment from Total as the extra costs it incurred (“contract variation”) in building the $3.3 billion floating production storage offloading (FPSO) vessel for the Egina deepwater oilfield.
The Korean company said it incurred additional costs because the engineering works on the vessel by Nigerians were below standard.
In memos to NNPC and NAPIMS seen by TheCable, Samsung requested their assistance in persuading Total to pay $1 billion it claimed it had incurred as a result of “extraordinary increase in the quantities of structure and piping materials of the FPSO”.
There are insinuations that Samsung Heavy Industries, SHIN’s parent company based in South Korea, has been suffering heavy financial losses in recent years and is desperately seeking the $1.6 billion award to turn around its fortunes.
But the company insists, in documents seen by TheCable, that the terms of the contract allowed for variation and it wants to enforce its rights.
The Korean company has already been paid $500 million by Total but it is seeking an additional $500 million, otherwise the $1.6 billion arbitration case will continue.
The company had threatened to stop work on the vessel by serving a “notice of dispute” on Total in April, and actually stopped work in July before heading to court.
On August 21, the National Petroleum Investment Management Services (NAPIMS) and Total met with Samsung and gave the company till August 24 to launch the FPSO from LADOL or face the termination of their contract and a 10-year ban from working in Nigeria.
WHAT IS THE ISSUE AT PLAY?
The Egina oil field is located in OML 130, which is 200 kilometres offshore Port Harcourt, Rivers state, and is expected to start production in December 2018 but the dispute with Samsung is casting a shadow on the mega project.
Egina has oil deposits in excess of 550 million barrels and is one of the biggest in Africa.
Total has a 24% stake in OML 130 while SAPETRO holds 15%, Brazil’s Petrobras 16% and China National Offshore Oil Corporation (CNOOC) 45%.
In 2010, Total — as the operator and acting on behalf of its partners — invited tenders for the procurement, engineering, construction and commissioning contract to build the FPSO vessel for the deep offshore field.
The contract, valued at $3.3 billion, was awarded to Samsung, with Lagos Deep Offshore Logistics (LADOL) serving as the local content partner.
This was in line with the regulations of the Nigerian Content Development and Monitoring Board (NCDMB) which require the involvement of Nigerian companies in oil sector contracts.
The partnership was named Samsung Heavy Industries Mega Construction and Integration Free-Zone, shortened as SHI MCI FZE, which was also to construct and own the fabrication and integration facility of LADOL.
Upgrading the LADOL facility was one of the local content benefits approved by NCDMB for the Egina contract, with Total mandated to pay Samsung a lump sum for it.
“Trouble started when Samsung started complaining that the local fabrication was not properly done by Nigerians. It later said it had committed $1 billion — about 33 per cent of the original cost — to correct the flaws,” a Total official in the know of the conflict told TheCable.
“This was a bit startling but we reluctantly parted with $500 million just for the vessel to sail to the field so that we can start production in December. We were already behind schedule by one year.”
THE BITTER DISPUTE WITH LADOL
The relationship between LADOL and Samsung has been far from smooth, according to an official of the NAPIMS, which oversees NNPC contracts and investments.
“When Samsung issued a notice of dispute against Total in April 2018 claiming financial losses of $1 billion, we knew there was going to be serious trouble ahead and the completion of the FPSO vessel would be endangered,” the official said, who spoke on the condition of not being identified.
“The amazing thing was that Samsung claimed to have invested $300 million in upgrading LADOL’s fabrication yard, and this is counted as part of the loss.
“Samsung contacted us in June, requesting our assistance and explaining that they badly needed the money. We examined all the facts of the matter and were not convinced by their claims.”
At the heart of Samsung’s dispute with LADOL was the claim by the Koreans that it invested $300 million in the fabrication yard — allegedly hiding the fact that Total had actually paid $214 million for that purpose as part of the contract.
The $300 million figure itself was also considered suspicious because Total and LADOL were not in the know of how the costs were incurred.
Officials of Samsung, LADOL and Total preparing for the sail-away of Egina in August 2018
Unknown to LADOL that Total had already paid Samsung $214 million for the upgrade, the Nigerian company was forced to cut down its interest in the SHI MCI FZE to 30 per cent, in addition to paying Samsung $40.5 million for its interest.
It was only at a senate public hearing early 2018 that Total revealed it had paid Samsung $214 million for the upgrade of LADOL’s fabrication, whereas Samsung was claiming to have invested $300 million of its money in it.
Global Resources Management Free Zone Ltd, a member of the LADOL Group, which manages the lease at the free zone, served SHI MCI FZE a notice of increase in fees for the sublease. It further went to terminate the sublease as the crisis worsened.
Samsung has, meanwhile, taken a legal action, insisting that its lease will expire in 2024. The case is now before the federal high court in Lagos.
CASES THROWN OUT IN COURT
Samsung has so far lost two cases in its dispute with Total.
It had in July 2018 approached the federal high court seeking an injunction to prevent Total from terminating its contract after stopping work on the vessel.
It also sought to remove the FPSO from LADOL.
In August, Samsung went to the high court again seeking injunctions against Total pending the commencement of arbitration in London under International Chamber of Commerce arbitration rules.
The court initially had granted Samsung an ex-parte order to maintain the status quo, effectively restraining the sail-away of the Egina FPSO vessel scheduled for between August 19 and 24.
This would have delayed the December 2018 target date for commencement of production in the Egina field.
But the federal high court, in the substantive case, ruled that it was inappropriate for Samsung to be granted interim injunctions in aid of arbitration when it had taken no steps to institute any arbitration proceedings, despite serving notices of disputes on Total several months before its application for an injunction.
The court then dismissed the reliefs sought by Samsung, thus paving way for the sail-away of the FPSO vessel on August 25.
While LADOL and Samsung continue to engage in legal brickbats over the dispute, some government officials who spoke with TheCable are of the view that the Korean company is launching an indirect war on the country.
“If they had succeeded in delaying the vessel from sailing to the Total oilfield, that would have amounted to a significant setback for Nigeria. We are talking about a potential increase of 200,000 barrels of crude oil for Nigeria,” the official said.
Samsung’s arbitration against Total is expected to continue, while it has also sued Global Resources for terminating the lease at the LADOL Free Zone.
Officials of LADOL and Samsung refused to respond to questions from TheCable, saying the cases are already in court.