The story behind Nigeria’s $9.6bn judgment debt in London that has shaken the West African nation

Although Nigeria is the largest producer of sweet oil in OPEC (Organization of the Petroleum Exporting Countries), the country has shown little determination to improve its oil infrastructure base to generate maximum returns and use the accrued funds to develop other sectors of the economy.

According to the International Energy Agency, although Nigeria has the production capacity of producing over 3 million barrels (480,000 m3) of oil per day, as at 2011, it was producing just about 2.53 million barrels (402,000 m3) per day, showing that a lot more work had to be done to become efficient.

There’s the case of the country improperly managing its oil and gas resources such that between January and June 2019 alone, the country lost 22 million barrels of crude oil.

Pipeline vandalism and aged pipelines contribute to the losses but the twin troubles of corruption and fraud are not far behind.

Compounding these problems is a US$9.6 billion judgment debt the West African nation faces, following non-fulfilment of a contract it entered into with private company, Process and Industrial Development (P&ID), in 2010.

On January 11, 2010, P&ID, a company based in the British Virgin Islands, signed a gas supply and processing agreement contract with the Federal Government of Nigeria for Nigeria to supply natural gas (wet gas) to P&ID’s production facility over a 20-year period.

In return, P&ID would process the wet gas by removing natural gas liquids and return approximately 85% of it to the government in the form of lean gas. This lean gas was to be returned at no cost to the Nigerian government.

With the agreement, the Nigerian government was to construct pipelines and arrange facilities for transporting the wet gas, however, it failed to do this for three years.

For P&ID, the Nigerian government’s inability to fulfil its obligation meant it had repudiated the contract. In March 2013, P&ID began an arbitration action against the government before a London tribunal as the city was agreed by both parties to be the centre for the resolution of disputes although other venues could be settled upon.

In July 2015, the tribunal decided that by failing to fulfil its obligations, the Nigerian government had repudiated the agreement. By January 2017, the tribunal, by a majority of 2 to 1, made a final award of $6.597 billion together with interest at the rate of 7%, starting from March 20, 2013, until payment is made, The Conversation writes.

The 7% interest reflects what P&ID would have paid to borrow the money or earned by investing the money in Nigeria.

P&ID sought to enforce its damages by March 2018 and on August 16, 2019, the court made an order enforcing the tribunal’s final award which now stood at about $9.6 billion.

According to P&ID, it had invested $40 million in the project even though it had not acquired the land or built any facilities for gas processing. It claimed damages of about US$6.6 billion dollars – the amount of the net income it would have earned over the 20-year period of the agreement, The Conversation added.

But the Nigerian government, even if by its own failure caused the judgment debt, argues that damages sought by P&ID are not fair and reasonable as the company never commenced building the gas processing facility.

It also argued that P&ID should be awarded only three years’ worth of income as the company, by that time, should have found some other profitable investment which would reduce its losses from the breach.

The Nigerian government is yet to pay the judgment debt, saying that it intends to appeal the amount awarded.

Given that the damages sought by P&ID amount to 20% of the country’s foreign reserves, the federal government is aware such payment could easily destabilize the economy, something it would rather avoid.