International arbitration

Quantum matters – Record USD6.6bn award against Nigeria

Marion Lespiau Marion Lespiau

On 16 March 2018, a BVI-based engineering and project management company sought to enforce in the US a USD6.6 billion award it obtained in January 2017 against Nigeria. This is one of the highest arbitral awards known to date. It shows the importance of the Respondent challenging facts, assumptions and calculations provided by the Claimant and of providing alternative evidence to the Tribunal.

Background

In January 2010, Process and Development Limited (P&ID or the Claimant) and the Ministry of Petroleum Resources of the Federal Republic of Nigeria (Nigeria or the Respondent) entered into a 20-year Gas Supply and Processing Agreement (GSPA). Under this agreement Nigeria would supply Wet Gas to P&ID, who would process it in a newly-built facility and return it in the form of Lean Gas. P&ID could then sell the by-products of the refinement process (natural gas liquids (NGLs) for their own profit.  

Nigeria did not make arrangements for the agreed supply of Wet Gas, including building the necessary pipelines. In March 2013, P&ID treated this failure as a repudiation of the GSPA. By that date PI&D estimated that it had invested USD40 million in the project, although it had not yet acquired the land or built the facilities. 

In July 2015, an ad hoc tribunal seated in London decided that Nigeria was liable to damages to P&ID. In a majority decision in January 2017, the tribunal awarded USD6.6 billion in damages to P&ID. The dissenting opinion estimated the loss at USD250 million over three years.

Claimant’s position

The Claimant estimated that the project would produce a net profit of USD5 to USD6 billion over a 20-year period.

Income projections were based on several assumptions relating to the expected yield of NGLs and the price of NGL. The Claimant estimated capital expenditure at USD580 million and operational expenditure at cUSD60 million per year.

The Claimant used a discount rate of 2.65% based on US Treasury bonds to represent only the time value for money.

Respondent’s position

The Respondent objected that P&ID should only be entitled to nominal damages as it had not fully performed its obligations under the GSPA at the date of the repudiation.

It argued that production would be disrupted by militancy in the Niger Delta so that utilisation should be reduced to 40-50%. The Respondent’s expert challenged the Capex calculation as being based on inadequate material.

The Respondent also insisted that damages could only be awarded for a period of three years as the Claimant had a duty to mitigate its loss and it should have pursued other investment opportunities.

The Respondent adopted a discount rate of 7% to reflect the risk of investing in Nigeria.

Approach taken by the Tribunal

The Tribunal considered that there was no evidence that the Claimant was unable or did not intend to perform its obligations under the GSPA. Consequently, the Tribunal rejected the Respondent’s argument on nominal damages.

In addition, the Tribunal determined that there was no actual evidence that militancy in the Niger Delta had any impact on gas production or transport around the site earmarked by P&ID, or that other NGL prices than the ones forecast by the Claimant should be used.

In the absence of a meaningful challenge from the Respondent, the Tribunal agreed with the Claimant on key aspects of the measure and calculation of damages, including the 20-year period, the other underlying assumptions to project net income, and the discount rate. It awarded USD6.6 billion in damages together with pre and post-award interest of 7%. This interest rate reflects what PI&D would have had to pay to borrow the money or could have earned by investing in Nigeria.

Conclusion

An award of USD6.6 billion is quite remarkable, both in absolute terms and by comparison with the Claimant’s investment of USD40 million. Despite the repudiation occurring at a very early stage of the contract, the Tribunal considered that there was no evidence that the Claimant would not have performed its obligations if it had been supplied with Wet Gas, so awarded full compensation over the full length of the contract. This shows the importance of a Respondent challenging facts, assumptions and calculations provided by a Claimant and providing alternative evidence to the Tribunal.

Case information

Claimant: Process and Industrial Developments Limited

Respondent: The Ministry of Petroleum Resources of the Federal Republic of Nigeria

Case ref: 1:18-CV-00594

Tribunal: Lord Hoffmann, Presiding Arbitrator

Sir Anthony Evans, Arbitrator

Chief Bay Ojo San, Arbitrator (dissenting)

References

  1. In the Matter of Process and Industrial Developments Limited and The Ministry of Petroleum Resources of the Federal Republic of Nigeria, Final Award dated 31 January 2017
  2. In the Matter of Process and Industrial Developments Limited and The Ministry of Petroleum Resources of the Federal Republic of Nigeria, Dissenting Opinion dated 31 January 2017

For further information, please contact Marion Lespiau or Lisa Mazzucotelli