SAVILLE & CO
SCRIVENER NOTARIES
One Carey Lane
London EC2V 8AE
Tel: +44 (0)20 7776 9800
Fax: +44 (0)20 7776 9801
www.savillenotaries.com
[email protected]
Sophie Milburn
Nicholas Thompson
Robert Kerss
Andrew MacNab
Christopher Higgins
(General Notary)
Eleonora Ceolin
(General Notary)
Richard Saville
(Consultant)
KINGDOM OF ENGLAND)
SS
CITY OF LONDON
TO ALL TO WHOM THESE PRESENTS SHALL COME, I
CHRISTOPHER GERARD HIGGINS of the City of London
NOTARY PUBLIC by royal authority duly admitted and sworn DO
HEREBY CERTIFY the genuineness of the signature of SEAMUS
RONALD ANDREW subscribed at foot of the certification
hereunto annexed, such signature having been subscribed today in
my presence in London, England by the said Seamus Ronald
Andrew, whose personal identity and capacity I attest, a solicitor of
the Senior Courts of England and Wales and designated member and
the managing partner of the law firm styled SCA ONTIER LLP of
London, England;
AND I DO FURTHER CERTIFY THAT the said SCA ONTIER
LLP is a limited liability partnership duly organised and existing in
accordance with the laws of England and Wales, registered with the
Registrar of Companies for England and Wales under number
OC327289 and with registered office at One New Ludgate, 60
Ludgate Hill, London, EC4M 7AW, England.
IN FAITH AND TESTIMONY WHEREOF I the said notary have
subscribed my name and set and affixed my seal of office at London
aforesaid this fourteenth day of March two thousand and eighteen.
My Commission expires at Death
SCRIVENER
NOTARIES
Regulated by the Faculty Office of the Archbishop of Canterbury
SCA Ontier LLP
One New Ludgate
5th Floor
60 Ludgate Hill
London EC4M 7AW
T: +44(0)20 7183 1701
F: +44(0)20 7183 1702
DX248 London/Chancery Lane
www.scaontier.com
SCA ONTIER
I, the undersigned Seamus Ronald Andrew, English solicitor and Managing Partner of
SCA Ontier LLP, hereby certify that the attached document consisting of 34 pages is a true,
faithful, and complete photocopy of an original Final Award dated 31 January 2017, which was
issued and signed by a majority of the arbitral tribunal, on page 34 thereof, in an arbitration
captioned In the Matter of the Arbitration Act 1996 (England & Wales) and In the Matter of an
Arbitration Under the Rules of the Nigerian Arbitration and Conciliation Act (Cap A18 LFN
2004) Between Process and Industrial Developments Limited, Claimant, and the Ministry of
Petroleum Resources of the Federal Republic of Nigeria, Respondent. I served as counsel for the
Claimant Process and Industrial Developments Limited in the aforesaid arbitration, and I have
compared the attached document with an original of the Final Award.
Signature
Seamus Ronald Andrew
14 March 2018
SCA Ontier LLP is a limited liability partnership registered in England
Registered No. OC327289. A list of the members is open to inspection at the registered office
Authorised and Regulated by the Solicitors Regulation Authority
[Page 1]
IN THE MATTER OF THE ARBITRATION ACT 1996 (ENGLAND AND WALES)
AND
AND IN THE MATTER OF AN ARBITRATION UNDER THE RULES OF THE
NIGERIAN ARBITRATION AND CONCILIATION ACT (CAP A18 LFN 2004)
BETWEEN:
| PROCESS AND INDUSTRIAL DEVELOPMENTS LIMITED | |
| Claimant | |
| and | |
| THE MINISTRY OF PETROLEUM RESOURCES OF THE FEDERAL REPUBLIC OF NIGERIA |
|
| Respondent |
Tribunal:
Lord Hoffmann (Presiding Arbitrator)
Chief Bayo Ojo
Sir Anthony Evans
31 January 2017
[Page 2]
1. This Final Award is signed and issued by the majority of the Tribunal
(Lord Hoffmann and Sir Anthony Evans). The dissenting opinion of Chief
Bay Ojo SAN is attached.
2. The reference arises out of a Gas Supply and Processing Agreement ("the
GSPA") dated 11 January 2010 made between the Claimant Process and
Industrial Development Limited ("P&ID") and the Ministry of Petroleum
Resources of the Federal Government of Nigeria ("the Government")
whereby the Government agreed that for a term of 20 years it would make
to available to P&ID 400 MMScuFD of Wet Gas and P&ID agreed to
process the gas and return approximately 85% by volume to the
Government in the form of Lean Gas.
3. This is the final award in the reference, the Tribunal having previously
issued two partial final awards. By its first Partial Final Award dated 3
July 2014 the Tribunal ruled that it had jurisdiction and that the GSPA was
valid and binding. By its second Partial Final Award dated 17 July 2015
the Tribunal decided that the Government had repudiated the GSPA and
was liable in damages to P&ID. This Final Award deals with the
quantification of the damages for which the Government is liable.
4. P&ID is an engineering and project management company registered at
Trident Chambers, P.O. Box 146, Road Town, Tortola, in the British
Virgin Islands. It was represented by SCA ONTIER LLP of One New
Ludgate, 60 Ludgate Hill London EC4M 7AW:
Contact: Mr Seamus Andrew
Telephone +44(0) 20 7183 1701
E-mail [email protected]
5. The Government is the Ministry of Petroleum Resources of the Federal
Government of the Federal Republic of Nigeria whose office address is
[Page 3]
11th Floor, Block D, NNPC Towers, Herbert Macaulay Way, Central
Business District, Abuja, Nigeria. It was represented by Chief Bolaji
Ayorinde SAN, FCIArb, OFR of B. Ayorinde & Co, Adebayo Chambers,
136 Awolowo Road, Ikoyi, Lagos, Nigeria.
Contact: Chief Bolaji Ayorinde SAN, FCIArb, OFR
Email: [email protected]
6. Clause 20 of the GSPA, so far as relevant, provides:
"The Agreement shall be governed by, and construed in accordance with
the laws of the Federal Republic of Nigeria.
The Parties agree that if any difference or dispute arises between them
concerning the interpretation or performance of this Agreement and if they
fail to settle such difference or dispute amicably, then a Party may serve
on the other a notice of arbitration under the rules of the Nigerian
Arbitration and Conciliation Act (Cap A18 LFN 2004) which, except as
otherwise provided herein, shall apply to any dispute between such Parties
under this Agreement. Within thirty (30) days of the notice of arbitration
being issued by the initiating Party, the Parties shall each appoint an
arbitrator and the arbitrators thus appointed by the Parties shall within
fifteen (15) days from the date the last arbitrator was appointed, appoint a
third arbitrator to complete the tribunal...
The arbitration award shall be final and binding upon the Parties. The
award shall be delivered within two months after the appointment of the
third arbitrator or within such extended period as may be agreed by the
Parties. The costs of the arbitration shall be borne equally by the Parties.
Each party shall, however, bear its own lawyers' fees.
The venue of the arbitration shall be London, England or otherwise as
agreed by the Parties. The arbitration proceedings and record shall be in
the English language..."
7. By Procedural Order No 12 dated 26 April 2016 the Tribunal ruled that the
seat of arbitration was London, England.
[Page 4]
8. The procedural history of the reference up to the issue of the second Partial
Award will be found in the first and second Partial Final Awards.
9. On 17 August 2015 the Tribunal wrote to the parties proposing a case
management conference on 3 September 2015 to consider procedural
matters for the next and final phase of the arbitration, which would be to
determine the quantum of damages payable by the Government.
10. On 20 August 2015 the Government's then lawyers wrote to the Tribunal
requesting that the conference be postponed to 10 September 2015 so that
it could make settlement proposals. The Tribunal agreed.
11. After a further request by the Government for postponement, the
conference was fixed for 10 am London time on 28 September 2015.
12. At 9:18 am on 28 September 2015 the Government's lawyers sent the
Tribunal an e-mail saying that as a Minister of Justice had not yet been
appointed to the new Nigerian government, they would be "unable to
make any major contribution to the Case Management Conference
scheduled for today and therefore request for a postponement."
13. On 27 October 2015 the Tribunal made Procedural Order No 10 in the
form of an order nisi giving the Government leave to apply to discharge or
vary it provided such application was made before 6 November 2015. It
directed P&ID to serve all the documents and evidence upon which it
intended to rely for the quantum hearing by 4 December 2015 and the
Government to serve its documents and evidence by six weeks thereafter.
No application to discharge or vary was made.
14. Pursuant to Procedural Order No 10, on 4 December 2015 P&ID served
the expert reports of Andrew Caldwell, Simon Ede, Anthony Melling and
Bradley Wolf of the Berkeley Research Group ("BRG").
[Page 5]
15. On 21 December 2015 the Respondent applied to the Tribunal to vary
Procedural Order No 10 by requiring the Claimant to serve a written
statement of its case on quantum and extending the Respondent's time for
serving its evidence.
16. On 23 December 2015 the Government applied to the High Court of
Justice in London (the Commercial Court) for an order under the
Arbitration Act 1996 setting aside the second Partial Final Award.
17. On 7 January 2016 the Respondent submitted a draft Procedural Order No
11, which provided that the Claimant should serve a written statement of
its case by 12 February 2016 and that the Respondent serve a statement of
its case and the evidence and documents upon which it relied by 11 March
2012.
18. On 8 January 2016 the Claimant agreed to the Respondent's proposed
timetable and on 18 January 2016 the Tribunal confirmed it as Procedural
Order No 11.
19. On 10 February 2016 Mr Justice Phillips, sitting in the High Court of
Justice in London, dismissed the Government's application to set aside the
second Partial Final Award.
20. On 7 March 2016 the Respondent applied for a further extension of its
time to submit its statement of case and evidence until the first week in
June 2016.
21. On 16 March 2016 the Tribunal extended the Respondent's time for
service of its statement of case and evidence until 8 April 2016.
22. By Procedural Order No 13 dated 24 June 2016 the Tribunal fixed a
hearing of the determination of damages in London on 22nd-24th July and
gave directions for the service of evidence and submissions.
[Page 6]
23. On 19th July 2016 the Tribunal postponed the hearing until 30-31 August
2016 and the parties agreed consequential changes in the earlier procedural
steps.
24. On 12 August 2016 the Government served an expert report by Upstream
Commercial Advisory Limited ("Upstream").
25. On 19 August 2016 P&ID served a reply report from BRG.
26. On 22 August 2012 P&ID served written submissions.
27. On 24 August 2016 the Government served written submissions.
28. On 30 and 31 August 2016 the Tribunal held a hearing at the International
Dispute Resolution Centre, 70 Fleet Street, London EC4Y 1EU. The
parties were represented as above. Mr Seamus Andrew and Chief
Ayorinde made oral submissions and Andrew Caldwell, Simon Ede,
Anthony Melling and Bradley Wolf of BRG and Ade Dare of Upstream
were cross-examined.
29. Before considering the quantification of the Government's liability, it is
necessary to be clear about the findings made by the Tribunal in its second
Partial Final Award. The evidence for P&ID at that stage consisted of a
statement by Mr Michael Quinn dated 10 February 2014, the then
chairman of P&ID, who died before the hearing on 1 June 2015. He gave
account of what had happened after the signature of the GSPA:
"102. The day after the signing of the GSPA, on 12 January
2010, I wrote to the Minister on behalf of P&ID to inform
him that P&ID wished to commence work at once...
[Page 7]
103 I was keen to implement the GSPA as soon as possible...I
wished to minimise any delay which might be caused by
the operators of the 2 concessions that had been identified as
likely sources of Wet Gas for the project. P&ID required from
the Government certain up to date information which would be
critical to the construction of the gas processing facility which
P&ID would be building in Calabar to strip the Wet Gas.
For instance, the precise make-up of the Wet Gas (which
was also relevant to the Government's contractual obligations to
supply Wet Gas with a minimum propane and butane content)
and the pressure at which it would be delivered into the
gas pipeline which would transport it to Calabar...
109 In the meantime, the site for the onshore plant at Calabar
for the construction of the gas stripping plant and gas storage
facilities had been selected by P&ID and secured from the
Government of Cross River State. On 1 February 2010
Mr Hitchcock wrote to the Governor of Calabar requesting the
formal allocation of the land upon which the plant would be
constructed...On 16 February 2010 approval was granted, by
the Government of Cross River State, to P&ID, for the
allocation of Parcels 1 & 2 of the Energy City (Industrial) at
Adiabo in Odukpani Local Government Area, containing an
area of about 50.662 hectares of land, for the industrial use of
P&ID.
110 On 14 May 2010, I wrote to NNPC to update it on
the progress made by P&ID. I pointed out that all of the
project finance was in place, 90% of the engineering designs
had been completed, a 50 hectare site had been allocated
to P&ID by the Cross Rivers State Government, and that
Addax Petroleum had confirmed to the DPR its readiness to
supply to P&ID the Wet Gas that it was at that time flaring in
OML 123 in time for Phase 1 of the Project as set out in
the GSPA. I asked the Group Managing Director of NNPC to
authorise NAPIMS to oversee and conclude the necessary
arrangements between P&ID and Addax, by which I
meant the engineering logistics of delivery of the Wet Gas for
Phase 1 from Addax, to enable work to proceed on the gas
processing facility."
30. The Government did not thereafter do anything to comply with its
obligation under Article 6 b) of the GSPA to –
"ensure that all necessary pipelines and associated
infrastructures are installed and all requisite arrangements with
agencies and/or third party are in place to ensure that supply
and delivery of Wet Gas in accordance with Article 3 so as to
[Page 8]
facilitate the timely implementation of gas processing by the
GPFs [gas processing facilities to be constructed by P&ID] as
provided for in this Agreement."
31. The Government's obligation under Article 3 c. was to make available 400
MMSCUFD Wet Gas at the P&ID Calabar site boundary. By Appendix A
it undertook to deliver a continuous supply of 150 MMSCuFD by the last
quarter of 2011 and the remaining 250 MMSCuFD by the third quarter of
2012.
32. There followed discussions about the implementation of the Government's
obligations but nothing came of them. The Government has never
performed any of its obligations under Article 6 b). A compromise
solution involving a possible variation of the GSPA was discussed but
these negotiations were broken off in August 2012. P&ID served a
Request for Arbitration but did not at that stage terminate the P&ID. On
20 March 2013 P&ID wrote to the Government saying that it treated the
Government's continued failure to perform its obligations as a repudiation
of the GSPA and accepted it as such..
33. By Procedural Order No 9 dated 6 May 2015 the Tribunal directed that the
proceedings should be bifurcated and that there should first be a hearing
on the question of liability and thereafter, if P&ID were successful, a
hearing on damages. It directed the Government to serve "a statement of
any primary facts alleged in the evidence of Mr Michael Quinn which are
challenged and any other facts alleged to be relevant to the question of
liability."
34. On 12 May 2015 the Government served a statement of the facts in Mr
Quinn's statement which it challenged. None of them were the facts
recited in paragraph 29 above. P&ID elected not to put in any further
evidence and not to rely upon any of the challenged matters so far as they
were denials of facts.
35. In its Part Final Award dated 17 July 2015 the Tribunal dealt with a
[Page 9]
number of defences raised on the part of the Government which are not
now relevant. However, a good deal of attention was given in submissions
to the fact that P&ID had not actually acquired ownership of the
designated site or built any of the gas processing facilities. The written
submissions of Mr Olapo Shashore, then counsel for the Government,
submitted that the failure of P&ID to acquire the site and build the GPFs
was a "fundamental breach" and that no gas could be delivered until this
had been done.1
36. The Tribunal's finding on this point was that the Governments obligations
under Article 6 b) were not conditional upon P&ID having constructed the
GPFs:2
"It would have been commercially absurd for P&ID to go to the
expense of building GPFs when the Government had done
nothing to make arrangements for the supply of the Wet Gas."
37. Mr Shashore also advanced a modified version of this argument, saying
that P&ID should at least have acquired a site so as to enable the
Government to identify the "site boundary" to which the Wet Gas should
be delivered. The Tribunal said that this took the matter no further than
the first version of the argument:3
"Of course the Government could not actually deliver gas until
there was a Site and, as we have said, until there was a plant to
receive it. But that does not excuse the Government's failure to
comply with 6 b). There is no suggestion that its failure to
comply with these obligations was caused by uncertainty as to
where the Site was going to be. It was assumed by everyone
that it would be on the land allocated in Calabar."
38. After dismissing the other defences, the Tribunal found that the
Government had repudiated its obligations under the GSPA and that P&ID
had been entitled to accept the repudiation and claim damages for breach.
1 Written submissions, 28 May 2015, paragraphs 17-36. ↩
2 Second Part Final Award paragraph 64. ↩
3 Paragraph 66. ↩
[Page 10]
39. The effect of the acceptance by one party of the other party's repudiation
is that the primary obligations of both parties (on the one hand, to supply
gas, on the other, to process it) are discharged and come to an end. But the
contract "remains alive for the awarding of damages either for previous
breaches or for the breach which constitutes the repudiation."4 Thus any
obligations which P&ID had to buy the site, build the GPFs, etc. came to
an end when the repudiation was accepted. There is no claim that either
party committed any breach before the Government's repudiation. The
present question therefore is only the damage suffered by P&ID by reason
of the Government's refusal to perform the contract.
40. The damage suffered by P&ID is the loss of the net income it would have
received if it had been supplied with wet gas in accordance with the
contract and had been able to extract and sell the natural gas liquids. The
first question is whether this kind of loss is in principle recoverable or
whether it is too remote. The parties are agreed5 that the general rule for
answering this question is that formulated by Alderson B in Hadley v
Baxendale:6
"[T]he damages which the other party ought to receive in
respect of such breach of contract should be such as may
fairly and reasonably be considered either arising naturally,
i.e., according to the usual course of things, from such
breach of contract itself, or such as may reasonably be
supposed to have been in the contemplation of both parties,
at the time they made the contract, as the probable result of
the breach of it.
41. Loss which does not fall within either of these two branches of the rule is
4 Lord Wright in Heyman v Darwins Ltd [1942] AC 356, 379. ↩
5 Claimant's written submissions of 22 August 2016, paragraph 18.2; Government's written submissions of ↩
24 August 2016, paragraph 1.2.
6 (1854) 9 Ex 341. ↩
[Page 11]
usually considered too remote.
42. The Government submitted that the loss of income from sale of the natural
gas liquids could not be considered to arise naturally from its repudiation
of the contract because at that time P&ID had not acquired a site or
constructed the GPFs. The point is put with great clarity at the outset of its
written submissions:
"In order to put the Claimant's argument in the right
perspective, it is important to consider this pertinent question
which flows from the Claimant's position above. Can the
damages in the sum of $8.627 billion dollars as claimed by the
Claimant be regarded as a fair, reasonable and natural
consequence of the Respondent's breach? We shall answer in
the negative. This is based on the premise that it is not natural
and in the usual course of things for the Claimant to make such
profit without taking any steps towards the actualization of the
contract such as building a gas facility or purchasing the land
allotted to it."
43. In other words, the Government submits that damages should be
calculated on the assumption that even if the Government had performed
its obligations, P&ID would not have done anything more. It would not
have acquired the site or built the gas facility. The fact that P&ID had not
done so before the repudiation is a constant theme of the Government's
submissions.7
44. The Tribunal considers that this submission is wrong in law. If one party
(D) repudiates a contract, the other party (C) is entitled to accept the
repudiation and sue for damages. The measure of damages is the sum
required to put C in the position in which he would have been if D had
performed his obligations under the contract. For this purpose it is
necessary to consider not only what D was obliged to do, but also whether
C would have performed his obligations under the contract. If he would
not have been able to do so, he may not be able to recover more than
7 The point is made in the written submissions at paragraphs 1.4, 1.9, 1.10, 1.11, 1.12, 1.15, 1.16, 1.17, 1.19, ↩
1.20, 1.21, 1.22, 1.23, 1.24, 1.26, 1.27, 1.34, 1.38, 2.4, 2.8, 2.10, 2.11, 4.9, 4.10, 4.11, 5.2 and 5.3.
[Page 12]
nominal damages for the repudiation. But the question is whether he would
have performed his obligations, not whether he had already done so before
the repudiation. The Tribunal must decide this according to the evidence,
the burden being upon the claimant. What would have happened is of
course a hypothetical question but courts and tribunals frequently have to
make such decisions.
45. These principles are clearly established in the laws of both Nigeria and
England. In Tanko v Kaduna North Local Government the Nigerian
Court of Appeal said:
"In the resolution of this issue on the assessment of damages, it
is very important to note that it is a fundamental principle of
our law on damages that in the event of a breach of any
contract, the Plaintiff is entitled to be placed, so far as money
can do it, in the same position as he would have been in, had
the contract been performed. See: ROBINSON V. HARMAN
(1848) 1 EX.850, 855 AND PIEDMOUNT PLYWOODS V.
GOLDEAC (NIG) LTD (1992) 8 NWLR (PT. 260) 481 AT
491."
46. The reference to Robinson v Harman was to the well-known statement by
Parke B:
"The rule of the common law is, that where a party sustains a
loss by reason of a breach of contract, he is, so far as money
can do it, to be placed in the same situation, with respect to
damages, as if the contract had been performed."
47. In Flame SA v Glory Wealth Shipping PTE Ltd8 there was a question as
to whether the innocent party would have performed his obligations,
Teare J summarized the law:
"The assessment of loss necessarily requires a hypothetical
exercise to be undertaken, namely, an assessment of what
would have happened had there been no repudiation. That
enables the true value of the rights which have been lost to be
assessed. The innocent party is claiming damages and
therefore the burden lies on that party to prove its loss. That
requires it to show that, had there been no repudiation, the
innocent party would have been able to perform his obligations
under the contract. [But]...when assessing what the innocent
8 [2014] QB 1080 at paragraph 85. ↩
[Page 13]
party would have earned had the contract been performed the
court must assume that the party in breach has performed his
obligations."
48. It follows that if the evidence had showed that for some reason, even if
the Government was ready and willing to perform the contract, P&ID
would never have been able to acquire the site or build the plant, then it
would not be able to recover more than nominal damages. So, for example,
in North Sea Energy Holdings NV v Petroleum Authority of Thailand9 the
buyer of a very large quantity of oil over a five year period wrongfully
repudiated the contract. The seller claimed as damages the huge profit it
would have made on the difference between the sale price and the price for
which it expected to be able to buy the oil in Saudi Arabia. But the judge
found as a fact that it would not have been able to obtain the oil from
Saudi Arabia to perform its side of the contract and awarded nominal
damages.
49. In some cases the fact that a party had not done anything by way of
performance of the contract for three years, as in the present case, might be
evidence that it was unable or did not intend to do so. But that is not the
case here. There was an obvious reason why P&ID had not started upon
performance. As the Tribunal said in its second Part Final Award –
"It would have been commercially absurd for P&ID to go to the
expense of building GPFs when the Government had done
nothing to make arrangements for the supply of the Wet Gas."
50. In fact, the evidence shows a high degree of likelihood that if the
Government had been willing to perform, P&ID would have acquired the
site and built the plant. First, P&ID was fully prepared to acquire the land
and start constructing the plant. Mr Quinn says in his witness statement
that, starting in 2006, P&ID -
"...[42] set about the necessary preparatory engineering work
required to construct a gas stripping plant capable of processing
9 [1997] 2 Lloyd's Rep 418; [1999] 1 Lloyd's Rep 483 ↩
[Page 14]
400 MMSCUFD of Wet Gas and a polymer grade propylene
plant capable of producing 250,000 metric tonnes per annum of
polymer grade propylene....[47] During the course of the next
two years, we made good progress and reached a very
advanced stage of the preparatory engineering work necessary
to implement such a project on the ground. I would estimate
that the total costs sunk into the preparatory work during that
period were in excess of $40 million...[49] By the end of the
first 2 years of our work on the Project, we had put together a
completed engineering package ready for actual permit
applications, procurement and construction... [102] The day
after the signing of the GSPA, on12 January 2010, I wrote to
the Minister on behalf of P&ID to inform him that P&ID
wished to commence work at once... [110] On 14 May 2010, I
wrote to NNPC to update it on the progress made by P&ID. I
pointed out that all of the project finance was in place, 90% of
the engineering designs had been completed [and] a 50 hectare
site had been allocated to P&ID by the Cross Rivers State
Government..."
51. As recorded in paragraph 33 above, the Government was directed by
Procedural Order No. 9 to serve notice of any primary facts in Mr Quinn's
witness statement which it disputed. It did not dispute any of the matters
mentioned above. P&ID thus showed every sign of being willing, indeed
anxious, to implement the project and there is no dispute over its ability to
have done so.
52. Upstream Commercial Advisory Limited (“Upstream"), the Government's
expert witnesses, do not appear to have been shown Mr Quinn's evidence.
Under the heading "Readiness Status of P&ID" they say that –
"P&ID made an investment decision based on a Class 5
estimate. This is flawed because a Class 5 estimate
classification is based on two percent (2%) detail definition of
the proposed project with just a notional sense of engineering
deliverables. A Class 3 estimate is indeed required for Final
Investment Decision... There's no mention of a detailed EPC
schedule in the cost estimates."10
10 ACEE International, an international association of cost engineers, divides cost estimates in to five ↩
classes according to their degree of detail, purpose, expected accuracy and preparation effort. Class 1 is at
the greatest level of detail, used to check a bid or tender. Class 5 is at the most general level and is intended
for a first appraisal of a project: see AACE International Recommended Practice No 18R-97.
[Page 15]
53. It is true that, as the Tribunal will in due course explain, P&ID's expert
witness Mr Wolf had made his own Class 5 estimate by way of a check on
the three earlier estimates with which he had been provided. But P&ID
itself had gone a good deal further. Besides the uncontested evidence
extracted in paragraph 50 above, Mr Quin had said:
"[48] By way of example, extensive work was
commissioned from various specialist engineering
companies such as CB&I Lummus Technology Group in
New Jersey, KRAN Developments in Johannesburg and
ABB Limited in the UK. The cost of the work of these three
companies alone was about $29 million. In addition our
own internal costs were significant...[49] By the end of the
first two years of our work on the Project, we had put
together a complete engineering package ready for actual
permit applications, together with a 3-D software model of
the plant which was in such high detail that it would have
enabled training of the plant staff even before completion of
construction."
54. Secondly, the prospective profits were such as to create a substantial
financial incentive to go ahead. Mr Quin estimated that the project would
produce a profit of $5 to $6 billion for P&ID over a 20 year period.
55. Thirdly, there is no evidence of any legal or financial obstacles which
stood in the way of the scheme. The Upstream report has a discussion of
the "business environment" in Nigeria but there is nothing to suggest that
with the co-operation which the Government had promised in the GSPA, it
would not have been able to acquire the site and construct the plant.
56. Consequently, the Tribunal finds on a balance of probability that that
P&ID would have performed its obligations under the GSPA and therefore
did suffer loss. Furthermore, such loss flowed naturally from the
Government's repudiation and was not too remote. The next step is the
quantification of that loss.
[Page 16]
57. If the contract had been performed, P&ID would have received for 20
years an income from the sale of natural gas liquids extracted from the wet
gas supplied by the Government. As against that income, it would have
had to finance the necessary capital expenditure to acquire the site and
construct the gas processing facilities ("CAPEX") and incur revenue
expenditure in operating the plant ("OPEX"). The loss is therefore the
value of the stream of net profit which P&ID would have made if the
Government had performed the contract according to its terms. As the
damages have to be assessed once and for all, it is necessary to estimate
the value of that stream of profit at the time of the breach, making an
appropriate discount for the fact that P&ID will be awarded immediate
payment in place of sums which would actually have been received over a
20 year period. The Tribunal will in due course consider whether the
valuation at the date of breach may take into account what is known to
have happened since that date.
58. P&ID's expert witness on expenditure was Mr Bradley Wolf. He is an
engineer with 30 years of experience in engineering, procurement and
construction of complex infrastructure, power generation and commercial
and industrial facilities. Mr Wolf dealt first with CAPEX and then OPEX.
59. Mr Wolf's principal source for estimating CAPEX was the detailed
engineering work which had been done by P&ID as described by Mr
Quinn.11 This was in his opinion, at the minimum, a Class 2 estimate in the
ACEE classification.12 In addition, in April 2013 P&ID had commissioned
11 See paragraphs 50 and 53 above. ↩
12 BRG Second Expert Report paragraph 2.2.8 ↩
[Page 17]
an independent assessment from Genesis Oil and Gas Consultants Ltd.13
Mr Wolf treated this as a Class 3 estimate.14 Thirdly, in October 2015 it
had obtained another independent assessment from Wood Group Frontier
Ltd, another well-known company offering consultancy services.15 Mr
Wolf regarded this as also being a Class 3 estimate.16
60. Mr Wolf then built upon these estimates to construct his own. First, he
removed the cost of plant which was additional to that required to perform
P&ID's obligations under the contract. The original plans had included a
propylene plant which had been abandoned by the time the GSPA was
signed. This had required the use of a specialised recovery process
(Randall NGL) which had the high recovery rate of the propane needed to
make propylene. Genesis had therefore both dropped the Randall NGL
process and substituted the AET Mehra process instead. Wood Group
favoured the Russell UOP process. Mr Wolf's view was that all three
processes were capable of meeting the requirements of the GPSA17 but
that "based on removal rates, capital cost and operational considerations",
the UOP Process was the proper selection.18
61. Based on these materials, Mr Wolf made a calculation of the probable cost,
which he tested by reference to a Class 5 estimate of his own and "bench
marked", i.e. compared it, with information about similar plant which had
been built elsewhere. He observed in his report:
"It is important to note that this was not by any means a
unique project whose costs would consequently be very
difficult to predict. The project described in the GSPA was
typical of many others in gas rich regions of the world.
There was nothing in the project scope, cost or timetable
that was any different [from] many other such projects
routinely completed around the world."
13 Exhibits BRG 402 and 403. ↩
14 BRG Second Report paragraph 2.2.12. ↩
15 Exhibit BRG 404. ↩
16 BRG Second Report paragraph 2.2.15. ↩
17 BRG Report, paragraph 4.6.9 ↩
18 BRG Report paragraph 4.6.11 ↩
[Page 18]
62. There is nothing to show that Mr Wolf failed to take account of local
conditions in calculating CAPEX, nor was it put to him in cross-
examination that he had not done so. Most of the components of the plant
would have been imported and their prices were unaffected by local
conditions, but labour costs were based on Nigerian rates.19
63. In calculating the sum which ought to be provided for contingencies, he
used a programme ("@risk") which calculates the probability of deviations
from estimate of each item in the budget and combines them. This has the
advantage, Mr Wolf said, of taking into account "the extremely low
probability that all of the estimated values will require the maximum
contingency level."20
64. On this basis, Mr Wolf produced an estimated CAPEX of $579,990,000,
which included a contingency allowance of $65,890,000. This represented
about 15% and gave in his opinion a 90% chance that the project would
not go over budget.21
65. The chief objection of Upsteam, the Government's expert, was that Mr
Wolf had inadequate material upon which to arrive at his estimate. This,
as noted above, was based upon the misapprehension that P&ID had done
nothing but make a Class 5 estimate before entering into the contract and
that Mr Wolf had no other material upon which to make his own estimate.
The report contains no comment upon Mr Wolf's contingency calculation
but the final recommendation, without explanation, is that one should
"assume nominal Class % CAPEX estimates + 40%."22 In cross-
examination, the government's expert Mr Dare said that reflected the
reliability of a Class 5 estimate.23 In other words, it was made upon an
altogether false assumption about the underlying figures.
19 Second BRG Report, paras 2.6.5-7. ↩
20 BRG Second Report, paragraph 2.5.11. ↩
21 BRG Report, paragraph 2.1.7. ↩
22 Final Upstream Report, p. 26. ↩
23 Transcript Day 1, 30 August 2016, pp. 93-105. ↩
[Page 19]
66. The Upstream report contains no comment upon the equipment which Mr
Wolf considered would be needed or any specifics of his estimate. Nor
was anything of the kind put to him in cross-examination. Counsel for the
Government appeared to be satisfied with his admission that he had found
the P&ID materials "extremely helpful".24 He was asked whether he had
subjected the third party studies to an audit. He replied that he had –
"compared the values that were presented with other ones that I
have personal knowledge of or are in the public domain. So
from a reasonableness standpoint, these values certainly, within
my experience, I had no reason to question them."25
67. Finally, Mr Wolf was asked whether his estimates were "founded on
assumptions". He replied:
"My job is to make sure they are reasonable assumptions and
reflective of what...it would have cost to build a plant that
would have achieved what was outlined in the facility, but all
estimates are based on assumptions."
68. In his closing submissions, Chief Ayorinde said that, as a matter of
Nigerian law, a "feasibility study" should not be the basis for an award of
damages26 and that Mr Wolf, in his reliance upon the pre-contractual work
of P&ID, was presenting the Tribunal with a "feasibility study". It was
true that he also relied upon other material and exercised his own
judgment, but his use of the P&ID papers "removes from the purity of his
report."27
69. The Tribunal rejects this submission. There is no authority in Nigeria or
England for the proposition that an expert estimating what work of
construction would have cost may not have regard to the specification of
work and estimates of cost made by the person who was to undertake that
work, simply on the ground that it was a "feasibility study". In the case
upon which counsel relied, Artra Industries Ltd v Nigerian Bank for
24 Transcript Day 1, 30 August 2016, pp. 8-9. ↩
25 Transcript Day 1, 30 August 2016, p. 11. ↩
26 Transcript Day 2, 31 August 2016 ↩
27 Transcript Day 2, 31 August 2016, p. 49. ↩
[Page 20]
Commerce and Industries28 the court said that a particular document called
a feasibility study tendered in evidence had no probative value. That was
true on the facts of that case. In the present case, the Tribunal is satisfied
that Mr Wolf carefully examined all the available materials and exercised
his own judgment. There are no grounds upon which to reject his estimate
of $579,990,000 or the adequacy of the $65,890,000 contingency which he
included within it.
70. P&ID had made its own calculations of the OPEX for the project under
six heads and arrived at a figure of $59,881,600.29 Mr Wolf says that he
has reviewed these costs and considers that they are reasonably accurate.30
Mr Wolf was not cross-examined on this part of his evidence.
71. The Upstream Report makes no comments upon any of the six individual
heads of expenditure but simply recommends that OPEX should be based
on "2.5% of CAPEX with uplift of +25% to capture Niger Delta security
arrangements". This produced a figure lower than Mr Wolf's estimate, but
Upsteam produced an addendum in which they increased Mr Wolf's figure
by 25%. Asked in cross-examination for the justification for this increase,
Mr Dare said:31
"it did not factor in Niger Delta adjustments, it did not factor in
the fact that you have Nigeria content development
requirements, all of that is a way of making operations more
expensive."
72. He went on to speak of condensate evaporation strategy and the cost of
transporting the condensate.
28 [1997] 1 NWLR 574 ↩
29 The estimate, broken down into 6 heads of expenditure, are at paragraph 4.9.2 of the BRG report. ↩
30 BRG Report, paragraph 4.9.3. ↩
31 Transcript Day 1, 30 August 2016, p. 106. ↩
[Page 21]
73. One difficulty which the Tribunal has with these submissions is that none
of it was put to Mr Wolf. The final Upstream report had spoken only of
"uplift of +25% to capture Niger Delta security arrangements (i.e.
hardening of the facility site with relevant Government Security Agency
personnel) as well as factor-in Nigerian Content Development (NCD)
compliance"." The Tribunal received no evidence about the circumstances
in which it is obligatory or prudent to employ "Government Security
Agency personnel", or the incidence of insurgent activity against gas
installations in the area. These are matters which must be known to the
Government and on which evidence was available. But none of it was put
before the Tribunal or put to Mr Wolf in cross-examination. Mr Dare, in
oral evidence32 after Mr Wolf had concluded his testimony, produced a
number of points which had not previously mentioned in the Upstream
report or otherwise: performance would be “sub-optimal" on account of
having to employ Nigerian personnel, precautions would be needed to
protect the condensate before export, stolen condensate could cause
pollution and the government "will come after you". The claimants had no
opportunity to comment on any of these matters.
74. Mr Wolf commented in his second report:
"[2.6.3] The OPEX costs in our First Report were derived from
a compilation of detailed information developed for this plant
by P&ID, Genesis and the Wood Group. These studies
described that the OPEX was based on information from
similar projects and lease costs obtained after preliminary bids
were tendered and woulod already have included any extra
security precautions deemed prudent.
32 Transcript Day 1, 30 August 2016 pp. 111-113) ↩
[Page 22]
[2.6.4] Since the facility capital costs included security fencing
around its defined perimeter and guarded entrances as part of
the infrastructure and the OPEX estimates already considered
the location, I believe that no specific additional uplifts to
OPEX costs for "Niger Delta security arrangements" especially
since the risk of disruption, to the extent that it exists, is likely
more prevalent to the incoming pipeline which in this case is
the responsibility of the respondent."
75. The Tribunal considers that it has no satisfactory basis for deciding that
Mr Wolf did not take into account factors which would increase the OPEX
by 25% or any other figure. They accordingly accept his figure.
76. An estimation of future income requires a calculation of (a) the yield of
NGLs which the plant would have recovered from the incoming gas and
(b) the prices at which they could have been sold. The resulting figure
must then be discounted to allow for the award being for an immediate
lump sum rather than income spread over 20 years.
77. The expert witness for P&ID on this point was Mr Anthony Melling of
BRG. He has general experience in the gas industry and specializes in
natural gas, LNG and associated liquids. The first part of his estimate was
concerned with identifying the content of the gas stream which the
Government was required to supply under the GSPA. As the Government
could supply gas meeting the contract specification from anywhere it
chose, this meant having to identify the content which such gas was most
likely to have. P&ID had information about the gas quality from OML
123 in May 200833, but considered that this was out of date and based
upon insufficient volumes.34
78. Instead, Mr Melling constructed from information derived from the
33 Table 17 at paragraph 5.3.2 of the BRG Report. ↩
34 Ibid, paragraph 5.3.3 ↩
[Page 23]
Department of Petroleum Resources and NNPC a "Typical Composition of
Nigerian Gas." The minimum propane and butane contents specified in
the GSPA were 3.5 and 1.8 mol per cent respectively. Accordingly, Mr
Melling produced a "Minimum" yield by adjusting the typical composition
so that it had no more than the contractual requirement of C3+ liquids.
79. He did not however consider that a composition producing the minimum
yield was the most likely. The GSPA provided that the Lean Gas was to
be 85 mol% of the Wet Gas provided. This suggested that the parties
contemplated that P&ID would be left with 15% for NGLs, fuel gas and
other losses. On this assumption, Mr Melling produced a higher figure for
what he called the "Expected" yield.
80. Mr Melling also produced a "Maximum" case in which more NGLs could
be obtained from a richer feedstock which was still consistent with the
contractual specifications.
81. For the purpose of calculating an annual yield in metric tonnes, Mr
Melling assumed (a) that the Russell UOP plant assumed by Mr Wolf
would be operational for 93% of the available time (340 days a year) with
maintenance in parallel with maintenance at the end user plant (b) 4% of
the energy content of the feedstock gas would be used as fuel gas (c) the
production efficiency of propane and butane extraction would be 94% and
(d) the process efficiency would be 90%, the rest of the propane, butane
and condensate being lost to evaporation or flaring.
82. On this basis, the annual sales volumes in metric tonnes would be:
Minimum yield: 491,037
Expected yield: 811,000
Maximum yield: 1,245,739
83. The Upstream report said that the use of a typical rather than absolute
[Page 24]
composition was "unacceptable".35 It noted, however, that its own
analysis of the only actual field data available, namely the OML 123
figures for 2008, had produced an annual yield of 838,437 metric tonnes,
i..e. slightly more than Mr Melling's Expected yield. The Tribunal does
not accept that Mr Melling was wrong to start from a typical composition.
As the GSPA did not say from which field the Wet Gas had to come, an
estimate of what was likely to have happened if the Government had
complied with its obligations required him to say what the composition of
the gas was likely to have been. For this purpose, it was right to start with
the typical composition of Nigerian gas.
84. The only one of Mr Melling's assumptions which the Government
contested was the 93% operational time. Mr Dare said one should rather
assume it would operate only for 40%, or perhaps 45%, or 50% of the
time.36 The Upstream report said 50% and eventually Mr Dare said he
would stay with that figure. The reason given in the report was "unabated
militancy in the Niger Delta...on account of the firm nexus between AG
production and oil production performance (militancy activities are
primarily targeted at disrupting oil export.)"
85. Even assuming that the GSPA was about exporting oil, a 50% reduction in
operating time would have been a remarkable figure. The Upstream report
offers no actual evidence of (1) the incidence of militant attacks in the
Calabar region and its effect on oil production (2) if the attacks were
against oil pipelines, how this would affect the production of associated
gas at the wells (3) whether there had been any interference with gas
pipelines.
86. The comment in the Second BRG Report by Mr Melling was:
3.6.2 I am aware of course of the problem of militant
35 Upstream Report p. 20. ↩
36 See Transcript Day 1, 30 August 2016, pp. 113-115. ↩
[Page 25]
attacks on oil and gas infrastructure in the Niger
Delta, which have a variety of reasons. However
it is my understanding that this problem
manifests itself in the West and North West of
the Niger delta region rather than the South East,
where Calabar is located. This is borne out by
material in the public domain.
3.6.3 The EIA state that this militant group is the most
active in the region. Appended to this report is a
map plotting the locations of all of the attacks by
the Niger Delta Avengers reported by the online
publication "Ventures Africa" in 2016.6 This
map indicates that militant attacks are focused
around Warri and to a lesser extent around
Brass, at the mouth of the Niger Delta. Calabar
is hundreds of kilometres to the East of this
region.
3.6.4 Nigerian Oil Spill Monitor provide a map of
spills in the Niger Delta area, indicating where
they are caused by third parties.7 Almost all
spills caused by third parties are found to the
west of Calabar.
3.6.5 My conclusion is further supported by the 2015
Annual Report of Seven Energy, the leading
integrated gas company in south east Nigeria.
Seven Energy has operations in 3 locations in
the Niger Delta – in the North West (around
Warri), in the Anambra Basin, and in the South
East, in an area encompassing Port Harcourt and
Calabar.
3.6.6 The Seven Energy Annual Report specifically
discloses the militancy affecting operations in
the North West Delta – see page 13 - referring
to "considerable interruption due to sabotage
and damage caused to the Trans Forcados
Pipeline". (The Trans Forcados pipeline is a
crude oil pipeline in the North West Niger Delta
which was bombed in February 2016).
However, in the Operational Report for the
South East Delta region (pp 34-37 of the Seven
Energy Annual Report) no mention is made of
any operational interruption due to militancy.
3.6.7 1 further note that according to its 2015 Annual
Report Seven Energy is actively supplying lean
gas to power plants in the Calabar region. A
[Page 26]
more recent update reporting on the first quarter
of 2016 states: "During the first quarter of 2016,
Seven Energy gas deliveries in the south east
Niger Delta averaged 101 MMcfpd (Q1 2015:
44 MMcfpd). The 44% increase from the 2015
average gas deliveries of 70 MMcfpd was due to
the increase in gas taken by the Calabar NIPP
and Alaoji NIPP power stations as they increase
their electricity generation into the power grid."
3.6.8 Finally, the US Department of Energy, Energy
Information Agency provide data that can be
used to give a rough estimate of the level of
disruption to Nigerian oil production due to
militancy. Their data shows that, prior to 2016,
approximately 13% of oil production was not
achieved due to militancy. Only in 2016 did
increasing militancy cause greater disruption,
with disruption increasing to approximately
32%. This is not analogous to the outages that
one might expect in a single NGL facility in an
area relatively unaffected by militancy, but it
shows that an assumption of 50% downtime due
to militancy over the life of a project from 2015
onwards is wholly unrealistic (even for the part
of the industry most effected by attacks).
3.6.9 In summary, I am not aware of any sensible
foundation to support the assumption that the
P&ID plant would have suffered 50%
downtime, as suggested by Upstream. As stated
above, I believe that my uptime assumption of
93% is realistic.
87. There was no attempt in cross-examination to discuss or challenge any of
this information.
88. The Tribunal therefore considers it highly implausible to assume that a gas
stripping plant, situated in an area away from the main focus of militant
attacks, will be out of commission for 10 out of its 20 years of operation.
89. In any case, the Upstream calculation is based upon a misapprehension,
evident throughout the report and the submissions on behalf of the
Government, about the nature of the calculation which the Tribunal has to
[Page 27]
make. It fails to appreciate that the calculation must be made on the
assumption that the Government will perform its obligations under the
contract. Except so far as the Government would be entitled to plead force
majeure (as to which no argument was presented to the Tribunal) it must
be assumed to have delivered the necessary quantities of Wet Gas to
P&ID's site and taken the Lean Gas for its power stations. If militancy
makes it difficult to obtain the gas from one field, it must find the gas
somewhere else.
90. The Tribunal finds that Mr Melling's assumption of 15 days of downtime
for maintenance and other eventualities during the year is the one most
likely to be correct.
91. The price of NGLs is closely linked to the price of oil which is, like that of
most commodities, cyclical - sometimes dramatically so. It is not easy to
predict the future movement of prices. But such predictions have to be
made, because investment decisions depend upon them. Likewise, they
have to be made by the Tribunal to determine the loss which has been
caused to P&ID by the repudiation of the contract.
92. There is a preliminary point of principle which needs to be decided. Is the
appropriate prediction that which would have been made at the date of
acceptance of the repudiation, i.e. March 2013, or should it be what would
be predicted now, i.e. at the date of the hearing? P&ID's expert witness on
this aspect of the case, Mr Simon Ede, has prepared calculations on both
bases.
93. The Tribunal considers that the correct approach is to take into account all
the information available at the hearing. This is the trend of recent
decisions of the English courts on questions which involve predictions: see
[Page 28]
The Golden Victory37 and Bunge SA v Nidera BV38. Mr Ede says of his
2015 calculation of the loss suffered by P&ID by the 2013 repudiation:
"I take the actual 2015 prices...I assume that the price fall of
2014-15 is completely foreseen and future expectations...about
long term oil prices [at the hearing date] are similarly known."
94. This appears to the Tribunal to be the right approach.
95. Mr Ede made two assumptions about how P&ID would sell its NGLs
which are not challenged. First, he assumed that they would be sold f.o.b
Nigeria into the north west European market. So he took into account the
cost of shipping the liquids to Europe. Secondly, he assumed that NGL
prices would closely follow oil prices.
96. The experts differed, however, in their forecasts of oil prices. Mr Ede
based his first estimate, made in 2015, upon predictions published by the
International Energy Agency (“IEA") available in 2013. Upstream did not
produce an independent calculation but said that Mr Ede's estimate should
be uniformly reduced by about 38% to reflect the fall in oil prices which
had occurred since 2013. Mr Ede's second estimate, based on the
principles stated above and an IEA forecast published in 2015, averaged
about 24% lower than his first forecast.39
97. The 2015 IEA report, upon which Mr Ede chiefly relied, contained four
different scenarios which might affect future oil prices. They were (1) the
New Policies scenario, described as "the central scenario of this Outlook",
which assumed that all policies affecting the energy market which had
been announced would in fact be implemented (2) the Current Policies
scenario, which assumed that only policies currently in force would
continue (3) the 450 scenario, which assumed that policies to reduce the
rise in long term average temperature, caused by greenhouse gases, to 2°C
37 [2007] 2 AC 353 ↩
38 [2015] Bus LR 987. ↩
39 As it happens, since Mr Ede's second report the price of Brent crude has increased from US$48 a barrel ↩
to US$55 a barrel.
[Page 29]
would be implemented (4) a Low Oil Price scenario, assuming no
reduction in supply and reduced demand because of slow economic
growth. The report said that the Low Oil Price scenario was unlikely in the
long term because lower prices were likely to result in increased demand.
98. Mr Ede adopted the New Policies scenario for his second estimate. He
was not cross-examined on this estimate, save to secure the admission that
forecasting oil prices 20 years ahead was difficult. However, when Mr
Dare gave oral evidence, he said that there were several forecasts available
on web sites which were different from the New Policies scenario. He did
not however identify these or produce them to the Tribunal. The Tribunal
did not have the benefit of Mr Ede's comments because none of this
material (if such it was) had been put to him in cross-examination.
99. It is important to identify precisely the exercise which the Tribunal has to
undertake. It is to make the best estimate which would be made today of
the income stream which P&ID would have received from the sale of
NGLs if the Government had performed its side of the bargain. The actual
outcome will not be the same as the prediction. It is bound to be, to a
greater or lesser extent, higher or lower. But this is, by definition,
something which the Tribunal cannot know. One method sometimes
adopted for making the necessary calculation is to ask what a third party
would have paid to acquire the benefit of the GSPA on the assumption that
the Government would definitely perform its obligations. The notional
third party would have decided what he should pay by making the same
calculations as to what the income he would be likely to receive. Putting
the question in this way has the advantage of drawing attention to the fact
that the value of future income depends upon the estimate which a notional
buyer and seller would make today. That is what determines the present
value of what P&ID has lost. Someone who makes a higher or lower
prediction may be able to say "I told you so" in years to come, but that
does not affect the value which would now be attached to the future
income stream. The duty of the Tribunal is to decide on the evidence what
that estimate would be likely to be. It is not to increase or reduce that
[Page 30]
estimate according to its own intuition.
100. The only estimates of what might happen to oil prices that the Tribunal
has actually seen are those in the IEA report relied upon by Mr Ede. IEA,
says Mr Ede -
"is an intergovernmental organization that provides reporting
and analysis on international energy markets. Included in their
work is analysis of future trends and developments in the oil
and gas industries and as such they regularly publish forecasts
of prices for these commodities. Companies operating in the oil
and gas industries regularly make use of IEA forecasts when
benchmarking price forecasts and analysis. I believe that this
is...reasonable."
101. Mr Ede is an economist who has for 15 years specialized in energy
markets. His evidence is that IEA's New Policies scenario is the one most
appropriate to be used in forecasting. None of this was challenged in cross-
examination.
102. By contrast, Mr Dare has said only that there are other forecasters in
the business who have arrived at different but unspecified conclusions. No
such forecasts were actually made available to the Tribunal, still less to Mr
Ede.
103. The Tribunal considers that there is no material upon which it can
come to a conclusion different from that of Mr Ede's second estimate,
which gave effect to all the information presently available about the
movement of oil prices. Accordingly it accepts the forecasts of prices (in
real 2013$ terms) in the second BRG Report:40
104. Clause 8 h) of the GSPA provided that P&ID would enjoy "Pioneer
Status", i.e. freedom from taxation, for a period of 5 years from the
40 Figure 6 in paragraph 4.5.6. ↩
[Page 31]
commencement of commercial operations. The BRG Report therefore
assumed that the P&ID income stream would not be taxed for the first 5
years but would thereafter pay tax at the standard rate of 30%.41 The
Upstream report assumed a rate of 20% without any period of exemption,.
This produced a slightly lower deduction than the BRG estimate.
105. The Upstream Report contains no explanation of why it (a) ignored the
5 years Pioneer Status granted by the GSPA and (b) reduced the standard
rate of tax to 20%. In the circumstances the Tribunal will accept the BRG
calculation, which in fact results in a lower award of damages than the
Upstream calculation.
106. The total net profit which P&ID would have received over 20 years
must be discounted to reflect early payment, just as interest is added to
damages to reflect late payment. Of course in the valuation of a business,
estimated future earnings may also be discounted to reflect the risk that
they will not materialise. The Government submits that such a discount
should also be applied to the estimate of future profits in this case, to
reflect the risk of investing in Nigeria. For this purpose, as well as the time
value of money, Upstream proposes a discount rate of 7%.
107. P&ID on the other hand say that a discount for risk is in principle
wrong. If one is valuing a business where the future profits depend upon
performance by the Government in the Nigerian environment, the main
risk is that for one reason or another the Government will not perform its
obligations, as indeed happened in this case. If P&ID was selling its rights
under the GSPA to a third party, that risk would be foremost in the minds
of the parties to the negotiation. But the law does not permit damages for
breach of contract to be reduced to allow for the risk that the party in
default will default. As for other risks, these have already been built into
41 BRG Report, paragraph 7.2.2 (VI) and (VII). ↩
[Page 32]
the calculation of future income: there are contingency allowances for
CAPEX and OPEX and the possible variations from the assumptions about
future oil prices may be up or down, thus cancelling each other out. P&ID
therefore submits that a deduction for risk would be a double deduction.
The BRG report says that US Treasury bonds are regarded as risk free and
their 2.65% rate of interest represents only the time value of money. It is
therefore the appropriate discount rate to use in this case.
108. The Tribunal considers that P&ID is right for the reasons stated in the
last paragraph. A 7% rate would constitute a double contingency
allowance or allow the Government a reduction to reflect the risk of its
own default or both. 2.65% is the correct rate. On the other hand, for the
reasons given by the Government, 7% is the correct rate of interest to
apply to the Government's obligation to pay damages which crystallised at
the date of repudiation. It is not a risk free rate but reflects what P&ID
would have had to pay to borrow the money or could have earned by
investment in Nigeria.
109. The Government submits that only three years loss of income should
be taken into account because by that time P&ID should have found some
other profitable investment and thereby mitigated its loss. There is no
suggestion of what this other investment would have been. Nor is there
any explanation of why, if found, this would have mitigated the loss
caused by repudiation of the GSPA. Even if P&ID could have found some
other unspecified investment opportunity, there is no reason why this
should be treated as mitigation of its loss. An employee who is dismissed
can mitigate his loss by finding another full time job. But there is no
reason why P&ID should not have pursued more than one investment
opportunity. The burden of proving that loss could have been mitigated is
upon the party who has broken its contract: see Roper v Johnson (1873)
LR 8 CP 167; Geest plc v. Lansiquot [2002] 1 WLR 3111 (Privy Council).
The Government has not suggested, let alone proved, what the Claimant
[Page 33]
might have done to earn the equivalent profit. This is not surprising
because the law does not require the innocent party to take risks in an
endeavour to save the party in breach from having to pay damages: Banco
de Portugal v Waterlow & Sons Ltd [1932] AC 452 at 506 (Lord
Macmillan). For all these reasons, the Tribunal considers that in this
context the argument as to mitigation is misplaced.
110. The effect of the Tribunal's decisions on what P&ID's expenditure and
income would have been if the GSPA had been duly performed is that the
net present value of the profits which would have been earned is
$6,597,000,000.42 This is the measure of damages. It is a very large sum
because (a) it is the present value of income which would have been
earned over a long period and (b) the GSPA would have been very
profitable for P&ID and (although the Tribunal has not had to make any
findings on the point) probably for the Government as well.
111. Clause 20 of the GSPA provides that the parties are to bear the costs
of the arbitration equally but that each party is to bear its own lawyer's
fees. There has been no application by either side in respect of the costs of
the arbitration and the Tribunal assumes that they have been borne equally.
112. We, Leonard, Lord Hoffmann and Sir Anthony Evans, having read the
parties' written evidence, pleadings and submissions and having heard
their oral evidence and submissions, and having carefully considered the
same and for the reasons stated above, make our Final Award as follows,
namely we order the Respondent to pay to the Claimant the sum of
42 See Second BRG Report, Appendix H. ↩
[Page 34]
$6,597,000,000 together with interest at the rate of 7% from 20 March
2013 until the date of this award and at the same rate thereafter until
payment.
Place of arbitration: London, United Kingdom.
Signed:
Lord Hoffmann
Signature
Sir Anthony Evans
Signature
31 January 2017.