The Nigerian National Petroleum Corporation (NNPC) and Samsung Heavy Industries (SHI) are in discussion over further variation of the $3.9billion Engina Floating, Production, Storage, Offloading (FPSO) vessel contract.
While the NNPC appears not to be favourably disposed to further payment of variation costs to SHI, the latter is pushing for variation cost of $800 million citing extra ordinary increase in the quantities of structure and piping materials of the FPSO. The contract was awarded to SHI by Total Upstream Nigeria Ltd, the operator of the ultra deep offshore Egina oilfield in Oil Mining Lease (OML) 130 and a joint venture (Jv) partner with NNPC, in 2013, at an initial sum of $2,993,800,514. It was later reviewed up to $3,335,941,349.
The FPSO vessel, adjudged the largest in the world, measuring 330 million in length and 61 million in breadth, was designed to have an oil storage capacity of two million barrels.
In line with the Federal Government’s resolve to grow local content, ensure speedy technology transfer and in conformity with the Local Content Act, indigenous firms were allotted leading roles in the engineering design of the vessel and its fabrication and integration were to be carried out in-country. It was a first major move at local content promotion in the upstream sector of the oil industry.
High level oil industry sources however said the local content initiative, which was seen as a step in the right direction, seems to have now become the excuse to compel the government to pay astronomical cost for the contract.
Relying on the clause in the contract which allows variation cost requests, SHI had, at various times made requests for variation costs, claiming that it incurred additional cost because the engineering works on the vessel by Nigerians were below standard.
Investigations reveal that the Total/NNPC JV has paid additional $546,755,118 as variation costs to SHI to date , thus bringing the total cost of the project to $3.9Billion.
High level NNPC contact disclosed that Samsung is currently in discussion with the National Petroleum Investment Management Services Ltd (NAPIMS), the upstream subsidiary of NNPC and Total on variation costs of $800 million.
SHI last April, had threatened to stop work on the vessel by serving a “notice of dispute” on Total. It carried out the threat the following month after which it resorted to legal battle.
Shocked by the turn of event, NAPIMS and Total met with Samsung and handed it an August 24 ultimatum to launch the FPSO or face the termination of the contract. To show how serious it was, NAPIMS threatened to place a 10 year ban on Samsung if it fails to comply with its directive.
Although SHI went back to work and the FPSO had since sailed away to Egina oilfied, the LADOL fabrication Yard and Quay where it was built, SHI has intensified its agitation for variation cost payment and has made it clear that it was going to press on with its suit at the Arbitration in London where it is seeking for the payment of $1.6 billion if Total /NNPC JV fails to honour its variation cost invoice.
A top oil industry source, who retired as the head of one of the key oil industry agencies, weekend expressed disbelief over such huge variation costs, insisting that it is only in Nigeria that such could happen.
He said: “Don’t forget that the Bonga oilfield vessel had a similar, if not exactly the same crisis situation. NAPIMS did a thorough investigation, forensic audit was done, a report was written thereafter, but what becomes of this effort?
“If NAPIMS and Total accede to Samsung’s request for additional US$800 million, total increase in approved contract variation costs would have hit US$1,708,895,953. This will be 57 % of the original cost price.
” In my 33 years in the oil industry, I never heard of such ridiculous variation cost, especially when you do not have any significant increase on work scope or any remarkable unusual development which may have had profound impact on project execution, manpower and man hour. Even by Nigerian bizarre standard, this will emerge as the highest level of variations in the history of EPC contract,” he said.Another oil industry chieftain, the CEO of an oil producing company describes the situation as truly unfortunate. “ Generally projects of this kind are too expensive in Nigeria. To appreciate the seriousness of this issue, go and take the total development cost of the field, total development cost of the FPSO and all the variation costs they are talking about and divide it by the ultimate recovery, that is the number of barrels of oil they will recover and you will see what the development cost is.
“Elsewhere in the world, development cost is between US$5 and 7, check that one, it is probably betweenUS$20 and 30. So you start asking yourself, if the price of crude oil falls to US$50, other than royalty, the government does not get anything because the development cost already wipes out everything.”
Impeccable NNPC sources disclosed that the corporation’s management has taken a position similar to the one taken by these oil industry chiefs.
“I can say it emphatically that NNPC is opposed to any further variation cost. As an EPC contract, paying even 30% over the original contract price is mind boggling, given that there was never any major engineering redesigning and no significant increase in scope of work. To take it to the level of 57% of the original cost is simply absurd. Don’t forget that as a joint venture partner to Total, NNPC, and by implication, Nigeria, is being called upon to cough out this unjustifiable huge amount at a time when every cent is needed to build our infrastructure.”
Checks revealed that while a key manager of Total Upstream who is fully involved in the project argued in favour of the payment of the US$800 million being requested by Samsung, other management staff are said to be opposed to any further variation, and are not willing to discuss any variation cost
