ENERGY INSIGHTS

OIL PRICE DIP & COVID-19: A TWOFOLD IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY

A PUBLICATIONwww.kennapartners.com BY KENNA PARTNERS’OIL PRICE ENERGY DIP & COVID-19: PRACTICE A TWOFOLD UNIT IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY APRIL 20201 Contents

Introduction 3

Dwindling Oil Prices & the Nigerian Economy 4

Impact of Covid-19 on Oil & Gas Contracts:

Force Majeure 4

Frustration 6

Impact of Covid-19 on Employments Within The Oil & Gas Industry 6

Conclusion 7

2 OIL PRICE DIP & COVID-19: A TWOFOLD IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY www.kennapartners.com OIL PRICE DIP & COVID-19: A TWOFOLD IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY

Introduction The World Health Organisation’s (WHO) designation of the corona virus (Covid-19) as a pandemic and the response of governments across the globe, declaring lockdowns have brought with them dire economic consequences and looming global economic crisis.

Economists and fiscal policy experts are calling this the worst global economic crisis in the last century – surpassing the global economic recession crisis of 2008 and the economic depression of the 1930s.1 The impact of Covid-19 will be felt across various sectors of the global economy for a long time. One of the sectors which appears to be doubly hit in this period is the oil and gas industry. As Covid-19 continues to wreak operational and economic havoc on the sector, the dwindling oil prices only exacerbates the already terrible situation.

For countries like Nigeria where crude oil revenues are crucial to the economy (data shows the oil contributes up to 87% of foreign exchange and about 9% of GDP), the performance of this sector is critical.2 The Group Managing Director (GMD) of the Nigerian National Commission (NNPC), Mallam Mele Kyari, recently warned that Covid-19 and the dwindling oil price in the international oil market are already taking its toll on the Nigerian economy. This strain has been heightened by the reports that the NNPC would no longer pay subsidy on pretrol in light on the ongoing oil price decline.

The major impact of Covid-19 on the gas industry, particularly for emerging economies like Nigeria, is that the lockdown orders have hugely impacted the demand for oil and gas products produced in these countries. This has been influenced by the fact that some of the biggest consumers in the sector have been significantly affected by Covid-19. Take for instance, China which is the largest economic consumer in the world; a reduced market for oil and gas products, carries dire economic consequences for the industry globally and particularly for Nigeria which depends heavily of revenue gained from exports to China.

The situation has led some IOCs such as PetroChina and China National Offshore Oil Corporation (CNOOC) to refuse some crude oil cargoes supplied from some emerging 3 economies such as Brazil and countries in West Africa (Nigeria). The NNPC recently stated The major impact that due to the Covid-19 pandemic, Nigeria had about 50 cargoes which have not found of Covid-19 on landing due to the fact that the global drop in demand for oil has necessitated an absence of off-takers for them. The NNPC also hinted at the existence of 12 stranded Liquefied the gas industry, natural Gas (LNG) cargoes in the global market; a situation which has never been previously particularly for experienced, that is until now.4 All these go to show that the longer the pandemic forces emerging economies lockdowns, the dicier the situation becomes for the oil and gas industry in Nigeria. like Nigeria, is In the international oil market, the reduced demand for oil and gas produce has caused that the lockdown countries like Saudi Arabia and Iraq to provide discounts for the purchase of their products, orders have hugely further driving down the price and fostering unhealthy competition in the international oil impacted the demand market. Furthermore, the labour shortages identified above also negatively affect efficiency for oil and gas in production levels in these countries. Directly or indirectly, Covid-19 continues to pose products produced in huge problems for the demand and supply of oil and gas products in the oil and gas industry. these countries. This has been influenced 1 Peter S. Goodman, “Why The Global Recession Could Last a Long Time” (New York Times, April 1, 2020). by the fact that https://www.nytimes.com/2020/04/01/business/economy/coronavirus-recession.html Last accessed April 6, 2020. some of the biggest 2 Africa Check, “Nigeria’s Economy: Services Drive GDP, but oil still dominates exports” (August 29, 2018). consumers in the https://africacheck.org/reports/nigerias-economy-services-drive-gdp-but-oil-still-dominates-exports/ Last accessed April 16, 2020. sector have been 3 Jessica Jaganathan and Chen Aizhu (Thomson Reuters Market News, February 5, 2020) https://www.reu- significantly affected ters.com/article/china-health-energy-imports/coronavirus-paralyses-short-term-oil-gas-sales-into-china-idUSL- 4N2A526N April 6, 2020 by Covid-19. 4 Punchnews, “Coronoavirus: 50 Nigerian crude oil cargoes stranded in Market, says NNPC (March 11, 2020)

www.kennapartners.com OIL PRICE DIP & COVID-19: A TWOFOLD IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY 3 Dwindling Oil Prices and the Nigerian Economy Goldman Sachs Historically, the Nigerian economy has always fared poorly with low prices in the posits that given the international oil market. This is due to the fact that the oil and gas industry is the mainstay dwindling oil price of the Nigerian economy. As the in the international oil market continues its downward slope, experts believe that as other oil rich nations make matters worse by in the international selling at a discount, Nigeria will find it extremely difficult to find buyers of its crude and will oil market, there is be forced to sell at even lower prices when it eventually finds buyers. This does not augur bound to be pressure well for the economy. on Nigeria’s balance The Federal Government of Nigeria passed the 2020 budget with a for crude of payment (BoP) oil to sell for 57 dollars per barrel of oil. With this situation, the Government is even less since crude oil likely to achieve its oil revenue target for 2020 thus making it extremely difficult if not accounts for up to 85 outright impossible to finance its budget from its main revenue earner.5 This loss will be percent of Nigeria’s felt across the various sectors of the economy and may force the government to begin to goods exports draw from its diminishing excess crude account or worse, increase government debt. The latter situation will lead to an even worse economic situation for the country – the depletion and 73% of total of the country’s foreign reserves. Difficulty in payment of workers’ salaries, increased exports of goods and unemployment, increased inflation rate, inability to finance various projects, etc. are only services. some of the many potential knock-on effects of this challenging economic situation will have across the country.

The NNPC has recently expressed its intention to design measures that would greatly reduce the cost of crude oil production in the bid to create markets for Nigeria’s oil and gas products. It is hoped that these measures will be effective.

Goldman Sachs posits that given the dwindling oil price in the international oil market, there is bound to be pressure on Nigeria’s balance of payment (BoP) since crude oil accounts for up to 85 percent of Nigeria’s goods exports and 73% of total exports of goods and services. (The investment bank further argues that such pressure on the country’s BoP will hugely impact local monetary conditions. This can lead to the Naira further depreciating against the US Dollar.

Fareed Zakaria a CNN anchor also takes the position that “the world cannot afford to let Nigeria explode over the coronavirus pandemic”, he further notes that “owing to the drop in the demand for oil globally, the implications for countries like Nigeria could be political turmoil, revolutions, crackdowns and maybe terrorism”.

Impact of Covid-19 on Oil and Gas Contracts The impact of Covid-19 on the oil and gas industry has dire implications from non- performance to abandonment of various contracts across the oil and gas value chain. With this situation, it is expected that parties will be relying heavily on force majeure clauses in their various contracts to justify failure to meet their obligations.

Force Majeure and gas leases, joint operating agreements (JOA), master service agreements, and gathering or sales contracts usually contain a force majeure provision; many of which expressly include pandemics and epidemics. A force majeure event can be referred to as an occurrence which can be said to be reasonably outside the control of a party and which can also prevent such a party from carrying out its obligations in a contract. Under common law, force majeure can only be claimed by a party where it has been specifically provided for as a contractual term. Alternatively, especially within the specific context of Covid-19, a party can only rely on the common law doctrine of frustration where the force majeure clause was not specifically provided for in the contract.

5 Yomi Kazeem, ‘The coronavirus outbreak and tumbling oil prices are triggering a dollar shortage in Nigeria,’ Quartz Africa, available at; https://qz.com/africa/1817186/coronavirus-oil-price-crash-trigger-dollar-shortage-in- nigeria/

4 OIL PRICE DIP & COVID-19: A TWOFOLD IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY www.kennapartners.com The Court of Appeal has also defined force majeure in Globe Spinning Mills Nigeria Plc v Reliance Textile Industries Limited6 as something that is unexpected and unforeseen The effect of a force happening, making nonsense of the real situation envisaged by parties majeure clause is Force majeure can only be claimed by a party where it has been specifically provided for that it relieves a as a contractual term. The Courts would not take it upon themselves to make contracts for party from liability parties and are always reluctant to read meanings into contract terms on which there is no for a delay or an agreement. This much has been stated by the Supreme Court in BFI Group Corporation v inability to carry Bureau of Public Enterprises7 and Baker marine (Nig) Ltd v. Chevron (Nig.) Ltd.8 out its contractual For a party to successfully rely on force majeure, there are certain conditions that must be obligations under the complied with by such a party. These conditions are; contract. However, • The event which the party seeks to rely on as a force majeure must be one which is for this clause to be beyond the reasonable control of the party seeking to rely on it; triggered, the party in • The ability of the party who has been affected to perform the contract must have question must be able been impeded or hindered or prevented by the event in question; and to reasonably show • The party who has been affected must have been seen to have taken all steps some connection which could reasonably have mitigated or avoided either the event itself or the or link between the consequence of the event. event in question and Since the force majeure clause is usually provided for as a contractual term, the clause the party’s inability may delimit or qualify what may be considered to be a force majeure event between the parties and in relation to the particular contract. It may either give broad categories of what to carry out the the parties may call a force majeure event or specifically identify a list of events which the contractual obligation parties have already agreed will be regarded as force majeure events. in the contract. The effect of a force majeure clause is that it relieves a party from liability for a delay or an inability to carry out its contractual obligations under the contract. However, for this clause to be triggered, the party in question must be able to reasonably show some connection or link between the event in question and the party’s inability to carry out the contractual obligation in the contract. The language of the clause must also be considered by the party in question, i.e. where the force majeure clause relieves a party from liability for a situation which completely prevents his ability to perform the contract, that might appear to be easier to be relied upon than one which relieves the party from a mere impediment (which may not prevent but only delay or make performance more onerous) to a performance of the contract.

As a general rule, force majeure clauses require the party seeking to rely on them to have taken all reasonable steps to mitigate or avoid the consequences of the force majeure event. Accordingly, this will usually require that the party must have explored options or reasonable alternatives to ensure that the contract is performed. There is no general conception of what will be a useful and viable alternative and this is usually dependent on the nature of the contract entered into between the parties.

The party who seeks to place reliance on the force majeure clause will usually be required to notify the other party of the force majeure event and support it with all the relevant evidence for the non-performance of the contract. Where the force majeure event has occurred, this may either suspend the obligations under the contract or relieve the party of liability for non-performance, depending on the contractual terms and the nature of the contract between the parties.

It is also important to analyse force majeure and Covid-19 alongside various oil and gas industry standard agreements. For instance, the Energy Charter treaty defines Force majeure to mean “irresistible compulsion or coercion, unforeseeable course of events, fulfilment of contract.” It is arguable that the pandemics and lock downs may classify as “unforeseeable course of event”.

6 (2017) LPELR-41433 (CA) 7 (2012) LPELR-9339 (SC) 8 (2006) 8-9 SCM 103

www.kennapartners.com OIL PRICE DIP & COVID-19: A TWOFOLD IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY 5 Another example is the AIPN Model for Joint Operating Agreement (JOA). One of the specific events listed in the optional provision of the model contract is “lockouts, and other industrial disturbances even if they were not beyond the reasonable control of the Party”. An example of a force majeure clause that specifically provides for pandemics is the South Eastern African upstream license force majeure clause; it also includes quarantines and public order disturbance.

Where a standard oil and gas agreement does not specifically include a pandemic or epidemic, parties seeking to invoke a force majeure clause may be able to reply on force majeure provisions such as governmental action, act of God, etc. Parties may also be able to re-negotiate such contracts.

Interestingly, the Nigeria Department of Petroleum Resources on March 30, 2020 issued an Industry Circular to all oil and gas operators and service providers on the management of the Covid-19 outbreak. The said circular provides that the current situation is considered “force majeure” to ensure the safety and welfare of all personnel and to contain the spread of COVID-19. The Industry Circular further urges all operators and their contractors to ensure strict compliance with the government directives on social distancing, lock down, etc. and requires the demobilisation of personnel from sites to the extent required to satisfy the requirements.

Frustration Where the contract entered into between the parties does not contain a force majeure clause, the parties may also be able to rely on the common law doctrine of frustration. Conversely, where there is a force majeure clause in the contract, the parties will not be able to place reliance on the common law doctrine of frustration to excuse non-performance.

The Supreme Court expatiated on the doctrine of frustration in AG Cross Rivers State v AG. Federation & Anor 9 as it held that:

The doctrine of frustration is applicable to all categories of contracts. It is defined as the premature determination of an agreement between parties, lawfully entered into and which is in the course of operation at the time of its premature determination, owing to the occurrence of an intervening event or change of circumstances so fundamental as to be regarded by law both as striking at the root of the agreement and entirely beyond what was contemplated by the parties when they entered into the agreement.

For a successful plea of frustration in a contract under common law, the following conditions/ Where the contract criteria must be satisfied by the party seeking to plead it; entered into between • The event in question must not have been due to the fault of any of the parties to the the parties does contractual agreement; not contain a force • The event in question must not have predated the formation of the contract and must majeure clause, the not have been one which the parties might or should have foreseen; and parties may also be • The event in question has made it impossible to perform the contract at all or in a state able to rely on the that was envisaged by the parties at the formation of the contact. common law doctrine The effect of a successful plea of frustration on the terms of the contact is that it has of frustration. the capacity to relieve a party who pleads it from sanctions that ought to apply when the contract is not performed. Accordingly, it will be deemed that the contract has come to an Conversely, where end or the obligations have been terminated. As such the parties are no longer contractually there is a force bound to fulfil their contractual obligations. As can be gleaned from the conditions stated majeure clause in above, it is much harder to prove that a particular event has frustrated the contractual the contract, the obligations of the parties under the contract than it is for the parties to prove that a particular parties will not be event amounts to a force majeure. able to place reliance Impact of Covid-19 on Employments within the Oil and Gas Industry on the common law What makes Covid-19 such a threat to stability and growth in the oil and gas industry is the doctrine of frustration challenging nature of the social distancing measures that Governments have been forced to excuse non- performance. 9 (2012) LPELR-9335(SC)

6 OIL PRICE DIP & COVID-19: A TWOFOLD IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY www.kennapartners.com to introduce as a result of it. This can be problematic for the employees who earn their From a legal perspective, bread from the activities in the industry and for the economic impact of the projects and the lockdown order in activities that these employees were scheduled to conclude during this period. major cities in Nigeria The International Labour Organisation (ILO) estimates that the Nigerian oil and gas industry will also negatively affect creates over 65,000 direct jobs in Nigeria and 250,000 jobs in non-direct employment. In the the labour force in the oil wake of the Covid-19 crisis, the Department of Petroleum Resources (DPR) via its Industry and gas industry. This is Circular ordered oil and gas companies to reduce their offshore workforce. The measure due to the fact that by the is a part of the plan of the Government to contain the spread of the virus. This came after Nigerian Labour Act, the the Nigeria Centre for Disease Control and Nigerian Ports Authority (NPA) announced that companies in the oil and six workers on the Siem Marlin offshore rig were diagnosed with Covid-19. The order by gas industry can easily the DPR also stated that all offshore travel would now require a DPR permit. With this new declare a redundancy normal in the oil and gas industry, this is expected to negatively affect efficiency across and layoff a good number the value chain in the industry and lead to redundancy in the industry. All these, happening of their staff. at a time when the oil price in the international oil market is dwindling. The combination of these two portends great danger for not just the oil and gas industry but the Nigerian economy as a whole.

From a legal perspective, the lockdown order in major cities in Nigeria will also negatively affect the labour force in the oil and gas industry. This is due to the fact that by the Nigerian Labour Act, the companies in the oil and gas industry can easily declare a redundancy and layoff a good number of their staff. There will be good economic arguments to support such a move. While this will arguably help these companies keep their heads above water, it will have severe consequences on the economy with a good number of Nigerians becoming unemployed. Where this extreme measure is not adopted, it can also lead to pay cuts these companies. This has been the trend by many companies globally and the mere fact that the Nigerian government has not begun the implementation of any fiscal policy which can help prevent this situation (as has been the case in many other countries) makes this an even greater possibility. Needless to say that the impact will be devastating on the economy.

Conclusion If any silver lining could be sought in the current cloud hanging over the Oil and Gas industry, it may be that it is a reminder that the government should revamp the refineries and diversify the economy. This is the easiest way to ensure that the sneeze in the industry does not create a cold across various other sectors of the Nigerian economy. For stakeholders in the industry, the fiscal year 2020 will present very difficult challenges to the oil market. While the NNPC continues to fashion strategies to hopefully ensure that the situation in the international oil market does not severely affect the industry locally, it is hoped that the Government can effectively craft a way to save the Naira and the economy.

For the performance of contracts in the industry, it is also expected that post-Covid-19, there will be innumerable disputes on the applicability of force majeure clauses and the common law doctrine of frustration. In relation to this, oil companies can do the following:

• Extensively review the force majeure clauses contained in the various contracts they have entered into with third parties. This is in the bid to ascertain the nature of the events that will qualify as force majeure and whether the language of the contract permits Covid-19 into its force majeure clause;

• Where there is a force majeure clause in the contract, take advice on whether there are viable alternatives to mitigate or avoid the effect of Covid-19 on the performance of the obligations between the parties;

• In the bid to satisfy all the necessary preconditions for the successful plea of force majeure, have its advisers consider whether all the conditions have been met, there is evidence to support it and draft the necessary notices to the other party of the effect of Covid-19 on its ability to fulfil the terms of the contract;

• Take guidance on what the effects or consequences of the force majeure claim might be based on the terms of the contract between the parties;

www.kennapartners.com OIL PRICE DIP & COVID-19: A TWOFOLD IMPACT ON NIGERIA’S OIL AND GAS INDUSTRY 7 • Where the business or individual is the contracting party receiving a force majeure notice, it should have its Lawyers advise it on whether the necessary preconditions under the law and based on the terms of the contract for a successful plea of force majeure have been complied with;

• Where there is no force majeure clause, take advice on whether there can be a successful plea of frustration to terminate the contract given the nature of the contractual obligations between the parties; and

• Take advice on what role, if any, insurance may play in assisting it in recovering any loss arising that it may have incurred as a result of the novel corona virus pandemic.

For the benefit of the labour force in the country and preserving the current unemployment level in the country (as opposed to making it worse), it is hoped that these companies will A Kenna Partners’ adopt the less severe measures, whilst taking the measures that are optimally necessary Energy & Natural to ensure that the enterprise is sustained. Resources Unit ______Publication Kenna Partners

April 6, 2020 Contributors

Okechukwu Ekweanya Energy Practice Unit

Chinonye Nnaji Energy Practice Unit

Daniel Olika Energy Practice Unit

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