FINANCE - 25 NOV 2019

Nigeria and P&ID: The story behind the $9.6 billion judgement

Nigeria and P&ID: The story behind the $9.6 billion judgement
Gas flaring has been a big problem in Nigeria, even though government attempts to solve it have been unsuccessful

In January 2017, an independent London tribunal found that Nigeria was liable for $6.6 billion in damages against Process and Industrial Development (P&ID) after it failed to deliver on terms agreed in a 2010 gas facility contract. Three years later, and prompted by P&ID looking for enforcement of the ruling, a United Kingdom (U.K.) court ruled that Nigeria’s state-owned assets could be seized if the country refused to settle its bill, which had risen to $9.6 billion because of accrued interest. Nigeria was granted the right to appeal but asked to pay $200 million in the meantime.

The judgement caused a stir in Nigeria, given that the sum is over 20% of both the country’s reserves and the value of its annual exports. Amid this, the government essentially accused international parties of trying to scam the country while the Economic and Financial Crimes Commission expanded its probe into the initial deal by seeking assistance from Irish and U.K. law enforcement.

How did Nigeria find itself on the receiving end of one of the largest ever judgements against a sovereign state? And why was this verdict delivered 5,000 kilometres from home? The P&ID case is a classic Nigerian tale of broken promises, scheming individuals, and an inept government. This article tells that story while looking to the future to assess Nigeria’s fate.

 

The Nigerian Government meets P&ID

For decades, oil companies simply flared the gas that escaped when they excavated crude oil from oilfields, resulting in an environmental and health crisis in the Niger Delta. In 2008, the government decided it would end this practice, and instead capture and refine the gas to produce electricity via gas-powered plants.

Despite being one of the premier oil & gas spots in the developing world, the government found few takers among international oil companies (IOCs) when it laid out its proposal. IOCs were sceptical about investing in the infrastructure required to capture, transport and refine the gas. Instead, thirteen small and virtually unknown companies were finally granted concessions for the project. One of these was P&ID. Where Nigeria’s trusted international energy partners feared to tread, an obscure company boldly ventured—in hindsight, perhaps the first sign that all was not as it seemed.

On paper, P&ID was an engineering and project management company. Its founders and principals, Michael Quinn and Brendan Cahill, both Irishmen, claimed to have over 60 years of combined experience of project management and execution in Nigeria.

In reality, P&ID was a shell company registered in the British Virgin Islands with no operational history. It did not even have a website. The company has since created https://pandidfacts.com which is more a myth-busting blog than an actual website. In the time since the deal unravelled, questions have been asked about how this relatively unknown company came to be awarded this deal. Did no one at the Nigerian National Petroleum Corporation (NNPC) google the company? How was the lack of a website, office address, number of employees and previous experience with deals like this ignored by the Nigerian government?

Well, you see, the deal (and subsequent case) was never really about P&ID; it’s always been about the men behind it. One of them, Michael Quinn, was known to have strong ties with senior government officials and even presidents. Neil Murray, a former colleague of Quinn’s and friend for thirty years, confirmed to Bloomberg that Quinn knew Obasanjo and Yar’Adua personally.

 

President Buhari recently issued a stinging rebuke of the P&ID judgment

 

Michael Quinn: An adopted Nigerian

P&ID was not Quinn’s first government contract. He was a veteran with clear themes in his past work.

In 2001, Quinn was involved in a failed contract to repair and upgrade 36 British-made scorpion tanks in Nigeria. The Irishman had charged the Nigerian army for tank parts that were never delivered, costing the government millions of dollars and earning him a considerable fortune. Quinn was eventually charged with espionage and handling secret military materials in 2006, but the case was dropped within the year amid claims from some prosecution lawyers that the government had intervened.

There are many others.

One notable example is an Air Force repair contract that the Nigerian Air Force reneged on within months. The issue was taken to a Nigerian arbitration panel which ruled in Quinn’s favour. But the Air Force never paid up, leaving Quinn and his partners upset. Brendan Cahill, P&ID’s co-principal, wrote to colleagues in 2013, saying, “The moral of the story is that ideally, the ‘seat’ of arbitration should be outside of Nigeria and preferably in London.” Cahill’s accurate assessment of the peculiarity of the Nigerian judicial system would acquire a more sinister interpretation given the events that would play out in the P&ID case and the surgical precision with which the company would pursue its case.

Moreover, Quinn’s dallies with governments and the law were not restricted to Nigeria. In 1994, one of Quinn’s companies was awarded a $4.3 million contract by the European Union (EU) to produce steel in a cleaner way in Ireland. At the time, a member of the European Parliament publicly expressed suspicions about the deal. However, Quinn’s methods were honed; he was very good friends with the Irish Prime Minister at the time, earning him valuable political protection. Ultimately, the project produced zero tons of steel, and instead, triggered an EU investigation which concluded that there had indeed been some fraudulent activity but it was unable to determine the perpetrators.

This trend would continue for the next two decades—Quinn cleaning out and leaving governments with egg on their face—until he died of cancer aged 75 in 2015.

 

The Deal

In 2010, P&ID entered into a 20-year agreement to build a gas processing facility that would refine wet gas generated from oil drilling into lean gas that could be used for electricity generation. P&ID would refine the gas and give it to the Nigerian government for free and would make its profit from selling the by-products (Natural Gas Liquids) on the international market. In return, the Nigerian government would guarantee the supply of wet gas and construct pipelines and other infrastructure to transport the gas to the processing facility.

By mid-2012, neither party had laid a single brick in respect to its obligations. P&ID viewed the failure of the government to construct the facilities to begin the deal as a renouncement of its obligations per the contract and began an arbitration proceeding against the government. Why arbitration? The contract detailed arbitration as the means for settling disputes with the seat of arbitration determined to be London, United Kingdom. Despite the Nigerian government contesting for the proceedings to take place within the country, a three-man tribunal (one representative appointed by each party and an independent member) was set up to assess the case in London.

Brendan Cahill had gotten his wish.

 

The Case

Neither party had fulfilled its obligations so why was the Nigerian government being asked to pay damages?

At the tribunal hearing, Michael Quin explained that P&ID had already invested $40 million on preparatory engineering work to make sure they could execute the project even before the contract was awarded. Interestingly, Theophilus Danjuma, the billionaire one-time Defence Minister and a former friend of Quinn’s, revealed in a Bloomberg interview that his company had spent the $40 million and Quinn was only a consultant. He also claimed that Quinn applied for the gas contract without his knowledge.

Apart from the money invested, Quinn also claimed that the company had secured (but not purchased) land from the Cross River government, as specified in the agreement. In addition, P&ID had gotten confirmation from Addax Petroleum, the oil & gas upstream company that would supply some of the gas, and secured financing for the gas processing facility. In short, P&ID was ready to proceed and communicated as much to the NNPC in May 2010.

For two years, all P&ID got from NNPC was radio silence, even though the first gas was supposed to flow to the facility by the end of 2011. As a result, it asked the tribunal to award damages based on the lost profit the company would have earned if the project had been carried out. The tribunal agreed and, in a 2-1 judgement (the Nigerian member dissented) January 2017, awarded P&ID $6.6 billion in damages and set an annual interest rate of 7% from the time of the contract breach (2013), resulting in the $9.6 billion figure currently hanging over Nigeria’s head.

Did the tribunal make the right call?

Nigeria’s lawyers argued otherwise, stressing that P&ID should only be awarded nominal damages (i.e. they should not be compensated for lost future earnings). The government’s argument was two-fold: that P&ID had not met its obligations either and that at the point of the arbitration it should have sought to mitigate its loss by pursuing other investment opportunities.

Let’s analyse each of these arguments in turn.

On the first, the government seemed to make a good point. P&ID had not built the gas facility so it could not reasonably claim that the government’s failure to fulfil its side of the bargain had prevented the company from earning its future profits. If there was no facility, there could be no profits. However, the tribunal rebuffed this view by highlighting that there was no evidence to suggest that P&ID’s failure to build the processing plant arose from any reason other than the government’s refusal to deliver on its end.

Moreover, the tribunal pointed to the $40 million invested (which Nigeria did not dispute) as proof of P&ID’s intention and dismissed the idea that P&ID should have gone further than it did with a memorable quote: “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.” Finally, the tribunal highlighted that both U.K. and Nigerian law specify that damages should be calculated to get the claimant to the position they would be if the contract has been fulfilled. In essence, the law says that it is not about whether P&ID actually built the plant but if they would have had the government not reneged on the contract. Taken further, this suggests that Nigeria would probably have gotten away with this argument if there was any proof that P&ID never intended to build the facility. At this point, it is worth asking whether Michael Quinn’s history of shady and incomplete projects should count as proof.

How about the argument that P&ID should have mitigated its loss? Was the government correct in saying that it should not be asked to compensate P&ID if the company chose to sit on its hand doing nothing for the next 20 years? The dissenting (Nigerian) member of the tribunal thought so, arguing that PID should have taken reasonable steps to mitigate the loss by finding another investment opportunity when it was clear that the gas processing facility was not going to work out.

Again though, the argument does not survive scrutiny. The other two tribunal members pointed out that even if P&ID had found another investment opportunity, it is not clear why that should be considered a mitigant for the loss of the gas facility; after all, the company could have executed both investments.

With its two defences rejected by the tribunal, Nigeria faced only one possible outcome.

 

Those who live by the sword, die by the sword

The Nigerian government has been quick to paint itself as the victim, but it is far from blameless. Bizarrely, the government seemed to have underestimated P&ID and the possibility of losing the case. Perhaps this overconfidence was fostered by the fact that the Nigerian government defaults on contracts with domestic counterparties all the time, usually with no consequence. For example, Nigeria continues to owe its oil production Joint Venture partners billions of dollars as part of its contribution to funding oil production. Meanwhile, many local construction companies have large receivables from the government dating back many years.

Whatever the reason, the Nigerian government may look back at how it handled the case with regret. Here’s a run-through of what happened from the first time P&ID served the government:

Despite all this, the Nigerian government has gone on the offensive after the latest ruling. Zainab Ahmed, the Minister of Finance, Budget and National Planning, called the judgment an attack on every Nigerian. Godwin Emefiele, the governor of the Central Bank of Nigeria, called P&ID a fraud.

Nigeria has vowed to take all necessary diplomatic and legal means to prevent its assets being seized, and in his latest speech to the United Nations, President Buhari issued a stinging rebuke of P&ID. The government seems to have adopted the strategy to go down fighting, with an Abuja Court permitting them to seize P&ID’s local assets, and the EFCC hastily arraigning two P&ID directors, James Nolan and Richard Quinn. In short, Nigeria remains on the offensive, bolstered by President Buhari’s view that the whole matter is a scam. The time—and opportunity—to make peace is quickly slipping away.

 

What next?

A thicker plot. After the court ruling, a U.S. hedge fund called VR Capital acquired a 25% stake in P&ID, a company with no website but one potentially very profitable asset. VR Capital got to work very quickly in helping P&ID secure the payment, and we don’t have to look far to see how this could play out. In the late 2000s, Argentina found itself in a legal battle with another U.S. Hedge fund—Elliot Capital Management—trying to force the South American country to pay a 2001 sovereign bond it owed. Elliot Capital Management ended up seizing a ship owned by the Argentine Navy while it was docked in Ghana, and the case is often cited to show how ruthless hedge funds can get when recovering money owed.

And that is not all. The U.S. Senate lobbying register shows that P&ID has hired law firms and professional lobbyists to help it secure the payment from the Nigerian state. These include Black Diamond Strategies, a firm with Doug Davenport, former Trump strategist on the payroll, sovereign debt fight specialist DCI Group and Kobre & Kim, the law firm that represents it in court. Clearly, P&ID is intent on securing its awarded damages, and one can only hope the Nigerian government does not underestimate them the second time around. The ramifications of this matter will have long term effects on Nigeria’s finances and reputation (and respect for the rule of law), but will also lay down a mark in international arbitration, which is a big part of global trade.

Nigerians may feel hard done by, especially as Michael Quinn’s history and eagerness to enter the contract suggests something amiss from the start. After all, how far can you separate the deal from the dealmaker? Still, a deal is a deal and Nigeria is arguably the more blameworthy party, if not for signing the contract in the first place—and then reneging, then for how the arbitration process was handled. Moreover, neither the Nigerian judiciary nor the anti-corruption agency has covered themselves in glory with the tactics employed since the ruling. And if it turns out that the P&ID deal was a scam all along, it would be quite ironic that the country most popularly associated with fraud, may have found itself on the receiving end of the fleece of the century.

Follow this writer on Twitter @pheekayo. Subscribe to read more articles here.  

 

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