NATURE OF DISPUTES THAT MAY BE REFERRED TO ARBITRATION

By Azubike Okoye, FCIArb

  1. Introduction:

Arbitration is a process by which disputes or difference between two or more parties as to their mutual legal rights and liabilities is referred to and determined judicially with binding effect by the application of the law by one or more persons (the arbitral tribunal) instead of by a court.[1]

An arbitration agreement is therefore where two or more persons covenant that a dispute or a potential dispute between them shall be resolved and decided in a legally binding way by one or more impartial persons in a judicial manner, upon evidence put before him or them. The agreement is called an arbitration agreement or a submission to an arbitral proceeding when after a dispute has arisen, it is put before such person or persons for decision. The procedure is called arbitration and the decision when made is called an award.[2]

It is apposite to note that arbitration may either be voluntary or compulsory. In other words, it may be by parties’ agreement or by statutes. A voluntary arbitration is by mutual consent of the parties whilst a compulsory arbitration is that which is demanded by the provision of the statute.

2.    Meaning and test of ‘dispute’ for purposes of arbitration:

The word dispute means contention, discord, conflict, friction and antagonism. It also implies a conflict or controversy. If there was concord and harmony, then the parties have no valid legal basis to seek a reference to arbitration. Our apex Court has defined dispute to mean “act of arguing against, controversy, debate, contention as to right, claims and the like or on a matter of opinion.”[3]

A matter shall be referred to arbitration when it becomes clear or is to be interpreted to mean that a difference or dispute exists between the contending parties. Therefore, where a party admits liability of an existing debt but simply defaults to pay, or when a cause of action has been extinguished owing to the death of a party embedded in the Latin maxim, actio personalis noritur cum persona, then there is no dispute to arbitrate upon or relevant party to arbitrate with. The conflict which the parties to an arbitration agreement agree to refer to must consists of a justiciable issue triable civilly. A fair test of this is whether the difference can be compromised lawfully by way of accord and satisfaction.[4]

The next step is to determine whether the dispute or difference necessarily arises from or it is connected with the clause contained in the agreement i.e. it falls squarely within the scope of the parties’ agreement. If a party to an agreement has compromised his position by conceding to numerous alternative remedies to the other party, other than resort to arbitration, and by showing an intention to compromise, to an act of the party which he is complaining about, he has, in consequence, robbed himself of competence or premise of referring the subject matter of complaint to arbitration.[5]

3.    Arbitrable Disputes:

It is a general perception that any agreement that contains an arbitration clause shows a clear and unmistaken indication that the contract requires the parties to resolve their disputes through an arbitration process. Unarguably, arbitration is generally encouraged in Nigeria in particular and the international community in general because arbitration clauses reduce the court dockets to resolve disputes. Therefore, in keeping with the sanctity of agreements, the law is enthusiastic to ensure the validity of arbitration clauses notwithstanding any apparent inadequacy or lack in the normal formal language with legal contracts.

Hence, once parties covenant in their agreement to resolve their dispute through arbitration and an issue is perceived or is to be interpreted to mean a difference or dispute exists, such dispute shall be referred to arbitration. The difference or dispute must, however, arise from the clauses contained in the agreement i.e. fall within the scope of the parties’ agreement. Therefore, it is not every dispute or difference that can be referred to arbitration. The Disputes must be capable of being disposed of judicially, in a civil form. These disputes include all matters in controversy about any real or personal property, disputes as to whether a contract has been breached by either party thereto, or whether one or both parties have been discharged from performance thereof.[6]

Sections 48 (b) (i) & (ii) and 52 (2) (ii) of the Arbitration and Conciliation Act, CAP A18, Laws of Federal Republic of Nigeria[7] provide that even when an award has been procured and it becomes clear that an agreement on which the arbitral award was premised on arose from an invalid contract or the subject matter of the dispute is not capable of settlement or is contrary to public policy, such an award is bound to be set aside. This, therefore, reinforces the position that the dispute must be capable of settlement before it qualifies as an arbitrable dispute. This is also the same position in international arbitration under Chapter VII, Article 34 (2) b) and Chapter VIII, Article 36 1) a) i) & 1 b) of UNCITRAL Model Law on International Commercial Arbitration 1985 with amendments as adopted in 2006.[8]

4.    Matters that cannot be referred to Arbitration:

It is trite that the disputes, which are the subject of an arbitration agreement, must not cover matters, which by the law of the State are not allowed to be settled privately or by arbitration usually because this will be contrary to public policy.[9]

It is manifestly clear that the following categories of matters cannot be the subject of an arbitration agreement as enunciated by the Nigerian Supreme Court and therefore cannot be referred to arbitration: –

  1. an indictment for an offence of a public nature;
  2. disputes arising out of an illegal contract;
  3. disputes arising under agreements that are void as being by way of gaming or wagering;
  4. disputes leading to a change of status, such as a divorce petition;
  5. any agreement purporting to give an arbitrator the right to give judgment in Therefore, a criminal matter, like the allegation of fraud does not admit of settlement by arbitration. This is because these issues are a matter of public concern. It is contrary to public policy to compromise such disputes.[10]

Similarly, the Nigerian Court of Appeal has held in two decisions[11] in Esso Petroleum and Production Nigeria Ltd & Anor. (SNEPCO) vs. NNPC unreported Appeal No. CA/A/507/2012; delivered on 22 July 2016 and Shell (Nig.) Exploration and Production Ltd & 3 others vs. Federal Inland Revenue Service unreported Appeal No. CA/A/208/2012; delivered on 31 August 2016 that tax disputes arising from a Production Sharing Contract (PSC) are not arbitrable because the subject matter of the dispute is within the exclusive jurisdiction of the Federal High Court. The rationale for the above decisions seems to appear that it may be contrary to public policy to compromise the revenues due and payable to the government. These decisions are currently subject of appeals to the final Court in Nigeria. Until then, they remain the authority that tax disputes are not arbitrable.

5.    Conclusion:

It is pertinent to note that by the provisions of Section 2 of the Arbitration and Conciliation Act 1988 (ACA). (Cap A18 Laws of the Federation of Nigeria 2004)[12] an

arbitration agreement shall be irrevocable except by agreement of the parties, or by leave of Court, or a Judge. Consequently, the mere fact that parties agree to proceed to arbitration once there is a dispute does not ipso facto make the agreement to arbitrate irrevocable because not all disputes are arbitrable. The disputes must be triable civilly. It should not be illegal or tainted with a crime or fraud.

However, it is worthy of mention that the right to go for arbitration is a personal right. It is not a constitutional right. Therefore, it can be waived by either of the parties to the agreement expressly or by contract, more particularly where the two contending parties submit their disputes to Court for determination.[13]

 

[1] Miss Nigeria –v- Oyedale (1960) NCLR 191

[2] C. N. Onuselogu Enterprises Ltd. -v- Afribank (Nigeria) Plc. (2005) 12 NWLR (Pt. 940) 577

[3] Plateau State & Anor. v. AG Federation & Anor.(2006) LPELR-2921(SC)

[4] Chief Felix K. Ogunwale v. Syrian Arab Republic (2002) 9 NWLR (Pt. 771) 127

[5] United World Ltd Inc. –v- MTS Ltd (1998) 10 NWLR (Pt.568) 106.

[6] BCC Tropical Nigeria Ltd. v. The Government of Yobe State of Nigeria & Anor. (2011) LPELR-9230 (CA).

[7] Sections 48 (b) (i) & (ii) and 52 (2) (ii) of the Arbitration and Conciliation Act, CAP A18, Laws of Federal Republic of Nigeria

[8] Chapter VII, Article 34 (2) b) and Chapter VIII, Article 36 1) a) i) & 1 b) of UNCITRAL Model Law on International Commercial Arbitration 1985 with amendments as adopted in 2006

[9] B. J. Export & Chemical Company Ltd v. Kaduna Refining & Petro-Chemical Company Ltd (2002) LPELR- 12175(CA).

[10] Kano State Urban Development Board V. Fanz Construction Ltd. (1990) 4 NWLR (PT.142) 1 at 32-33.

[11] Esso Petroleum and Production Nigeria Ltd & Anor. (SNEPCO) vs. NNPC unreported Appeal No. CA/A/507/2012; delivered on 22 July 2016 and Shell (Nig.) Exploration and Production Ltd & 3 others vs. Federal Inland Revenue Service unreported Appeal No. CA/A/208/2012

[12] Section 2 of the Arbitration and Conciliation Act 1988 (ACA). (Cap A18 Laws of the Federation of Nigeria 2004)

[13] Kurubo v. Zach-Motison (Nig.) Limited (1992) 5 NWLR (Pt. 239) 102.

THE NIGERIAN PETROLEUM INDUSTRY ACT 2021: ‘NEW BEGINNINGS & NEW CONCERNS’

In 2021, the most significant development in the energy sector was the enactment of the Petroleum Industry Act (PIA), bringing to a close a 20-year effort to reform the Nigerian oil and gas sector, with the aim of overhauling the regulation and governance of the oil and gas industry.

A lot has changed in the sector domestically and globally since the reform efforts began. The number of indigenous oil and gas firms has grown, but so has the number of oil-producing countries in Africa. Militancy in oil-rich communities, while remaining, has diminished. Concerns over climate change have fuelled aggressive efforts to reduce global consumption of fossil fuels, driving divestment from the Nigerian oil and gas sector by international companies and institutions.

The PIA represents a new beginning and an effort to meet the changes in the oil and gas environment. In 2019, the oil and gas sector accounted for about 5.8 percent of Nigeria’s real GDP and was responsible for 95 percent of Nigeria’s foreign exchange earnings and 80 percent of its budget revenues. The law is therefore far-reaching in its remit; however, it is complex, and serious concerns remain as regards its implementation.

If well implemented, the PIA can represent an international standard for natural resource management, with clear and separate roles for the subsectors of the industry; consisting of:

  1. The existence of a commercially oriented and profit-driven national petroleum company;
  2. The codification of transparency, good governance, and accountability in the administration of the petroleum resources of Nigeria.
  3. The economic and social development of host communities; environmental remediation; and a business environment conducive for oil and gas operations to thrive in the country.

The PIA which embodies 5 Chapters, 319 Sections, and 8 Schedules, was enacted to provide for the legal, governance, regulatory, and fiscal framework for Nigerian petroleum industry, the establishment, and development of and other related matters in the upstream, midstream and downstream sectors of the petroleum industry. It, therefore created an array of provisions and innovations that will affect the private, public sector and stakeholders in the oil and gas industry.

Key provisions

Dual Regulatory and Governance Architecture

NUPRC

The Act establishes dual regulators for the petroleum industry. One is called the Nigerian Upstream Petroleum Regulatory Commission NUPRC (the “Commission”), which is a body corporate with perpetual succession whose functions are limited to only the upstream petroleum activities as provided for in Section 4 of the Act, which provides that “the Commission is responsible for the technical and commercial regulation of the upstream petroleum operations”. The Commission is also established to ensure compliance with all applicable laws and regulations governing upstream petroleum operations.

NMDPRA

The other regulatory agency under Section 29 of the Act is the Nigerian Midstream and Downstream Petroleum Authority – NMDPRA (the “Authority”), responsible for the technical and commercial regulation of the midstream and downstream petroleum operations in the petroleum industry as provided under Section 29(3) of the Act.


NNPC

The PIA commercialises the perennially loss-making state-owned enterprise, the Nigerian National Petroleum Company (NNPC), turning it into the NNPC Ltd, a quasi-commercial entity the ownership of which shares shall be vested with the government, and the ministries of Finance and Petroleum, who shall hold the shares on behalf of the government.

Pursuant to the PIA’s provisions, the president of Nigeria will appoint the president of NNPC Ltd as well as heads and members of the regulatory agencies. Separately, the minister of petroleum, then, will head the industry with a wide range of powers to formulate, monitor, and administer government policy under the PIA.

Importantly, the PIA provides that 30 percent of the profits of the NNPC Ltd will fund a new entity, to finance exploration in other basins in the country (Frontier Exploration Fund). Ten percent of rents on petroleum prospecting licenses and 10 percent of rents on petroleum mining leases are also assigned to Frontier exploration. The PIA is unclear on whether there will continue to be exploration in existing basins.

Host Communities

The PIA aims to address the relationship between the oil companies/operators and the host communities by creating the Host Community Development Trust Fund (HCDTF) whose purpose will be to, among others, foster sustainable prosperity, provide direct social and economic benefits from petroleum to host communities, and enhance peaceful and harmonious coexistence between licensees or lessees and host communities.

Specifically, the law stipulates that existing host community projects must be transferred to the HCDTF, and each settlor (or oil license holder) must make an annual contribution of an amount equal to 3 percent of its operating expenditure for the relevant operations from the previous year. The management committee of the trust must include one member of the host community. In addition, the act stipulates a penalty for failure to comply with host community obligations, including revocation of license.

Section 257 of the PIA also imposes the responsibility to protect oil and gas assets on host communities and stipulates that any host community that fails to protect oil assets in its community from vandalism will be held accountable for the repairs.

Fiscal framework

The PIA introduces a new tax regime, replacing the existing petroleum profits tax with a hydrocarbon tax and introducing a tax on the income of oil companies. Under this new fiscal regime, hydrocarbons—including crude oil, condensates, and natural gas liquids produced from associated gas—will be subject to taxation. Notably, crude oil from deep offshore is excluded from the tax.

A controversial provision in the PIA is the provision stating that, in the event of supply shortfalls, only companies with active refining licenses or proven track record of international crude oil and petroleum products trading will be allowed to import such products. This is a controversial provision that has been interpreted as an attempt to confer monopoly powers on a few domestic refiners.

Finally, the fiscal framework provides for penalties for gas flaring arising from midstream operations. Revenues from these penalties will accrue to the Midstream and Downstream Infrastructure Fund and will be used to finance midstream and downstream infrastructure investment.

 

KEY ISSUES

The success of the PIA are conditional on Nigeria’s political and oil industry leaders overcoming some key challenges.

The PIA’s wording does create challenges to interpretation through imprecise language. This gives rise to ambiguity.  For example, it is unclear whether host community development trust obligations are additional to existing community levies (such as the Niger Delta development levy) or will be an aggregation of those levies. Similarly, the law is silent on the definition of “frontier basin” and host community, instead deferring to the NUPRC on the definition of frontier basin and to settlors or license holders on the definition of “host community.” These definitions are not neutral to revenue; they have revenue implications. This lack of clarity creates uncertainty and even possible disputes, especially if relevant parties define them differently.

Capacity building. This law is complex and complicated. While capacity in the oil and gas sector has been built over the years, the new legal provisions and fiscal framework will need new capacities to succeed. This challenge will be particularly acute in the new regulatory institutions; in the understanding, interpretation, and application of the law; and in the management of the funds, including the HCDTF.

There are several lingering North/South disagreements about the PIA. The bill that became the PIA was originally proposed by the executive (largely supported in the North) and passed largely along regional (North/South) lines. Leading politicians from the Niger-Delta states opposed it and many lawmakers from the South believe the bill advances Northern interests to the detriment of the South.

The African Continental Free Trade Area Agreement (AfCFTA) – One year After – A Fresh Air of Optimism in 2022?

On the 1st of January 2021, continental trade between African countries significantly changed with the official commencement of the African Continental Free Trade Area Agreement (AfCFTA).

The AfCTA was an initiative that had been in the pipeline since 2012, with five years of negotiations and other logistic planning, which finally crystallised on March 21, 2018, after 44 African countries signed the pact at an AU extraordinary summit in Kigali, Rwanda. Shortly after, 10 more countries, including Nigeria, added their signatures, and the operational phase of the AfCFTA was marked to kick off by mid-2020. However, the covid-19 pandemic threw a cog in these projections, leading to a delay in starting operations until 1 January 2021, when the AfCFTA officially kicked off.

African countries have not been able to scale up their economic activities due to a variety of reasons exacerbated by the conflicts in the 7 different regional trading blocs currently in operation, hence the need for a deeply integrated and outwardly united front from which to achieve the cohesion needed to boost the scale of economic activity in Africa. This considered, the AfCFTA is aimed at creating the world’s largest free trade area; one that integrates 1.3 billion people across 54 countries.

As at December 2021, 41 out of 54 signatory countries have ratified the treaty, making the AfCFTA the fastest instrument in the African Union to be ratified. The ratification is significant as it signals the increasing interest of the State parties. The fact that the top 4 economic powers and richest countries on the continent, Nigeria, South Africa, Egypt, Algeria have ratified the trade agreement is clearly also significant.

The year 2021 also saw the roll-out of the pilot phase of the Pan-African Settlement System (PAPSS), a combined initiative of African Export-Import Bank (AFREXIM) and the AfCFTA, which was formerly launched in Ghana on 13 Jan 2022. The PAPSS serves as the continent-wide platform for the processing, clearing and settling of intra-African trades and commerce payments. The system was developed by the AFREXIM and promises to reduce the cost and time of payments, lower the level of banking liquidity required to make payments, and improve central bank oversight of payments.

The full implementation of PAPSS is expected to save the continent more than US$5 Billion in payment transaction costs each year.

Given the interests generated by the AfCFTA and the potentials it holds for established businesses, start-ups and SMEs, it is expected that 2022 will provide another opportunity for the State Parties to make significant progress.

According to the UN Conference on Trade and Development – UNCTAD’s Economic Development in Africa Report 2021, the total untapped export potential of intra-African trade is around $21.9 billion, equivalent to 43 per cent of intra-African exports (yearly average for 2015–2019), with an additional $9.2 billion projected through partial tariff liberalization under the AfCFTA over the next five years. This statistic highlights the ultra-low level of intra-African trade when compared with that of countries in other continents, and in particular reflects Africa’s unenviable position as an exporter of raw materials to the rest of the world.

 

Optimism v Action

After the optimism that greeted the official launch of the AfCTA, one year after the launch, trade restrictions between African countries still abound. Although the pandemic may have had some effect on the AfCFTA’s integration goals, the reluctance of African leaders to open up borders and liberalising trade remains a major impediment.

AfCFTA had projected that the phase II negotiations consisting of the underlisted would be finalised and ratified by the end of 2021, namely:

  1. Trade in goods and services,
  2. Intellectual property rights
  3. Investment and competition policy, and
  4. E-commerce

The AfCFTA projections above have not been fulfilled and there are still many loopholes in negotiations that were not finalised in 2021 among member countries. There is still a feeling of uncertainty concerning where countries stand on the agreement— an uncertainty that has affected the AfCFTA’s implementation.

The abovementioned phase II negotiations and the general framework for trade in services appears to have taken a back seat pending the conclusion of the negotiations on rules of origin.

The following are the three key challenges:

  1. With African countries favouring protectionist policies in their African trade outlook, there is some unwillingness by State parties to ratify all the articles of the agreement exemplified by the prolonged negotiations on phase I consisting of rules of origin. Many African countries are still holding out on ratifying some of the phases of the AfCFTA. These countries, who make most of their revenue from exports to non-African countries, are yet to be convinced of the benefits that the AfCFTA to their economies.
  2. A lack of a manual of information for African businesses about the AfCTA regarding the ways to take advantage of it, and a substantial percentage of African businesses are still unaware of its terms (particularly the tariff arrangements). Until businesses are aware, the costs of trading under AfCFTA will remain high.
  3. A lack of customs infrastructure and policy to be able to complement the AfCFTA’s customs and tariff obligations (only three countries in the AfCFTA so far have the infrastructural and systemic customs capabilities on par with AfCFTA benchmarks), as well as a lack of capacity in the AfCFTA’s Secretariat to push the integration agenda, given its launch in the middle of the pandemic.

 

Private Sector Initiatives

Reports suggest that the AfCFTA enjoys wide acceptance and heightened interest amongst the young African entrepreneurs and SMEs who are ready to explore the potentials that a larger African market presents.

Private sector start-ups have notwithstanding the delays of States parties sought to integrate African trade with start-ups offering services for company formation and compliance across Africa’s 54 countries and others offering a single digital infrastructure for businesses to start, scale and operate in every African country efficiently.

More traditional companies namely, two of Africa’s major logistics companies, Ethiopian Airlines Group and A-E Trade Group, signed a MoU to establish the East African smart logistics and fulfilment hub, committed to the establishment of a business relationship to provide end-to-end logistics solutions across Africa. Also, some AfCFTA-focused organisations like the AfCFTA Young Entrepreneurs Foundation (AfYEF) – have been formed. This and many other intra-African private partnerships and agreements show that the private sector has been more enthusiastic about the AfCFTA than African governments so far.

 

Expectations in 2022

The priorities for the implementation of the AfCFTA regime is for the finalisation of negotiations such that the following are agreed upon:

  1. Member States should ensure the attainment of at least 90% attainment of the Rules of Origin. The Rules if properly crafted remain the building blocks for the industrialization of Africa through increase in local production and cross-border value chains. There are over 6000 tariff lines under the HS Code system and the AfCFTA ambition is to liberalize over 90% of them. The AfCFTA Rules of Origin would require that only made in Africa goods will benefit from the tariff concession. However, measures must be put in place to prevent its abuse as non-compliance will turn the member countries into dumping grounds and lead to significant job losses and displacements of workers in key sectors such as agriculture and manufacturing.
  2. Addressing non-tariff barriers in order to harmonised customs interconnectivity system and transit procedures across the major trade corridors in Africa.  For example, the Abidjan to Lagos trade route/corridor deserves special attention in view of its significance to the ECOWAS region. The non-tariff barriers inhibiting intra-trades across the Regional Economic Communities (RECs) should also be addressed.
  3. Providing access to private businesses and individuals of general information about AfCTA particularly about progress in Phases 1 & 2 negotiations.

Nigeria’s Suppression of Piracy and Other Maritime Offences Act (2019) and the Deep Blue Project (2021)

Nigeria’s Suppression of Piracy and Other Maritime Offences Act2019  and the Deep Blue Project aim to ‘prevent and suppress piracy, armed robbery’ and any other unlawful act against a ship, aircraft and any other maritime craft, including fixed and floating platforms.

As Nigeria gets set to deploy the Deep Blue Project to protect its coastal waters, the Nigerian Maritime Administration and Safety Agency (NIMASA) says “piracy will no longer be allowed to thrive”.

The combined effect of these two initiatives is to halt the rising trend of piracy and other illegal acts against maritime traffic. The objective being to enhance the flow of maritime activity in Nigerian waters and the Gulf of Guinea.

 

Nigeria’s Suppression of Piracy and Other Maritime Offences Act, 2019

The Suppression of Piracy and Other Maritime Offences Act 2019 (SPOMO) gives effect to the relevant provisions of the Convention for the Suppression of Unlawful Acts Against the Safety of Maritime Navigation, Protocol for the Suppression of Unlawful Acts Against the Safety of Fixed Platforms Located on the Continental Shelf (SUA) The SUA convention was adopted on 10 March 1988 and entered into force on 1 March 1992. Nigeria ratified his convention.

SPOMO has ended the controversy around whether the crime of sea piracy is defined in any local legislation. The Federal High Court has exclusive jurisdiction to determine matters of armed robbery and other unlawful acts at sea.

Without clear domestic statutes, the prosecution of parties suspected of sea piracy, prior to the law’s enactment, was problematic in Nigeria.

Notwithstanding the purported domestication of the SUA Convention (and its protocol) by section 215(h) of the Merchant Shipping Act 2007 there were doubts about the proper domestication of SUA as required by the Nigerian Constitution.

Section 3 of SPOMO has clarified the position by defining ‘piracy’ as any:

(a) illegal act of violence, act of detention. or any act of depredation, committed for private ends by the crew or any passenger of a private ship or private aircraft and directed

(i) in International Waters against another ship or aircraft or against a person or property on board the ship or aircraft, or

(ii) against a ship, aircraft, person or property in a place outside the jurisdiction of any state;

(b) act of voluntary participation in the operation of a ship or of an aircraft with knowledge of facts making it a pirate ship or aircraft; and

(c) act of inciting or of intentionally facilitating an act described in subparagraph (a) or (b) of this section.

SPOMO is a further illustration of the fact that Contracting states are empowered in accordance with their municipal laws to arrest and prosecute persons, ships or aircraft suspected of committing piracy regardless of whether the pirate or attacked ship flies a foreign flag or has a foreign crew. The definition also covers violent acts committed against property other than ships, such as aircraft and floating and fixed platforms in the Nigerian Exclusive Economic Zone.

Section 4 of SUA lists 18 maritime offences and unlawful acts at sea, which include armed robbery at sea and acts other than piracy committed within Nigeria or its maritime zone. Such acts include:

  • the hijacking of a ship, aircraft or fixed or floating platform.
  • the destruction or vandalism of a ship, installation, or navigation facility; or
  • interference with the operation of a ship, installation, or navigation facility.

Jurisdiction of the Federal High Court of Nigeria

Section 5(2) of SUA the Federal High Court, to the exclusion of all other courts, has jurisdiction to hear and determine any matter under the act.

Some Key SPOMO Provisions

Such provisions include those relating to restitution to owners of violated maritime assets and the forfeiture of proceeds of piracy or maritime offences.

The act also provides that the right of prosecution shall reside in the Attorney General of the Federation of Nigeria; any officer so designated by the attorney General; or the Nigerian Maritime Administration and Safety Agency (NIMASA), with the Attorney General’s consent. These provisions have given rise to genuine concerns about the potential for delays or outright vetoes, due to bureaucratic process or political reasons in the grant by the Attorney General of consent to commence proceedings, which may be very urgent.

 

Deep Blue Project – 2021

Nigeria is investing much of its maritime safety and security hopes in the Deep Blue Project. Initiated by the Federal Ministry of Transportation and Federal Ministry of Defence, it is being implemented by the Nigerian Maritime Administration and Safety Agency (NIMASA), with participation from the Nigerian Navy, Nigerian Army, Nigerian Air Force, Nigeria Police, and Department of State Services.

The Deep Blue Project aims to prevent illegal activities in the Nigerian Exclusive Economic Zone (EEZ), enforce maritime regulations, enhance safety of lives at sea, and prevent illegal activities in the inland waterways. In February, the Federal Government added the Secure Anchorage Area (SAA), off the coast of Lagos, to the areas under the protection of the Deep Blue Project.

The project is designed with three categories of platforms to tackle maritime security issues on land, sea, and air. The land assets comprise the Command, Control, Communication, Computer, and Intelligence Centre (C4i) for intelligence gathering and data collection; 16 armoured vehicles for coastal patrol; and about 600 specially trained troops for interdiction, known as Maritime Security Unit. On air, there are two Special Mission Aircraft for surveillance of the EEZ, one of which was received May 12, with the second expected to arrive soon; three Special Mission Helicopters for search and rescue; and four Unmanned Aerial Vehicles. The sea assets consist of two Special Mission Vessels and 17 Fast Interceptor Boats.

All the assets have been delivered, except one Special Mission Aircraft.

The Deep Blue Project assets would be deployed to prevent pipeline vandalism, oil theft, illegal bunkering, arms smuggling, drug trafficking, human trafficking, and illegal fishing. They would also be deployed for pollution prevention and control in the Nigerian maritime environment.

The project is in line with the country’s total spectrum maritime security strategy, anchored on four pillars, namely, situational awareness, response capability, law enforcement and local partnerships, and regional cooperation.

Big Wins! – Nigeria’s Oil and Gas Sector in Review – 2017

With crude oil prices remaining robust throughout 2017 and now reaching trading highs of $ 64-$65 per barrel, the international Oil Companies (IOCs) namely ExxonMobil and Royal Dutch Shell Plc (the latter being slightly ahead of the former) are leading other IOCs in global operational profitability and flourishing under current global oil prices.
In the same vein, the Nigerian oil industry seeks to re-position itself, having recovered from the low crude oil price volatility in 2016 punctuated by interruptions to key production sources arising from militant activity in the Niger Delta. The Nigerian government now seeks to attract more investment in the oil & gas sector, improve production activity, currently 1.85 million barrels per day (mbpd) and ensure that the oil sector continues to perform its traditional role of supporting the Nigerian economy.

The 2018 budget was presented to the Nigerian federal legislature on 7 November 2017. The budget proposal presented by the Minister of Budget and National Planning Mr. Udoma Udo Udoma provides that the government plans to fund the budget with N6.6 trillion (approx. $ 18.3 billion) in revenues from various sources particularly the oil and gas sector amongst which signature bonuses (funds paid by oil companies to the Federal Government upon their successful bid for oil blocks in the oil sector) will contribute 1.7% amounting to N112 billion (approx. $ 311m). Such signature bonuses arise from the planned marginal field bid round, in respect of which guidelines were released in September 2017. With 46 acreages on offer. No specific date has yet been fixed for this bid round and it is hoped that a process which has suffered several setbacks in recent years will finally be concluded in late 2017 or early 2018. The outcome of this bid round shall be an important litmus test of the current indigenous appetite for investment in the upstream oil and gas sector.

Further encouraging signs have come from the Nigerian National Petroleum Corporation (NNPC). The NNPC has stated, in endorsement of the 2018 budgetary projection, that the 2018 crude oil national production projection (for Joint Ventures, Modified Carry Arrangement or External Financing, Production Sharing Contracts, Independents, Marginal Fields and Service Contracts) that about 2,298,000 barrels per day is achievable and realistic in view of the renewed security in the Niger Delta. Such projections are based on price scenarios of $35 (low), $45 (medium – the benchmark used for the 2018 budget) and $55 (high)

This outlook is reassuring given the positive global economic growth and the improved compliance with the Organization of the Petroleum Exporting Countries’ (OPEC) current production cuts for 2017, which cap Nigeria’s crude oil production (excluding condensates) to 1.8mbpd. It however remains to be seen, how much of an impact, OPEC’s production caps on Nigeria will have on Nigeria’s 2018 budget projections.

The Minister of State for Petroleum Resources, Dr. Ibe Kachikwu, has on the back of the budgetary projections and highlighted key aspects of the roadmap policy unveiled in 2016 by President Muhammadu Buhari titled ‘7 Big Wins’ in the oil and gas sector said that the government would begin the implementation of some fiscal policies to generate about $2 billion yearly in the short term and $9 billion in the long term.

The other big wins have been the delivery of zero fuel availability since 2015/2016; exiting the cash call system giving the multinational oil firms more belief in the need to invest in the country (investments which could be in excess of $ 15 billion). Examples of such investments are Agip and Shell’s Zabazaba Deepwater project and Shell’s Bonga extension project. Other big wins are the improved transparency in NNPC’s operations and deeper engagement and resultant stability in the Niger Delta region through the office of the Vice President, the Niger Delta Ministry, the security forces and the Presidency.

In 2018/2019, the government plans to rehabilitate the refineries and end or severely diminish the importation of refined petroleum products and reveal a package of fiscal policies, which will be subject to the Federal Executive Council approval and thereafter transmitted to the federal legislature for requisite legislative backing. The Minister of State for Petroleum Resources has predicted that this will expand federal government income in the short-term by over $2 billion a year and then on to over $9 billion in the long-term.

The federal legislature continues its work, commenced at the beginning of this year (2017) as regards ensure the passage into law of the entire aspects of the Petroleum Industry Governance Bill PIGB (a bill for the establishment of the institutions that will govern the Nigerian oil and gas sector). It is widely understood that the PIGB will need the strong support of the executive arm of the federal government to make it functional for the long-term stability of the oil industry.

Brightening Lights in the Nigerian Power Sector: But How Much Brighter Can They Get?

The major trend witnessed in the Nigerian Energy and Utilities sector over the last 12- 18 months is increased government intervention through policy and regulation. There has been a focus on strong market regulation and a cost reflective tariff system, as evidenced in the Nigerian Electricity Regulatory Commission’s (“NERC”) new electricity tariff, called the Multi-Year Tariff Order (MYTO 2015) effective from February 1, 2016. The MYTO 2015 eliminates fixed charges and prescribes a robust mechanism which ensures that electricity distribution companies fully meter their consumers and eliminate baseless billing within one year.

Improvements in the performance of the Nigerian power sector in the past 2 years have dramatically increased power delivery by 35% and have bought breathing space for major reforms required to attract the investment needed to transform Nigeria’s power sector. Nigerian national power supply has reached new peaks with a daily average of 4,000 MW being achieved with a significant decrease in major blackouts. The improved service delivery in power has produced savings to Nigeria estimated by industry and infrastructure experts as worth over $1.2bn in a full year.

Nevertheless, the 4,000MW now being generated for Nigeria’s population of 180 million is grossly inadequate. In contrast, Brazil generates 100,000MW of grid-based power for 201 million and South Africa generates 40,000MW for 50 million.

Annual public sector investment averaging US$2bn between 2006-2009 leading to only moderate increases in power supply resulted in the Nigerian Government taking the logical decision to privatise the bulk of its power. This culminated in the execution of Share Sale Agreements and Concession Agreements, signifying the hand-over of power sector assets to 14 Preferred Bidders for 15 of the 17 Companies created out of the Power Holding Company of Nigeria on 21 February, 2013.

The current benefits are the outcome of the establishment in 2010 by the Nigerian government of a Power Programme Support Unit (PPSU) in collaboration with and management by the DFID-funded Nigeria Infrastructure Advisory Facility (NIAF), which is managed by Adam Smith International. The PPSU’s mandate was the rehabilitation of under-performing assets, adding more generating and transmission capacity to the grid, as well as stabilising the network by reducing the alarming number of system collapses. This resulted in the development of a comprehensive rehabilitation plan, with over 10,000 lines of activity, involving repairs and upgrades on plant and equipment across Nigeria, some of which had not been adequately maintained for decades.

However, with average annual per capita power consumption at only 155 kWh, Nigeria ranks amongst the lowest in the world. In contrast to its status as a leading global oil producer. Nigeria’s per capita electricity consumption is 7% of Brazil’s and 3% of South Africa’s. At the same time, at least 50% of Nigerian households have no connection whatsoever to the grid. Self-generation (diesel or petrol generators) in Nigeria is estimated to be 6,000MW.

According to DFID-NIAF estimates, Nigerians and the Nigerian economy pay unduly for the power gap in demand and supply. The poor currently pay more than N80 ($0.38)/kWh burning candles and kerosene, whereas manufacturers pay in excess of N60 ($0.28)/kWh on diesel generation. Meanwhile, everyone else who can afford it pays around N50-70 ($0.24-0.33)/kWh for self-generation. By contrast, grid power, if available, costs between N18 and N23/kWh.

The absence of adequate power is the most significant barrier to economic growth in Nigeria. If the current power situation continues as is until 2020, the Nigerian government estimates that some $97 bn (US dollars) in GDP would be lost every year.

The Nigeria Mining Roadmap: Relaunching the Nigerian Mining Sector

In September 2016, the Nigerian government through its Federal Executive Council (FEC) finally adopted the 103 paged “Roadmap for the Development of the Solid Minerals Sector.” This concluded a process which commenced on March 1, 2016 when a 16 man Committee on the Roadmap for the Development of the Solid Minerals Sector was empaneled by the Minister of Solid Minerals, Dr. Kayode Fayemi to formulate a course to stimulate the rapid growth of the sector. The Ministerial Committee concluded its deliberations on March 31 2016 and its recommendations were subjected to review by other stakeholders and equally circulated for input to all Governors of the 36 states in Nigeria including the FCT.

The 2016 Roadmap represents the latest mining sector initiative, since the 2012 Roadmap and the passage of the Nigerian Minerals and Mining Act (2007) and Nigerian Mineral and Metals Policy (2008), which amongst other things, created a modern Mining Cadastral Office, refined the tax code and expanded the airborne mapping of the country to sharpen knowledge of the mineral endowments.

The 2016 Roadmap is based on the identification of the current status and hindrances to the development of the mineral resources of Nigeria and proposes solutions to overcome such barriers. It prioritises activities for implementation and provides the time frame for all activities. It creates scenarios and models for successful implementation and monitoring of activities, while also developing a consensus strategy for the buy-in of all stakeholders.

The 2016 Roadmap by providing policy certainty, addresses several sector challenges, which are of major concern to industry participants, stakeholders, institutions and other enablers in the sector, It address challenges such as infrastructure, governance, fiscal incentives and geoscience, particularly the weak mechanisms for gathering, disseminating and archiving critical geological data required by investors and policy makers.

The 2016 Roadmap recommends a set of 8 critical levers for success that the government can put in place to improve the ecosystem for the minerals and mining sector were recommended. These are: i) Integrated Strategy, Proactively Communicated ii) Investor Friendly Regulatory Environment iii) Coordinated Infrastructure Investments iv) Community Partnership v) Investment Funding vi) Institutional Reform: vii) Geoscientific Value Add viii) Mining as Development Catalyst.

The Committee also reviewed how other countries such as Guinea Democratic Republic of Congo (DRC) and Cameroon have used similar levers to improve the competitiveness of their mining sector. It therefore incorporated into the 2016 Roadmap, competitive investor incentives in Nigeria when compared with several other major mining countries, in Africa including a more favourable tax regime and royalties.

A major distinguishing feature between the 2016 Roadmap and its predecessor, the 2012 Roadmap, is the determination of the government to set up an independent regulatory agency, different from the ministry, which has been serving mainly as a facilitator for the mining industry. To date, the Ministry has doubled as both facilitor for business opportunities in the industry and regulator, giving rise to conflicts of regulatory functions.

The new regulatory agency is to be made up of the Inspectorate and Environmental Compliance departments of the ministry. The Artisans and Small Scale units of the ministry would also form part of the regulatory agency.

The 2016 Roadmap also emphasises partnership between the Federal and State governments together with the overlapping of functions between the Federal Ministry of Mines and Steel Development and the various state Ministries for Mines.

A copy of the Roadmap is available via the following link: http://www.minesandsteel.gov.ng/wp-content/uploads/2016/09/Nigeria_Mining_Growth_Roadmap_Final.pdf

Nigerian Infrastructure: The Chinese Are Coming!

In the wake of Nigeria’s economic recession and the need to provide energy and infrastructure for its teeming population, the Nigerian Government has decided to look past its traditional Western trading partners and look East, more specifically China for trade and investment. This also coincides with China’s commitment to establish a strong trade and economic presence in Africa and invest heavily in the continent.

Nigeria is reported to require US$166 billion to provide energy and infrastructure for its growing population. According to the African Development Bank, Nigeria has an infrastructure deficit of US$300 billion. In fact, overall infrastructure spending (and in turn demand for financing) in Nigeria is expected to grow from US$23 billion in 2013 to US$77 billion in 2025.

With this is view, and the reluctance of Nigeria to increase its’ debt profile to Western Institutions like the International Monetary Fund (IMF) and the World Bank, economic, technical, trade and investment partnerships with other economic giants like China have become imperative. Infrastructure funding from China is hoped will bridge the funding gap (caused by dwindling oil prices and dollar scarcity) and support businesses which now need competitive, cheaper and longer term financing to fund infrastructure and other related projects in Nigeria.

Chinese Infrastructure Investments

Nigeria has secured a US$6 billion loan commitment from China to fund infrastructure projects in Nigeria. The Nigerian government can access this credit facility by identifying and putting forward the relevant projects to the Chinese presumably through a series of tranches in respect of each identified project.

Furthermore, it was reported in April this year that Nigeria and China have entered a currency swap deal. The swap deal is designed to facilitate the settlement of Nigeria-China trade by removing the dollar from transactions and trading instead in yuan, whilst also boosting imports from China, whose exports represent some 80 per cent of the total bilateral trade volume. This deal will also enable Nigeria to diversify its foreign reserves It is hoped that this in turn should reduce the demand for dollars on the Central Bank of Nigeria and improve the value of the Naira.

There have also been various agreements on infrastructure agreements between Nigeria and China. They include:

a. North South Power Company Limited and Sino Hydro Corporation Limited (“SCL”) signing an agreement valued at US$478 million dollars for the construction of a 300MW solar power in Niger State;

b. Granite and Marble Nigeria Limited and Shanghai Shibang signing an agreement valued at US$55 million for the construction and equipping of a granite mining plant;

c. Infrastructure Bank of Nigeria and SCL signing an agreement for the construction of a greenfield expressway for Abuja-Ibadan-Lagos valued at US$1 billion;

d. the signing of a US$2.5 billion agreement for the development of the Lagos Metro Rail Transit Red Line project in Lagos State;

e. the signing of a US$1 billion facility for the establishment of a hi-tech industrial park in Ogun-Guangdong Free Trade Zone in Ogun State.

There are also significant investments in the energy sector as well. In June 2016, the Nigerian National Petroleum Corporation (NNPC) arranged a road show in China to source for investments in the Oil and Gas sector resulting in the signing of a Memorandum of Understanding between NNPC and several Chinese counterparties worth approximately US$80 billion.

Chinese Infrastructure Investment is being driven by “cheaper financing models”. The Chinese through their financial institutions such as the ICBC export credit agencies (like China Exim Bank) and development finance institutions like China Development Bank and China-Africa Development Fund part finance these specified infrastructural projects on the condition that the contractor services are Chinese (mostly state-owned companies). The contract binding the Chinese Contractor and the borrower government is the Engineering, Procurement and Construction Contract (EPC Contract). These loans like most other external loans are guaranteed by a Sovereign Guarantee provided by the Nigerian Ministry of Finance and security is taken, where applicable, over the commodity offtake arrangements.

The implication of this arrangement is that the Nigerian government is bound to execute the contract to which the loan was obtained for. This will go a long way to curb “white elephant” projects and corruption which has long plagued Nigeria. However, the Chinese government benefits massively as Chinese labour, machinery and expertise is exported to other developing countries thereby improving their Gross Domestic Product(GDP).

The Nigerian Economy: 2016 Third Quarter Year Review – Budget and Currency Exchange Rates

The 2016 Nigerian budget’s expectation of earnings of N820 Billion ($4 Billion) from oil exports in 2016 was based on a production assumption of 2.2 million b/d and a benchmark price of $38/barrel. The N 6.07 trillion ($30.1 Billion) budget proposal for 2016 was predicated on the said benchmark, at the then prevailing official currency exchange rate of N197 – $ 1.

Global prices of crude oil have risen to circa $ 50/barrel from an all-time low in January 2016 of $ 27.10/barrel for Brent crude (the bench mark price for Nigerian crude) and well above budgetary benchmark of $ 38/barrel and thus potentially increasing revenue from oil exports, well above the aforesaid budgetary estimate.

However, the inability of crude oil production to meet daily production targets for prolonged periods in 2016, due to shut downs arising from pipeline vandalism and sabotage of oil infrastructure through militant activities has resulted in an extreme drop in oil revenue earnings. In consequence of this, the Central Bank of Nigeria (CBN) decided to review its longstanding fixed exchange rate regime in order to reduce the severe pressures on Nigeria’s external reserves, alleviate the foreign exchange supply crisis and address the considerable gap between the official and the unofficial (real market) exchange rate.

The CBN on May 24 2016 announced a flexible exchange rate regime aimed at making foreign currencies more accessible. With this action, the CBN nullified the official exchange rate regime of N197/dollar. By this development, the interbank foreign exchange market, which had been dormant for some time, was revitalised on an unrestricted exchange rate basis, while the Bureaux de Change, (BDC), would continue their operations, thus creating multiple exchange windows. Although the CBN would not permit the BDCs to purchase dollars from the interbank market. The markets opened in June 2016 with the flexible official rate at $1 – N280 and the unofficial rate at $1 – N340.

The technical details of the new system are as follows:
A. Market moving to single market through inter-bank via a Reuters / FMDQ order matching system with 10 primary dealers (two-way quote mechanism) and other secondary dealers.

 

NB. FMDQ -The Financial Markets Dealers Association, an association of the treasurers of banks and discount houses in Nigeria, commenced the project to create a self-regulatory organisation (SRO) in 2009 with the primary purpose of deepening the inter-bank OTC market trading in various securities and products. Thereafter the association promoted the formation of FMDQ OTC PLC. The company was licensed by the Securities and Exchange Commission, SEC, as a self- regulatory organisation, SRO, to organise and provide oversight on the Over-the-Counter, OTC, market in the Nigerian capital market in November 2012)

Primary dealers (authorised dealers i.e. the licensed banks) to operate the inter-bank market. CBN may intervene from time to time.

B. Primary dealers (authorised dealers i.e. the licensed banks) to operate the inter-bank market. CBN may intervene from time to time.

C. Proceeds of FDI (Foreign Direct Investment) shall be purchased by authorised dealers at the daily inter-bank rates.

D. Non-oil exporters are allowed unfettered access to export proceeds via the interbank rates

E. 41 items formerly constrained by CBN will still not be eligible for trade on interbank

F. To enhance liquidity, CBN may offer long dated 6 – 12 months’ forwards to authorised dealers. Forwards must be traded backed with no authorised spreads

 

G. A new product was introduced, namely the authorised NGN futures on the FMDQ OTC – which will allow non-standardised amounts, no fixed dates or tenors allowing businesses to hedge. Futures will be NGN settled.

It was expected that this would result in a drop and eventually herald the demise of the unofficial (real market) rate as anyone and everyone would be able to buy dollars at any bank or with authorised dealers at a market determined price.

Some volatility was anticipated but It was anticipated that over time, investors and businesses who were reluctant to import dollars into Nigeria would be encouraged to bring in their forex at a price they believe is market determined. That this would enhance liquidity over time.

The volatility did however exceed expectations as the rates fell sharply in the wake of the announcement between June – September 2016. There remains an appreciable gap between the official and the floating (official) rates and the unofficial rates. This has been a major concern for Nigerians and foreign investors alike and confidence in the Naira has been severely dented with the official flexible rate falling sharply to its currently prevailing rate at $1 – N315.25 and the unofficial rate at $1 – N468 on 14/10/2016.

However, it must be said that in many countries where a full float was launched, the value of the home country’s currency did plummet woefully before it found its level. However, the rates between the inter-bank market and the parallel market did narrow and although, this has not yet happened appreciably in Nigeria, economic experts expect that it will also replicate in Nigeria.

The CBN Governor has not dwelt on the controls currently in place such as limits to withdrawals of dollars from your bank domiciliary accounts or spending limits when abroad. However, it is expected that the severe limits will be removed in due time as the market becomes more liquid.

Nigerian Port Concessioning, 10 years of Port Reforms

In 2016, the Nigerian Ports Authority (NPA) took stock of the 10th anniversary of Port reforms in Nigeria amid assurances by the Minister of Transport, Mr. Rotimi Amaechi, that a comprehensive audit of the concessionaires’ operations would soon be carried out to know whether to review their agreement with NPA, especially those whose tenure expires this year.

The Nigerian economy accounts for about 70% of all seaborne trade in the West African sub-region and yet, the system of seaports, established in 1921, had not undergone any systematic process of re-development until the concession programme of port reforms, which commenced in 2000 and was concluded in 2006.

The concessioning programme with concession terms ranging from 10-25 years brought into existence the current system of private port operators in Nigeria, namely Lagos Port with 7 concessionaires, Lagos Tin Can Island Port with 4 concessionaires, Rivers Port (Port Harcourt) with 2 concessionaires, Delta Port Complex with 5 concessionaires, Onne Ports (Federal Lighter Terminal & Federal Ocean Terminal) with 4 concessionaires, Calabar Port with 3 concessionaires.

The concession system has resulted in compliance with international standards, particularly the International Ship and Port Facility Security Code (ISPS Code). Security compliance bench-marking to international regulations and elimination of a multiplicity of poorly coordinated federal law enforcement and security operatives, has also served to curb the incursions of unauthorised personnel within the port; along with the several vices long associated with the Nigerian ports, namely, pilferage, bribery and unscrupulous labour and stevedoring practices (including excessive charging). Additionally, plant and equipment inefficiencies and inadequacies have been minimized.

Significant gains have been made as a result of the concessioning such as: shortened turn-around time for ships; significant reduction of costs, seaport congestion, demurrage, overtime cargo and complaints of untraceable or missing cargoes; the rehabilitation/replacement of cargo-handling plants and equipment owned by the Nigerian Ports Authority (NPA) which were hitherto mostly unserviceable.

Nevertheless, it hasn’t been all smooth sailing, with concessionaires, who spoke under the aegis of the Seaport Terminal Operators Association of Nigeria (STOAN) in commemoration of 8 years of port reforms in 2014, cited ills affecting the effective and efficient running of the nation’s seaports to include inadequate power supply and incessant removal of management of government agencies. Others are arbitrary arrest of vessels at berth and attendant consequences, friction among maritime statutory agencies due to overlapping functions and lack of national carrier capacity for the United Nation Conference on Trade and Development (UNCTAD) 40:40:20 liner code.

STOAN have also recently cited, further challenges in need of attention, namely, inadequate provision of pilotage facilities, which reduces berth occupancy and utility rate; irregular sweeping of the Harbour bed, thus reducing draft and endangering vessels berthing; insecurity of vessels at the anchorage and water front of the Harbours and inconsistent cargo reception and release processes in the terminal together with associated delays.