$3.9 Billion Egina FPSO Contract: NNPC kicks against further variation payment to Samsung

The Nigerian National Petroleum Corporation, NNPC, is not favourably disposed to further payment of variation costs to Samsung Heavy Industries, SHI, in respect of the Egina Floating, Production, Storage, Offloading, FPSO, vessel contract and this is authoritative.

The contract, awarded to Samsung Heavy Industries, by Total Upstream Nigeria Ltd, the operator of the ultra deep offshore Egina oilfield in Oil Mining Lease, OML 130 in 2013, and a joint venture partner with NNPC, at an initial sum of US$2,993,800,514 was later reviewed upward to US$3,335,941,349.

The Egina FPSO vessel, adjudged the largest in the world, measuring 330m in length and 61m breadth, was designed to have an oil storage capacity of two million barrels.

In line with the federal government’s resolve to grow local content, ensure speedy technology transfer and in conformity with the local content law, Nigerians were allotted leading roles in the engineering design of the vessel and its fabrication and integration were to be carried out in Nigeria. It was a first major move at local content promotion in the upstream sector of the nation’s oil industry.

High level oil industry sources however said that the local content initiative, which was seen as a step in the right direction, seems to have now become the handy excuse to compel the government to pay astronomical cost for the contract.

Samsung Heavy Industries, relying on the clause in the contract which allows variation cost requests, had, at various times made requests for variation costs, claiming that it incurred additional cost because the engineering works on the vessel by Nigerians were below standard.

Investigations by this newspaper reveal that the Total/NNPC joint venture has paid additional US$546,755,118 as variation costs to Samsung Heavy Industries to date. This amount is about 30 % of the original price of US$2.9 billion.

Yet Samsung Heavy Industries’ requests for variation costs, are not abating, according to industry sources. High level NNPC contact disclosed that Samsung is currently in discussion with the National Petroleum Investment Management Services Ltd, NAPIMS, the subsidiary of NNPC in charge of the Upstream Sector and Total on variation costs of US$800 million, citing “extraordinary increase in the quantities of structure and piping materials of the FPSO.”

Samsung Heavy Industries last April, threatened to stop work on the vessel by serving a “notice of dispute” on Total. It carried out the threat the following month after which it resorted to legal battle. Shocked by the turn of event, NAPIMS and Total met with Samsung and handed it an August 24 2018 ultimatum to launch the FPSO or face the termination of the contract. To show how serious it was, NAPIMS threatened to place a 10 year ban on Samsung if it fails to comply with its directive.

Although SHI went back to work and the Egina FPSO had since sailed away to Egina oilfied from the LADOL fabrication Yard and Quay where it was built, SHI has intensified its agitation for variation cost payment and has made it clear that it was going to press on with its suit at the Arbitration in London where it seeks for the payment of US$1.6 billion, if Total /NNPC joint venture fails to honour its variation cost invoice.

But a top oil industry source, who retired as the head of one of the key oil industry agencies, weekend expressed disbelief over such huge variation costs, insisting that it is only in Nigeria that such could happen.

He said: “Don’t forget that the Bonga oilfield vessel had a similar, if not exactly the same crisis situation. NAPIMS did a thorough investigation, forensic audit was done, a report was written thereafter, but what becomes of this effort?

“If NAPIMS and Total accede to Samsung’s request for additional US$800 million, total increase in approved contract variation costs would have hit US$1,708,895,953. This will be 57 % of the original cost price. In my 33 years in the oil industry, I never heard of such ridiculous variation cost, especially when you do not have any significant increase on work scope or any remarkable unusual development which may have had profound impact on project execution, manpower and man hour. Even by Nigerian bizarre standard, this will emerge as the highest level of variations in the history of EPC contract,” he said.

Another oil industry chieftain, the CEO of an oil producing company describes the situation as truly unfortunate. “It’s too unfortunate. Generally projects of this kind are too expensive in Nigeria. To appreciate the seriousness of this issue, go and take the total development cost of the field, total development cost of the FPSO and all the variation costs they are talking about and divide it by the ultimate recovery, that is the number of barrels of oil they will recover and you will see what the development cost is.

“Elsewhere in the world, development cost is between US$5 and 7, check this one, it is probably between US$20 and 30. So you start asking yourself, if the price of crude oil falls to US$50, other than royalty, the government does not get anything because the development cost already wipes out everything.”

Impeccable NNPC sources told this newspaper that the corporation’s management has taken a position similar to the one taken by these oil industry chiefs.

“I can say it emphatically that NNPC is opposed to any further variation cost. As an EPC contract, paying even 30% over the original contract price is mind-boggling, given that there was never any major engineering redesigning and no significant increase in scope of work. To take it to the level of 57% of the original cost is simply absurd. Don’t forget that as a joint venture partner to Total, NNPC, and by implication, Nigeria, is being called upon to cough out this unjustifiable huge amount at a time when every cent is needed to build our infrastructure.”

It was learnt that while a key manager of Total Upstream who is fully involved in the project argued in favour of the payment of the US$800million being requested by Samsung, other management staff are said to be opposed to any further variation, and are not willing to discuss any variation cost, if any at all, until after the first oil is produced at Egina.

Egina Oilfield is expected to commence production this month and when it commences production, the prolific oilfield will add 200,000 barrels a day, about 10 % of the current national daily production of roughly two million barrels a day to Nigeria’s daily production.

But Samsung remains unyielding in its resolve to claim the variation cost it claimed to have incurred while on this contract. Confronted with serious financial crisis back home, Samsung is claiming to have lost over US$1 billion on the Egina FPSO vessel project, a claim many independent oil industry watchers, local and foreign, find difficult to identify with.

The Financial Times recently forecasted an operating loss of US$499 million in 2017 and US$278 million in 2018 for Samsung.