New York Court Summons NNPC in $2.5B Shell/ ExxonMobil Tax Suit

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The Court of Southern District of New York has summoned Nigerian National Petroleum Corporation (NNPC)’s powerful head of crude oil marketing, Mele Kyari, who is representing the government petroleum giant in a suit against it by two of the world’s largest oil companies.

A prolific offshore oil block; Oil Mining Lease (OML) 133 is the source of the unending dispute between an alliance of two international oil giants; ExxonMobil and Shell, and the NNPC.

                 The Dispute

 As is usual in Nigeria’s upstream oil sector, the duo is in a Production Sharing Contract (PSC) with the NNPC, aimed at the exploration of oil from OML 133. In these contracts, tax is paid in form of oil, lifted by the NNPC as proceeds to the Nigerian government. Also, under these arrangements, the NNPC is the holder of the concession while the International Oil Companies (IOC) are the contractors.

Mele Kyari; NNPC’s Head of Crude Oil Marketing

ExxonMobil and Shell are accusing NNPC of breaching the contract by over lifting tax oil from OML 133.They have dragged the NNPC before the court of southern district of New York to enforce what they see as their right to a $2.5 billion claim from a Court of Arbitration’s judgement on the case in October 2011.

According to a legal report on the issue, the Contractors initiated arbitration against NNPC in 2011 on the basis that the Corporation was lifting more tranches of oil (including Tax oil) than it was entitled to lift under the lifting allocation prepared by the Contractors, and that the Corporation had unilaterally prepared and submitted Petroleum Profit Tax(PPT) returns to the FIRS in breach of PSC.

The contractors demanded that NNPC stop further wrongful over-lifting and refund the over-lifted crude oil to them.

In October 2011, the Arbitration tribunal sitting in Abuja ordered the NNPC, and by extension the Nigerian government, to pay $2.5 billion to the duo.

After several years of suits and countersuits, a Nigerian Court of Appeal suspended the judgement in March 2017 on the basis that it was not a contractual issue, but an issue related to tax, and is therefore, not within the jurisdiction of the court of arbitration. Not satisfied with this judgement, ExxonMobil and Shell took their case to New York.

OML 133

OML 133, formerly Oil Prospecting Lease (OPL) 209, is located in the western part of the Niger Delta, approximately 100 kilometres offshore. The block contains three deep-water oil fields: Erha Erha North and Bosi.

Map of OML 133

In 1993, the NNPC awarded the block, known then as Oil Prospecting Lease (OPL) 209, to Esso Exploration and Production Nigeria Limited (EEPNL), a subsidiary of ExxonMobil. Today, OML 133 is jointly operated by EEPNL and Shell Petroleum Development Company (SPDC).

Findings show that EEPNL has a 56.25 per cent working interest in the block while SPDC holds 47.75 per cent.

“Development has focussed on Erha and Erha North, which comprise subsea wells tied-back to the Erha floating production, storage and offloading (FPSO) vessel. Production began in March 2006, and Erha North started producing in October 2006, “a Wood Mackenzie report stated.

In 2015, EEPNL started producing from Erha North Phase 2, which includes seven wells from three drill centres tied back to the existing Erha North FPSO vessel, reducing additional infrastructure requirements. In 2017, the media reported that Erha North Phase 2 has added 65,000 bpd to Nigeria’s oil production.

Oil Majors Take Case to New York

ExxonMobil and Shell have hired arbitration specialist, Elizabeth Snodgrass as they ramp up their case against the NNPC in New York.

Today’s Echo gathers that Snodgrass, who is an international specialist in the fields of energy and mining, has worked for the International Centre for Settlement of Investment Disputes (ICSID) and the International Chamber of Commerce (ICC). Snodgrass is partner at Three Crowns, an American law firm after joining in October 2017. She had previously worked for about 14 years in another law firm; Freshfield Bruckhaus Deringer.

According to our sources, Snodgrass had also represented the two oil majors in the previous case at the court of arbitration in 2011.

 One of the first things the oil majors aim to prove is that American courts have the jurisdiction to make the NNPC pay out.

To prove that their case against the Nigerian state-owned firm falls under US jurisdiction, the duo has submitted new items to the court. These include three archives of payment orders NNPC had sent to oil companies; Sahara Energy, Trafigura and Tridax Energy between 2011 and 2014. They have also presented evidences that the sums NNPC paid corresponds to taxes and royalties received from the Erha oilfield located on OML 133, the files show that the corporation asked buyers to pay the money directly to a JP Morgan account in New York.

They have also called into question, the independence of Nigeria’s courts, citing the case of Chief Justice Walter Onnoghen, who was suspended by the president in January.

Meanwhile, NNPC is also fighting back. To refute the American court’s competence, NNPC’s legal defence submitted a memorandum to the court stating that the majors had been unable to identify any transaction connected to OML 133.

As the parties in the suit await the New York Court’s judgement, experts are watching keenly while the NNPC continues to attract more scrutiny to its dealings with the IOCs. 

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