Mon - Sat: 9:00 - 18:00
Sat-Sun Closed
+44 788 084 2065
72 Newman Street London W1T 3EH



Items filtered by date: June 2019

Saturday, 29 June 2019 19:32


The meeting in Vienna among the  signatories of the JCPOA  minus the US was conceived as the last best  chance to save the historic accord. Many commentators thought it lacked the authority to provide a definitive outcome, not least because of the relatively junior level of delegations attending.

In an attempt to avoid a direct clash with the US, the countries that set up INSTEX have confusingly said that it would be "initially focusing on trade in humanitarian goods - such as pharmaceutical, medical devices and agri food goods." which are excluded under the current sanction regime.

In a statement on Friday, the EU said Germany, France and the UK have set up the special trade channel with Iran that aims to circumvent US sanctions. The Instrument in Support of Trade Exchanges (INSTEX) is a special-purpose vehicle (SPV) established in January 2019 by France, Germany and the United Kingdom to facilitate non-dollar trade with Iran. The SPV is headquartered in Paris, France

There are justifiable concerns that the JCPOA deal will collapse after the United States unilateral withdrawal from the accord last  year. It has subsequently pursued a policy of maximum pressure culminating with   punishing sanctions  which  amongst other things deny  Iran the sale of its oil.  There is also now a palpable sense that Iran and the US could end up in a calamitous conflict which will have dire consequences for  the rest of the  region.

The Iranian Ministry of Foreign Affairs spokesman Abbas Mousavi  said despite supporting Iran in several statements, the remaining signatories - the United Kingdom, France, Germany, China and Russia - failed to take any action to shield Iran from US sanctions.

The Vienna meeting was said to have made progress but the Iranians take the view if they cannot sell their oil the JCPOA has no benefit to them . Iran's Deputy Foreign Minister Abbas Araqchi went on to say   "It was a step forward, but it is still not enough and not meeting Iran's expectations, I don't think the progress made today will be enough to stop our process but the decision will be made in Tehran."

"France, Germany and the United Kingdom informed participants that INSTEX is operational and available to all EU Member States and that the first transactions are being processed".

Amid a war of words with the Trump administration Tehran has threatened to breach the limit of its stockpile of low-enriched uranium mandated under the deal in response to the US  policy of ‘maximum pressure’. It has so far failed to make good on its threats. The US has been steadfast in its demand that Iran must renegotiate the JCPOA prior to sanctions being lifted.

A fully functional INSTEX would relieve the maximum pressure created by US sanctions effectively nullifying US sanctions. The Iranians maintain  that for  INSTEX to be sufficient it would need to expand to cover a wider range of goods in order to satisfy Iran.

"For INSTEX to be useful for Iran, Europeans need to buy oil or consider credit lines for this mechanism otherwise INSTEX is not like they or us expect," the Deputy Minister  said.

The payment system, which would act as a middleman in trade between Iran and European companies and reduce the need for direct transactions, had been widened to include more countries beyond the UK, France and Germany, he added.

An increasingly belligerent China oppose the US unilateral sanctions. China's delegate at the Vienna  talks, Fu Cong, said Beijing would continue to import Iranian oil despite Washington's sanctions on Tehran.

"We reject the unilateral imposition of sanctions," he said. "For us, energy security is important and the importation of Iranian oil is important to Chinese energy security and also the livelihood of the people."

Despite China’s position European companies are wary of inviting secondary sanctions from the US with most reluctant to incur the wrath of US under any circumstances.

INSTEX was always going to be a contentious proposition which has the potential to create a schism between Washington and its Allies. The Trump Administration have made it very clear that they will employ secondary sanctions on any company breaching their sanctions with Iran. Brain Hook U.S. special envoy for Iran said on Friday.   "We will sanction any illicit purchases of Iranian crude oil." The chess playing Iranians with their utterances in the wake of the meeting and their declared deadlines which Washington has called ‘nuclear blackmail’, also seek to place the ‘Allies’ under maximum pressure.

All this comes at a time when both the US Senate and the UK law courts have blocked arms sales to Saudi Arabia. Whilst President Trump will ultimately veto Congress and the UK government will appeal the judgement of the UK law courts, this could not come at a worse time for US Sunni Allies in the Middle East.  These are the Allies that are supposed to lead any coalition against Iran and in Saudi Arabias case, Iran’s most implacable foe likely to receive the brunt of any Iranian malign behaviour.

The special relationship between Riyadh and Washington has been predicated on a shared understanding of a geopolitical reality far removed from the domestic ethical  exigencies of western liberal democracy. If the Gulf Sunni states are unable to rely on the US or the UK for arms, I am certain Russia harbour no such moral rectitude. This along with OPEC+ could be the beginning of a new geopolitical reality.

In any event it is looking increasing more likely that INSTEX will be the rock which will shatter the JCPOA and not the one which it will be built upon




Published in OIL MARKETS

According to reports from Platts outages at North Sea oilfields have helped put competing Nigerian oil on pace to arrive in Europe at the highest levels in seven months in June, according to Refinitiv Eikon data and traders. Nigeria is set to export about 905,000 bpd to the continent this month, the most since a roughly five-year high of about 1 million bpd in November.

Norwegian and UK offshore fields in the North Sea normally provide a steady supply of lighter crude to refineries feeding northern Europe’s major economies and are traditionally more competitive than Nigerian grades due to their proximity. But planned maintenance on Norway’s Ekofisk oilfields this month slashed exports to just one cargo from the usual 10-15. Flotta, another of the 12 North Sea fields, closed for repairs over two weeks in late May.

“Nigerian grades are normally middle-distillate-rich and with Ekofisk having undergone maintenance, Nigeria is meeting European demand for this type of crude,” said Ehsan Ul-Haq, lead analyst for oil research and forecasts at Refinitiv. Supply of the five North Sea crude grades that underpin the dated Brent benchmark is set to fall to around 720,000 bpd in June, from 948,000 bpd the month before.

The contamination of a pipeline carrying Russian Urals crude in April interrupted flows to central and eastern Europe for a month and left stocks in need of replenishment. Higher volumes to Europe have provided an unexpected boon, with Nigerian exports to the United States on the wane for a decade due to increased U.S. shale oil production, and demand relatively steady in Nigeria’s key markets India and Indonesia.


Published in OIL MARKETS

How likely are Iran to come to the negotiating table with increased sanctions and maximum pressure. The drama surrounding the cancelled US military strike is classic President Donald Trump replete with contradictions, threats and out right misinformation. It was reminiscent of an episode of the FOX hit Series 24. Ultimately at the moment of truth for  the US President, we are asked to believe that after he belatedly found out the probable casualty figures, he cancelled the strike. All this after threatening the complete obliteration of Iran.  He claims that a casualty toll  of 150 would have been disproportionate. There are many reasons such an excuse is ridiculous. What is frustrating is that the single truth we know beyond doubt is that he is not telling it.

If proportionality was an issue, the US had a variety of options, it could have targeted 2 sites instead of 3, could have employed different ordinance or  chosen different targets. The targets they chose were military targets which shot down their drone, so in a legal sense proportionality does not even come into it.

It is difficult not to draw the conclusion that his explanation which made no sense was a narcissistic indulgence, that Trump never really had any serious intention to respond militarily but was required to be seen to do so because Iran had called his bluff. The policy of maximum pressure will have envisaged the Iran military response as a likely outcome. It is farcical let alone bemusing, that Trump who has shown little refrain in going after ISIS and Syria to now seek to apply proportionality in a context where it is not applicable.


Iran has been embolden because their shrewd calculation has been proven  to be true. They know the last thing Trump wants or needs now is a war. A war with Iran would be more to do with who is able to endure the most pain and it would set the Middle East alight. There are those in Iran who are prepared to shed blood. There are hawks in the Trump administration that would welcome such a conflict too, the Commander-in-Chief is not one of them. It would put paid to his 2020 bid.

Whist Trump seems to be playing poker with a poor hand, the Iranians are playing chess at a high level. The shooting down of the US spy plane has sparked a wave of euphoria around Iran, pride even in economically hard times and given many Iranians a lift. It was a calculated risk but it sent a powerful message to Washington.  They believe they have demonstrated the ability to overcome US technology which to some extent will force the US to reconsider their military strategy. Retaliation can only be effective if it is carried out without the further loss of planes.

When it eventually emerged that  the US had launched a Cyber attack on Iranian military assets it seemed more like an acquittal than a reprisal. “They try hard, but have not carried out a successful attack,” Mohammad Javad Azari Jahromi, Iran’s minister for information and communications technology, said on Twitter.

The Trump playbook is very thin, he has attempted to reach out to the Iranians in his 'stick and carrot' maximum pressure mode. He has announced new sanctions to be extended to the Supreme Leader in an attempt to force Iran to the negotiating table. The Iranian Ambassador to the UN however made it clear

 " We are not in the business in succumbing to pressure. The US has been applying pressure against Iran and today we witnessed that they have added more sanctions, so nobody in a clear mind can accept to have a dialogue with somebody that is threatening you with more sanctions. So as long as this threat is there, there is no way that Iran and the US can start a dialogue."

The US special representative for Iran, Brian Hook went to Europe to explain US policy and  has  told European reporters  that Trump was willing to sit down with Iran, but that Iran must do a deal before sanctions could be lifted. Trump has always  argued that  the JCPOA,  did not go far enough, and new sanctions are needed to force Iran back to the table to make more concessions.

Trumps unilateral action has had the effect of strengthening the hand of Iranian hardliners whilst weakening pragmatic Iranian internationalists. It is hard to see how the impasse might be broken. The wisdom of piling up meaningless sanctions on the Iranian leadership is dubious.

But of course this is his predecessor President Obamas fault, he created the current crisis by employing diplomacy and by creating consensus. One can only speculate on the role the obsession President Trump has for  repudiating everything Obama played. There can be no ambiguity in Trumps motive in respect of Obama. The US President sees himself as a great deal maker and seems to relish the prospect of one on one negotiations. Yet there seems to be a lack of subtly and understanding that any wider deal will likely require greater concessions on both sides and will need to resolve long standing issues between regional actors who need to have a voice in the outcome.

Published in OIL MARKETS

In an action which bought  the simmering tension between Washington and Tehran to boiling point the shooting down of a US Spy drone RQ-4 Global Hawk in the Persian Gulf would have normally sent crude oil prices  spiking as the market sought to price in the anticipated  loss of crude from the market in geo political price risk premiums. The  Persian Gulf provides around a third of the world’s oil, with most of it passing through the narrow Strait of Hormuz

Yet although crude oil benchmarks rose modestly by about 5% off the back of the strike, Brent Oil was trading at about $65 a barrel on Friday morning. That in stark contrast to  recent highs of about $72 a barrel in mid-May. Though Brent price increased +$3.19 to $65.20 there was  almost no change in the  term structure.

The market has reacted as it generally would to a short term supply disruption and that is because  a shale driven  boom in oil and natural gas production in the United States as reconfigured the  world oil markets.


In the last decade, the United States has increased production by about six million barrels of oil a day, the equivalent of the combined production of Angola, Nigeria and the United Arab  Emirates. Canada, too, has seen its oil output surge, up 8.5 percent last year.

This  growth in shale production has weakened OPEC’s hold on the oil markets and redefined the risk calculus as supplies from the United States make their way into the global market. This was always OPEC’s worst case scenario for shale and US production.  Whilst not yet being energy independent the US relies a lot less on crude oil supply from the Persian Gulf. In fact  about 65% of all crude  passing through  Strait of Hormuz is destined for   China, India,  Japan, South Korea  and  Singapore.  


OPEC along side Russia have resorted to production cuts to balance the market with some degree of success. It now looks increasingly likely that those cuts will be extended when they meet in Vienna in July. OPEC’s premonition has come true as shale production has unbalanced the market despite OPEC record low May production.


There are substantial fears that oil demand growth is slowing and the China US trade war will see further demand destruction and less call for oil as inventories surge with oversupply. The predominant sentiment is of a prolonged bear market. Many commentators, this one included see the US-China trade war as a protracted and complex struggle which is more than simply trade war. The best we can hope for in the near future is an agreement which serves as a pause, however unlikely.


Tanker charter rates have ticked up substantially over the last week, hitting about $28,000 a day for chartering the largest class of tankers. Insurance premiums for shipping in the gulf have also risen. Though tanker operators have been disappointed that prices have not risen even higher; in late 2018, the operators were able to charge about $50,000 a day.

“Rates have increased some, though not as much as many had thought or even hoped for,” wrote Fearnleys, an Oslo-based ship broker, in a report published on Wednesday.


It seems The market has factored in that there has not been a  supply disruption.    A black swan event could roil the markets, ultimately it is unlikely as blocking the Straits of Hormuz is in no ones interest including Iran, which still exports what oil it can through the Gulf   21 million barrels pass through this strait daily it has never been blocked and the United States cannot allow it to happen.

The United States has shown in the past that it is willing to go to great lengths to keep the sea lanes open. In the 1980s, for instance, after dozens of ships were damaged during the conflict between Iraq and Iran, navy vessels from the United States and other countries escorted tankers through the area.

Published in OIL MARKETS

The Iranian foreign ministry described the drone as a provocation and by shooting it down they were sending a clear message to the US.  Whatever the Iranian intention was in shooting down the Drone they have ensured the film whose ending we  have all anticipated moves to the next chapter. If it were a movie it would be perhaps the most rotten of all rotten tomatoes we will see. We woke up this morning to recriminations and  the first but unlikely the last exchange between the US and Iran. 

The Iranians have shot down a  US Navy MQ-4C Triton drone. the Secretary of Iran's Supreme National Security council  almost jubilantly reiterated , "Our airspace is our red line and Iran has always responded and will continue to respond strongly to any country that violates our airspace," he goaded without actually mentioning the US by name.  Part of the reason for the jubilation was undoubtedly the Iranian capability to track down the drone and destroy it. The highly sophisticated drone is a $130 million ticket and downing it ranks alongside the U2" that was bought down in the 1960's

This action comes amid heightened tension in the wake of the attacks on oil tankers off Oman last week. The US and its regional allies - Saudi Arabia and the United Arab

Emirates (UAE) - have accused Iran of being behind these attacks with the US supporting the allegations with intellegance.

 The problem with US Intelligence reports is they are largely viewed with  skepticism. History and revealations as far back as the Gulf of Tonkin  undermined their

credibility especially  where any a priori interpretation of events clearly repudiates their  veracity. The US have belatedly produced 'photographic evidence to

substantiate their allegation  yet it is hardly overwhelming. The general sentiment is of Deja vu, with the purported evidence deemed a pretext to justify escalating

maximum pressure on  Iran. Crucially the shot down  US Navy MQ-4C Triton drone  flies real-time intelligence, surveillance and reconnaissance  (ISR) over vast ocean

and coastal regions, providing continuous maritime surveillance. Iran maintains the drone was shot down when it entered Iran's airspace near the Kouhmobarak

district in the south. After initially denying the report the US Navy confirmed a  MQ-4C Triton drone was brought down by an Iranian surface-to-air missile but  in

international airspace over the Strait of Hormuz and therein lies the problem. The US will maintain that the drone was in international airspace and as such the Iranian action was yet another malign and unprovoked attack. Already Trump has tweeted the action was a big mistake.  It is now highly likely with the US media beating the drum of war we will see an imminent, possibly surgical strke on key Iranian infrastructure. Putin has already warned that such an action would be a catastrophe. It could be similar to the strike carried out in Syria, but Iran are not Syria. They have recently deployed a new surface to air missile system known as the Khordad 15 which reputedly has both stealth and cruise missile tracking capabilities.  This could escalate very quickly

The downing of the drone is almost certainly part of an Iranian strategy to deny US surveillance capability  in the Straites of Hormuz by limiting their capacity to track

Iranian naval assets in the region. The direction of travel is ominous and perhaps a precursor to increased Iranian activity in the Straites. Iran have made it clear in the

past that if they are  unable to export their oil through  the Straites, they would deny its use as a passage for any crude oil. The Iranian strategy is high risk as it is dependent on the US desire to aviod all out war which could turn out to be a grave miscalculation.

The Iranians strategy initially seemed to be to drive a wedge between the US who abandoned the JCPOA and the other signatories of the agreement, especially the

Europeans. However the Iranians have made it clear that the longer the sanctions continue and the other signatories to the JCPOA are unprepared to shield Iran from

the effects, the more Iran will abrogate its obligations under the JCPOA. Iran has already put the other signatories of the deal on notice by setting  a deadline of 27th  

June by which it will breach limits on uranium stockpiles set out in the nuclear deal, at which point the deal would  effectively lapse.

 President Trump has stated  he is ready to talk to Iranian leaders and was not seeking regime change, this is however  at odds with his national security adviser. 

Pompeo also recalibrated his earlier position that the United States would not lift sanctions on Iran unless it complied with a dozen sweeping demands, suggesting that those demands could be part of negotiations instead of preconditions. Washington  appears to be trying to walk a tightrope on Iran policy. Trump has told aides he wants to avoid a war, yet his top foreign policy officials are pressing him to amplify a “maximum pressure” campaign against Iran that relies on sanctions and the threat of military force. This approach seems characteristic of Trump's  destructive disorder modus where he creates a broad policy objective without a co-ordinated approach from departments of government resulting in strategic dissonance and incoherence.

The Iranians on their part have made it clear in a statement after the visit of Japanese Prime Minister Shinzo Abe, they have no interest in negotiating with Washington. Indeed the Iranian Supreme Leader Ali Khamenei directly addressed US policy in comments made on May 29: “When you do not use your pressure tools and your pressure leverage, [the enemy’s] mind is at ease.” Tehran’s only option, he concluded, was using its own “pressure tools” in response.

Lest it be forgotten the sanctions not only seek to arrest Iran's capability to develop and deploy nuclear weapons but restrict its "malign" influence in the Middle East. Given that Iran is a  Shiite theocracy seeking to export its revolution and empower Shiite groups in the region the only conceivable way it can comply with US

demands is to repudiate it own Islamic revolution and raison d' etre . The Iranian involvement in backing militias in war-torn Yemen and Syria,  and Hezbollah, a Shiite

paramilitary group and political party in Lebanon, is their method of countering the influence of the Saudis, Israel and the US in the Middle East. There is no possibility

Iran will comply with that demand and therein lies the difficulty.

The "Maximum Pressure" policy has accelerated the process and made conflict between the 2 protagonists almost inevitable. It has allowed the Hawks in the US and

the Radicals in the Iran National Council  to sieze control of the narrative. The other signatories to the JCPOA, that is the Europeans are technically in breach of the

Agreement as a consequence of them observing US sanctions. The Chinese  and Russians have castigated the US for  unilaterally pulling out ot the  agreement with

the Chinese likely to  continue to trade with Iran which is a big market for it. The onus really falls on the europeans to keep the Iranians in the deal by observing their

obligations under the agreement.

Published in OIL MARKETS

At a time Iran’s Supreme Leader Ayatollah Ali Khameneni was meeting with Japanese Prime Minister Shinzo Abe in Tehran one of the tankers carrying "Japanese" cargo has been hit in a suspected torpedo attack. The attack was reported to have taken place in the same area where the US accused Iran of using naval mines to sabotage four other oil tankers in an attack in May. The incident represents another step in the direction of a Persian Gulf conflict which has the potential to set the Middle East alight and the region descending into chaos.

Two oil tankers were hit in the Gulf of Oman early on (this morning)Thursday, one of the ships, the MV Front Altair was on fire and was "suspected of being hit by a torpedo”, according to Taiwan’s state-owned petrol company. Whilst the other tanker, MV Kokuka Courageous was damaged with a breached hull above the water line while on passage from Saudi Arabia to Singapore. It has been confirmed that U.S Naval forces in the region were rendering assisting after having received two separate distress calls at 6:12 a.m. local (Bahrain) time and a second one at 7:00 a.m. The incidents took place outside the Strait of Hormuz, the strategic waterway between Iran and Oman which around a quarter of all the world’s oil passes

Iranian Foreign Minister Mohammad Javad Zarif said today on Twitter that the attack took place while Abe was meeting with Iran’s supreme leader, Ayatollah Ali Khamenei, for “extensive and friendly talks.” He went on to state,“Suspicious doesn't begin to describe what likely transpired this morning,”.

The exact circumstances of the attack were unclear. But the incident follows a similar operation targeting oil tankers in the same area last month, an assault that the U.S. pinned the blame firmly on Iran. Iranian officials deny involvement and by implication believe the attack was staged to undermine their efforts and or to provoke an armed conflict in the Middle East; they blame Mossad.

On the face of it Iran have a good case, if not for blaming Isreal, but because  they have nothing to gain from attacking these two vessels. Quite the contrary, it makes no sense and if it makes no sense then it is not true. So then the culprits need to be apprehended and their motivations understood. This incident will undoubtedly serve as a pretext to increase US military presence in the region. It now looks inevitable that some sort of confrontation will take place with Iran. I suspect it will be some sort of strike against Iranian naval assets but could be a straight forward retalitory attack. It could be a US-Saudi coalition which would in effect be a Shiite - Sunni conflict

Though the Japanese delegation purported not to be an informal conduit for U.S negotiators, rather troublingly Khamenei’s office released a statement following their meeting that said Abe had carried a message from Trump to Iran.

“I do not consider Trump, as a person, deserving to exchange messages with,” Khamenei’s website quoted him as saying. “We will not negotiate with the United States.”

It would appear the Iranians are currently in no mood to roll over


Published in OIL MARKETS

If we are to believe energy research firm Rystad Energy, US oil production is on track to a record 13.4 million barrels per day by the end of 2019 with Texas
producing over 5 million bpd in excess of every OPEC producer apart from Saudi Arabia .

The increase in US production has created inventory overhangs and a supply glut which has plunged oil back into a bear market. It now seems certain
that OPEC will extend production cuts until the end of the year with the Saudis equally likely to deepen further. Russian Energy Minister Alexander Novak
said in Moscow after meeting with Saudi oil minister Khalid al-Falih. “We’ve agreed that we need to run a deeper analysis and to see how events unfold in June.

OPEC's oil production in May slumped to 29.9 million barrels per day , the lowest in over five years. OPEC output is down 2.6 million per day since
October 2018 the month before oil prices crashed into the last bear market. Khalid al-Falih confirmed on Friday that OPEC is close to a deal to extend its
production cuts.

Soaring US production and a spike in US inventories at a time of forecasted demand reduction has created oversupply. U.S. crude inventories rose by 4.9 million barrels in the week ended June 7 to 482.8 million barrels, data from the American Petroleum Institute (API) showed on Tuesday. Brent has tumbled about 15%
since late April to $63 a barrel, WTI oil  is trading at about $54 a barrel, down nearly 19% since late April. The ongoing China - US trade war is expected to create a market deterioration. Global  manufacturing and purchasing indexes are witnessing  steady declines as inter connected and interdependent economies brace for an anticipated recession. The China -US trade war is set to affect global demand and impact growth negatively.

Shale however poses an intriguing conundrum. There is ample evidence to support the suggestion that the model which created the shale boom is unsustainable and on its last legs. The industry is operating under a tsunami of debt and negative cashflow. A cross-section of 29 fracking-focused oil and gas companies reported more than
$2.5 billion in negative free cash flows in the first quarter of 2019. These same companies from 2010 through early 2019, racked up aggregate negative cash flows of $184 billion. Shale production despite the much lauded efficiency gains spends more on drilling than it recieves in oil sales.

Capital markets have become increasingly reluctant to invest in companies that have not returned free cashflow or few returns for over a decade. Free cash flow is a crucial gauge of financial health. Positive free cash flows allow companies to pay down debt and reward equity investors. In contrast, negative free cash flows force companies to fund their operations by dipping into cash reserves, selling assets, or raising new money from capital markets.

The precipitous production profile of shale means that companies need to increase drilling by up to 70% year on year to maintain production levels. The frackers are yet to generate enough cash, not only to sustain their own capital spending, but also to pay off debt and reward stockholders whilst maintaining or even increasing their output to support rising stock prices. To complicate matters further as demand for oil weakens and prices deteriorate poor Shale economics are exacerbated. Over supply will have the effect of collapsing crude oil benchmarks and putting frackers in further financial jeopardy.

Whilst Trump is desperate to keep oil prices low the Saudis have made it abundantly clear that they need $84 oil to meet their budgetary projections. They are not alone and it is impossible for the Saudis to ride 2 horses.

Published in OIL MARKETS

The Department of Petroleum Resources (DPR) the regulatory authority of the Nigerian oil and gas sector has revoked 5 Oil Mining Leases and a prospecting license.  The directive was reported to be from the President  Muhammedu Buhari who is also the petroleum minister. The licenses that were revoked belonged to Pan Ocean (OML98) Allied Energy and Resources (OML 120, 121) Express Petroleum (OML108), Cavendish Petroleum (OML110) and Summit Oil (OPL206). The ostensible cause being legacy debt which was presumably in the form of unpaid royalties and tax on profits and production bonuses. The Minister of State  for Petroleum Resources Dr Ibe Kachikvwu  in remarks made public in February, put companies on notice of the government's intentions. At the time he expressed concerns that companies were not making their statutory remittances as required by the Joint Venture agreements with the government.

‘‘A situation whereby we write to oil companies to pay up royalties, and for 90 days they are unable to comply. What that simply says is that they are not ready for business and we cannot continue to wait for such companies. We must move on. So going forward, I have asked the DPR to give additional 30 days grace period, after which their licenses will be withdrawn. I have instructed the DPR to revoke their licenses.’

It has been a long time  in coming, but in the good old Nigerian tradition nobody pays a blind bit of notice to any warning until it is too late. The upstream sector of the Nigerian oil and gas industry has for far too long treated signature bonus  payments, royalties and other statutory payments as optional obligations to be circumvented or evaded. The DPR cannot be absolved as it has enabled the poor payment behavior of these companies. There are bound to be more companies and perhaps this  spate of revocations will serve to galvanise  those companies to settle their outstanding obligations. Many of the indegenous Operators have struggled to generate free cashflow. The effect of low barrel prices and shut ins caused by militants hsve affected their liquidity. There is also the issue of theft which has seen some producers lose up to 20% of their daily production. So many have chosen not to breach their covenants with bondholders in favour of negotiating with a more pliable DPR. It is apparent that a clearly  cash strapped Federal Government is in no mood to indulge big oil

It will be interesting to see what the DPR does with the leases that have been revoked. Given that the directive came from the President it is difficult to see how such a revocation can be challenged. Under extant legislation, the Petroleum Act grants the Minister exclusive and unfettered power to grant licenses and leases and amend, renew, extend or revoke same pursuant to the provisions of the Act. There is no express right of appeal against the decision of a regulator. In practice, redress from regulatory decisions can be sought before the Federal High Court by commencing an action in court or by initiating arbitration. In reality challenging the authority of the President in a Nigerian court is a poor alternative, moreso when a clear breach in the terms of the lease has been established.

There is clearly a renewed agression in going after errant oil companies, most of whom are owned by prominent indegenous families. Much was made of the revocation of Summit Petroleum's OPL owned by the family of the late Chief  MKO Abiola the winner of the 1993 Presidential election in Nigeria. But Cavendish Petroleum belongs to the equally illustrious Mai Deribe clan and Allied Energy Resources to well connected  but recently troubled  Kase Lawal of Erin Energy. Express Petroleum and Gas Company is owned by the Dantata family who are a well known wealthy Northern family.  It has been alleged that Pan Ocean's lease OML98 was revoked after negotiations failed with the Government, the JV partner to resolve the issue of outstanding payments . There has also been the suggestion from other Leasees that payments were not made due to current well documented litigation between NAE and Allied Energy. The Leasees first instinct will be to reach for the law courts but their obligations under the lease terms are very precise. 

There is an unsubstantiated rumour  the exercise is a ploy to transfer the leases to other companies. I think that is a bit far fetched.  There is also the distinct possibility however,  that the action is targetted and is a coded message to elite owners of oil  blocks, many of  whom acquired them  through grand acts of generousity and patronage. Given the shifting sands of litigation and emerging legislation it is hard to see how any other  investor would have the confidence to take on those leases.  More importantly there is also the question of the borrowing which the assets secured.  Allied Energy have announced three of their  projects around OML147 will be ready for unveiling at the technical start-up taking place June 10, 2019.  This revocation clearly puts the solvency of the company at risk. It is also a time of worry for local banks that have overextended exposure to indegenous oil companies.

Published in OIL MARKETS

First, a health warning. This article is about recalcitrant, inept and quite possibly corrupt Nigerian politicians and government ministers. It is certainly about incompetence and misconduct in public office. It should be about prosecution and incarceration.  You will read about how government officials have conspired to create  and place a liability on the Nigeria people, a burden capable of crippling a generation. So staggering is the highly likely outcome it will wreck Nigeria's economy. If you are Nigerian but not of stout disposition I would urge you to sit down or better still  look away now. .

 Process and Industrial Development Ltd  (P&ID)  entered into a contract with the Ministry of Petroleum Resources of the Federal Government of Nigeria (FGN) in 2010. The 20-year Gas Supply & Processing Agreement (GSPA) obliged P&ID to build a natural gas processing plant and  the FGN to build pipelines and to bring untreated gas to the plant. It will be remembered by many as a time the unicorn that is the Gas Master plan was a byword for confusion and ineptitude.

In August 2012, P&ID served the Nigerian government a Request for Arbitration. P&ID alleged that it invested US$40m in the project, although it did not actually build a plant. The company also alleged that the FGN did not build the pipelines as specified in the agreement. Therefore, P&ID  is entitled to compensation for lost earnings .

The arbitration hearing was conducted by a three-member  panel  chaired by The Right Honourable Lord Hoffmann, a retired British judge, Bayo Ojo, SAN representing Nigeria and Sir Anthony Evans QC representing P&ID.  Following a series of hearings in London, the Tribunal issued a first part final award on 3 July 2014 determining that it had jurisdiction to determine its own jurisdiction under the English Arbitration Act 1996, which it held was the law of the seat of the arbitration. This was because Nigeria’s petroleum ministry had challenged whether the Tribunal had jurisdiction on the matter at all.  On 17 July 2015, the Tribunal issued a second Part final award on liability concluding that the government’s failure to satisfy its contractual obligations was a breach of the agreement. 

At a point during the tribunal hearing, counsel to the Nigerian government, Supo Shasore, a senior advocate of Nigeria (SAN), gave a legal opinion that the government's defence for failure to discharge its obligation under the contract was "feeble and unsustainable.  Nigeria’s lawyers  participated in the proceedings in London over the quantum of damages.

The Goodluck Jonathan government actually reached a settlement with P&ID to pay  $850m. A government negotiation team constituted by Goodluck Jonathan's Administration successfully negotiated an out-of-tribunal settlement with P&ID and got the company to accept a $850 million settlement, about 9.6 per cent of the $8.9billion award. The Jonathan administration did not, however, pay the settlement sum and handed over to the incoming Buhari government. The Buhari government then astoundingly decided against proceeding with the settlement and instead instructed its lawyers to set aside the award.

 n December 2015, the ministry applied to the Commercial Court in London to set aside the liability award, but the Court dismissed the application in February 2016, finding that it had been filed more than four months out of the statutory period for such an application and that the grounds of the action had no merit. In an attempt to circumvent  this, the ministry approached the Federal High Court of Nigeria, requesting  it to set aside the liability award.  The Nigerian court duly obliged and in April 2016, it issued an order setting aside  the liability award on the grounds that the seat of arbitration is Nigeria and the reference to ‘venue’ in the arbitration clause is not definitive of seat.

 Lord Hoffmann told the parties that the Federal High Court had no jurisdiction to annul the liability award and that the case would proceed to the ‘quantum phase’ – where the amount to be paid by the losing party is determined.  On 31 January 2017, the Tribunal issued the final award, granting P&ID damages in the sum of  US$6.597 billion. Furthermore, the award was to accumulate interest at the rate of 7 per cent per year, working out at US$1.265 million per day.

  P&ID’s next step was to apply the award of the English court in the United States (US), following  the New York Convention which allows winners of arbitral awards to  enforce them in signatory countries. On 16 March 2017, P&ID filed a petition before the US courts to confirm the award. P&ID in its application seeking enforcement of the award said "The final award is governed by such a treaty, the New York Convention. So, Nigeria's status as a foreign sovereign does not deprive the court of jurisdiction to confirm the award," the company said.  A United States District Court  issued a default judgement affirming a $6.59 billion arbitral award against the Federal Government (FG), plus $2.3 billion in interest. The judgement was awarded against Nigeria because shockingly the FG did not appear in court to mount a defence.

 Nigeria’s foreign affairs ministry was served with the petition in March 2018 and had two months to oppose it. The document was received and signed for by the ministry on 27 March 2018. The two months expired by the end of May 2018 with Nigeria failing to appear to defend itself. The Solicitor General of Nigeria and Permanent Secretary of the justice ministry reportedly contacted two American law firms regarding the case but  stopped short of actually instructing them . As the deadline loomed large, international law firms sent letters to Nigeria’s justice minister,  Abubakar Malami, warning him of the seriousness  of the situation and the  urgent need to act promptly to avoid the dire consequences of case.

The explanation from Nigeria stated “Although the claim form was passed from the Ministry of Foreign Affairs and received at the Ministry of Justice, it was simply immediately filed and not passed up the chain of command. The relevant senior figures within the Ministry of Justice only became aware of the matter after the deadline for filing and acknowledgment of service had already passed and only after it was drawn to [the attention of Nigeria’s English counsel] following receipt of correspondence from the claimant’s solicitors.”

 Thankfully  the English courts took into consideration the extraordinary amount of the award and the effect on the citizens and tax payers in Nigeria,  and on 15 February 2019 the English High Court  granted Nigeria an extension  to file its arguments  and defend the enforcement proceedings and  scheduled the hearing for 21 May 2019. This has now been adjourned

Ominously a  sovereign debt hedge fund VR Capital Group are reported to have acquired a 25% stake in P & ID. VR Capital  founded and run by London-based hedge fund manager Richard Deitz, is well known for  buying distressed sovereign debt, with a track record in  Russia (1998), Argentina (2001), Greece (2012) and Ukraine (2014) among others. The involvement of  VR Capital Group is a clear indication that there is a high degree of  confidence in the outcome  of P&ID’s case.

In the byzantine world of Nigerian politics it is difficult to distinguish incompetence from malfeasance, whether acts of omission are contrived with the objective of creating space for corruption. The P &ID case is disturbing not least because of the uncertainty as to who awarded such a contract and via what process. The company has no track record in the gas industry and appears to have  spent little or no money in preparing to fulfill its own contractual obligations. It purports to have spent US$40m in front end engineering and design but has not been challenged on this and has shown no evidence that such a sum has been spent.

Marion Lespiau of Grant Thornton commented on the outcome of the arbitration. " It shows the importance of the Respondent (Nigeria) challenging facts, assumptions and calculations provided by the Claimant (P&ID)and of providing alternative evidence to the Tribunal."  Yet again it is hard to fathom out why the Nigeria's lawyers did not challenge P & ID on its calculations and provide alternative ones. surely such a action is fundamental.

 Nigeria's lawyers  claimed that P&ID should only be entitled to nominal damages as it had not fully performed its obligations under the GSPA at the date of the repudiation. It  also argued bizarrely  that production would be disrupted by militancy in the Niger Delta so that utilisation should be reduced to 40-50%.

Nigeria's Lawyers   insisted that damages could only be awarded for a period of three years as the Claimant had a duty to mitigate its loss and it should have pursued other investment opportunities.The Tribunal considered that there was no evidence that the Claimant was unable or did not intend to perform its obligations under the GSPA. Consequently, the Tribunal rejected the Nigeria’s argument on nominal damages. Furthermore it  determined that there was no actual evidence that militancy in the Niger Delta had any impact on gas production or transport around the site earmarked by P&ID, or that other NGL prices than the ones forecast by the Claimant should be used.

In the absence of a meaningful challenge from the the Nigerian lawyers, the Tribunal agreed with the Claimant on key aspects of the measure and calculation of damages, including the 20-year period, the other underlying assumptions to project net income, and the discount rate.

  Nigeria is now resisting enforcement of the award in the U.S. by claiming it is protected by sovereign immunity. Although states can be immune from legal proceedings in the courts of other countries, that is only true in certain situations. In this case, Nigeria will find it difficult to  claim immunity because it agreed to resolve its dispute with P&ID through arbitration in London. The amount is staggering and raises real questions as how Nigeria would be able to pay such a sum. The Buhari administration's refusal to comply with the out of arbitration agreement requires further scrutiny. Though the cost would have been high, in relative term it would have amounted to 10% of the eventual award which is still running. 

Though Industrial Consultants director, Brendan Cahill, founder of P&ID with his late business partner, Michael Quinn, told African media recently that the company intended to pursue the case. However, he stressed that P&ID was “open to a settlement on a reasonable basis” if it found someone in the Nigerian government willing to help resolve the dispute.

It seems to me that the failure to honour the agreement by Buhari was political and did not adequately assess the outcome of reneging on the agreement despite the advice of the then Attorney-General and Minister of Justice, Mohammed Adoke. It was a monumental failure of common sense and policy decision making. Quite what he hoped to achieve is anyone’s guess. He may well argue that the debt was not incurred under his watch and he would be right, but that does not obviate him of the responsibility to act diligently and exercise good judgement.

Indeed there has been a disconcerting lack of seriousness by the Executive which belies the gravity of the situation. The size of the award which is unprecedented adds to a  surreal sense and perhaps the notion of disbelief. As it stands Nigeria is facing calamitous payments of damages it cannot make. We can only hope , the oversight power of the National Assembly is exercised judiciously to identify and investigate those culprits  responsible for this act of economic sabotage and have them answer to the Nigerian people

Published in OIL MARKETS
Synterra Energy Assets
72 Newman Street, London W1T 3EH
+44 788 084 2065
© Copyright 2020 Synterra. All Rights Reserved.