Oil Price | 10 March 2021
Nigeria’s lawsuits against Shell could cause oil major exodus
By Viktor Kakona
Judging from recent headlines, Nigeria has unleashed one of the most spectacular legal attacks on one of its key oil and gas investors, to an extent previously unseen in the country’s more than 60 years of hydrocarbon production. Shell has been active in Nigeria ever since the African country opened up to international investment in the early 1960s, maintaining its position as one of the leading actors in its upstream segment, accounting for roughly 10% of Nigeria’s crude production. Seemingly, the timing is quite inopportune for a large-scale feud – projects are getting delayed and drilling contracts cancelled, Nigeria’s GDP dropped 2% in 2020 just as was bouncing off its period of economic lassitude and OPEC+ production curtailments limiting the potential output of Nigerian producers. Despite the odds, the conflict between Nigeria and Royal Dutch Shell might be a harbinger of great transformations, not necessarily to the benefit of either side.
Lawsuit #1. Bank Account Freeze Amidst Claims of Underreporting.
The Lagos-based Nigerian holding Aiteo Eastern E&P has taken Shell to court seeking a total of $4 billion over the poor condition of the Nembe Creek Trunk Line (NCTL), a pipeline used to move Bonny Light towards its export terminal, an asset it had bought back in 2015. The litigation might have taken many by surprise, although the manifold problems has experienced are an open secret, including several instances of third-party damage and subsequent fires. Aiteo simultaneously claims that Shell had been metering its oil exports at the Bonny Terminal in an improper fashion, i.e. underreporting its real barrels. The peculiarity of the issue lies in the fact that the Lagos federal court ruled that Shell’s Nigerian subsidiaries are prevented from withdrawing money held at local banks until it ringfences the $4 billion in question.
Lawsuit #2. Oil Spills Damage.
After almost 13 years of litigation, a group of Nigerian farmers that sued Shell over environmental damage to their livelihoods caused by pollution claimed victory in late January 2021. The litigants claimed the reoccurring pipeline leaks were caused by poor maintenance rather than sabotage acts, as was claimed by the Anglo-Dutch major. The Hague Court of Appeal decided that Shell’s Nigerian subsidiary was indeed responsible for oil leaks in the villages of Goi and Oruma, and even though it did not set any specific compensation to be paid, Shell will find it rather difficult to appeal against such a cumbersome decision. Moreover, the court ruling might create a dangerous precedent for any oil major active in Nigeria, where sabotage acts still coexist with weak infrastructure maintenance and oftentimes the distinction between the two is unobservable.
The legal spin-off potential of the Dutch court ruling was evident early on, roughly concurrently to the Goi-Oruma case the UK Supreme Court decided that another community living in the Niger Delta (Okpabi) would be legally justified to sue Shell on the basis of SPDC’s negligence causing environmental damage that affected their livelihoods and health. The scope of the UK case might surpass that of the Dutch one given the number of people who are reported to be interested in taking the Anglo-Dutch major to court, more than 42 000 of them. Such a swift degradation of the overall business climate for Shell might be a very powerful push factor, to the extent of it leaving the country altogether.
Lawsuit #3. Shell Fights Back
As of March 2021, however, Shell is still active in Nigeria – it operates some 340 oil wells across the country, operates two major oil terminals (Bonga and Bonny) and produces more than 600kboepd of oil and gas. As such, it still has the clout and leverage to counteract what it might perceive as increased government pressure. Within a couple of days following the UK Supreme Court decision, Shell has filed a lawsuit against the Nigerian government at the International Centre for Settlement of Investment Disputes (ICSID) for its illegal confiscation of OML 11 in December 2020. Effectively barred by the government to enter the territory of OML 11, Shell claims that it could not be held accountable for an oil spill in 1967 that it claims was caused by third parties during the Biafra War of 1967-1970. The initial confiscation was adjudicated by the Nigerian Supreme Court, now it is the World Bank’s turn to provide a legal opinion on the dispute.
Against this background it should come as no surprise that Shell is considering the sale of its onshore assets in Nigeria, i.e. everything that might be vandalized and subsequently utilized in the same fashion as the Nembe Creek pipeline. Just this January, the Anglo-Dutch firm has sold a 30% stake in OML 17 to a domestic company (TNOG Oil) for $0.5 billion, a trend that will most likely continue in the upcoming months and years. It is one thing to deal with criminal and sabotage activity in the Niger Delta, if this is coupled with an increasing government drive to increase the tax burden on companies present in Nigeria’s upstream segment, many majors might reconsider their readiness to stay in Nigeria. Such an exodus will inevitably hurt Nigeria’s long-term prospects because the national oil company NNPC is too overburdened to tackle production issues all by itself.