$3.9b Egina FPSO contract: NNPC, Samsung disagree on variation cost

The Nigerian National Petroleum Corporation (NNPC) and Samsung Heavy Industries (SHI) are in discussion over further variation of the $3.9billion Engina Floating, Production, Storage, Offloading (FPSO) vessel contract.

While the NNPC appears not to be  favourably disposed to further payment of variation costs to SHI, the latter is pushing for variation cost of $800million citing extra ordinary increase in the quantities of structure and piping materials of the FPSO. The contract was awarded to SHI by Total Upstream Nigeria Ltd, the operator of the ultra deep offshore Egina oilfield in Oil Mining Lease (OML) 130 and a joint venture (Jv) partner with NNPC, in 2013, at an initial sum of $2,993,800,514. It was later reviewed up to $3,335,941,349.

The FPSO vessel, adjudged the largest in the world, measuring 330million in length and 61million in 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 Act, indigenous firms were allotted leading roles in the engineering design of the vessel and its fabrication and integration were to be carried out in-country. It was a first major move at local content promotion in the upstream sector of the oil industry.

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

Relying on the clause in the contract which allows variation cost requests, SHI 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 reveal that the Total/NNPC JV has paid additional $546,755,118 as variation costs to SHI to date , thus bringing the total cost of the project to $3.9Billion.

High level NNPC contact disclosed that Samsung is currently in discussion with the National Petroleum Investment Management Services Ltd (NAPIMS), the upstream subsidiary of NNPC and Total on variation costs of $800 million.

SHI last April, had 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 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  FPSO had since sailed away to Egina oilfied, 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 is seeking for the payment of $1.6 billion if Total /NNPC JV fails to honour its variation cost invoice.