The Re-Validated Oil Processing Licences [analysis]

Lagos, Sep 08, 2009 (Daily Independent/All Africa Global Media via COMTEX) -- KEP | Quote | Chart | News | PowerRating -- Recently an Abuja High Court Judge, Justice Mustapha Abdullahi, cancelled the decision by the Federal Government to revoke the two Oil Processing Licenses (OPL 321 and OPL 323), which it had granted in 2005 to a South Korean consortium (Daewoo Shipbuilding and Korea Electric Power Corporation), represented by the Korea National Oil Corporation (KNOC), during the Olusegun Obasanjo administration.

The Federal Government's argument was that the company defaulted by not investing in the downstream sector as agreed, and that KNOC did not pay the signature bonus of $485 million as stipulated. Consequently, the government re-awarded the two licenses to new firms: Messrs ONGC VIDESH of India and Owel Petroleum Services Nigeria Limited. In his ruling, Justice Abdullahi made it clear that "Mr. President has no power to void the oil processing licences OPL 321 & 323. That power is conferred only on the Minister of Petroleum, under the Petroleum Act." Moreover, the "applicants did not get prior notice nor (were) given opportunity to make presentation, before the revocation of the oil processing licences".

He then directed that "the respondents, their agents and others" were "perpetually restrained from further interfering (with) or disturbing the applicants in the process of their lawful duty." We note also that contrary to claims by the government that KNOC did not pay the signature bonus of $485 million, the company had argued that it actually asked for an extension of 180 days, as permitted by law, which was approved by the bidding committee and had in fact paid $175 million in 2005 during the signing of the contract. Additionally, in return for their oil exploration rights, the South Koreans had offered to build a 1, 200km gas pipeline from the Niger Delta to Abuja and further generate 2, 250 megawatts of electricity.

Our worry, particularly, is that this case seems to confirm what is already becoming a trend with the present administration - diregard of contract agreements. We readily recall the confusion that trailed the concessioning of Lagos International Trade Fair Complex; the Railway Modernization Contract involving the Chinese; the sale of Ajaokuta Steel Complex; and, more recently, the frustration that led to the eventual pull-out of Sir Richard Branson from Virgin Nigeria Airline.

It is based on these that we consider the ruling of the Abuja High Court on the matter involving the KNOC oil processing licences as a watershed, given that it will help to bolster investor confidence in Nigeria. Countries all over the world now go all out to attract foreign investments in realisation of the impact of such investments on economic development, especially through job and wealth creation. Foreign investments enable other factors that may enhance development by way of transfer of technology, which could further engender domestic innovation; transfer of management know-how and skills, leading to development of intellectual capital; access to markets; stimulation of competition in the domestic economy, thus boosting productivity and reducing inflationary pressures; and integration of the domestic economy with international supply chains.

To attract and retain such investments depends, however, on such factors as the macroeconomic environment, relationship with the private sector regarding trade policies, regional integration and access to markets, ownership controls and support to small and medium enterprises, and more importantly, investment strategies of multinational enterprises in terms of risk perception, location, sourcing, integration and transfers.

It is common knowledge that investors hardly go to any place where they are not assured of sanctity of contracts, an efficient court system where they could seek redress and a level playing field. In fact, an independent judiciary facilitates economic growth in the sense that it enhances the credibility of government commitments as well as the development of a successful market economy. It is against this background that we advise the government not to pursue this case any further by appeal. Rather it should see the judgment as a bonus since the international business community will likely perceive greater credibility in the country's justice system, which will improve the willingness of international investors to do business with Nigeria.

It will also help to assuage their present fears that there is no sanctity of contracts in the country, especially when regimes change. Moreover, given the heavy strain on Nigeria's economy presently, and the perennial Niger Delta problem, which has impacted negatively on security particularly in Southern Nigeria - not to mention Mr. President's avowed commitment to deliver on his seven-point agenda before the 2011 elections - we think that, for now, this administration has enough to worry about rather than waste time on a case that is likely to do more damage to the already battered external image of the country.

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