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Increasing Legal Risk Factors for Offshore Drilling Contractors Operating on Nigerian Waters

There is a recent judgment of a Nigerian Federal High Court (Judgement) which exploration and production companies, particularly, offshore/deep water oil drilling contractors/charterers (Upstream Actors) need to be mindful of and in respect of which Upstream Actors will be well-advised to obtain strategic legal and tax guidance with respect to how best to proceed.

In practical terms, the Judgement endorses the position that offshore drillings rigs are to be considered as “vessels” for the purposes of cabotage regulation and that “drilling operations” carried out by offshore drilling rigs constitute ‘cabotage trade’, within the intendment of the cabotage law applicable in Nigeria. This has been the position of Nigeria’s cabotage regulator, for a while, despite some level of push back from industry. In a 2007 Guideline issued by the Ministry of Transportation, the Ministry specifically included FPSOs and FSOs as types of vessels that are registrable for the purposes of cabotage trade. The Ministry has defended this position in a number of court cases till date.

As a Firm, our view on the matter is that there exists legal basis for challenging the Judgement, a fortiori, for challenging the view that drilling rigs should be considered to be vessels for the purposes of cabotage in Nigeria and that drilling operations constitute ‘cabotage trade. It is important to note that the Judgement is that of a court of first instance, and therefore, still, subject to appeal.

Pending the decision of an appellate court on the matter and in view of the stance of Nigeria’s cabotage regulator, Upstream Actors that fail to comply with cabotage laws as interpreted by Nigeria’s cabotage regulator, run the risk of having their offshore drilling rigs detained by the said cabotage regulator. In the case under review, the offshore drilling rig of the Plaintiff, a subsidiary of a major global oil drilling firm, was detained by the regulator, for failure to register as a vessel for the purposes of cabotage trade.

It is important to put the practical implications of the Judgement into perspective. Based on our review of the extant cabotage law and practice, we have surmised the following general implications to include:

1). a requirement for offshore drilling rig contractors to register at the Nigerian company’s registry (CAC) as a shipping company and also with Nigeria’s cabotage regulator. At the level of the CAC, shipping companies are required to have a share capital of atleast N25,000,000 (Twenty-Five Million Naira) for this purposes;

2). a requirement for specific registration of offshore drilling rigs with Nigeria’s cabotage regulator for cabotage purposes;

3). a liability for payment of 2% of the contract sum performed by offshore drilling rigs engaged in coastal trade;

4). full compliance by offshore drilling rig contractors with cabotage regulations as applicable in Nigeria, in regard to the applicable ownership, operation and exemption regime provided under Nigeria’s cabotage laws

Earlier in 2019, Nigeria’s cabotage regulator published a new cabotage compliance strategy which was to apply to all Oil and Gas Operators and International Oil Companies. The new cabotage compliance strategy places (a) additional reporting obligations with regard to the marine service/vessel chartering plans of Oil & Gas Operators and International Oil Companies, to cover details like contract value (in local & foreign currencies) and nationality of contractor/vessel ownership (b) a mandatory obligation on Oil & Gas Operators and International Oil Companies to advertise for expression of interest & prequalification of tenders for award of marine contract/vessel engagement in at least three (3) National Newspapers and Nigerian Petroleum Exchange Platform (NIPEX), citing compliance with cabotage regulation as a prerequisite for award of such marine contract and contractor’s engagement in coastal trade (c) a mandatory requirement on Oil & Gas Operators and international Oil & Gas Companies to obtain NIMASA’s Certificate of No Objection prior to award of any marine related contract to a foreign firm on the basis of non-availability of local capacity to satisfactorily execute such job.

General Comments

More than previously, the evaluation and mitigation of regulatory risk is now a more important consideration for Upstream Actors, especially, foreign offshore drilling rig contractors, particularly in view of the increasing regulatory directives from the cabotage regulator.

Also, the likelihood and/or occurrence of regulatory risk may have serious, sometimes, unforeseen, contractual implications. On this basis, the allocation of risk between an operator and a contractor, in drilling charter contracts covering drilling operations in Nigerian waters assumes a more nuanced approach as parties must take even more discipline to put into drafting perspective, all the actual and potential local risk factors that can prevent the fulfilment of own contractual obligations.  For instance, the detention of an offshore drilling rig by Nigeria’s cabotage regulator on account of regulatory breach, would almost naturally trigger the force majeure (FM) provisioning of a drilling charter contract. As the English case of Seadrill vs. Tullow Ghana limitedwould suggest, the efficacy of FM provisioning in a drilling contract may well depend on, the detail with which FM events have been identified, on whether or not an FM event is the sole and effective cause of a party’s failure to perform a contractual obligation and the extent to which the party claiming the benefit of an FM provisioning has used reasonable endeavors to avoid or circumvent the effect of the FM.

 

Please reach out to our oil & gas finance & litigation team at energy@balogunharold.com or femia@balogunharold.com, if you require additional information, opinion or clarification  on this update.

 

 

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