INSIDE STORY: How gov’t slept on gas contract, and woke up to $70m judgment debt

The dust is still hovering over the US$170-million judgment debt case Ghana lost in the United Kingdom, but the government has been slapped with yet another judgment debt worth almost US$ 70 million.

Again, it is a fallout from an energy contract that went for international arbitration. Again, the agreement predates the Akufo-Addo administration, but this administration has been partly complicit in how Ghanaian taxpayers will pay for their government’s actions and inaction, but without any benefit.

It is a double blow to the government which has been trying to parry its negligence in the US$170-million judgment debt, which a London Commercial Court said was too late to appeal. The government had fallen on Covid-19 and the 2020 election as excuses for failing to set aside an arbitration it lost to the Ghana Power Generation Company (GPGC).

Just like GPGC, which won US$170 million without producing a kilowatt of power, the West Africa Gas Limited (WAGL) also got US$68.5 million without delivering a cubic meter of the gas it was contracted to produce.

In total, the Ghanaian taxpayer will be billed US$ 238.5 million for those two debts the courts considered an error in judgment on the part of the Ghana government.

In cedi terms, at an exchange rate of a dollar to GH₵ 5.7, the two debts amount to a little over GH₵ 1.3 billion. This amount is more than the GH₵ 1.2 billion the government committed to its flagship agriculture policy, Planting for Food and Jobs for three years (2017 to 2019).

The Judgment Debt

The WAGL had initially demanded almost US$ 1.1 billion in recovery fees but had to slash it drastically to almost $400 million for undisclosed reasons. The company’s grievance included the fact that the government of Ghana failed to provide “a revolving irrevocable cumulative standby letter of credit” as well as obtain all “approval necessary to purchase, receive and use gas” under the agreement.

A breakdown of the latest award indicates that almost US$68 million will go to third-party suppliers, engineering companies, and management companies that the WAGL hired to execute the contract while $578,971 is compensation for travel and legal costs the company incurred during the contract.

That aside, Ghana will also pay £353,000 in legal and arbitration costs. Signed on October 8, 2015, the contract was called Gas Supply Agreement (GSA) and required that the company, West Africa Gas Limited (WAGL), build the required infrastructure and supply gas to Ghana for 10 years.

WAGL is a joint venture company of Nigerian oil and gas giants, Ocean Bed Trading (BVI), a member of the Sahara Group; and the Nigerian National Petroleum Company.

Ghana’s counterclaim for the breach of contract and demand for approximately US$ 88 million was dismissed. WAGL’s demand for $310 million as a cost incurred in contracting one of its service providers was also thrown out.

It will not be the first time the Sahara Group is involved in a controversy in Ghana. During the Mills administration, the oil conglomerate was accused of allegedly using a phony company in a US$48 million crude oil transaction with the Tema Oil Refinery.  Another company claimed ownership of the product. But the Sahara Group vehemently denied the allegations.  A Bureau of National Investigations (Now National Intelligence Bureau) later cleared the company of any wrongdoing.

The WAGL Contract

Signed on October 8, 2015, the contract was called Gas Supply Agreement (GSA) and required that the company build the infrastructure and supply gas to Ghana for 10 years.

Unlike the GCGP contract, which the government abrogated, this time, it was the WAGL that terminated its deal with the state, citing bureaucratic bottlenecks.

The agreement allowed it to do so. But it must have a strong case to abandon the deal or risk compensating Ghana. The London Arbitration panel believed the Nigerian company was justified in walking away from the contract.

When Ghana’s energy crisis bit hard between 2012 and 2016, courting the anger of the public ahead of the 2016 elections, Mahama’s government signed a wave of power purchase agreements, including gas supply contracts to increase the country’s power generation capacity.

The WAGL deal was meant to deliver gas at a time the country’s energy sector balance sheet was in deficit. While the government was expanding the country’s generation capacity, critics pointed out the problem was more financial than technical. The energy sector debt was crippling banks.

 Ghana’s agreement with WAGL did not require that the government spend a cent except to help the company secure a letter of credit for an initial US$ 140 million for the first four months. The letter of credit was to assure banks that the government of Ghana would be willing to shoulder the liabilities in the event that the company failed to meet its liabilities.

The Mahama administration was also required to validate the agreement with the Attorney-General’s opinion on the contract’s validity, the government’s ability to honour its financial obligations, as well as parliamentary approval.

On the part of the company, it was expected to build its own financial backbone and also build the infrastructure required as there was no berthing facility at the Tema Port.

It was also to get its license from Ghana’s Energy Commission.

On January 21, 2016, the Ministry of Justice confirmed, on behalf of the Attorney General, that the GSA did not contravene any existing law and could be executed by the parties.

After the signing of the agreement on March 8, 2015, it would take a number of letters and reminders from the WAGL to the government asking to be updated on the parliamentary approval, the letter of credit, and the other government obligations.

The letters, which were dated December 28, 2015; May 27, 2016; September 26, 2016; and October 5, 2016; provided updates on the projects, but received only one response from the Ministry of Power.

Even before the first cubic meter of LNG was delivered, the Mahama administration on   March 18, 2016, a year after the contract was due, expanded the scope of the contract. The government increased the duration of the contract, the daily contract quantity, and contract quantity.  The variation of the contract received presidential and Cabinet endorsements.

But the deadline for the completion was not extended or waived. This would later come to haunt the Ghanaian taxpayer.

It was in October 2016 that the agreement and an addendum to expand its scope received parliamentary approval. This was a year after the deal was signed and seven months after the WAGL was expected to be complete (March 8, 2016) and feed power plants in Tema with gas.

With both eyes on the 2016 elections and the tension eased by an improvement in the power situation, it appeared the Mahama government took its eyes off the WAGL deal. It eventually lost the 2016 elections to Nana Akufo-Addo.

On January 6, 2017, a day before President Nana Akufo-Addo was sworn-in, WAGL through its lawyers, Clyde & Co, wrote to the outgoing Mahama government with a number of reminders. It seemed to be a subtle wink at the new administration of its unfinished business.

In that letter, the company noted that it had “already been exposed to very significant project costs, but had been prevented from progressing matters as a result of the GoG’s failure to comply with its obligations,” adding that the “WAGL’s exposure was continuing to grow.”

That letter received no response.

Interestingly, while WAGL and the government struggled to fulfill the terms of the contract, the Ghana National Petroleum Corporation (GNPC) was signing other gas supply deals.

On December 1, 2016, GNPC entered into a 20- year contract with a Norwegian oil and gas giant, Höegh LNG, for the supply of natural gas to power plants in Tema.

On September 14, 2017, GNPC concluded an agreement with a multi-billion Russian company, Gazprom, for the supply of liquified natural gas.

In September 2018, the Energy Ministry also announced that the China Harbour Engineering Company had been appointed to build onshore facilities and that Jiangnan Shipyard had been appointed to provide a floating storage regasification unit (FSRU)— a special type of ship used for LNG transfer.

Ironically, a similar FSRU facility, Mt Golar Tundra, which was hired by WAGL, had docked at the Tema Harbour from May 27, 2016, to September 2017.

The arrival of WAGL’s facility was known to officials of the Ghanaian government, who oversaw the contracting of a similar facility later. The vessel left the country in 2017 because its owners were growing agitated over the lack of payments from WAGL.

Service providers angry

From May to December 2015, WAGL signed a number of construction, service agreements, and consultancy services, including the hiring of vessels at its own expense.

However, with the company failing to meet its financial obligations to these companies became agitated.

On April 18, 2016, FMC, the company manufacturing the loading arm for the gas delivery, froze its work stating that “upon receipt of the funds, manufacturing would restart and a new schedule and delivery date would be provided and notified.”

On July 5, 2017, Amazon, which was to handle construction work, issued a notice of termination of its contract with WAGL for its failure to make payment and demanded the payment $310 million being its contract sum.

On September 19, 2017, Golar, the vessel for storage facility (FSRU) gave notice of termination and withdrawal.

New administration’s complicity

Just like its predecessor, which failed to clear the legal and administrative hurdles to allow the agreement to be executed, it appeared the Akufo-Addo administration took little interest in the contract. This compelled the company to write another letter on August 3, 2017, its frustrations were glaring in that correspondence.

“Upon Parliament’s approval of the binding GSA… and subsequent kick of meeting (with members of your team in attendance) of 16 December 2016, we are yet to be formally engaged by the Ministry of Energy in expediting steps towards the implementation of the project. Her previous correspondence, and in the bid to curtail the exposure, WAGL has been inclined to slow the pace of execution,” the arbitration quoted WAGL.

The company also reminded the government of the cost it was incurred while the contract crawled at the pace of a tortoise.

This got the attention of the GNPC, which wrote to the WAGL on September 4, 2018, inviting it to negotiations, adding that following a review of the country’s power requirements, the Ministry of Energy was considering an implementation of the project to be executed by WAGL in Takoradi instead of the original agreed location in Tema, necessitating a review of the GSA.

This also happened in the GPGC case, where the company was asked to relocate from Takoradi to Kpone – causing another layer of delay.

But eight months later—April 22, 2019 — WAGL pulled the plug on the deal.  This was almost three years after the contract was signed. For an emergency agreement meant to provide gas solutions for an ailing power sector within five months (October 8, 2015, to March 8, 2016), 36 months later, it was still teething.

With the terms of the deal allowing WAGL “to terminate [the] agreement with immediate effect” if any of the conditions were not met by the execution date, it received a shot in the arm to walk away.

In simpler terms, both sides renounced their obligation under the contract. Consequently, on July 25, 2019, WAGL  began an arbitration action against the government before the London Court.

During the arbitration, which ended on January 15, 2021, WAGL claimed that there was no provision in the agreement which held it to an obligation to comply with its conditions before invoking the termination clause or to give notice of the government defaults before termination.

“WAGL contended that it was not suggested that by waiting until April 22, 2019, to terminate the GSA [Gas Supply Agreement], WAGL waived its right to do so,” the court’s documents said.

Like a jealous spouse, the company told the court that the Akufo-Addo administration’s coldness towards it was because there was another partner in the picture.

“WAGL further submitted that the GoG had decided that it no longer wished to purchase Gas from WAGL and that was why the GoG did not fulfill the remaining Buyer’s Conditions as it was able to receive gas at a considerably cheaper price from Gazprom, namely at a saving of some US$400 million,” the court document explained.

The company also justified its inability to fulfill all its obligations, saying it had “repeatedly warned the GoG, it had been obliged to slow down its progress with the project because of the delays on the part of GoG, as buyer, in obtaining Parliamentary approval and, thereafter, providing the letter of credit. As to the former, GoG failed to ask for it, let alone obtain Parliamentary Approval before March 8, 2016.”

In response, the government said the company’s decision was an early legal ejaculation.

It disputed the company’s right to terminate the agreement on various grounds and argued that if the company was minded to abrogate the contract, it should have been done on March 8, 2016, the date task should have been executed.

“GoG adds that it satisfied all but two of its conditions before WAGL prematurely terminated the GSA. While accepting that it did not establish the letter of credit or the disputed amount account under, it submitted that the time frame for complying with that requirement was distorted following the parties’ decision to amend the GSA by entering into an addendum to vary the terms of the GSA. By that decision, the parties, by necessary implication, waived the period of compliance, both of which required parliamentary approval,” the government argued.

The government’s legal team led by the then Deputy Attorney General, Godfred Yeboah Dame, said the company’s decision to terminate the deal tied the government’s hand, preventing it from fulfilling its part of the contract.

That is not all.

“GoG also argued in oral submissions that WAGL did not use its reasonable endeavours to perform the GSA because it [WAGL] did not even obtain a license to import LNG into Ghana in accordance with the provisions of the Energy Commissions Act. WAGL only provided a LNG provisional license in the name of Sahara,” the court document said.

On its failure to provide a letter of credit, the government’s position was that until WAGL had satisfied all of its conditions, particularly the completion of the infrastructure works, and was in a position to supply gas, the government’s financial obligation did not arise.

“GoG submitted that WAGL’s admission that it could not raise financing as a result of GoG’s failure to establish an LC, even though the contract did not make the establishment of an LC a contingent condition for WAGL to raise financing for the contract, laid bare the real reason why WAGL was compelled to terminate the contract, namely that WAGL did not have the financial capacity to complete the project.”

The court’s decision

The three-member arbitration panel, comprising a Nigerian academic, Prof Fidelis Oditah;  a veteran Nigerian lawyer,  Dorothy Ufot, and presided over by an international arbitrator, Hilary Heilbron, reasoned that WAGL made a more convincing case.

It unanimously agreed that although both parties failed to meet their obligations under the agreement, the WAGL had incurred costs that would have been avoided if the government had been responsive.

It provided eight reasons for which WAGL’s failure to terminate the deal on the deadline date of March 8, 2016, saying the decision was commercially not viable.

“As WAGL argued, it would be very uncommercial if the GoG could announce that it was not going to further perform, yet WAGL had to undertake further expenditure to complete, for example the infrastructure works, which would mean an increased Recovery Fee which GoG would ultimately have to pay. That would be in neither party’s interests,” the court document stated.

The tribunal, therefore concluded that there was no time limit on the exercise of the right to terminate the agreement on the part of the WAGL.

“The Tribunal rejects the contention that the seller [WAGL]can only terminate the GSA” if it itself has complied with all its conditions.

You can reach the writer of this story, Seth Bokpe, via email at seth@thefourthestateghcom. You can follow him on Twitter @thekekeli