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Introduction
The petroleum industry in Nigeria is an industry that runs on various contracts, arrangements, and compromises. However, there are instances where disputes may arise out of these contractual arrangements in the oil and gas industry.
The Oil and Gas industry is the main focal point of the Nigerian economy and contributes to a large extent to Nigeria's economic atmosphere. Due to the myriad of contractual arrangements and the nature of activities occurring in the petroleum industry, disputes are inevitable. Disputes arise amongst the investors or between operators and the oil-producing communities, contracting state governments, and foreign investors, etc1
Parties to Oil and Gas contracts often resort to the use of alternative dispute resolution (ADR) processes whenever disputes occur in business agreements, especially arbitration, which is an established and significant feature in such agreements.2 Arbitration is more suited compared to litigation because the Oil and Gas industry involves heavy capital investment from foreign investors who are unlikely to agree to resolve disputes that may arise before the Nigerian courts. Also, due to the sophisticated contractual agreements involved in the Oil and Gas industry, foreign investors are reluctant to submit such contractual disputes to the jurisdiction of the host country's judicial system and would rather resort to arbitration where they can select arbitrators with the requisite experience and expertise to resolve their disputes.
This article examines the various contractual arrangements and the current legal framework for dispute resolution in the Oil and Gas industry in Nigeria.
Contractual Arrangements in the Oil and Gas Industry
In Nigeria presently, there exist four major types of contractual arrangements for crude oil exploration and production. They are hereunder listed and discussed seriatim:
- The Concession
- The Joint Venture
- The Production Sharing Contracts (PSC)
- The Service Contract
The Concession
The concession is divided into traditional and modern concessions. The traditional concession is the earliest type of petroleum arrangement between government and companies was the traditional concession. This was a contractual agreement in which the oil company received the exclusive right to explore, produce, market, and transport (EPMT) oil and gas in return for paying specified costs and taxes. These classical concessions have certain characteristics, and these include a large contract area, e.g., the Shell concession of 1938 was sole and covering the entire mainland of Nigeria (375,000 sq miles). The traditional concession is usually for a duration of 40-75 hears subject to renewal.
In contrast, under the modern concession, the oil company is still given the exclusive right to explore for petroleum and to produce, transport, and market the same in return for payment of specified costs and taxes. Ownership of the petroleum is in the company at the point of extraction. It is now called by various names, e.g., license or lease, as in Oil Mining Lease (OML), being granted to companies in Nigeria. It is usually for an initial duration of 20 years.
The Joint Venture
The Joint Venture (JVS) arrangement is a name used to describe the most important legal arrangement in Nigeria between the government (through the NNPC) and the multinational companies for the exploration and development of petroleum in Nigeria. Since the 1970s, participation by host countries in their mineral and oil rights has become increasingly common. When the government participates, the resulting effect is what is commonly known as a Joint Venture.
The Italian state-owned company, Ente Nationale Indro Carbon (ENI), was the first to enter into an agreement with the Nigerian government. It gave Nigeria the option to purchase 30% of its shares' capital in its Nigerian subsidiary (Nigerian Agip Oil Company Ltd.) when commercial discovery was made. This option was exercised with effect from 1st October, 1971.
The JV arrangement moved the state from being mere regulators to partners in the enterprise. In Nigeria, it is the most important legal arrangement in the oil industry, and most of our production is done under it. Although with the government policy shift towards private sector participation, the attractiveness is in the decline. When Joint Venture participation occurs, the foundational contract often remains the same. However, other contracts that define the participation arrangement are now entered into.
One of the features of the JV is that each of the parties has a capital obligation to make with respect to the JV. JVs also give the state the opportunity to influence partners' actions directly through the arrangement.
The Production Sharing Contracts (PSCs)
This is a contract or legal arrangement where the oil produced is shared between the parties in a predetermined proportion. It originated in Indonesia and is probably the world's most popular contract. In a standard PSC, the company bears all the risks of exploration and is often in charge of the operation and management of the contract area. When oil is discovered in commercial quantities, the company is entitled to recoup its investments from the crude oil produced from the contract area. This portion of the oil is often referred to as cost recovery oil.
The first PSC to be signed in Nigeria was the one between NNPC and Ashland Oil (Nigeria) Company, the Nigerian subsidiary of an American company. The contract was signed between the parties in June 1973, covering the exploitation of NNPC's concessions of Oil Prospecting Licenses (OPL) numbers 98 and 118 located in Imo and offshore Cross River states, respectively. The life of the contract was stated to be 20 years from 1979, with a renewal term of five years.
The Service Contract
Nigeria, learning from and reacting to the experience of other OPEC countries and from its own experience, decided after the PSC with Ashland Oil (Nigeria) company (AON), to adopt the service contract. Service contracts employed in the petroleum industry in the Middle East and Latin American countries are substantially different. In Indonesia, it is called – Service Contracts – these are hardly distinguishable from Concessions. The analogous contracts in Latin American countries are referred to as Operation Work or Risk Contract.
The service contract could be a risk service contract or a pure service contract. The risk service contract is an arrangement whereby the contractor provides the entire risk capital for exploration and production. If no discovery is made, the contract ceases to exist with no obligation on either party. In the event of a commercial discovery, expenses are recouped, and the contractor is entitled to payment, which is in cash, although often an option for payment to be made in crude oil is included within the contract.
On the other hand, the pure service contract is a simple contract of work. All risks are borne by the State, and the contractor performs its stipulated services and is paid a flat fee for these services. Arrangements of this sort exist mainly in the oil-rich Middle East countries, e.g., Saudi Arabia, Kuwait, Qatar. Often, the service contract is accompanied by a usually unconnected but parallel purchase contract for part of the oil being produced from the contract area, as is the case in Saudi Arabia. It should be noted that the fact that the state is bearing all risks and costs does not imply a transfer of knowledge and/or technology, just as employing a contractor to build a house does not imply that the owner of a building will acquire any knowledge of the construction process as a result of the relationship.
Dispute Resolution Mechanisms in the Oil and Gas Sector
Given the capital-intensive nature of petroleum operations and the multiplicity of stakeholders involved, the oil and gas industry in Nigeria has developed a robust preference for structured dispute resolution mechanisms. Disputes in the sector may arise from exploration and production activities, host community relations, environmental damage, fiscal obligations, contractual breaches, or regulatory enforcement actions. These disputes may involve private parties, state-owned entities, host communities, or the Nigerian State itself, thereby necessitating a dispute resolution framework that balances commercial certainty with sovereign and public interest considerations.
Dispute resolution mechanisms in the Nigerian petroleum industry can broadly be classified into litigation, arbitration, and other alternative dispute resolution mechanisms such as mediation and negotiation. However, in practice, arbitration remains the dominant mechanism for resolving petroleum-related disputes, particularly those with international dimensions.
Litigation in Petroleum Disputes
Litigation remains the traditional means of dispute resolution under Nigerian law, with jurisdiction vested in the Federal High Court over matters relating to mines and minerals, including oil fields, oil mining, geological surveys, and natural gas. The constitutional foundation for this jurisdiction is found in the Constitution3 of the Federal Republic of Nigeria 1999 (as amended). Consequently, disputes arising from petroleum operations, regulatory enforcement, taxation of petroleum profits,4, and the interpretation of statutory obligations may be determined by Nigerian courts.5
Notwithstanding this constitutional competence, litigation is often perceived as unsuitable for resolving complex oil and gas disputes. This perception is largely due to delays associated with judicial proceedings, procedural technicalities, concerns over the enforcement of judgments across borders, and the limited technical expertise of courts in highly specialised petroleum contracts. As a result, parties—particularly foreign investors—are often reluctant to submit petroleum disputes exclusively to domestic courts.6
Arbitration as the Preferred Mechanism
Arbitration has emerged as the most preferred dispute resolution mechanism in the Nigerian oil and gas industry. Most petroleum contracts, including Joint Venture Agreements, Production Sharing Contracts, and Service Contracts, contain arbitration clauses that provide for the resolution of disputes through institutional or ad hoc arbitration. This preference is informed by the confidentiality of arbitral proceedings, the enforceability of arbitral awards under international conventions, and the flexibility afforded to parties in selecting arbitrators with industry-specific expertise.
In Nigeria, the legal framework for arbitration has been significantly strengthened by the enactment of the Arbitration and Mediation Act 2023, which repealed the Arbitration and Conciliation Act. The Act aligns Nigeria's arbitration regime with international best practices and incorporates the UNCITRAL Model Law. It further reinforces Nigeria's obligations under the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, thereby enhancing investor confidence in the enforceability of arbitral outcomes.
Under the Nigerian legal system, arbitration is recognized as an effective means of dispute resolution. National laws (and in recent times, some sub-national laws, e.g., Arbitration Law of Lagos State) have been enacted to incorporate arbitration in the country's legal system. The statutes enacted give recognition to arbitration as a prominent mechanism for the settlement of disputes in the Oil and Gas industry in Nigeria. Some of the national laws generally give room for voluntary arbitration by parties, whilst some other statutes mandate compulsory arbitration.7 The domestic statutes that provide for arbitration in the Nigerian Oil and Gas sector include the newly enacted Petroleum Industry Act ("PIA"),8 the Petroleum Act ("PA"),the Oil Pipelines Act,the Nigerian Investment Promotion Commission Act,and the Nigeria LNG (Fiscal Incentives, Guarantees and Assurance Act).
Prior to the signing of the PIA bill into law, Section 11 of the now-repealed PA stipulated that:
"(1) Whereby any provision of this Act or any regulations made thereunder, a question or dispute is to be settled by arbitration, the question or dispute shall be settled in accordance with the law relating to arbitration in the appropriate State, and the provision shall be treated as a submission to arbitration for the purposes of that law.
(2) In this section, "the appropriate State" means the State agreed by all parties to a question or dispute to be appropriate in the circumstances or, if there is no such agreement, the Federal Capital Territory, Abuja."
The above provision is an indication that arbitration is legally permissible in the settlement of disputes arising from transactions in the Oil and Gas sector. However, the PA did not lay down the procedure or rules to be followed in the conduct of arbitration of this nature.
On 16th August 2021, the PIA was enacted, and it repealed the existing PA 2004.9 The PIA stipulates an array of provisions and innovations that influence the status of the private and public sectors, as well as stakeholders in the oil and gas industry. The PIA was enacted after several attempts by the Nigerian government to develop a new legal, governance, regulatory, and fiscal framework for the Nigerian Petroleum Industry.10 Significantly, the new Act does not provide an equivalent provision to section 11 of the repealed PA. However, there are provisions in relation to arbitration in the PIA. We highlight below most of the provisions setting the background for arbitration or relating to arbitration, or the consequences of arbitration or its awards on stakeholders in the Oil and Gas industry.
Under the PIA, the Nigerian Midstream and Downstream Petroleum Regulatory Authority is charged with the duty of making regulations concerning dispute resolution. This is provided for in Section 33 (t) of the Act as follows:
"Subject to section 216, the Authority shall make regulations concerning dispute resolution and customer protection."
Alongside the description of the acreage and the terms and conditions of the licence and lease, section 76(1)(f) of the PIA mandates that the model licence or model lease for each bid round should include a clause containing the rules for the resolution of disputes, including arbitration, mediation, conciliation, or expert determination. The provision states thus:
"The model licence or model lease for each bid round shall reflect the conditions of the licensing round guidelines for the bid round and shall in all circumstances include the following clauses: rules for the resolution of disputes including arbitration, mediation, conciliation, or expert determination".
Section 96 of the PIA provides for the revocation of a license or lease where the licensee or lessee fails to abide by an arbitration award set forth in the licence, lease or the Act. Section 96(1) (l) stipulates that:
"...upon receipt of the written recommendation of the Commission for revocation, the minister may revoke a petroleum prospecting license or petroleum mining lease, where the applicable licensee or lessee: fails to abide by any expert determination, arbitration award or judgment arising from the dispute resolution provisions set forth in a licence, lease or this Act."
Similarly, Section 120 (1) (j) of the PIA provides for the revocation of a licence or permit in midstream and downstream petroleum operations where the holder does not abide by an arbitration award set forth in the licence or the Act. The section states thus:
"Notwithstanding the provisions of Chapter 2 of this Act related to midstream and downstream petroleum operations, a licence or permit may be revoked where the holder fails to abide by any expert determination, arbitration award, or judgment arising from the dispute resolution provisions set forth in a licence or this Act".
Section 4 of the First Schedule to the PIA made pursuant to section 3(3) of the PIA also provides that:
"Any disputes as to whether a delay was due to causes beyond the control of licensee/lessee shall be settled by agreement between the Minister and the licensee/lessee or in default of agreement by arbitration"
Section 5 (b) of the First Schedule to the PIA, made pursuant to section 3(3) of the PIA, also provides that:
"Dispute as to price of petroleum products taken by the Minister at port of delivery pursuant to his preemptive right is to be settled by agreement between the Minister and the licensee/lessee or in default of agreement by arbitration."
Section 7 of the First Schedule to the PIA made pursuant to section 3(3) of the PIA also stipulates that:
"Any arbitration under the First Schedule shall take place after the petroleum or petroleum products have been delivered."
Section 16 (Grievance Mechanism) of thePetroleum Host Community (Commission) Regulationsmade pursuant to Section 235 PIA provides that grievances should be referred to the National Oil and Gas Excellence Centre (NOGEC) – the Alternative Dispute Resolution Centre (ADRC) established for the resolution of disputes through mediation, reconciliation and arbitration by the Department of Petroleum Resources (DPR) now (the Nigerian Upstream Regulatory Commission). The ADRC was established and inaugurated in April 2021. The section provides for grievances to be resolved by arbitration after the host community and the settlor (and failing that, the mediator) have failed to resolve the dispute.
Saving/Transition Provisions of the PIA: Preserving Arbitration as a means of Dispute Resolution in the Oil and Gas Sector.
The above highlighted provisions in, or made pursuant to, the PIA provide context for arbitration in the Nigerian oil and gas industry. Although, arbitration is not directly provided for in the same manner as under section 11 of the repealed PA, the sections highlighted above show that the provisions of paragraph 42 of the First Schedule to the PA made pursuant to section 2(3) of the PA, paragraph 5 of the Pre-emptive rights in the Second Schedule made pursuant to section 7(2) of the PA are all saved and become part of the extant law by the PIA given that paragraph 42 of the First Schedule to the PA is not inconsistent with the provisions of the PIA.
Section309 of the PIA(Consequential Amendments)provides that:
"Subject to the provisions of the Constitution, upon the coming into force of this Act, where the provisions of any other enactment or law are inconsistent with the provisions of this Act, the provisions of this Act shall prevail and the provisions of that other enactment or law shall, to the extent of that inconsistency, be void in relation to matters provided for in this Act.
PA is not expressly repealed, but some of its provisions are impliedly modified by the PIA. The PA itself, and particularly its First Schedule, is not listed in section 310 of the PIA (Repeals) as one of the laws and regulations repealed.
Section 311 of the PIA (Saving provisions) in its subsections 1 and 2 provides that:
"(1)Any Act, subsidiary legislation or regulation, guideline, directive and order made pursuant to any principal legislation repealed or amended by this Act, shall, in so far as it is not inconsistent with this Act, continue in force mutatis mutandis as if they had been issued by the Commission or Authority under this Act until revoked or replaced by an amendment to this Act or by subsidiary legislation made under this Act and shall be deemed for all purposes to have been made under this Act.
(2) Any oil prospecting licence or oil mining lease granted under the Petroleum Act, 1969 that is subsisting as at the effective date of this Act shall continue to have effect, subject to the following terms and conditions...."
The 'terms and conditions' referred to above relate to when the licenses and leases terminate and how to renegotiate renewals in conformity with the PIA, while the conditions of issuance of the licenses and leases continue to be applicable until converted or made to be in conformity with the PIA, as long as their provisions do not conflict with the PIA.
Section 311 (9) of the PIA specifically saves the provisions of the PA with respect to extant licenses and leases, only making them renewable/renegotiable pursuant to the PIA. The PA is not expressly repealed, but any of its provisions that conflict with the provisions of PIA are void to the extent of the conflict. Thus, the provisions of section 11 of the PA have been saved by the PIA, particularly with respect to disputes in respect of the licenses and leases, etc., issued under the PA, and its provisions are applicable to arbitrations under the current regime. This also applies to the Alternative Dispute Resolution Centre ("ADRC") set up by the erstwhile Department of Petroleum Resources ("DPR"), now Nigerian Upstream Petroleum Regulatory Commission ("NUPRC"), in consonance with the provisions of the PA, as it aligns with the provisions of the PIA highlighted above for dispute resolution via ADR means. The ADRC emphasizes the settlement of disputes through ADR mechanisms (mediation, conciliation and arbitration) without recourse to litigation. With a six-member Advisory Council and a 20-member Body of Neutrals to mediate on disputes between players in the oil and gas value chain, the ADRC has recorded significant successes via mediation of disputes within its short existence.
Arbitration is particularly attractive in petroleum disputes involving multinational corporations and the Nigerian State, as it provides a neutral forum and mitigates concerns about home-court advantage. International petroleum contracts frequently designate arbitration seats outside Nigeria, such as London or Paris, to further enhance neutrality and investor comfort.
Mediation and Other Alternative Dispute Resolution Mechanisms
In recent years, there has been increased recognition of mediation and other consensual dispute resolution mechanisms within the petroleum sector, particularly in disputes involving host communities and environmental claims. These disputes are often socio-economic in nature and require solutions that go beyond strict legal remedies. Mediation allows parties to preserve commercial relationships, manage community expectations, and achieve sustainable outcomes without the adversarial posture associated with litigation or arbitration.
The Petroleum Industry Act 2021 expressly encourages alternative dispute resolution mechanisms in certain contexts, particularly in disputes involving host community development trusts and operating companies. By promoting dialogue and negotiated settlements, the Act seeks to reduce operational disruptions and foster peaceful coexistence between petroleum operators and host communities.
Contractual Dispute Resolution Clauses
Dispute resolution in the oil and gas industry is fundamentally shaped by the contractual arrangements entered into by the parties. Petroleum contracts typically contain multi-tier dispute resolution clauses requiring parties to attempt amicable settlement or negotiation before resorting to arbitration or litigation. These clauses reflect the commercial reality that petroleum projects are long-term and relationship-driven, making early resolution of disputes commercially desirable.
The enforceability of such clauses has been upheld under Nigerian law, provided they are clearly drafted and do not oust the jurisdiction of the courts entirely. Courts have generally shown willingness to give effect to arbitration and ADR clauses in petroleum contracts, in line with Nigeria's pro-arbitration policy.
Conclusion
Dispute resolution in the Nigerian petroleum industry is shaped by the unique characteristics of the sector, including high capital investment, technical complexity, foreign participation, and sovereign interests. While litigation remains constitutionally relevant, arbitration has become the dominant mechanism for resolving petroleum disputes due to its neutrality, expertise-driven process, and international enforceability. The increasing recognition of mediation and other ADR mechanisms further reflects a shift towards more pragmatic and relationship-preserving approaches to dispute resolution.
The evolving legal framework, particularly under the Petroleum Industry Act 2021 and the Arbitration and Mediation Act 2023, demonstrates Nigeria's commitment to providing a stable and investor-friendly dispute resolution environment. Effective dispute resolution remains central to sustaining investment, ensuring regulatory compliance, and maintaining industrial harmony in Nigeria's petroleum sector.
* Prosper Echefu is a Nigerian Lawyer with a deep interest in Taxation, Commercial Law, and Dispute Resolution. He has represented clients in a wide range of cases and he advises and represents Multinational Companies, Corporate entities, and High Net-worth Individuals on various commercial disputes that revolve around Tax, Finance, and Labour.
Footnotes
1.Temitayo Bello, 'Dispute Mechanism in Petroleum Industry: An Overview of Arbitration Frontiers' Babcock University: School of Law and Security Studies [2017] (29) (10) 26 available at https://deliverypdf.ssrn.com/delivery.php?
2. D. Nwaogu, F. Onomrerhinor & D. Nicholas, 'An Examination of the Legal Frameworks on Arbitration in the Nigerian Oil and Gas Industry' International Journal of Business & Law Research 9(3): 236-247, July-Sept., 2021 available at https://seahipaj.org/journals-ci/sept-2021/IJBLR/full/IJBLR-S-21-2021.pdf
3. S. 251 (1) (n) CFRN 1999
4. Esso Exploration and Production Nigeria Limited & Anor v Federal Inland Revenue Service (FIRS) & Anor (2021) 8 NWLR (Pt 1777)
5. S. 251 CFRN
6.Chinedum Umeche, 'Arbitrability of Tax Disputes in Nigeria' (2017) Arbitration International33(3).
7.Mark Ukeche, 'A Legal Perspective for ICSID Arbitration Reforms: the Benefits for Nigeria Oil & Gas Sector' Faculty of Law, Baze University, Abuja, available at https://portal.bazeuniversity.edu.ng/student/assets/thesis/202105041326131579595152.pdf
8. The Act was signed into law on 16thAugust 2021. It repealed the existing Petroleum Act
9. Section 317 of the Petroleum Industry Act
10. See Nigeria:"Behold The Brand New Nigerian Petroleum Industry Act, 2021" at https://www.mondaq.com/nigeria/oil-gas-electricity/1103114/behold-the-brand-new-nigerian-petroleum-industry-act-2021
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