DISPUTE MECHANISM IN PETROLEUM INDUSTRY; AN OVERVIEW

OF ARBITRATION FRONTIERS

By

BELLO, Adesina Temitayo (Ph.D) *

ABSTRACT

This article seeks to show arbitration as a dispute resolution mechanism in the resolution of
investment or commercial disputes which inevitably occur in the Petroleum industry. Treaties
are entered into between states in a bid to allow nationals of a particular state to invest in
another thereby bringing income to both foreign investors and the host state. This article reveals
that bilateral investment treaties are often entered into to provide for arbitration clauses for
settling any investment dispute that may arise between parties to the treaty. The article further
shows that for the purpose of having a unified framework for settling investment disputes the
international Centre for settlement of investment disputes was established through the
convention on the settlement of investment disputes between states and nationals of other states.
In Nigeria, certain statutes make provisions for the settlement of investment disputes through
arbitration. The article recommends the need for well - established institutional arbitration
centres in Nigeria. Furthermore, this article recommends that all statutes on petroleum industry
should include provisions on Arbitration as a mechanism for dispute resolution. Conclusively,
this article establishes that arbitration is a necessary mechanism to resolve disputes in the
Petroleum industry as it helps disputants to achieve amicable resolution of disputes.

Keywords: Petroleum Industry, Arbitration, Dispute Resolution Mechanism.

INTRODUCTION

Disputes are generally an inevitable part of human relationship, which may arise in the economic
aspect of human relationship, social, political, and even international relationship. Nonetheless,
what is of essence is the way in which such dispute is resolved or handled between the disputing

*
Senior Lecturer, Department of Private and Commercial Law, Babcock University School of Law and Security
Studies Iperu-Remo Ogun State Nigeria. E-mail: tayobellous@gmail.com

Electronic copy available at: https://ssrn.com/abstract=2971020

parties. Petroleum industry plays a major role in the economy of Nigeria. However, disputes
abound also therein in the course of contractual relationship between government and Petroleum
companies, Petroleum companies and host community, etc. This article considers the various
disputes that exist in the Nigerian Petroleum industry such as contractual disputes, tax disputes,
and environmental disputes, among others. More so, the causes and resultant consequences of
such dispute will be well examined and its impact on the Nigerian petroleum industry. Be that as
it may, it is very important to bear in mind that in resolving disputes the law encourages that
disputes should be settled amicably between disputing parties. The advantage of this is to ensure
that upon the settlement of the dispute, parties involved feel better to still retain their
relationship. Hence, to achieve this, a more reliable system of dispute resolution different from
the traditional one (litigation) is desirable. This brings us to arbitration.

The Nigerian Petroleum industry being the most lucrative sector of the Nigerian economy is
poised to be faced with diverse disputes owning to the myriad contractual arrangement and
nature of activities that are being carried out in the upstream sector (exploration and production);
midstream and downstream sector (refining, transportation and marketing of Petroleum). The
dynamism of the industry had drawn disputing parties and their advisers to possible choices in a
spectrum of dispute resolution mechanism some of which are litigation, arbitration, mediation,
negotiation, conciliation among others. Arbitration is progressively becoming an indispensable
tool in resolving disputes around the world. Commercial transactions involving Petroleum,
energy, banking and finance, construction, engineering, etc. bring about disputes among parties
to such a contract. However, in a bid of looking for a more reliable, swift and efficient way of
resolving disputes amicably contracting parties include arbitration clauses in their terms of
contract, this in return preventing them from the use of litigation for dispute resolution.

WHAT IS ARBITRATION?

The term, “arbitration”, has always been used to represent a resolution procedure which is not
judiciary in nature. That is, a no judicial process applied to resolve disputes between parties, be
they individuals or groups. Although arbitration is not wildly known or applied by many it does
not in any way refute the fact that the world is becoming inclined to the application of arbitration
because of the advantages it provides a person with. It can be adduced that there is no universal

Electronic copy available at: https://ssrn.com/abstract=2971020

definition for the term, “arbitration”. However, some authors have expressed their views about
the term

“A complete definition adequate to suit all circumstances cannot succinctly be

formulated. It would be enough if a list could be made of those characteristics
which a method of deciding questions must (or must not) possess if it is to be
an arbitration. Unfortunately, even after centuries of judicial involvement in
the judicial process it is still not possible to set out such a list with any degree
of confidence. Despite this observation, a few authors have tried to define
arbitration. ”1

Arbitration can simply be defined as when dispute or difference between two parties or more is
referred to an independent person for resolution. It is a device whereby the settlement of a
question which is of interest for two or more parties, is entrusted to one or more persons – the
arbitrator or arbitrators – who derive their powers from a private agreement, not from the
authorities of a state, and who are to proceed and decide the case on the basis of such an
agreement.2 The Arbitration and Conciliation Act3 which is the governing statute for arbitration
practice in Nigeria defines arbitration in Section 57 as:

“Commercial arbitration whether or not administered by a permanent

arbitral institution”

Be that as it may, this definition stated by the principal statute on arbitration in Nigeria is in no
way detailed enough to have a crystal understanding of the term, “arbitration”. Nonetheless,
according to Halsbury’s Laws of England arbitration is seen as:

“the process by which a dispute or difference between two or more parties as to

their mutual legal rights and liabilities is referred to and determined judicially
and with binding effect by the application of law by one or more persons (the
arbitral tribunal) instead of by a court of law”4

1
Sir Michael J. Mustil and Stewart C. Boyd Q.C., “The law and practice of commercial arbitration in England” (2 nd
Ed, England: Butterworths, 1989, Pg. 39).
2
Rene David., “Arbitration in international trade”, (Kluwer Law and Taxation Publishers, Netherlands, 1985, p. 5).
3
CAP A10 Laws of the Federation 2004.
4
Halsbury’s Law of England (1999) 4 th Ed. Butterworths para 601,332

3
Prof. J. Olakunle Orojo CON and Prof. M. Ayodele Ajomo defined the term as:

“Arbitration is a procedure for the settlement of disputes, under which the

parties agree to be bound by the decision of an arbitrator whose decision is, in
general, final and legally binding on both parties”5

Although these definitions go a long way to expatiate the meaning of arbitration it should be
noted that an exercise is not arbitration, strictly so called, if it does not answer to these above
definitions. Another author has considered the term, “arbitration”. In describing this term he
considers arbitration from the agreement point of view. To him:

“when two or more persons agree that a dispute or potential dispute between
them shall be decided in a legally binding way by one or more impartial persons
in a judicial manner, that is upon evidence before him or them, the agreement is
called an arbitration agreement or a submission to arbitration. When, after a
dispute has arisen, it is put before such person or persons for decision, the
procedure is called arbitration, and the decision when made is called award”6.

Furthermore, the court in the case of Kano Urban Development Board v. Fanz Construction
Company Ltd7 defined Arbitration. Herein, the court stated

“Arbitration is the reference of a dispute or difference between two or more

parties for determination, after hearing both sides in a judicial manner, by a
person or persons other than a court of competent jurisdiction.”

Having assessed the plethora of definitions used to describe the term, “arbitration” it is needful to
note one very important point. One very important feature of arbitration is, every arbitration
agreement must be in writing.8 Thus, in any contract wherein arbitration will be employed to
resolve a dispute the contracting parties must have stated in the terms of the contract that

‘disputes are to be settled by arbitration’.

5
Orojo. J.O and Ajomo. M.A., “Law and practice of Arbitration and Conciliation in Nigeria”, (Mbeyi & Associates
(Nig). Ltd, Lagos, 1999, Pp.3)
6
Ronald Bernstein (ed.): The handbook of Arbitration Sweet and Maxwell quoted by Onyeabo C. Obi;
“Introduction to Arbitration Clauses” Continuing Legal Education Association (Nigeria) Lecture Notes – Nos. 3a
and 3b at page14.
7
(1990) 4 N.W.L.R (Pt.142) at page 32.
8
Section 1(1) Arbitration and Conciliation Act.

4
ARBITRATION AGREEMENTS

It is a fundamental principle that every arbitration agreement must be in writing. This written
agreement may however take different forms. for instance, this agreement may be contained in a
document signed by the parties, or it may be contained in an exchange of letters, telex, telegrams
or other means of communication (e.g. Electronic mails), that provides a record of arbitration
agreement. More so, any reference in a contract to a document containing an arbitration clause
constitutes an arbitration agreement if such contract is in writing and the reference is such as to
make such clause part of the contract.9 Except a contrary intention is explicitly expressed, an
arbitration agreement is irrevocable except by agreement of the parties or by leave of the court or
a judge. Arbitration has four basic forms. According to Ajomo,10 there are four categories of
arbitration. These four categories are

‘domestic’, ‘international’, ‘ad hoc’, and ‘institutional’ arbitration.

Domestic arbitration: A domestic arbitration is a form of arbitration between persons who at

the time of concluding the contract are doing business in the same country and the contract is to
be performed in the same country where they carry on business. 11. The nationality of the parties
and their place of residence are irrelevant to this determination. Thus, arbitration in Nigeria
between Nigerians or Nigerian companies or person carrying on business in Nigeria is a
domestic one.

International arbitration: The United Nations Commission on International Trade Law

(UNCITRAL’) Model law on international commercial arbitration (UNCITRAL Model Law) is
the single most important legislative instrument in the field of international commercial
arbitration. It has been adopted in a substantial (and growing) number of jurisdictions and served
as a model for legislation and judicial decisions in many others. Recent revisions to the model
law (in 2006) sought to improve its legislative framework, introducing new features and
providing a good representative example of ongoing legislative effort aimed at improving the
international arbitral process. An arbitration is international if: –

9
Ibid. Section 2.
10
Orojo. J.O and Ajomo. M.A., “Law and practice of Arbitration and Conciliation in Nigeria”, (Mbeyi & Associates
(Nig). Ltd, Lagos, 1999, Pp.3).
11
Orojo. J.O and Ajomo. M.A., “Law and practice of Arbitration and Conciliation in Nigeria”, (Mbeyi & Associates
(Nig). Ltd, Lagos, 1999, Pg. 52)

5
  The parties to an arbitration agreement have, at the time of the conclusion of that
agreement, their places of business in different States; or
 One of the following places is situated outside the State in which the parties have
their places of business:
 The place of arbitration if determined in, or pursuant to, the arbitration
agreement;
 Any place where a substantial part of the obligations of the commercial
relationship is to be performed or the place with which the subject-matter of the
dispute is most closely connected; or –
 The parties have expressly agreed that the subject matter of the arbitration
agreement relates to more than one country.12

Ad hoc arbitration: An ad hoc arbitration arises when the parties in their contract agreement do
not refer to arbitration rules of commercial arbitration administering agency or institutions but is
entered into after a dispute has arisen. The arbitration is conducted within the framework of the
submission and any applicable law.13 The parties to this type of arbitration usually establish their
own rules of procedure that may be made to fit the facts of the dispute between them as the
dispute arises.

Institutional arbitration: An institutional arbitration is one that is administered by a specialist

arbitral institution under its own rules of arbitration. In this type of arbitration, the parties
provide in their contract for the arbitration to be conducted in accordance with the rules of a
named arbitration agency or institute. For example: International chamber of commerce (ICC) in
Paris14, London Court of International Arbitration (LCIA),15etc.

12
Uncitral Model Law on International Commercial Arbitration.
https://www.uncitral.org/pdf/english/texts/arbitration/ml-arb/06-54671_Ebook.pdf. Accessed September 12, 2016.
13
David St. John Sutton kendall and Judith Gill, “Russel on Arbitration 21 st Ed” (Sweet and Maxwell, 1997, Pg.
42).
14
International Chamber of Commerce: ICC. http://iccwbo.org. Accessed September 12, 2016.
15
The London Court of International Arbitration (LCIA). http://www.lcia.org/ . Accessed September 12, 2016.

6
DISPUTE

Disputes may be seen as a result of a dynamic relationship between interested parties, struggling
to gain control of valuable resources. According to the Black’s Law Dictionary,16 a dispute is
referred to as:

“a conflict or controversy…”

According to Otite,17 dispute arises when individuals or groups in a defined environment pursue
divergent goals, interest and ambitions. When there is a change in the social environment, for
instance, the discovery of new resources from development in the physical environment, a fertile
ground for conflict is created. The ensuing dispute usually involves individuals and groups who
are interested in using the new resources to achieve their goals. He further observes that dispute
is a conscious act in which personal or group contact and communication are involved.
Furthermore, Coser18 views dispute as

“a struggle over values or claims to status, power and scarce resources, in

which the aims of the opponents are to neutralize, injure or eliminate their
rivals”19

On the other hand, Schelling20 states that

‘dispute occurs when competing groups, goals, objectives, needs or value

clash, and aggression, although not necessarily violence, is a result’.21

Finally, Park & Burgess22 argue that dispute is devised to resolve divergent dualism, and to
achieve some sort of unity, notwithstanding its propensity to eliminate one of the conflicting
parties. However, dispute should not be perceived as being only a negative, dysfunctional, or

16
Garner, B. Black’s Law Dictionary, 5th edition, USA: West Publishing (1979).
17
In Otitie. O. & Albert. I.O. (Ed), “Community Conflicts in Nigeria: Management, Resolution and
Transformation”, (spectrum books ltd; Ibadan, 2001).
18
Coser L.A. “The function of social conflict”, (The Free Press; London, 1956).
19
ibid
20
Schelling T., “The strategy of Conflict”, 1960, cited in Cunningham, W.G. Jr (1998). Conflict Theory and
Conflict in North Ireland (Unpublished Thesis). Literature and Political Studies, University of Auckland.
http://eprints.covenantuniversity.edu.ng/2398/1/The%20Nexus%20Btw%20Communication%20and%20P
eace.pdf. Accessed September 14, 2016.
21
ibid
22
Park, R.E & Burgess E.W., “Introduction to the science of sociology”, (University of Chicago Press;
Chicago,1921).

7
disjunctive process, and a communication breakdown, as some scholars tend to suggest. Folarin
199823 agrees with the above by stating that dispute is not necessarily a bad thing: rather, it can
be both functional and dysfunctional. According to him, there is general agreement among
scholars that development is hardly conceivable in the absence of some form and measures of
dispute. He submitted by noting that what matters is the way and manner in which the dispute is
handled.

NATURE OF PETROLEUM DISPUTE

Nigeria, Africa’s most populous country, is also the continent’s largest petroleum producer. In
2005, the country produced 2.6 million barrels of oil per day, 2.3 million of which was exported,
making it the sixth largest net exporter in the world24. The contribution of Nigeria’s crude oil to
US oil imports has increased, from 8% in the late 1990s to about 14% in 200525. It should be
noted that Oil has for the past three decades provided approximately 98% of export earnings,
95% of foreign exchange earnings and 83% of total Federal Government revenue.26 In the same
vein, Nigeria also has a huge reserve of natural gas, yet to be fully exploited. Nonetheless,
Nigeria operates a joint venture contract with Transnational Corporations (TNCs). The
government, through the Nigerian National Petroleum Corporation (NNPC), owns 55% share in
the joint venture with Shell Petroleum Development Company of Nigeria (SPDC), Exxon/Mobil
Producing Nigeria Unlimited, Chevron Nigeria Limited, Nigerian Agip Oil Company (NAOC),
TotalFinaElf and Pan Ocean Oil.27 As at 2015, Nigeria had a maximum petroleum production
capacity of 2.5 million barrels per day, with an approximate gas production of 1,681.66 billion
scf, 1,371.5 billion scf was associated gas and the rest 310.16 billion was non-associated gas.28
The nature of the Nigerian Petroleum Industry is such that is infested by foreign investors for
several reasons such as security of supply, operational know how, capital and ideals of capitalism

23
Folarin, B., “Issues in applied communication”, (Stirling-Horden Publishers (Nig) Ltd, Nigeria, 1993)
24
Energy information association (EIA). (2005, JUNE). OPEC revenues: country details.
http://www.eia.doe.gov/emeu/cabs/orevcoun.htm. Accessed September 5, 2016.
25
Omeje K., “Oil conflict in Nigeria: contending issues and perspectives of the local Niger Delta people. “New
Political Economy (2005) Volume 10 number 3, Pp. 321-334”.
www.tandfonline.com/doi/abs/10.1080/13563460500204183. Accessed September 12, 2016.
26
Oil Production - NNPC. http://nnpcgroup.com/nnpcbusiness/upstreamventures/oilproduction.aspx. Accessed
September 5, 2016.
27
Ifeanyi Izeze; NNPC and Foreign Multinationals: Joint Ventures of Fraud.
hhtp://gamji.com/article6000/news7814.htm/. Accessed September 5, 2016
28
Nigerian National Petroleum Commission archives.
http://nnpcgroup.com/nnpcbusiness/upstreamventures/oilproduction.aspx . Accessed September 5, 2016.

8
in developing countries where the sovereign states are directly involved in activities through
ownership and regulation results in peculiar matrix where, typically, the owner of the natural
resources beneath the land is the sovereign state; the owner/lawful occupier of the land is the
host community, family or private person; the holder of the right to exploit subsurface resource is
foreign investor.

Be that as it may, disputes often arise when an issue occurs which has not been prepared for or
agreed on in the principal agreement between the parties, whether this is a delay in the delivery
of equipment, maritime boundary issues, a problem with an indigenous community or an
unexpected pipeline incident. Petroleum is one of the must dispute-intensive industries in the
world and the types of disputes arising from relevant contracts include disputes among operators,
non-operators and joint ventures in property acquisition, exploration development, supply and
marketing arrangement and construction projects, among others. Over a while there has existed
tension between foreign investors from the developed world and developing countries for several
reasons some of which are as a recourse to Colonial history, prioritization of interests, etc. Be
that as it may, the interests of these parties diverge and constitute a source of grave tension.

Dr. Dayo Adaralegbe,29 takes his time to outline the various interests of the various parties in a
Petroleum agreement to show how the occurrence of dispute is inevitable in the Nigerian
petroleum industry. He opined that:

The sovereign state is essentially interested in the following:

 revenue from the exploitation activities in terms of tax, royalties,

bonuses and other government takes
 work program that allows for oil production and increase in revenue
 local content development
 Technological transfer.

On the other hand, the host community is essentially interested in

29
In a paper presented by Dr. Dayo Adaralegbe at IIPLEP OIL AND GAS WORKSHOP FOR NIIGERIAN
JUDGES AND JUDICIAL OFFICERS ON ‘’Settlement of disputes arising from upstream oil and gas contract
activities in Nigeria‘’. 16th-18th October, 2012.
https://webcache.googleusercontent.com/search?q=cache:9rG3NzOI1JgJ:https://www.international-arbitration-
attorney.com/wp-content/uploads/dr-bayo-adaralegbell-m-dundee-ph-d-dundee-fciarbuk-feiuk-fcisukpartner-head-
ene.pdf+&cd=1&hl=en&ct=clnk&gl=ng. Accessed September 14, 2016.

9
  compensation where it has to be relocated from land because of exploitation
 a right to first, second and third generation of human right
 Protection against environmental degradation, oil pollution and gas flaring.

Meanwhile, the foreign investor is solely interested in a legal system that recognizes its property
rights to exploit.

It is highly incontrovertible that these divisions of interest will certainly result in a conflict or
dispute between the parties to the contract or parties involved in the Petroleum industry, that is,
the host community, sovereign state and foreign investors. Disputes in the petroleum industry
may result for several reasons. Owing to numerous activities that go on in the Petroleum
industry, there are various types of disputes that arise, and they will be examined below.

Petroleum Tax Dispute is also referred to as Tax Dispute. This type of dispute occurs between
companies engaged in petroleum operations and tax authorities. There are cases that discuss tax
disputes. According to Niger Delta Development Commission v. Nigeria Liquefied Natural
Gas Limited30, NLNG is not liable to pay NDDC levy because paragraph 3 of the 2nd schedule
to the Nigeria LNG Act exempts it from the applicability of such laws, taxes, etc. more so, in the
case of Shell v. Burutu LG31, item 1(j) of the fourth schedule to the constitution limits the
functions of the local government to assessment of privately owned tenements, A LG cannot
levy tenement in respect of oil storage tanks, tanks farms, and oil pipeline not being privately
owned. Federal Inland Revenue Service v. Nigerian National Petroleum Corporation &
ors32., in this case, it was established that there is no provision in the PPTA under which the
parties to PSC can refer tax disputes to arbitration. The mechanism provided for resolution of
such disputes under Section 41 is an appeal to Tax Arbitration Tribunal. Furthermore, another
type of petroleum dispute is the Illegal Oil Bunkering. Bunkering is a term used to describe the
process of filling a ship with oil33. Although bunkering is legal, illegal bunkering on the other
hand used in respect to oil is a euphemism for oil theft. Oil theft has however become an

30
(suit No: CA/PH/520/2007)
31
(2000) 1 NRLR 1
32
(2014) LPELR-23144(CA)
33
Stephen Davis, Dimieari Von Kemedi and Mark Drennan., “Niger Delta Peace and Security strategy working
papers: Illegal oil bunkering in the Niger Delta” pg.1.
https://webcache.googleusercontent.com/search?q=cache:cq4lt_WkVLcJ:https://www.yumpu.com/en/document/vie
w/6077819/niger-delta-peace-and-security-strategy-working-papers-legal-oil+&cd=1&hl=en&ct=clnk&gl=ng.
Accessed September 1, 2016.

10
increasingly significant issue to tackle34. In the year 2000, it was reported that 140,000 barrels of
crude oil were stolen each day. In 2001, the reported figure had dramatically risen to 724,171
barrels per day. The average daily figure from January to October 2002 was 699,763 barrels35
with these figures rising on a yearly basis. The issue of illegal bunkering has been in existence
for a long time in the Niger Delta region which is the basis of pipeline vandalism, kidnapping
and various vices related with the crime. This act of illegal bunkering has been incessant and a
terror to the Petroleum industry to the extent that some government officials assists in this
unscrupulous act that has led to a lot of disputes in the industry. In the 2004, precisely in
November, three high – ranking Nigerian Naval officials were dismissed and charged over
complicity in illegal bunkering and for facilitating vessels’ disappearance36. More so, Oil
companies and community crises, is another type of dispute in the Petroleum industry. The
crisis in the Niger Delta has increased in recent times. According to Anikpo M37 the key feature
of this crisis between the Petroleum companies and the community (oil rich areas) can be solely
attributed to oil exploration and unequal appropriation of what accrues from oil. More so, it may
include the acquisition of more or vast acreage, clearing of sites, and introduction of new cultural
patterns into the host communities, which are against the traditions of the community. According
to Anikpo M38, there are several forms in which this dispute occurs and they are:

Road block/protest demonstration; disruption /stoppage of operations;

vandalism/destruction of facilities; closure of flow station and rig/molestation
of petroleum company staff; piracy/seizure of vehicles or boats; hostage
taking.

34
Ibid.
35
www.vanguardngr.com,24/12/2002.
36
Katharine H., ‘Oiling the wheels of death’, The guardian, Wednesday 17 November 2004. P.13.
https://www.theguardian.com/society/2004/nov/17/environment.environment2. Accessed September 14,
2016.
Jacques L., ‘Petrol-bunkering scandal rattles Nigeria’, Mail and Guardian Online, http://www.mg.co.za/article/2007-
07-29-petrol-bunkering-scandal-rattles-nigeria. Accessed September 14, 2016.
37
Anikpo M,’’Communal conflicts in the East Niger Delta: A Cultural Matrix”, Pan African Social Science Review
3, 1-12, 1998. kms1.isn.ethz.ch/serviceengine/Files/ISN/98433/.../Chapter2.pdf. Accessed September 12, 2016.
38
ibid

11
In addition, another paramount form of petroleum dispute is Ownership of Land. This begs the
question as regards the ownership of the territory where oil is found. By virtue of Section 1 of
the Land Use Act39 which provides:

‘subject to the provisions of this act, all lands comprised in the territory of
each state in the federation are hereby vested in the governor of that state and
such land shall be held in trust and administered for the use and common
benefit of all Nigerians in accordance with the provisions of this act’.

The issue of ownership cannot be overemphasized as it is a key subject in the maintenance of

federal peace and stability. However, it has become a prevailing issue in the Nigerian Petroleum
industry wherein several states claim ownership of either an oil well or a defined territory where
there is a lot of oil in strata. The crux of these disputes is that under the Nigeria’s oil derivation
laws, each designated oil-producing state retains 13% of taxes on any oil produced inside its
boundaries40. Thus, states with the prospect of becoming oil producing states become very
watchful. One of the most recent cases on land ownership is that of Anambra basin, which
involved Enugu, Anambra and Kogi States. This dispute centered on the ownership of land and
oil in Aguleri Otu Community in Anambra. Be that as it was, Hon. Chriscato Amaeke regretted
that the dispute resulted in the killing and abduction of innocent people, burning of houses,
farmlands, livestock and properties worth millions of Naira in these areas41. Environmental
dispute is the most dreaded type of dispute that has ensued in the Petroleum industry in Nigeria.
It is no longer news that the issue of environmental degradation has been incessant in Nigeria,
especially in the Niger Delta region. However, this has resulted into serious disputes and conflict
in that region. From 1976 to 2010 a total of 13,030 oil spills had occurred in the territory, thereby
resulting in the discharge of 3,257,362.44 barrels of oil into the terrestrial, coastal and marine
environment in the Niger Delta region. Consequently, this spill causes soil infertility, damage to
farmlands and even the waters to be utilized by the region.42 A counterpart in environmental

39
CAP L5 Laws of the Federation of Nigeria 2004.
40
Local Politics, Oil, and a Land Dispute in Nigeria’s Anambra Basin. http://globaltorchlight.com/2013/04/10/local-
politics-oil-and-a-land-dispute-in-nigerias-anambra-basin. Accessed September 12, 2016.
41
Reps Intervene In Kogi-Anambra Oil Well Dispute. http://www.informationng.com/2013/04/reps-intervene-in-
kogi-anambra-oil-well-dispute.html. Accessed September 12, 2016.
42
Chizoba. C., Abiola-Oloke G., Ijeoma O., Kennedy-Echetebu.C., and Chike J., “Oil and gas activities and the
Nigerian environment”.
http://conferences.iaia.org/2012/pdf/uploadpapers/Final%20papers%20review%20process/CHINWEZE,%20CHIZO

12
degradation is gas flaring. Apart from the huge economic loss that is caused by this act its
consequential effect on the environment and health of the people therein is not palatable. More
gas is flared in Nigeria than anywhere else in the world. Estimates are notoriously unreliable, but
roughly 2.5 billion ft3 of gas associated with crude oil is wasted in this way every day. This is
equal to 40% of all Africa’s natural gas consumption in 2001, while the annual financial loss to
Nigeria is about US$2.5 billion. The flares have contributed more greenhouse gases than all of
sub-Saharan Africa combined. The flares contain a cocktail of toxins that affect the health and
livelihood of local communities, exposing Niger Delta residents to an increased risk of premature
deaths, child respiratory illnesses, asthma and cancer43. In the quest for development, activities in
the Petroleum industry have greatly impaired the eco-system by undermining its viability. Oil
exploration, refining and storage have carried with them a lot of environmental problems
especially in the Niger Delta region. Oil spillage, for instance causes the destruction of aquatic
life, eutrophication of water bodies, de-vegetation and other forms of ecological damage. Gas
flaring, gas emissions and fumes are hazardous to human and animal health. The issue of
environmental degradation would continue to be a great cause of dispute in the Niger Delta
region owing to the inability of the various environmental legislations to curb this great menace.
Finally, Contractual disputes also result. There are a variety of contractual agreements for
exploitation and production of Petroleum. These contractual agreements are of various
descriptions giving rise to various disputes in Petroleum contracts. For instance, a production
contract where exploration and Production Company carries the whole cost of exploration in
respect of the contract area and is rewarded if a commercial discovery is made and development
follows often causes disputes among contracting parties.

Disputes are highly inevitable. Nonetheless, this does not entail that a deliberate attempt cannot
be made to avoid certain disputes by identifying their causes. Hence, there are several causes of
disputes which often occur at either upstream or downstream sectors. Regardless of the sector
that may be possibly involved dispute can be caused by the following:

BA.%20%20OIL%20AND%20GAS%20ACTIVITIES%20AND%20THE%20NIGERIAN%20ENVIRONMENT.p
df. Accessed September 14, 2016.
Asume O., ‘Gas Flaring in Nigeria: A Human Rights, Environmental and Economic Monstrosity’ (July
43

2005). Climate Justice Programme, Friends of the Earth International.

https://www.foe.co.uk/sites/default/files/.../gas_flaring_nigeria.pdf. Accessed September 14, 2016.

13
 Economic change, infrastructural needs, technical assumptions, political
expectations and attitudinal change, economic crises, foreign investors caught up
with domestic disputes, government change, economically or politically unviable
projects.

MECHANISMS OF DISPUTE SETTLEMENT PROVISIONS APPLICABLE LAW AND

REGULATION

Various mechanisms have been put in place for settling Petroleum disputes which are inevitable.
It should be noted that such provisions have been made available at both the national and
international levels. There are basically two modes in which Petroleum disputes can be settled.

 Statutory Provisions

Hereunder, this article examines the various Petroleum dispute settlement mechanisms made
available in the Nigerian law.

1999 Constitution of the Federal Republic of Nigeria (as amended)

The constitution established the judiciary by virtue of section 6 and saddles it with the role of
adjudication over litigations and disputes between persons, persons and government 44, and
between governments45. Furthermore, Section 251(1) provides that

“… the federal High court shall have and exercise jurisdiction to the exclusion
of any other court in civil cases and matters - …”

(n) Mines and minerals (including oil fields, oil mining, geographical surveys
and natural gas).

This depicts the fact that the court has the jurisdiction to hear and attend to matters that bother on
the Petroleum industry.

44
Section 272 (1) 1999 constitution of FRN (as amended)
45
Section 232(1) 1999 constitution of FRN (as amended)

14
Petroleum Act46

Section 11 of this Petroleum Act provides for Arbitration as a mechanism for the settlement of
disputes. Nonetheless, it should be noted that this does not invalidate the court’s jurisdiction to
attend to such matters where a party decides to opt for litigation.

Arbitration and conciliation Act47

The ACA was enacted to provide a unified legal framework for the fair and efficient settlement
of commercial disputes by arbitration and conciliation and to make applicable the New York
Convention to any award made in Nigeria or any contracting state arising out of international
commercial arbitration. Section 37 provides for the use of conciliation in the amicable settlement
of disputes.

Nigerian Minerals & Mining Act48

Section 14(3) of this Act provides that “any other dispute between the holder of a mineral title
and the government shall be resolved in the federal high court, if not settled in accordance with
the provisions of subsection (1) or (2) of this section”

Nigerian Investment Promotion Commission Act49

The Nigerian Investment Promotion Commission Act makes provisions for dispute settlement
procedure under section 26. According to the Act:

(1). Where a dispute arises between an investor and any government of the
federation in respect of an enterprise, all efforts shall be made through mutual
decisions to reach an amicable settlement.

(2). Any dispute between an investor and any government of the federation of
Nigeria in respect of an enterprise to which this act applies which is not
amicably settled through mutual discussions may be submitted at the option of the
aggrieved party to arbitration as follows:

46
CAP P10 LFN 1990
47
CAP A18 LFN 1990
48
Nigerian Minerals & Mining Act 2007
49
Nigerian Investment Promotion Commission Act

15
 (a). in case of a Nigerian investor, in accordance with the rule of procedure for
arbitration as specified in the arbitration and conciliation act

(b). in the case of a foreign investor, bilateral or multilateral agreements on

investment protection to which the federal government and the country of which
the investor is a national are parties, or

(c). in accordance with any other international machinery for the settlement of
investment disputes agreed on by the parties.

 Contractual Agreement

The second mode by which Petroleum disputes can be settled is by contractual agreement which
could be achieved by the inclusion or insertion of expressly agreed clauses. Clauses which make
provisions for dispute settlement are invariably found in practically all petroleum production
agreements. For instance, in the course of international business transactions between private
companies, or between states and private companies, provisions are usually, made for ad hoc or
institutional arbitration. For instance, there are certain contracts in which agreements are made
for the application of arbitration, e.g.,

“If a difference or dispute arises between NNPC and CONTRACTOR,

concerning the interpretation or performance of this contract, and if the
parties hereto fail to settle such difference or dispute by amicable agreement,
then either party may serve on the other a demand for arbitration ”50

ARBITRATION AS A DISPUTE SETTLEMENT MECHANISM FOR PETROLEUM

DISPUTES

The ill feeling of many developing countries towards international commercial arbitration has
been an abiding source of concern to all fair-minded arbitration practitioners and business people
across the world. Often times, these developing countries hardly believe that they have had a fair
deal in international arbitration and since their economics are mainly heavily dependent on
natural resources and this antipathy has been greatest with respect to disputes arising out of
foreign investments in their natural resources sector such as Petroleum, they have sought, with a

50
Article 22.2 service contract of September 1979 between a private company and NNPC.

16
declining degree of emphasis over the decades to have disputes in those sectors determined in
their domestic tribunals, following domestic laws, believing that they would get justice from
such domestic tribunal. Nonetheless, foreign investors have never felt comfortable with any
arrangement whereby disputes involving their investment in a country would be determined in
that country’s courts following that country’s laws in every case. This position however is the
same whether the host state is a developed or developing one and whether the investor’s
nationality is that of a developed or developing country. Commercial arbitration is no doubt very
effective in the settlement of disputes in the international business forum and promises to remain
so in the foreseeable future. Developing countries are therefore normally urged to completely
overcome their antipathy towards it. It is understood that the international business community
stands to gain from a more zealous participation of all countries in arbitration and that the
developing countries will also benefit if they thoughtfully embrace this current vogue in
commercial dispute resolution.

Petroleum has become the power house of the Nigerian economy. Many of the disputes arising
from the Petroleum industry are settled through international commercial arbitration. However,
in order to have free access, user friendly and fair financial terms for dispute resolution, the
international community designated Lagos as the international commercial arbitration Centre for
West Africa. However, Nigeria has accepted and ratified all international conventions and rules
pertaining to international commercial arbitration. Nigeria now makes use of the 1998 version of
the international chamber of commerce (ICC) Rules. Our Arbitration and Conciliation Act is
derived from the UNCITRAL Model law - an international convention sponsored by the United
Nations. Nigeria has also adopted and ratified the New York Convention on the Recognition and
Enforcement of Foreign Arbitral Awards in 1958.

Of course, there are several instances wherein arbitration can be applied to Petroleum disputes.
Some of such areas are:

Agreement of parties, investment dispute, statute, commercial disputes.

Arbitration in Petroleum agreement

The Petroleum industry routinely employs arbitration agreements in contractual agreements.

Some of such contracts as well as arbitration clauses therein will be highlighted below.

17
Government and Petroleum Company

Oftentimes, the Petroleum Company and the government come into a contractual relationship,
for instance, by the grant of oil exploration licence, oil prospecting licence or oil mining lease by
the state to a licensee/lessee and the grant of fiscal incentives by the government in form of a
memorandum of understanding or side letter. Conventionally, government never liked entering
into arbitration agreement, assuming the position that the attempt to diminish its power in
dealing with interest conferred in the Petroleum industry amounts to a derogation of sovereignty.
However, the ICSID is gradually removing this barrier. The ICSID provides facilities for
arbitration of investment disputes between host government and foreign investors. ICSID
jurisdiction is limited to disputes occurring between a contracting state and a national of another
contracting state. Although parties must consent in writing to submit disputes to the ICSID, such
consent may be expressed in bilateral treaties and foreign investment laws as well as in contracts.

Host states wishing to attract foreign investment often advertise their willingness to resolve
foreign investment disputes using ICSID in domestic investment law51. Foreigners are
encouraged to invest taking comfort from the fact that they will not be compelled to submit
disputes to an unfamiliar panel. A local example of contemporary host government’s enthusiasm
for inclusion of arbitration clauses is the Nigeria LNG (fiscal incentive’s guaranties and
assurances)52. Paragraph 22. Schedule 2 of the legislation provides that in the event of the failure
to amicably resolve any dispute within 90 days of issue of the letter of notification of the dispute
to the government, such may be submitted to arbitration before the ICSID.

Joint Concession Holder (that is, Joint ventures, production sharing contracts, and farm
out agreements)

Contractual agreement may be made between and Petroleum Company and a designated state
enterprise to create a joint interest or to grant a general exclusive authorization to the Petroleum
Company in respect of a certain area (licence area). Similarly, joint ownership agreement may
exist between Petroleum Companies. Examples of such are the Joint ventures agreement, joint
operating agreement and production sharing contracts. Arbitration agreements are commonly

51
Carolyn B. L., & Abby C.S., “The international center for settlement of investment disputes: responses to
problems and changing requirements”, Journal of the Chartered Institute of Arbitrators(1998), volume 64 number.1
52
Decree No. 39 of 990 (as amended).

18
found in these contracts, although the applicable law is generally that of the state enterprise, if
any, reflecting the stronger bargaining power of the state. Sandy Shaw53 likens Joint operating
agreement to marriage, where partners agree:

“to have and to hold in accordance with the terms of the JOA until
termination, withdrawal, assignment or default do us part”.

Furthermore, in a production sharing contract, the contractual agreement is between a foreign

Petroleum Company, who is the contractor, and a designated state enterprise (state party)
authorizing the contractor to conduct petroleum explorations and exploitation within a certain
area (contract area) in accordance with the rules of the arrangement. More so, it is the contractor
that is responsible for funding the exploration and exploitation work. Whilst the state party owns
the resources, it lacks the manpower, funds, technology and know-how required to exploit it.
Further, as the sums involved are usually substantial, in the event of a dispute, parties are likely
to opt for arbitration.

Contracts between Petroleum Companies

Common types of contracts between Petroleum Companies are utilization agreements and
contracts granting third party access to oil field facilities. The utilization agreement is an
agreement by the owner of a single oil field which extends into more than one licence to develop
that field as a single unit54. Otherwise referred to as ‘unit operating agreement’, the utilization
agreement normally includes all provisions of an ordinary JOA, together with additional ones
which are intended to establish the rights of respective parties to production from the field. A
typical clause of such an agreement is this:

“all rights and interests of the parties under the license are hereby
unitized in accordance with the provisions of this agreement in so far
as such right and interests pertain to the unitized zone and each of the
parties shall own all unit property and unitized petroleum in undivided
shares in proportion to its unit equity”.

53
Sandy. S., “Joint Operating Agreements, upstream oil and gas agreements” (Sweet & Maxwell, London, 1996).
54
Warwick English, “Utilization agreement, upstream oil and gas agreement” (Sweet and Maxwell, 1996)

19
Thus, it is explicit from wherever in the reservoir unitized petroleum actually comes, and in
whichever licence block the platforms are located, the owners will own them in their unitized
proportion. However, a party though signatory to the agreement, who observes that much of the
‘unitized petroleum’ comes from his licence area may attempt to renege on the agreement. A
pre-emptive measure might be to include in the unitization agreement a reward system which
takes into consideration the situation just described. Arbitration proceeding where adopted
should also reflect this fragile arrangement. Institutional arbitration may be advisable. That is,
because of the experience and expertise of those institutions. Invariably, unitization agreements
provide for the appointment of an expert, for binding expert determination in the event of dispute
during the equity determinations. This is known as the ‘guided owners’ process in which an
expert is appointed from the beginning of the process, before any dispute arises. The expert is
invited to all discussions of the unit owners and as such will be aware of all the issues and
positions of the parties as the process evolves. The advantage of this process is that disputes are
resolved promptly as they arise, saving the parties the huge costs attendant on delays.

Petroleum operators and service contractors

The list of services provided by contractors to operators in the Petroleum industry is endless,
ranging from major construction and rig leasing contracts top minor supply contracts. Arbitration
clauses are a common feature of contracts in this category with the operator often providing
standard forms of contract. Nonetheless, where the contractor is providing highly specialized
services or plant and equipment, there is likely to be intense negotiation between the parties on
the content of the arbitration agreement. For example, in mobile production unit agreements,
mobile production units (MPUs), i.e., jack up rigs, semisubmersible drilling rig and floating,
production, storage and offtake facilities, are facilities which can be rapidly mobilized and
demobilized at a low cost. As the parties are likely to do business together for a long time and
considering the huge amounts at stake, an arbitral process is often carefully negotiated to resolve
any dispute arising during the life of the contract.

20
Intervention of courts in Petroleum arbitration in Nigeria

The court has no right to set aside the awards of arbitration. By the provision of section 34 ACA:

“a court shall not intervene in any matter governed by this act, except,
where so provided in this act”.

However, by virtue of section 29(2) ACA, the court may set aside an arbitral award, if the award
contains decisions on matters which are beyond the scope of the submission for arbitration. Also
by provision of section 30, the court can set aside an arbitral award where the arbitral
proceedings award has been improperly procured. All of these are subject to the application of
one of the parties to the arbitral proceeding.

The Nigerian courts have at some point supported arbitration in relation to the enforcement of
arbitration agreement and arbitral awards. In Onward enterprises LTD V. MV Matrix55 the
court of appeal held that:

“Once an arbitration clause is retained in a contract which is valid and

the dispute is within the contemplation of the clause, the court will give
regards to the contract by enforcing the arbitration clause. It is therefore
the general policy of the court to hold parties to the bargain which they
freely entered.”

CONCLUSION

The Nigerian Petroleum industry is an area of the economy that has been faced with various
disputes arising from the inability of a party to fulfil his contractual obligation at the detriment of
the other party. Environmental dispute, fiscal (tax) disputes, ownership, ownership of land where
there is oil, etc., and a wide range of areas bothering on dispute resolution in the Nigerian
Petroleum industry have been treated, giving us a bird’s eye view of the dynamics of the industry
with dispute resolution. It can then be said that arbitration should be used in settling Petroleum
disputes on the basis that such disputes are commercial or investment disputes. Where the
disputes are not of a commercial nature, other disputes settlement mechanisms can be utilized.
However, the practice of Petroleum arbitration has not received a light of the day as compared

55
2010 2 NWLR (Part 1179) at 530.

21
with other jurisdictions that have been discussed in this paper owing to the ability of Nigeria to
develop a strong base of arbitration practice as a lot of disputes are most times referred to other
jurisdiction as the lex arbitri of the arbitration panel. Once Nigeria can develop its arbitration
institution and adopt the recommendations as stipulated above especially the model arbitration
clause, the practice of Petroleum arbitration would be well practised in Nigeria.

It is totally unthinkable that any Petroleum dispute relating to North Sea Britain and Norway will
be taken to Lagos for arbitral proceedings or that the Petroleum disputes in Texas or in Gulf of
Mexico, United States of America will be taken to New Delhi (India) or Lagos for settlement.

RECOMMENDATIONS

Having analyzed the nature of disputes in the Nigerian Petroleum industry and the way such
disputes are settled by arbitration following recommendations are paramount.

 Firstly, there is a need to make good use of ‘expert determination’ in settling a number of
disputes that arise from the Petroleum industry. The basis for this is due to the enormous
sums involved, the technical nature of many disputes and the need to preserve a long term
relationship between the disputing parties. Another reason why expert determination
would help in resolving certain Petroleum disputes is based on the fact that the person
presiding over such dispute is one who is an expert in the field of dispute and as such his
decision would be seen as automatic based on his knowledge in the area under dispute.
 Secondly, there is a great need for the use of partnering agreement between Petroleum
companies and service companies, where attempts are made to reconcile strict business
relationships with the conduct and will of the parties. Partnering agreement recognizes
that:

“every contract imposes upon each party a duty of good faith

and fair dealing in its performance and its enforcement.”56

This partnering contract will save costs by minimizing disputes, using gain sharing and risk
sharing mechanisms, reducing adversarial contracts clauses and forging close work relationship
and team work. Where partnering contract is well stated, it will produce the effect of avoiding
disputes and, at the very least, minimize the negative consequences of disagreement.
56
1981, Restatement (Second) of Contracts, American Law Institute.

22
  Thirdly, there is a need to improve the arbitration institutes. The importance of
institutional arbitration centres cannot be overemphasized as it is the most used form of
arbitration for example ICSID, LCIA, etc. Once Nigeria can have well established
institutional arbitration centre it would help in boosting the economy of the nation, and
different persons from various parts of the world would subject their resolution of
disputes to the Nigerian institutional arbitration centres.
 Finally, there needs to be an inclusion of provision on arbitration in all statutes that deal
with the Petroleum Industry excluding the Petroleum Act which already has a provision
on Arbitration, to create easy access for Arbitration and mutual way of resolving
disputes.

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