The National and International Legal Framework of Arbitration in the Oil and Gas Sector

The National and International Legal Framework of Arbitration in the Oil and Gas Sector

The National and International Legal Framework of Arbitration in the Oil and Gas Sector

Arbitration has been incorporated into the Nigerian legal system and domestic statutes have been enacted to give recognition to arbitration as a mechanism for the settlement of dispute in the oil and gas industry in Nigeria.

Some of these statutes allow for parties to voluntarily choose arbitration; whilst some other statutes make arbitration compulsory. The domestic statutes that provide for arbitration in Nigeria include: The Petroleum Act, Oil Pipeline Act, Nigerian Investment Promotion Commission Act and Nigerian LNG (Fiscal Incentives, Guarantees and Assurance Act). Meanwhile arbitral awards granted outside Nigeria is enforceable and binding on parties to it.

In Edokpolor & Co Ltd v Bendel Insurance Co Ltd, the Supreme Court held that a foreign arbitral award could be enforced in Nigeria by suing upon the award, even where there is no reciprocal treatment in the country where the award was obtained.

Intervention of ICSID Arbitration in the Oil and Gas Industry: A Case Review

There have been many cases that the International Center for the settlement of Investment Disputes has arbitrated on. For the purpose of this article, it would be useful to review ICSID judgments in the circumstance where the dispute has been between parties in the oil and gas industry.

In Shell Nigeria Ultra Deep Limited v Federal Republic of Nigeria, this case was pertaining to the ‘rights under an ultra-deep offshore production sharing agreement concluded between Nigeria’s national oil company and the claimant.’

With the unavailability of data, in Interocean Oil Development Company and Interocean Oil Exploration v Federal Republic of Nigeria, it is unclear why the ICSID tribunal discontinued the proceedings. In Guadalupe Gas Products Corporation v. Nigeria, it was a circumstance where the Nigerian oil companies were able to reach an agreement privately, and it shows a promising future for oil and gas disputes in Nigeria. If other oil companies attempt to resolve their dispute privately, there will be less need for parties to approach the ICSID Tribunal, and the oil and gas disputes will reduce in tension.

In Perenco Ecuador Limited v Republic of Ecuador, oil and gas investors-Perenco Ecuador Limited invested in Ecuadorian participation contracts for hydrocarbon blocks in the Amazon; shortly after, the prices of oil rose and Ecuador imposed a profit tax fee on 99 percent windfall and expropriated the investment. This led to Perenco initiating ICSID Arbitration to get compensation.

In the case of ConocoPhillips Petrozuata BV v Republic of Venezuela, ConocoPhillips invested in projects that involved the ‘production, partial refining and marketing of extra heavy oils.’ Meanwhile Venezuela intended to restructure the projects into companies so that Venezuela’s state-owned company has a 60% share in the business.

In Caratube International Oil Company LLP and Devincci Salah Hourani v Republic of Kazakhstan. Dispute arose over an oil exploration production contract that Kazakh Ministry of Energy and Mineral resources concluded with Consolidated Contractors (CCC) in 2002.

In Burlington Resources Inc. v Republic of Ecuador, Burlington Oriente entered into a PSC with Ecuador, the contract concerned oil blocks and Burlington decided to assume all the risk of exploitation in exchange for a share of the oil produced. However, as oil prices internationally soared high, Ecuador believed a renegotiation would be better, subsequently imposed ‘a windfall levy of 99 percent on oil revenues.

Advantages of ICSID Arbitration for the Oil and Gas Industry

ICSID arbitration has been thought to be advantageous to disputants in the oil and gas industry for a number of reasons. Firstly, an environment of mutual trust between the oil company and the host country. An environment of this nature will control the tension between the disputants to a reasonable level.

Secondly, ICSID arbitration enables the oil company to gain a direct access to an efficient and effective international forum, in the event a dispute arises. The investors can therefore have the confidence that ICSID can provide an adequate mechanism to settle the dispute between themselves and the host country.

Read also: An Overview of the Nigerian Oil and Gas Sector and Dispute Resolution

For the host state, ICSID arbitration helps to shield them against diplomatic protection, and by submitting itself to ICSID arbitration, they are further protected from receiving an order from other international courts to appear in court and defend the claims made against them by the oil companies. This reduces the financial liability that may be imposed on them because they will not be subjected to foreign litigation where there is no room for any negotiations and the process is more expensive.

Under ICSID Arbitration, the host state is not subjected to as much formalities as foreign litigation; neither will they be subjected to a long and strenuous process of settlement. Another advantage of ICSID Arbitration to oil and gas disputes is that the parties will be reassured that there will be an effective enforcement. This is a distinctive feature that sets ICSID arbitration tribunal from other instruments that govern international adjudication.

Article 54(1) of the ICSID Convention is the provision that guarantees parties that there will be an effective enforcement. Other international adjudication systems would usually leave the issue of enforcement to the domestic laws of the disputants which makes enforcement more complex.

However, with the parties submitting themselves to ICSID, the Oil Company and host state can be reassured that whatever decision ICSID reaches, both parties will lawfully obey it. Furthermore, Article 48 of the ICSID convention ensures that whenever ICSID makes an award, such award must be given with credible and cogent reasons on which the decision is based. This is beneficial for disputants in the oil and gas industry because they can be confident that the ICSID decisions will be reached with a good reason.

The reason for the award being issued will also enable the oil company or host state to also be aware of where they breached their contractual terms and thereafter, they would know how to avoid such breach from re-occurring in the future.

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Furthermore, ICSID awards are decided by a majority vote of the tribunal members. This democratic style of arbitration is advantageous to the oil company and host state as such ensures that awards are decided in a fair manner, given the fact that the decision is not left in the hands of one person and such reduces the risk of a biased decision being given by ICSID. ICSID arbitration brings further advantage to the host country as it improves their overall investment climate.

Investment climate pertains to the social, economic, financial and political conditions that render it possible for host states to invest in oil companies in exchange for acquiring a stake in the Oil Company. With the oil companies having access to ICSID arbitration, such forum allows them to defend their interest.

And thus, they would be more willing to approach these host states for investments with the assurance that in the event of any dispute, the ICSID tribunal would protect their interest in the investment provided that they are not liable for any breach of the investment contract, this in turn, puts the host state in a position where they become prospective recipients of investment. This advantage was also recognized in the case of Amco v Indonesia.

Another advantage of the ICSID tribunal to disputants in the oil and gas industry is that the world’s most experienced conciliators and arbitrators are appointed on the panel, so both the oil company and the host state are assured that the panel that settles their dispute have the requisite knowledge to deliberate on the whatever breaches may have occurred in the execution of their oil exploration contract.

Thus, a lot of oil companies are much more comfortable with the manner in which the ICSID arbitration tribunal resolves disputes and it has become a preferred forum for the settlement of disputes in the oil and gas industry.

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