Oil and Gas Contracts: Legal Issues and Experience from Nigeria Bamidele Aturu* Introduction Exploration and

production contracts in the oil industry enjoy a pre-eminent status in the scale of preference of the Nigerian state. This is understandable given the overdependence of the economy on revenue from oil. With the way the economy is structured by the ruling elite, if oil production stops for any reason the country would simply grind to a halt. There would be no money to pay workers salaries or maintain infrastructure and services that that are already either comatose or epileptic. Over 90 per cent of total foreign exchange earnings come from oil1. Since the contracts regulate the relationship between the state and the oil companies, it is useful to take a closer look at them, not necessarily by doing a clause by clause analysis but rather by assessing the contracts in the wider context of economic and social development of the country. The contracts in the oil and gas industry in Nigeria are governed by both common law and statutes. The common main types of contracts are those which regulate the Joint Venture arrangements (i.e., the Oil Mining Leases, the participation, operating agreements and the Memorandum of Understanding), Service Contracts and the Production Sharing Contracts. Some of the statutes that have direct impact on the letters and spirit of the contracts include the Constitution, the Petroleum Act and the Petroleum Profits Tax Act. Each of the different types of contract reflect the policies and needs of oil-bearing states. It would appear that difficulties in making contractual payments under the Joint Venture arrangement when due has increasingly led the National Oil Corporation, the NNPC, increasingly to enter into more production sharing contracts with the multi-national companies, although an overwhelming proportions of oil production are still covered by the Joint Venture contracts2. In this paper we are concerned only with certain socio-legal issues that cut-cross these agreements.
*General Counsel, Bamidele Aturu & Co, Legal Practitioners and Code Specialists, 24, Mbonu Ojike Street, Surulere, Lagos. NIGERIA. aturulaw@yahoo.com, 234-8055999888, 234-1-8043418. Akin Oyebode, Law and the Management of a Petroleum Economy: Revisiting the Nigerian Crisis, Second Edition of Lectures in Honour of Prof G. A. Olawoyin, SAN on 21st June 2005 at Obafemi Awolowo University Ile Ife, Osun State, Nigeria, p.2
1

Madaki. O. Ameh, The Nigerian Oil and Gas Industry: From Joint Ventures to Production Sharing Contracts, http://www.hollerafrica/showArticle.php?catId=2&artId=85. In the new inland and deep water acreages the NNPC and the oil companies prefer the PSC contract mode. The
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Ownership and Control of Natural Resources A common feature of all oil and gas contracts in Nigeria is that the recitals begin by emphasizing the legal position that the state is vested with the entire ownership and control of all petroleum in, under or upon any land which is in Nigeria or under the territorial waters of Nigeria or forms part of the continental shelf of Nigeria. This is a mere repetition of the constitutional position. Section 44(3) of the Constitution provides that the entire property in and control of all minerals, mineral oils and natural gas in, under or upon any land in Nigeria or in, under or upon the territorial waters and the Exclusive Economic Zone of Nigeria and shall vest in the Government of the Federation and shall be managed in such manner as may be prescribed by the National Assembly. In the same vein, Item 39 of the Second Schedule on the Constitution confers the power to make laws on mines, minerals, including oil fields, oil mining, geological surveys and natural gas on the central legislature. The Petroleum Act3 also echoes this position in its very first section. It provides that the entire ownership and control of all petroleum in, under or upon any lands to which this section applies shall be vested in the State. The section applies to all land which is in Nigeria, under the territorial waters of Nigeria, or forms part of the continental shelf or part of the Exclusive Economic Zone of Nigeria. The present legal arrangement excludes the communities and local authorities from oil exploration and production. The Supreme Court of Nigeria has given judicial imprimatur on this legal regime in a decided case4. This explains why the contracts are bilateral between the National Oil Company which represents the Federal Government and the multi-national corporations. As noted by Sagay (2008) this issue of denying the people of the oil-bearing communities of right to the resources found on their land and their attendant exclusion from any control over same is the most contentious and explosive in the national political agenda of Nigeria. According to him:
Having been dispossessed for more than 30 years of their rights over their natural resources, the nationalities of the Niger-Delta are now demanding those rights back. This provision has merely worsened an

contractors bear all the costs of exploration and production. If the company makes no find it licks its wound, but if it does the company and the NNPC share the profit in crude oil at an agreed rate, after the company must have deducted the cost of operation and the taxes. This contrasts with Joint Venture where a budget is drawn up and both parties are responsible for funding.
3 4

Cap P10, LFN, 2004 AGF v AG Abia State (2002) 6NWLR (Pt. 764) 542

already tense situation. It is most unlikely that the good government, order and peace of Nigeria (see S. 4(2) of the 1999 Constitution) can be achieved, if the Federal Government, claims 100% ownership the of Niger-Delta's natural resources. Obviously, this item (39 on the Exclusive Legislative list) and section 44(3) have to be radically modified or repealed completely if there is to be unity progress and justice in this country5.

The National Political Reform Conference set up by the government in 2005 to amend the Constitution dealt with the question of resource control and made recommendations which coincide with the demands of the people of the oil-bearing communities in the Niger Delta area of the country. Significantly it proposed that the people should be made active participants in the management and control of the resources in their communities by having assured places in the Federal Government mechanisms for the management of the oil and gas exploration and marketing. These mechanisms obviously include the Constitution, relevant Acts and the various contracts entered into with contractors of different shades. The provision of the African Charter on Human and Peoples right in Article 21 that confers the right on communities to dispose their resources is redundant at best as a result of the doctrine of constitutional supremacy. Although the apex court recognizes that the Charter is part of our laws and that its provisions are binding, it nevertheless held that it is inferior to the provisions of the Constitution6. The point cannot be overstressed that there is no way social justice can be guaranteed or the contractors (the MNCs) made to use the environment in a sustainable manner without the people playing active role in the exploration and production of oil and gas. The statutory impediments in the Constitution and the Petroleum Act to the control and /or participation of the oil communities in that process would have to be removed. There is without doubt a connection between the violence and kidnappings in the Niger Delta and the denial of the right of the people to have a say in the resources mined from their region. Thus, it is a political and as well an economic imperative to involve the people in negotiation of contracts and other aspects of oil mining, if the current suspension and outright stoppage of production in parts of the region is to end.
Itse Sagay, A General Overview of the 1999 Constitution, Paper presented at a Retreat organized for the Joint Constitutional Committee Review of the National Assembly in Minna on 16th of January, 2009.
5 6

Abacha v Fawehinmi (2000)6NWLR (Pt.660) 228

Secrecy of Contracts and Lack of Transparency Closely related to the exclusion of the communities from the process of production in the oil and gas sector is the non-accessibility of the various contracts entered into by the government and the oil companies. The fiscal terms are only known to the parties and a few scholars or professionals who are close to the oil companies or government. This does not encourage transparency. There is no requirement that the agreements be registered with the Corporate Affairs Commission and the documents do not seem to fall within the definition of public documents under section 109 of the Evidence Act for which certified copies can be obtained by interested members of the public upon payment of nominal fees. The opaque atmosphere surrounding the contracts makes a mockery of the commitment of the Nigerian government to the Extractive Industry Transparency Initiative (EITI) principles and criteria. Without access to the contracts it is difficult if not impossible for principles 5 and 9 of EITI to be realized. These principles underline the importance of transparency and accountability by governments and companies in the extractive industries. Although Nigeria has passed the Nigeria Extractive Industry Transparency Initiative (NEITI) Act to promote the principles and criteria of EITI, the initiative which came into legal existence the 28th of May, 2007 has not made any noticeable impact in pursuit of its objective. So far it has only published a commissioned final audit report of payments by the oil companies. That report prepared by the Hart Group covered the period between 1999 and 2004 and that was before the founding law came into force. It made very damning findings against the companies and the Central Bank of Nigeria that have been ignored by law enforcement agencies. Up till today the huge discrepancy observed by the group of $263 million dollars in what the companies claimed they paid to the Central Bank and what the latter recorded for 2004 is yet to be resolved in spite of demands by civil society organizations7. The public does not know if any action has been taken on the finding that the FIRS does not maintain its record on the double entry, or keep a proper cash book or any ledger or on the aspects of the report detailing failure of the companies to pay petroleum profits and other taxes8. It is doubtful that the National Stakeholders Working Group that is charged with ensuring transparency in the extractive industries under the NEITI Act or its appointed auditors have the technical capacity to monitor payments and receipts in
7

See the Position of the PWYP Nigeria on the audit Report, Press Release, 30 April 2006 Hart Nurse Ltd, NEITI: Report on the Financial Audit, 1999-2004.

the oil industry. The ironical inactivity of the body after 2007 when the enabling law came into effect reflects the general relaxation of the anti-corruption war of the present administration which reached a watershed with the hounding and ultimate dismissal of the former Chair of the Economic and Financial Crimes Commission. Mallam Nuhu Ribadu the former chair of the EFCC is generally believed to have achieved significant results in prosecuting the anti-corruption agenda of the last administration despite accusations of selective prosecutions under him. Many commentators and organizations have said that the dismissal of Ribadu by the present administration even when his suit against the police authorities was pending signaled its lack of interest in fighting corruption. The defence of the government is that in prosecuting the war against corruption it must show respect for the rule of law. Critics are not convinced and many have argued that the government is using the rule of law argument to shield those who sponsored the election of the present President and who have reputation for being some of the most corrupt Nigerians from justice. Environmental Issues The devastating effects of oil exploration and exploitation by the oil companies on the Nigerian environment in general and the Niger Delta in particular is widely acknowledged and documented in spite of claims by the companies that they conduct their activities to the highest environmental standards and that the impact of oil on the environment of the delta is minimal9. Against the background of the ecological disaster that the largely unregulated exploitation of oil means for the people and the communities, one would have expected that oil and gas contracts would contain environment-protecting or environment-sensitive clauses. But that is not the case. A typical Production Sharing Contract has no less than 27 clauses dealing with such matters as recovery of operating cost and capital cost allocation, rights and obligations of the parties, payment, confidentiality, and valuation of crude oil et cetera. Quite tellingly, there is no single provision on environmental protection or remediation. This demonstrates the levity with which the state treats the issue of environmental pollution by the oil companies and indicates the compromising nature of the status of the National Oil Company as both a regulator and a partner of the oil companies in the

Enegbo Emeseh, The Limitations of Law in Promoting Synergy between Environment and Developing Countries: A Case Study of the Petroleum Industry in Nigeria, pp12-19. The paper contains an excellent analysis of the deleterious effects of oil exploitation in the Niger Delta. The 1999 report by Human Rights Watch titled, The Price of Oil, London also examines in-depth the impact of oil operations on the environment in the Delta area of Nigeria at pages 56-68
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process of oil and gas exploration and production10. While it may be argued that the agreements generally, some may say glibly, recognize the binding effect of statutes on the parties, the truth is that the agreements are replete with references to other Acts such as the Petroleum Profits Act, the Petroleum Act, acts which affirm state ownership of all lands in the country or make provision for the payment of taxes and royalties. The inescapable conclusion to be drawn from this is that the parties, particularly the state, do not consider environmental issues serious enough to deserve a mention in the contracts. The Environmental Impact Assessment Act came into force on the 10th day of December 1992. Agreements executed in 1998 do not refer to the obligation of the oil companies to comply with the Act. The oil companies may argue that they have been complying with the Act by carrying out environmental impact assessment before exploitation. The truth of the matter is that the degradation of the environment and the persistent complaints of members of the oil bearing communities justify the argument in certain quarters that the state lacks the will and indeed the competence to review the assessments done by the companies. The point is not that Nigeria does not have laws regulating the use of the environment by the oil companies11. The problem is lack of the will on the part of the government and its agencies to enforce the laws for a variety of reasons. As noted earlier the fact that government is a business partner of the companies severely compromises its fairness or firmness as a regulator. Apart from this conflict of interests, the capacity of the regulating agencies to monitor the activities of the companies is seriously doubtful. Corruption on the part of officials of the regulating agencies has also been advanced as one of the factors for non-enforcement of environmental protection laws12. The
Emeseh, Op. cit, p.20

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The dumping of toxic waste in Koko by an Italian Company in 1988 and the outcry from the public generated a flurry of legislative activities. In that year the Federal Government enacted the Federal Environmental Protection Agency Act (1988, Cap. F10, LFN, 2004), the Environmental Impact Assessment Act (1988, cap. E12, LFN, 2004), Harmful Wastes (Special Criminal Provisions) Act (1988 cap H1, LFN 2004). The Petroleum Act (under which a number of regulations relating to the environment such as the Petroleum (Drilling and Production) Regulations, the Minerals Oils (Safety) Regulations, and the Petroleum Refining Regulations) were made), Oil in Navigable Waters Act, Cap O6, LFN, 2004 and Oil Pipelines Act (cap. O7, LFN 2004 are laws before 1988 that have environmental implications.
11

M.A.O. Aluko, Sustainable Development, Environmental Degradation and the Entrenchment of Poverty in the Niger Delta of Nigeria, J. Hum. Eco., 15(1):63-68(2004).
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judiciary also has not been helpful. In many cases, contemptible sums are awarded as damages for oil spills and the deleterious effects of oil exploration and exploitation. In yet others the archaic doctrine of locus standi is used to deny access to court by members of the community who have the legal burden to show that the injury they suffer is over and above that suffered by other members of the community13. Emeseh identified other factors that explain the regime of non enforcement of the regulations. Having noted that there was no justification for the establishment of the NLNG project without an Environmental Impact Assessment required under the relevant Act, he correctly concluded that there is absolute lack of enforcement of the laws in the oil industry due to prioritization of economic development separately from environmental protection, weak governance structures and lack of organized and effective public pressure groups. Gas flaring by the oil companies more than anything else demonstrates the utter incapacity of government to enforce legislations on the environment14. In 1979 gas flaring was prohibited and defaulters were made to pay fines generally accepted as paltry15. Companies prefer to pay the fines than take the trouble to re-inject associated gas thereby wasting billions of dollars and causing acid rain and other environmental disharmony that are well documented. Recently, the President of the Senate lamented the incapacity of government to stop the environmentally dangerous practice by the oil companies. The report of the journalist is quite instructive: From the country's No. 3 man came a rare confession yesterday: that the Federal Government
lacks the will to put a stop to gas flaring by multinational oil companies operating in Nigeria. Senate President David Mark admitted this fact on a day the Senate Committee on Gas summoned all the multinationals to appear before it today to present their timetable on gas flare-outMark said gas flaring had continued in the country in spite of its grave consequences on the health of the people and the environment due to the inability of government to stop the oil companies from gas flaringMark said that gas flaring was still being carried out in Nigeria because oil companies were more comfortable with violating the various laws in place because of the penalties for defaulters which were not stiff.According to him, "I am told that gas flaring is the largest contributor of green house gas to the atmosphere in sub-Saharan Africa; and we know the effect."I have been to so
13 14

Douglas v Shell Petroleum Dev. Co. Ltd (1999) 2 NWLR (Pt. 591) 466

With the exception of Russia, Nigeria flares more gas than any other country in the world:20 billion cubic metres a years from a world total of 150 billion-see The Economist, Nigeria: Another Deadline goes up in Flames, April 3rd, 2008. Associated Gas Reinjection Act, cap 26, LFN, 1990. The fines were raised from N0.5 to N10 for every 1,000 standard cubic feet of gas in January 1998 and ten years later in January 2008 they were further raised to $3.5 for every 1000 standard cubic feet of gas flared.
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many places in the oil-producing areas and you really could pity the communities that live in that place because of the effects that goes on."Not that government has not been able to do anything about it, there has been government policies starting from Decree No. 99 of 1979, which was amended again in 1985."But those decrees which are eventually more like policies have not been backed up by serious legislations. More importantly, I think the government has never been able to develop a strong will to ensure the implementation of these basic policies and the result, of course, is like any other law, the operators take the easiest line of resistance, which is to maybe pay N2, or 1K or whatever and flaring so many feet of gas." He said further, "More importantly, the penalty for any defaulter is too meagre for anybody to go the hard way of reducing gas flaring. Whatever it is, it is cheaper for the companies or the operators to flare gas and pay the penalty than to stop."16

National Interest and Economic Development Nigerian economy is usually referred to as a mixed economy. The Constitution reflects this by creating an economic system in which both the State and other persons can participate in all the sectors of the economy, although it is a duty of government manage and operate the major sectors of the economy17. Nevertheless, the Constitution forbids the concentration of wealth or the means of production and exchange in the hands of few individuals or of a group18. There is therefore nothing wrong in the State inviting investors to explore and exploit oil in the face of underdeveloped technical capacity and insufficiency of funds. However, what is indefensible is that 53 years after the discovery of oil in Oloibiri in 1956, the participation of Nigerians is still abysmally low, so much so that even government in formulating its local content policy in the oil industry which it defines as the utilization of the Nigerian human and material resources in the exploitation and exploration of the Nigerian hydrocarbon resources cannot but lament. The NNPC bemoan the marginal participation of Nigerians in the following words: In Nigeria, the Oil and Gas sector plays a very dominant role to the economy in that 90 percent of the total revenue is from Oil and Gas production while over 90 percent of the nation foreign exchange earnings comes from the sales of crude oil. Therefore a situation where less than 5 percent of the total annual budget of about USD$S.S billion in the industry is very worrisome to both the Federal Government and citizenry(sic).
16 17 18

Sufuyan Ojeifo, Nigeria: Mark-FG Lacks the Will to stop Gas Flaring, Thisday, 25 November, 2008 S. 16(1)(c ) of the Constitution S. 16(2)(c ), ibid.

Nigerians have very little share of the oil and gas business, local participation is very low and in order to arrest and dissuade capital flight, a local content policy is being developed. The objectives of the local the content development is to significantly increase the contribution of the expenditures in the upstream sector to the Gross Domestic product over a defined period of time. It is hopeful that local content development would ensure that the quantum or percentage of locally produced materials, personnel, goods and services rendered to the industry are increased, thereby generating more employment and economic empowerment19 This is nothing but lip service as government itself is to blame for the sidelining of Nigerians in the process of oil production. The Senior Staff Association of workers in the industry, PENGASSAN, was recently reported to have accused the government of colluding with the oil companies to marginalize Nigerians thus: the attainment of local content policy has continued to elude Nigeria due to the lackadaisical manner and official compromises of the weak and indulging legal and institutional frameworks couple with official compromises of the Immigration departments in the expatriate registration and renewal services. It took exception to the way government agencies and immigration aided by the encouragement of frivolous and absurd monthly returns filed by some oil and gas companies to continually justified expatriate applications which in most cases creates a lot of disconnect with the Department of Petroleum Resources (DPR) and National Petroleum Investment Management Services (NAPIMS), adding: "Don't be surprised that some of the understudy names in such monthly returns employee are low cadre, ghost workers and ex-employees of the company, whereas there are qualified
Nigerians being denied opportunities in such company
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In order to find answer to the question why it took so long for the state to realize the marginalization of Nigerians in petroleum business in Nigeria and why it is only now just hoping to increase the participation one must reflect on the character of the ruling elite that took over the reins of power from the colonialists. While that is outside the scope of the present paper, the point can be made that in taking over power they did not reflect adequately on the responsibilities that go with it. This can be seen from the choice of the type of oil and gas contracts that they made and still make. They chose the Joint Venture arrangement and lately the production sharing contracts which though contain clauses about training local personnel do not encourage dominant or
19http://www.nnpcgroup.com/opportunity.htm

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Dele Fanimo, Nigeria: Mark-FG Lacks Will to Stop Gas Flaring, The Guardian, Jan 13, 2009

even adequate participation by the country and the citizens. For reasons best known to them they ignore Technical Assistance Agreements. The benefits of which outweigh the other modes of contracts for a country seeking to develop its indigenous oil industry. Yinka Omorogbe, who a few weeks ago became the Company Secretary of the Nigeria National Petroleum Corporation highlighted the advantages of Technical Assistance Agreements inimitably thus: Technical assistance agreements are of great significance for a country that is interested in developing a viable indigenous petroleum industry. On the face of it they are remarkably similar to pure service contracts, the main difference being that the company in question is engaged to provide technical services, without any interest in the oil at any time. However technology and knowledge transfers are more likely to occur under this type of contract. Under the technical assistance agreements (TAA) the host country is exclusively responsible for the financing of the project. In addition, it owns the crude oil, equipment and facilities relating to the project, and manages it through the national oil company. The company provides technical services relating to all aspects of the project and seconds its own staff to run the project under the management of the national oil company. The company is purely a contractor without even purchase rights to any part of the production 21 Whether the new Company Secretary would be able to convince her colleagues at the NNPC to dump the production sharing contract mode is a matter for speculation. But if the orientation of state managers of the oil industry is anything to learn from, it is one recommendation they would not touch with a long pole. Perhaps a better explanation is the culture of cronyism among the politicians who are content to award a few oil licenses as patronages or with an eye for kickbacks who readily sell same to the oil companies. The abuse in the bidding or licensing rounds for the licenses is one of the yardsticks for perennially declaring the country as one of the most corrupt in the world by Transparency International. But at the heart of all this is the development options adopted by the state. Nigerian State has chosen the path that government has no business in business. This choice is contestable but it is outside the scope of the present paper. The Way Forward Community participation in oil exploration and exploitation is central not only to creating an atmosphere of peace in the Niger Delta but also to any effort aimed at enforcing or
21

Yinka Omorogbe, Oil and Gas Law in Nigeria, Malthouse Law Books, Lagos, 2001, page 44

bringing about sustainable and sensible use of the environment. The state is economically weak and so dependent on petro-dollars that it lacks the will and moral capacity to enforce the environmental regulations. The communities cannot afford to toy with matters of the environment as their livelihoods and lives depend on it. Social justice demands that the oil-bearing communities play very crucial if not decisive role in all the processes of oil and gas production. To this end, the Constitution, the Petroleum Act, the Land Use Act and all other laws that confers exclusive ownership of land on the state would have to be amended to reflect the global tendency towards community participation in the extractive industries. While foreign participation is welcome in the Nigerian oil industry, genuine efforts must be made by both governments and the oil companies to engage qualified personnel from the communities not only as hewers of wood and fetchers of water but at the highest levels and in the right number provided that they are qualified to carry out the functions required. True, the Managing Director of Shell in Nigeria is a Nigerian. But that would amount to tokenism or empty symbolism if a disproportionate number of management staff are foreigners. This compels us to suggest that the Production Sharing Contracts be jettisoned in favour of the Technical Assistance Agreements. The aim is to encourage the development of local manpower that can play significant role in the oil industry22. There is no alternative to firm enforcement of environmental laws. Oil companies must be made to comply with these laws or face very stiff penalties for their breach. This cannot be achieved unless the right staff are employed to work in the regulatory agencies. Civil society organizations have a role to play in exposing corruption in these agencies and pressure government to prosecute promptly those accused of engaging in corrupt acts where there are prima facie evidence. In order to guarantee openness and transparency in the industry, contracts should be mandatorily registered with the corporate affairs commission. This would enable members of the public have access to them as public documents under the Evidence Act. In addition to this, the NEITI should regularly audit the payments made by the oil companies to the government to promote and ensure accountability and transparency in line with the EITI principles and criteria.

Although the Production Sharing Contracts contain provision for training of local manpower and the need to consider them for employment, communities and the trade unions accuse the companies of insincerity in filling vacancies in breach of the clause on employment and training of personnel.
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