Introduction
The upstream oil and gas sector in Sub-Saharan Africa is characterised by its complexity, high value investments and intricate joint venture structures, which are either incorporated or unincorporated. In this article, we explore the Unincorporated Joint Venture model as a corporate mechanism for upstream activities in the oil producing nations in Sub-Saharan Africa, the potential disputes that can arise therefrom, and the benefits of resolving these disputes through arbitration.
Joint Ventures (Unincorporated)
In oil and gas exploration, the fundamental principle that oil and natural resources are owned by sovereign nations influences how these resources are developed, managed and utilised. Oil exploration and production is typically carried out with the involvement of nations through their national oil companies, with the national oil companies owning majority interest in the oil producing asset and the resources. The involvement of the national oil company and the need to ensure that investors’ interests are adequately protected underscores the importance of ensuring that there are clear legal structures to protect investments in the oil producing assets. These legal structures, often described as joint ventures, aim to ensure that parties contribute assets, capital, unique enterprise, and labour, and enjoy risk sharing. A joint venture could either be incorporated (IJV) or unincorporated (UJV). An example of an IJV is the BP p.l.c and ENI SpA. BP collaboration in Azule Energy which has participating interests in about 11 oil blocks in Angola. An example of an UJV is the collaboration between the Nigerian National Petroleum Company Limited and First Exploration and Production Development Company Limited JV on the Madu Field in Nigeria.
The UJV model has been widely adopted for upstream activities in Sub-Saharan Africa as it allows parties the freedom of collaborative agreements for exploration and production activities without forming a distinct, separate or new legal entity. Parties maintain their individual legal identities while sharing risks, costs, and rewards associated with the project/activity while avoiding tax liabilities that may accrue from operating through an incorporated entity.
A UJV is primarily governed by contracts which could be structured as Joint Venture Agreements, Joint Operating Agreements, Unitisation Agreements, and Production Sharing Contracts. Notwithstanding the contractual structure adopted, parties will typically retain direct interests in the oil producing assets to the extent of their contractually agreed participating interests. The UJV model has been largely successful in oil producing nations in Sub-Saharan Africa. For example, the Nigerian Oil Mining Leases (OML) 49, 51, 89, 90, 91, 95 had been operated by Chevron Nigeria Limited (CNL) in collaboration with the Nigerian Petroleum Development Company (NPDC), a subsidiary of the Nigerian National Petroleum Corporation (NNPC) through a UJV. In Angola, the oil blocks 46 and 47 have been operated by Azule Energy through a UJV with Sonangol, Angola’s state oil company, and Equinor. In Ghana, the offshore Jubilee Field operates under a UJV model involving Tullow Oil as operator and other parties including Kosmos Energy, and the Ghana National Petroleum Corporation (GNPC).
Potential Disputes and Applicability of Arbitration in Resolving Disputes
As lucrative as the upstream sector is, there is significant potential for disputes, many of which are complex or high stakes. Surveys from arbitral institutions indicate that upstream disputes that have been referred to them include those pertaining to termination of licences, financing and operation mechanisms between JV partners, and project disruption/delay issues, amongst others. Some of the disputes that may emanate from the UJV model are discussed as follows:
i. Funding / Cash Call Obligations
The UJVs may adopt several funding mechanisms including contribution of cash calls by parties on a monthly or periodic basis. Many of the disputes that arise under the UJV model are related to the funding mechanism of the UJV and, particularly, the delay or failure to meet cash call obligations. In a JOA or a JVA, where a party has been designated as the operator of the oil producing asset, such an operator has the contractual responsibility to manage the affairs of the asset and demand cash calls from the parties. As operation of the assets may be funded directly through payment of cash calls, delays or failure to meet cash call obligations can lead to significant operational and financial strain on the other partners and upstream activities, causing disputes. Further, as the JV is unincorporated, partners may face joint and several liability for these obligations, as opposed to liability being borne by the incorporated JV. Therefore, it is very common to have operators issue a notice of dispute over a defaulting UJV partner’s failure to meet its cash call obligations in time or at all.
ii. Accounting Discrepancies / Cost Allocation
Discrepancies in calculating financial contributions and accounting practices affecting revenue allocation can lead to disputes. Additionally, disputes can arise with respect to cost allocation, what costs should be considered shared expenses or whether a non-operator’s costs should be computed as the UJV’s cost. While the operator’s costs will typically be computed as the UJV’s costs, it is not unusual for a non-operator to demand that some of its costs (incurred for the activities of the UJV) should also be computed as the UJVs costs. Where the contractual terms are unclear on this issue and where the operator disputes the non-operator’s costs, disputes have historically been declared on this issue.
iii. Operational Management / Performance Issues
Although many UJV structures have delineated roles for the operator and a management committee (if any), it is not uncommon for parties to disagree on underperformance issues or failure to meet agreed milestones, project management, technical approaches, operational efficiency, or even well development approvals. For instance, there were disputes between UJV parties with respect to the Nigerian OML 113 as to whether the well development plans had been properly approved and the impact of such approvals on cash call payments.
iv. Regulatory Compliance Issues / Revocation of Licences
UJVs and the relevant oil producing assets may be subject to heavy regulatory and compliance requirements. Disputes may arise between parties on how to navigate these regulations and ensure adherence to legal standards. For instance, in Nigeria there have been disputes about the requirements when applying for ministerial consent for the assignment of participating interests in an oil producing asset to a JV partner.
Depending on each nation’s regulatory requirements and sanctions for non-compliance, there is the risk of revocation of upstream licences by the Government. For instance, the Nigerian government has recently announced the potential revocation of more than 50 marginal oil field licences due to failure to commence operations. Affected UJV parties may lay claims against each other over failure to commence operations leading to the revocation of the licences.
v. Crude Allocation
Partners might disagree on production quotas or the allocation of production volumes, particularly when one partner believes that there is non-adherence to agreed production levels. Disputes can also arise if there are changes in production levels due to technical issues, market conditions or force majeure.
Additionally, disputes may emanate from valuation of oil reserves or differences in reserve estimates. In UVJs pertaining to unitisation agreements, disputes could concern calculation and quantum of crude allocation to each party or the determination/redetermination of a party’s participating interest. For instance, the disputes arising from a unitisation agreement between parties with oil blocks straddling the Agbami deepwater field in Nigeria over the determination and redetermination of equity and the resultant effect on each party’s crude allocation.
vi. Exit Strategies
In recent years, several international oil companies have divested their interests in upstream assets in some African countries. Some of the divestments have either been a complete exit from the country or a divestment of onshore assets while retaining offshore assets. Disputes may occur over valuation, exit terms and the impact on ongoing operations.
Why Arbitration?
In view of the complex nature of upstream UJV structures, arbitration is (or ought to be) the preferred means of resolving disputes. In some jurisdictions, parties are bound by model contracts (created by the applicable state government entities) which provide for arbitration as a means for resolving disputes. For example, the 2013 Tanzanian Model Production Sharing Contract and the Special Purpose Vehicle Operating Agreement which was applicable to marginal field operators in Nigeria both include arbitration agreements. Notwithstanding, the arbitration agreement is subject to arbitrability provisions in each jurisdiction.
UJV contractual documents will typically have multi-tiered dispute resolution procedures, from negotiations up to arbitration. For more technical issues, the UJV contract may also provide for expert determination. Reasons why UJV parties would prefer arbitration as opposed to litigation include,
i. Confidentiality
UJV parties typically opt for arbitration as it affords the opportunity to keep sensitive information confidential as opposed to litigation. Various national arbitral rules and institutional rules also offer varying degrees of confidential protection for arbitration. While some laws/rules mandate that arbitration is confidential, others allow the tribunal to make orders as to whether the arbitration should be confidential. The ICC Rules 2021 allows the tribunal to make orders concerning the confidentiality of arbitration while the LCIA Rules 2020 mandate that the awards, materials, and documents pertaining to the arbitration and deliberations of the tribunal must be kept confidential. The Lagos Chamber of Commerce International Arbitration Centre (LACIAC) Rules 2016 allow awards to be made public only with the consent of the parties, while the Kigali International Arbitration Center Rules 2012 mandate that the parties and the arbitral tribunal must treat the arbitration and the award with confidentiality.
ii. Involvement of the national oil company and the independence of the arbitral tribunal
With the structure of the UJVs and sovereign ownership of crude by nation states through the national oil companies, these national oil companies are typically contractual parties to the UJV. To avoid the risk of host country judicial bias if the disputes are before the national courts, parties ought to opt for arbitration and ensure that there is a neutral seat of arbitration.
iii. Complexity of issues and the technical expertise of arbitral tribunals
The complex nature of disputes in the upstream sector calls for keen attention and arbitrators with specialist skills in resolving these disputes. For instance, a dispute pertaining to oil allocation on a unitised field may require arbitrators with a specialised knowledge of geology and engineering to better understand the technical arguments and evidence presented. There is also the advantage of having arbitrators with industry knowledge as they can understand the industry nuances and proffer strategic insights into the disputes.
iv.Speed and Finality of Arbitration
With the high value nature UJVs, parties prefer that ensuing disputes are resolved speedily so as not to disrupt upstream operations. Some arbitral institutional rules provide time limits for the delivery of awards. For example, the ICC Arbitration Rules 2021 provide for a six-month timeline from the last signature to terms of reference. The Dubai International Arbitration Centre Rules also provide a 6-month timeline from the date of the transmission of the file to the Tribunal by the Centre. The Kigali International Arbitration Centre Rules 2012 provide that the draft form of the award must be submitted to the secretariat within 45 days of the close of proceedings. In view of the benefit of party autonomy that is the bedrock of arbitration, parties may also, in their arbitration agreement, provide a time limit for the conclusion of any potential arbitration.
In addition to speed, there is also the advantage of finality of arbitration since arbitral awards are final and binding and may only be set aside on limited grounds and depending on the law of the seat of arbitration. In Nigeria, the Arbitration and Mediation Act 2023 provides for an opt-in Award Review Tribunal (ART) whereby arbitral awards may be reviewed by the ART within a sixty-day period. Where the ART has affirmed the award, parties can only seek to set aside the decision of the ART on the very limited grounds of public policy and non-arbitrability of the dispute.
The advantage of speed and finality of the arbitration is also critical in the upstream sector. This is because many of the UJV contracts will have multi-tiered dispute resolution procedures often consisting of negotiations at management committee meetings or expert determination (decisions from which may not be final and binding) before arbitration. Where the dispute has been escalated to arbitration, the parties at that stage will be particularly keen on a speedy and final resolution of the issues.
Conclusion
The dynamic and often volatile nature of the upstream industry underscores the critical need for effective dispute resolution mechanisms. Arbitration emerges as a highly viable means of addressing conflicts within these ventures due to its flexibility, neutrality, and efficiency. By offering a structured framework that accommodates the unique legal, economic, and cultural contexts of the region, arbitration can help parties navigate disputes with greater certainty and fairness.
As the Sub-Saharan African upstream sector continues to evolve, the adoption of arbitration as a standard practice for resolving joint venture disputes can foster a more stable and attractive investment environment. It enables stakeholders to manage risks proactively, maintain robust partnerships, and ultimately contribute to the sustainable growth of the sector.
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