FROM SEIZURE TO SAFEGUARDS: THE LEGAL LANDSCAPE OF EXPROPRIATION OF OIL & GAS INVESTMENTS IN NIGERIA

INTRODUCTION

Expropriation refers to the power of government to take over private property for public interest or purposes. Given the potentially adverse effects of the exercise of powers of expropriation by government, it remains a critical concern for both foreign and local investors in Nigeria’s petroleum sector. Expropriation is considered to be an inherent right of the government and can take both direct and indirect forms. Direct expropriation usually involves the mandatory legal transfer of the title to the property or its outright physical seizure[1]. Indirect expropriation, on the other hand, occurs through actions such as destruction of the property, or regulatory changes that substantially deprive the investment of its economic use, or deprive the owner of the ability to manage, use, or control the property in a meaningful way without legal title being affected. Given the Nigerian government’s significant control over its natural resources,[2] understanding the legal framework that governs expropriation particularly as it relates to investments in the oil and gas sector, is crucial.

In the light of recent developments in other African nations, such as the enactment of laws permitting expropriation without compensation under certain circumstances,[3] this briefing note seeks to dissect the legal framework that governs expropriation by governments in Nigeria as well as the protections available to investors in Nigeria.

LEGAL FRAMEWORK GOVERNING EXPROPRIATION IN NIGERIA

In Nigeria, there is no single comprehensive law on expropriation. Rather, a combination of statutes and constitutional provisions govern the process of expropriation. The key legislations that govern expropriation by the government include:

1. The Constitution of the Federal Republic of Nigeria (1999)

The Constitution of the Federal Republic of Nigeria 1999 (as amended) (“CFRN”) provides the legal foundation for expropriation in Nigeria. Section 44(1) of CFRN stipulates that no property shall be compulsorily acquired except in the manner and for a purpose prescribed by a law and upon payment of adequate compensation. The CFRN however, provides in Section 44(2), certain general laws which may not be affected by that provision, including laws for the imposition or enforcement of any tax, rate or duty; and for the imposition of penalties or forfeiture for breach of any law, whether under civil process or after conviction for an offence. Furthermore, the CRFN vests the ownership and control of all minerals, mineral oils, and natural gas in the Nigerian government, emphasizing the government’s authority over natural resources[4].

2. The Petroleum Industry Act 2021

The Petroleum Industry Act 2021 (“PIA”) is the comprehensive legal framework that governs Nigeria’s petroleum sector. Section 1 of the PIA vests the property and ownership of petroleum resources in Nigeria and its territorial waters, continental shelf and exclusive economic zone in the Federal Government of Nigeria. Furthermore, Sections 96-99 of the PIA give the Minister of Petroleum Resources the power to revoke Petroleum Prospecting Licenses (“PPLs”) and Petroleum Mining Leases (“PMLs”). The grounds for such revocation are varied, including non-compliance with host community obligations, environmental obligations, the prescribed terms and conditions of the grant, and domestic gas supply commitments. The PIA also ties petroleum operations to the Land Use Act, ensuring that compensation is paid for land acquisition under the PIA.[5]

3. The Land Use Act of 1978

The Land Use Act 1978 (the “Act”) governs land ownership in Nigeria, and it directly impacts the petroleum sector, particularly, where the hydrocarbons to be drilled are located on land. The Act vests all land in the State in the Governor of the State, who holds such land in trust for the use and benefit of the citizens within the State. The Act equally empowers the Governor of the State to revoke rights of occupancy and compulsorily acquire land within the State on the basis of overriding public interest[6].

The Act however creates a carveout for lands which are vested in the Federal Government or its agencies.  The Act provides that nothing shall affect any title to the land, whether developed or undeveloped, held by the Federal Government or any of its agencies.[7]

Under Section 29 of the Act, the government may acquire land for public purposes, which includes projects initiated by both State and Federal Governments. Such acquisition shall be subject to the payment of compensation to the owner of the land that has been compulsorily acquired. [8] Here, the compensation process is designed to ensure that landholders and occupiers are fairly compensated when their land is acquired by the government for public purposes.

Significantly, Section 29 of the Act provides that where a right of occupancy is revoked for land required for mining purposes, oil pipelines, or for related purposes in the case of a statutory or customary right of occupancy, the holder and the occupier shall be entitled to compensation under the relevant provisions of the Minerals and Mining Act or the PIA (formerly the Petroleum Act). This provision ensures that those affected by such acquisitions are compensated under laws that apply specifically to mining and petroleum operations.

4. The Nigerian Minerals and Mining Act 2007

Section 1 of the Nigerian Minerals and Mining Act 2007 vests the entire property in and control of all mineral resources in, under or upon any land in Nigeria, its contiguous continental shelf and all rivers, streams and watercourses throughout Nigeria, any area covered by its territorial waters or constituency and the exclusive economic zone in the Federal Government.

   It authorizes the revocation of a mineral title where the holder has failed to pay the prescribed fees for processing of applications for mineral titles and an annual service fee.[9]

5. The Nigerian Investment Promotion Commission Act 2007

The Nigerian Investment Promotion Commission (“NIPC”) was established to promote and protect investments in Nigeria. It guarantees that foreign investors will not face arbitrary expropriation. Section 25 of the NIPC Act provides for guarantees against expropriation. It is to the effect that generally, no enterprise shall be nationalized[10] or expropriated by any Government of the Federation; and no person who owns, whether wholly or in part, the capital of any enterprise shall be compelled by law to surrender his interest in the capital to any other person. However, it also provides that where acquisition occurs, it must be of national interest or for a public purpose and under a law which makes provision for payment of fair and adequate compensation; and a right of access to the courts for the determination of the investor’s interest or right and the amount of compensation to which he is entitled. It further provides that any compensation payable shall be paid without undue delay, and authorisation for its repatriation in convertible currency shall where applicable, be issued. This provision serves as an important safeguard for investors, providing a legal mechanism for them to seek redress in the event of expropriation.

INVESTOR PROTECTIONS AND LEGAL REMEDIES

Remedies which Investors may seek where expropriation occurs include the following:

1. 1. Right to Compensation

Under both Nigerian law and international legal standards, investors are entitled to fair and adequate compensation in the event of expropriation. However, the determination of what constitutes ’adequate compensation’ can be contentious. The valuation of assets, especially in the petroleum sector, has the potential to become contentious, particularly when the assets involved are infrastructure or mineral resources that have substantial future value.

2. Stabilization Clauses in Production Sharing Contracts

To mitigate the risk of expropriation and regulatory changes, oil and gas companies include stabilization clauses in their Production Sharing Contracts (“PSCs”) to protect against the risks of expropriation or regulatory changes. These clauses protect investors by maintaining agreed-upon terms over a defined period, even if new laws or regulations are introduced.

In Nigerian PSCs, a ‘Change in Law’ clause typically ensures that the contractor’s profit oil entitlement remains as established under the lifting module in the event of any change in the applicable law to the PSC. Following the enactment of the PIA, concerns arose that stabilization clauses were no longer applicable to PSCs entered into after the PIA came into effect. However, this is not the case. Section 305 of the PIA does not prohibit stabilization clauses but rather limits their scope. Investors are not shielded from the effects of changes in statutes of general application, levies, taxes, or compliance obligations related to environmental, labour, health, and safety laws. Additionally, they remain subject to new taxes, levies, or duties imposed to implement Nigeria’s climate change commitments under the United Nations Framework Convention on Climate Change) and related agreements. This is a departure from the broader protections available under the Petroleum Act of 1969.

3. Arbitration and Dispute Resolution

In light of concerns over the independence of Nigeria’s domestic judiciary, many investors opt for international arbitration as a means of resolving expropriation disputes. Institutions like the International Centre for Settlement of Investment Disputes (ICSID) offer a neutral forum where investors can seek redress. Past arbitration rulings, such as in the Interocean Oil v Nigeria[11] case, have affirmed that for a State to be held liable for expropriation, there must be a clear and direct link between State actions and the alleged deprivation of assets.

THE ATTITUDE OF NIGERIAN COURTS TOWARDS EXPROPRIATION

While Nigerian courts are constitutionally tasked with upholding legal protections for investors, including safeguards against unlawful expropriation, concerns persist regarding the consistency and fairness of judicial decisions in expropriation case. These concerns have led some investors to seek justice elsewhere rather than exhaust all domestic legal remedies. For instance, in Interocean Oil v. Nigeria[12], the arbitral tribunal alluded that the claimants ought to have exhausted available domestic remedies by appealing the Federal High Court’s decision before a judicial expropriation could be considered to have taken place.[13]

That said, Nigerian courts have often taken the view that the government must honour its contractual obligations to investors. In Federal Government of Nigeria V. Zebra Energy Limited, [14] Zebra Energy applied for the allocation of an Oil Prospecting License (“OPL”) subject to certain conditions, including payment of a signature bonus and reserve value. Zebra Energy failed to pay the signature bonus within the stipulated period but sought an extension of the timeframe for payment of the signature bonus, which was granted by the appellants. However, before the extension period expired, the allocation of the OPL to Zebra Energy was withdrawn by the Ministry of Petroleum Resources in accordance with the recommendation of the panel established by the Nigerian Government to review all contracts, licences and appointments made by the government.[15] Dissatisfied with the revocation of its interest in the asset, Zebra Energy approached the courts for the determination of the propriety or otherwise of the revocation of its interest in the asset.  Both the trial court and the appellate court ruled in favour of Zebra Energy. When the Federal Government of Nigeria appealed to the Supreme Court, the Supreme Court held that the government was bound by its agreement with the company and that a valid contract existed between the parties and found that the revocation of the allocation of the OPL was unlawful.

Similarly, in NNPC v. Famfa Oil Ltd[16], where the Federal Government appealed to the Supreme Court contending that the government had a right to participate in OML 127, the Supreme Court reaffirmed the judiciary’s role in protecting contractual agreements. The Supreme Court found that where the government reserves a right to participate in an oil and gas venture, it is like any other right and is by no means absolute but subject to limitations imposed by law. Specifically, the government’s right is burdened by its duty to follow the relevant law and the constitution. The Court ruled that the government’s attempt to acquire a 50% interest in OML 127 without adhering to the provisions of Paragraph 35 of the First Schedule to the Petroleum Act and Section 44(1) of the CFRN was unconstitutional, emphasizing that government actions cannot infringe on contractual and constitutional rights without due legal process. These cases illustrate the ability of Nigerian courts to provide investors with a degree of protection, especially where the government oversteps its legal boundaries.

CONCLUSION

Expropriation remains a real and significant risk for investors in Nigeria’s petroleum sector. Although the Nigerian government holds the constitutional authority to expropriate assets, there are legal safeguards in place that offer investors protection, such as compensation rights, stabilization clauses, and local/international dispute resolution mechanisms. However, these protections are not always guaranteed, and the process can be complex and unpredictable.

To mitigate the risks associated with expropriation, investors should engage in thorough due diligence, negotiate favourable contractual terms, and monitor regulatory changes. By taking these steps, investors can better safeguard their interests and navigate the complexities of doing business in Nigeria’s petroleum sector.

REFERENCES

[1] United Nations Conference on Trade and Development, Expropriation, UNCTAD Series on International Investment Agreements II (2012) https://unctad.org/system/files/officialdocument/unctaddiaeia2011d7_en.pdf accessed 2 February 2025.

[2] See Section 44 (3) of the Constitution of the Federal Republic of Nigeria 1999 (as amended); Section 1 of the Petroleum Industry Act 2021; Section 1 of the Land Use Act 1978; and Section 1 of the Nigerian Minerals and Mining Act 2007.

[3] Khanyisile Ngcobo, ‘South African president signs controversial land seizure law’ (BBC News, 24 January    

  2025) <https://www.bbc.com/news/articles/cvg9w4n6gp5o> accessed 2 February 2025

[4] Section 44(3) of the CFRN

[5] Section 115 of the PIA

[6] Section 28 of the Land Use Act

[7] Section 49 of the Land Use Act

[8] Section of the Land Use Act

[9] Sections 11 and 12 of the Nigerian Minerals and Mining Act

[10] Nationalization  is defined as “a process in which a government takes control of an industry or company and becomes its owner.” Cambridge Dictionary https://dictionary.cambridge.org/dictionary/english/nationalization accessed 3 February 2025.

[11] Interocean Oil Development Company and Interocean Oil Exploration Company v. Federal Republic of    Nigeria, ICSID Case No. ARB/13/20

[12]  Ibid

[13] Viola Echebima, ‘ICSID tribunal dismisses claims of Interocean Oil Development Company and Interocean Oil Exploration Company against Nigeria while upholding its jurisdiction to hear the claims solely based on Nigeria’s domestic investment statute’ (Investment Treaty News, 19 December 2020) < ICSID tribunal dismisses claims of Interocean Oil Development Company and Interocean Oil Exploration Company against Nigeria while upholding its jurisdiction to hear the claims solely based on Nigeria’s domestic investment statute – Investment Treaty News> accessed 2 February 2025

[14] Federal Government of Nigeria and 6 others V Zebra Energy Limited (Sc 268/2001) [2002] Ngsc 18 (13 December 2002)

[15] The panel, chaired by Dr. Christopher Kolado, was established by the Federal Government of Nigeria to review all contracts, licenses, and appointments made between January 1 and May 28, 1999.

[16] (2012) 17 NWLR (Pt. 1328) 148 at 185