Ghana Loses Arbitration Over Oil Field Unitisation, Dodges Damages

Ghana Loses Arbitration Over Oil Field Unitisation, Dodges Damages

• Ordered to pay half of the claimants’ arbitration costs of €189,900

Ghana has suffered a setback in an international arbitration case concerning its attempts to unitise offshore oil fields but avoided potentially significant financial damages, the NorvanReports has learned after reading the ruling, In the matter of an arbitration under the 1976 Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) (SCC Arbitration U2021/114).

An arbitral tribunal seated in Stockholm has ruled that Ghana breached its Petroleum Agreement with Eni Ghana Exploration and Production Limited and Vitol Upstream Ghana Limited when it issued directives to unitise the Sankofa oil field with the adjacent Afina discovery.

The dispute arose after Ghana’s Ministry of Energy ordered the unitisation of the Sankofa field, operated by Eni and Vitol, with the Afina discovery operated by local company Springfield Exploration & Production Limited. The claimants argued that the unitisation directives were issued prematurely and without proper technical justification.

In its ruling, the tribunal found that Ghana had failed to establish the existence of a straddling accumulation, which is a prerequisite for unitisation under Ghanaian law. It also criticised the arbitrary determination of tract participation and procedural irregularities in the unitisation process.

However, in a significant relief for Ghana, the tribunal dismissed the claimants’ substantial damages claim, which industry sources suggest could have run into hundreds of millions of dollars. The arbitrators deemed the claim premature, as the unitisation directives have not yet been enforced.

“This ruling underscores the importance of following proper procedures in resource management, but also highlights the challenges in quantifying damages in such complex scenarios,” said an oil and gas consultant.

“You cannot shortchange that. Ghana lost on the substantive issue. Every country [it is common knowledge] has the right to ask parties to unitise oil fields to exploit their petroleum resources efficiently. However, the process of doing this matters. The Arbitral Tribunal found that “in the circumstances in which they were issued,” the Unitisation Directives breached the Petroleum Agreement. That is, the unitisation was contrary to the applicable regulations and thereby breached Article 26(2) of the Petroleum Agreement,” economist and political risk analyst Dr. Theo Acheampong also tweeted.

The decision could have far-reaching implications for Ghana’s oil industry and its approach to unitisation. It may also influence how other African countries manage similar situations in their offshore oil sectors.

Despite avoiding a potentially large payout, Ghana has been ordered to bear its own legal costs and pay half of the claimants’ arbitration costs, amounting to €189,900.

The ruling comes at a sensitive time for Ghana, which is currently implementing an IMF-backed economic recovery programme. The country has been seeking to maximise returns from its oil and gas resources to bolster its economy.

Neither the Ghanaian government nor the claimants responded to requests for comment before publication. The award is subject to challenge under Swedish law within two months of receipt.

This case highlights the delicate balance between state regulation and investor protection in Africa’s growing oil and gas sector, and may set a precedent for future disputes in the region.

Case Analysis: Eni Ghana Exploration and Production Limited and Vitol Upstream Ghana Limited v. The Republic of Ghana and Ghana National Petroleum Corporation

I. Background

This arbitration arose from a dispute over unitisation directives issued by Ghana’s Ministry of Energy (MoE) concerning oil fields operated by the Claimants (Eni and Vitol) and Springfield Exploration & Production Limited. The Claimants argued that these directives violated the Petroleum Agreement and Ghanaian law.

II. Key Issues

1. Whether the Unitisation Directives violated the Petroleum Agreement and Ghanaian law
2. Whether the Claimants suffered compensable damages
3. Validity of the Respondents’ counterclaims
4. Allocation of costs

III. Tribunal’s Analysis and Decisions

1. Violation of the Petroleum Agreement:

The Tribunal found that Ghana breached the Petroleum Agreement by issuing the Unitisation Directives. The key reasons were:

a) The MoE’s discretion to direct unitisation under Section 34(1) of the Petroleum Act was not triggered, as the existence of a straddling accumulation was not established. b) The imposition of unitisation terms violated procedural and substantive rules under the Petroleum Act and Petroleum Regulations. c) The determination of initial tract participation was arbitrary and lacked justification.

2. Damages Claim:

The Tribunal dismissed the Claimants’ damages claim as premature and unsubstantiated because:

a) The Unitisation Directives have not yet been enforced. b) The claim was based on unproven assumptions about future events. c) The Claimants failed to account for potential adjustments through the True-up Payment mechanism.

3. Counterclaims:

The Tribunal rejected the Respondents’ counterclaims, finding that:

a) The provisions of the Petroleum Agreement invoked by the Respondents did not impose an obligation on the Claimants to comply with measures contrary to the stabilization regime. b) Non-compliance with unlawful Unitisation Directives could not be deemed a breach of the Claimants’ contractual obligations.

4. Costs:

The Tribunal ordered each party to bear its own costs, with Ghana required to pay 50% of the Claimants’ share of the arbitration costs. This decision was based on:

a) The mixed outcome of the case, with Claimants prevailing on liability but not on damages. b) The reasonable conduct of both parties during the proceedings. c) The comparable reasonableness of both parties’ claimed costs.

IV. Key Takeaways

1. The case highlights the importance of following proper procedures and substantive requirements when implementing unitisation measures in the oil and gas industry.
2. It underscores the significance of stabilization clauses in protecting investors’ rights under petroleum agreements.
3. The decision emphasizes the need for concrete evidence of harm when claiming damages, particularly in cases where disputed measures have not yet been fully implemented.
4. The case demonstrates the complex interplay between contractual obligations and state regulatory powers in the natural resources sector.
5. The Tribunal’s approach to costs allocation reflects a balanced consideration of the overall outcome and the parties’ conduct throughout the proceedings.

V. Potential Implications

1. The decision may influence how states approach unitisation processes in the future, emphasizing the need for thorough technical assessments and procedural compliance.
2. It may encourage investors to seek declaratory relief in similar situations where damages are not yet quantifiable.
3. The case could impact how stabilization clauses are interpreted and applied in the context of state regulatory actions in the oil and gas sector.
4. The Tribunal’s approach to damages may set a precedent for similar cases where disputed measures have not yet been fully implemented.