Dispute resolution mechanisms in upstream oil and gas contracts

The oil and gas industry plays a crucial role in economic development of Tanzania. Due to the high-value transactions, long-term commitments, and multiple stakeholders involved, disputes are common. Efficient dispute resolution mechanisms are essential to ensure stability and continued investment in the sector.

In this month’s legal update, we explore the dispute resolution mechanisms available in oil and gas contracts relating to upstream activities in Tanzania, focusing primarily on the Petroleum Act, No. 21 of 2015 (as amended) (the Petroleum Act) and alternative dispute resolution methods.

Key Interpretations

The following key terms have been defined in the relevant legislation which are applicable to this legal update:

“Gas” means any naturally occurring mixture of hydrocarbons in gaseous state, principally methane with varying quantities of ethane, propane, butane and other gases used as fuel or feedstock, whether:

(a) pressurized to be transported and distributed through pipelines, lateral lines and spur line;

(b) compressed in special cylinders or vessels, to be efficiently transported or stored as CNG by special trucks or ships; or

(c) liquefied using special facilities, to be efficiently transported as liquefied natural gas (LNG);

“Natural wealth and resources” means all materials or substances occurring in nature such as soil, subsoil, gaseous and water resources, and flora, fauna, genetic resources, aquatic resources, micro-organisms, air space, rivers, lakes and maritime space, including the Tanzania’s territorial sea and the continental shelf, living and non-living resources in the Exclusive Economic Zone which can be extracted, exploited or acquired and used for economic gain, whether processed or not;

“Oil” means naturally occurring liquid hydrocarbon (crude oil) and the refined products obtained from these;

“Petroleum” means any naturally occurring hydrocarbon, whether in gaseous, liquid, solid state or any naturally occurring mixture of hydrocarbons, whether in a gaseous, liquid, or solid state or mixture of one or more hydrocarbons whether in a gaseous, liquid or solid state and any other substance and includes petroleum that has been returned to a natural reservoir, but shall not include coal or any substance that may be extracted from coal or other rock;

“Petroleum operations” means any or all operations and activities in connection with reconnaissance, exploration, appraisal, development, production, processing or liquefaction, and includes activities in connection with decommissioning of petroleum facilities;

“Upstream activities” comprises of geophysical exploration, exploration for and development of Petroleum, constructing and operating of wells, production of Petroleum, construction, operating and use of storage reservoir, construction and operation of pipelines and other special infrastructure for Petroleum; and

“Upstream operator” means a person who undertakes one or more upstream activities.

Legal Framework

As the primary legislation that governs oil and gas activities, the Petroleum Act regulates the exploration, development, and production of petroleum resources in Tanzania as well as disputes relating to the contractual aspects of these matters. The Petroleum Act is supplemented by the Petroleum (Settlement of Disputes Arising from Upstream Operations) Rules, G.N. No. 620 of 2023 (the Dispute Settlement Rules). Disputes arising from contracts relating to upstream activities may be determined by the Petroleum Upstream Regulatory Authority (PURA) which exercises regulatory authority over upstream petroleum operations.

Regulatory Powers

Being an upstream regulator, PURA may inquire and decide on contractual disputes among upstream operators themselves or between an upstream operator and third parties. In particular, PURA may determine disputes in relation to the following:

1. boundaries of any exploration area or development area;
2. any act committed or omitted, or alleged to have been committed or omitted, in the course of, or ancillary to, exploration or development operations;
3. the assessment and payment of compensation pursuant to the Petroleum Act; or
4. any other matters in relation to exploration and development operations.

It is important to note that adjudication of a contractual dispute by PURA may only be done where the contract from which the dispute arises does not contain specific provisions for alternative dispute resolution. This is provided under rule 2(3) of the Dispute Settlement Rules. Under such circumstances, parties to the contract may agree for their dispute to be adjudicated by PURA in accordance with the Dispute Settlement Rules.

To institute a complaint at PURA, the complainant shall be required to lodge a complaint to the Director General of PURA (the Director General) and serve a copy of the complaint to the respondent. The respondent shall be summoned to file his defence against the complaint. Upon filing a defence, the complainant may opt to reply to the defence and submit a reply to the Director General. Once all the pleadings have been lodged, the Director General shall, within fourteen (14) days, scrutinise the complaint and make preliminary examination. The Director General may reject a complaint which does not meet the requirements under the Dispute Settlement Rules.

Reconciliation

If upon scrutiny and preliminary examinations, the Director General determines that the complainant has an interest in the matter to which the complaint relates and the complaint is not frivolous, then the Director General shall investigate the matter within thirty (30) days. The Director General will then advice the parties on how to arrive at a settlement. In the event where the parties reach a settlement, the settlement shall be reduced in writing and signed by the parties. Where the signed settlement is registered by PURA, it shall be deemed to be an award issued by PURA and enforceable as a court decree or order.

Mediation

In the event where the Director General fails to resolve the dispute, an officer of PURA or any other person mutually agreed between parties to the dispute, may be appointed by the Director General to act as a mediator between the parties. A settlement reached out of the mediation session shall be reduced into writing and signed by the parties who will then submit a copy of the settlement to PURA for registration. PURA may return a settlement to the parties if deemed insufficient for registration. In such an instance, parties will need to reconsider their settlement and resubmit accordingly. If a settlement is successfully registered by PURA, it shall be enforceable as a court decree or order.

Hearing

Where at any stage, upon completion of scrutiny or mediation, it becomes evident to the Director General that parties cannot reach an amicable settlement, the Director General shall submit the complaint to the PURA Dispute Resolution Committee (the Committee). Submission of such complaint shall be done within thirty (30) days of the issue becoming evident to the Director General. The Committee is vested with the duty to facilitate resolution of complaints and dispute pursuant with section 12(2)(n) of the Petroleum Act. Once the complaint is referred to the Committee, the Director General will have a duty to notify the respective parties within seven (7) working days.

Upon receipt of the complaint, the Committee will set a hearing date and summon the parties in writing for the purpose of ascertaining the speed track of the dispute. For clarity purposes, a case speed track is the categorisation of legal cases based on their complexity and urgency to determine how quickly they should be adjudicated. Once the speed track is determined, a scheduling order will be issued, and the dispute will proceed to the hearing stage. The proceedings shall be quasi-conciliatory in nature. This means that, while the proceedings will encourage settlement and mutual agreement between the disputing parties, they will still retain some formal legal or adjudicative elements (such as presenting arguments and evidence).

Once the hearing is complete and the Committee has made its findings on the dispute, it shall recommend such findings to PURA within thirty (30) days of completion of the hearing. PURA will then consider the recommendations and make orders or decree on the dispute. A decree or order issued by PURA shall be enforceable as a decree or order of the court pursuant to section 243 of the Petroleum Act. 

Refusal to Adjudicate

Despite being empowered to determine disputes in the manner expounded above, PURA may refuse to decide any dispute when it deems fit. The Petroleum Act does not explicitly provide grounds on which PURA may refuse to determine a matter. However, as a matter of practice, the refusal would be on a case-to-case basis. In the event of such refusal, PURA shall notify the respective parties to the dispute in writing accordingly.

Appeals

In the event where a party to the dispute is aggrieved by the decision made by PURA, it may appeal to the Fair Competition Tribunal within thirty (30) days of such decision being made. The grounds for appeal include:

1. the decision made was not based on the evidence produced;
2. there was an error in law;
3. the procedures and other statutory requirements applicable to the Committee were not complied with and the non-compliance materially affected the determination; or
4. that PURA did not have power to make the award.

Conclusion

Our analysis above is based on instances where a contract relating to upstream activities does not provide for dispute resolution, and instead, parties agree to resolve the dispute through the Dispute Settlement Rules. There are instances where the underlying agreement incorporates multiple dispute resolution mechanisms, including negotiation, mediation, arbitration, and litigation.

Despite the underlying agreement having room to dictate dispute resolution mechanisms, parties must comply with Tanzanian law, which may limit proceedings in foreign courts in certain cases involving oil and gas as it falls under the category of natural wealth and resources. This restriction is in accordance with the Natural Wealth and Resources (Permanent Sovereignty) Act No. 5 of 2017.

If you have any further questions regarding dispute resolution mechanisms in upstream oil and gas contracts, please contact Amalia Lui or Hadia Mgaya.