Opinion ID: 6498714
Heading Depth: 3
Heading Rank: 1

Heading: Erha oil production

Text: For nearly three decades now, NNPC and Esso—a wholly owned Nigerian subsidiary of Exxon Mobil Corporation 4—have partnered in a petroleum exploration and oil extraction venture in the Erha oil field, located offshore in the Niger Delta and governed by Nigeria. In 1990, Nigeria began to solicit bids from international oil companies, seeking a partner in the development of its deep offshore oil fields. Exxon bid on Erha and aggressively negotiated the project terms with the Nigerian government and NNPC, leading Esso and NNPC in 1993 to enter into the Production Sharing Contract (“PSC”), the document that governs the parties’ relationship in the venture. The PSC obligates Esso to “provide funds and bear the risk of” development and extraction at Erha. App. 418. Under the PSC, any oil extracted from Erha is divided, conceptually, into four tranches: (1) tax oil, to cover the taxes owed by Esso under the Nigerian Petroleum Profits Tax (“PPT”) Act; (2) royalty oil, to cover royalty payments owed to the Nigerian government; (3) cost oil, to cover operating costs, which Esso alone bears; and (4) profit oil, which includes all remaining oil and is split between Esso and NNPC. Consistent with the tax oil allocation, Esso must calculate its tax liability for the Erha operation and prepare tax returns in accordance with the PPT Act. NNPC then transmits the returns to the Nigerian government. NNPC is responsible for lifting (i.e., taking and transporting) the tax oil and royalty oil for delivery to the government. Of 4Esso assigned some of its rights under the contract with NNPC to Shell Nigeria Exploration and Production Company Limited (“SNEPC”), and accordingly, SNEPC is also a named petitioner-appellant–cross-appellee in this case. Esso’s and SNEPC’s distinct corporate identities are not relevant for purposes of this appeal, however, and so we refer only to Esso in our discussion. We note, however, that some of the rights and obligations discussed in this Opinion apply to SNEPC as well as to Esso. 9 particular import here, the PSC also provides that any “dispute . . . concerning the interpretation or performance” of the contract may be subject to binding arbitration, and that any such arbitration must be conducted in Nigeria under Nigerian law. App. 446. After spending more than 13 years and several billion dollars developing Erha, Esso began extraction in 2006. By late 2007, the parties had become embroiled in a dispute over the oil allocations, each accusing the other of overestimating or underestimating the amount properly allocable to each tranche. Over Esso’s objections, NNPC began to lift more tax and royalty oil than Esso had allocated, apparently (as alleged by Esso) for the purpose of implementing a new Nigerian government “policy directive to capture additional ‘revenue opportunities’ from the PSC,” in response to changing oil prices. Esso Br. at 12. In addition, instead of transmitting the tax returns that Esso had prepared as contemplated by the PSC, NNPC prepared and delivered to the government its own returns, in which it calculated a higher tax liability for Esso. In response, Esso commenced arbitration in July 2009.