Are Host Community Development Trust Boards the Next Frontier for Energy Sector Disputes in Nigeria?

One of the most interesting institutional innovations introduced by the Petroleum Industry Act, 2021 is the creation of Host Community Development Trusts (HCDTs). The framework represents an important attempt to address a long standing challenge within Nigeria’s petroleum industry, which is ensuring that host communities meaningfully benefit from the exploitation of resources within their environment.

Under the Act, settlors who are typically petroleum operators, are required to establish and fund these trusts for the benefit of host communities. In theory, the structure is designed to foster sustainable development, improve relations between operators and communities, and reduce the conflicts that have for a long time affected petroleum operations in the Niger Delta and other producing regions.

However, as these trusts become operational across the industry, an important question arises, which is; are Host Community Development Trust Boards sufficiently structured to prevent disputes?

Trust boards operate at the intersection of several competing interests. On the one hand are the expectations of host communities, many of whom view the trusts as long awaited vehicles or means for meaningful development. On the other hand are operators, who remain responsible for funding the trusts while also seeking operational stability and regulatory compliance. Regulators and government institutions also play an oversight role in ensuring that the objectives of the Act are achieved.

This complex web of relationships raises several governance and legal issues that practitioners are likely to confront in the coming years.

First issue is that the fiduciary duties of trustees will become increasingly significant. Trustees are expected to manage trust assets in the best interests of the beneficiaries (i.e. the host communities). However, questions may arise where trustees are perceived to be aligned too closely with either the settlor or particular community interests.

Secondly, transparency and accountability in the management of trust funds will be dicey. Where significant funds are involved, disputes relating to project selection, procurement processes, or financial management may become inevitable unless robust governance structures are implemented from the outset.

The third probable issue is that the degree of influence exercised by settlors may also prove contentious. This is because, while operators establish and fund the trusts, excessive influence over trust decisions could raise questions about the independence of the ‘governance structure’ and the extent to which the trusts truly serve community interests.

Finally, the mechanisms for resolving disputes involving HCDTs will become increasingly important. Disagreements may arise between trustees and beneficiaries, between communities and operators, or even among different community stakeholders. It is important that clear dispute resolution frameworks; such as arbitration or other alternative dispute resolution mechanisms, play an important role in preserving the effectiveness of the system.

The long term success of Host Community Development Trusts will depend not only on the availability of funding but also on the strength of their governance structures and the clarity of their dispute resolution mechanisms.

This writer believes that if properly managed, these trusts could represent one of the most transformative reforms in Nigeria’s petroleum sector. Therefore, if governance challenges are not proactively addressed, they may also become a significant source of disputes within the industry.

As the framework continues to evolve in practice, it will be interesting to see how operators, communities, regulators and dispute resolution practitioners respond to these emerging governance questions.

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