One of Nigeria’s largest oil producers owes $1.7bn to Shell and seven banks, which if unpaid, could do significant harm to the West African country’s financial system, say the lenders.

Aiteo Eastern E&P purchased a pipeline and an operating interest in one of the nation’s most prized onshore oil blocks seven years ago for $2.4bn. Zenith Bank, Fidelity Bank, Guaranty Trust Bank and other Nigerian lenders loaned the company $1.5bn to support the acquisition, while Shell — the seller of the assets — provided $504m in financing. The parties have been locked in a tangled legal dispute since October 2019 when the creditors notified Aiteo that it was in default.

The lenders claim the debt owed climbed to $1.7bn by the end of last year, from less than $300m in late 2019, according to a ruling by the English commercial court on April 1. The rising sum is due to missed repayments, unpaid interest and default penalties, the financiers said when they began an arbitration case against Aiteo in late 2020, when the amount stood at $910m.

Those loans are “systematically important” within the Nigerian banking system and “represent significant credits on the books” of the exposed institutions, the Lagos-headquartered Africa Finance Corp said in written evidence to the court, according to the judgment. “A default under the loans would be a very serious matter” for the banks, said AFC, which administers the financial agreement between Aiteo and the bank creditors.

The UK court earlier this month made permanent an injunction obtained by the lenders and AFC in late 2020 that instructed the oil firm it was contractually required to stop challenging the debt claim in Nigerian courts and to resolve any disputes before an arbitration tribunal in London. The judge also refused Aiteo’s application to set aside the injunction.

Shell welcomes the decision, the company said by email. A spokesperson for Aiteo and lawyers representing the lenders didn’t respond to requests for comment.

A federal court in Nigeria’s capital, Abuja, had granted Aiteo an injunction in November 2019 that prevented its creditors from collecting on the alleged debt. The company, controlled by tycoon Benedict Peters, denied being indebted and in default. It argued that the lenders were obliged to restructure its repayment schedule due to unforeseen “events of force majeure,” including rampant oil theft and pipeline leaks.

Aiteo has also taken its fight to Shell in two other cases, blaming Shell’s “wrongful actions” for the firm’s difficulties servicing its loans. A court in Lagos restricted the oil major’s access to its Nigerian bank accounts in February last year, after Peters’ company argued Shell misrepresented the condition of the pipeline it sold in 2015. 

Aiteo then sued Shell in Abuja in July for more than $2bn alleging Shell falsely presented itself as the owner of six oil wells the buyer believed were included in the asset sale. Shell says both suits are baseless. 

The banks and Shell filed their arbitration claims against Aiteo in December 2020 and the tribunal issued a partial award on March 15, determining that it does have jurisdiction over the dispute, according to the commercial court decision.