The 2012 Agreement on the Exploitation of Transboundary Hydrocarbon Resources in the Gulf of Mexico: confirmation of the rule or emergence of a new practice?

Author:Garcia Sanchez, Guillermo J.
Position:I. Abstract through III. Transboundary Hydrocarbon Development Under International Law C. International Customary Law, Judicial Decisions and Expert Opinions, p. 681-720
 
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  1. ABSTRACT II. INTRODUCTION III. TRANSBOUNDARY HYDROCARBON DEVELOPMENT UNDER INTERNATIONAL LAW A. Sources of Law Governing Transboundary Deposits B. Third United Nations Convention on the Law of the Sea (UNCLOS) and the Obligation to Cooperate in Developing Transboundary Hydrocarbon Resources C. International Customary Law, Judicial Decisions and Expert Opinions D. State Practice: Agreements Used to Coordinate Development of Transboundary Reservoirs IV. U.S. AND MEXICO BILATERAL PRACTICE ON TRANSBOUNDARY RESOURCES V. DEVELOPMENT OF BOUNDARY TREATIES IN THE GULF OF MEXICO A. The Treaty of 1978 B. The 2000 Treaty VI. 2012 TRANSBOUNDARY AGREEMENT AND ITS IMPLICATIONS UNDER INTERNATIONAL LAW A. Ratification Process B. Preamble and the Guiding Principles of the 2012 Transboundary Agreement C. Reporting Requirements and Information Sharing D. Determining the Existence and Allocation of a Transboundary Reservoir E. Unitization F. Fiscal Regime G. Cooperation and Facilitating Access to Facilities H. Dispute Resolution I. Texas Border J. Inspections K. Safety and Environmental Protection L. Termination VII. IMPLICATIONS OF INTERNATIONAL LAW ON THE IMPLEMENTATION OF THE 2012 TRANSBOUNDARY AGREEMENT A. The 2012 Transboundary Agreement Unitization Process B. When a Unitization Agreement Cannot Be Reached Does International Law Restrict the Ability of the Parties to Still Exploit the Transboundary Resource? C. Is the 2012 Transboundary Agreement Inconsistency with International Law? VIII. CONCLUSION I. ABSTRACT

    This Article explores the international law applicable to the exploitation of hydrocarbon resources that straddle the boundaries between states (transboundary fields) and its applicability to the U.S. and Mexico maritime boundary in the Gulf of Mexico. After a detailed examination of the different sources of international law including treaties, customary norms, judicial decisions, and bilateral practice, the Article concludes that the United states and Mexico have deviated in some regards from the standard international legal practices that other states have adopted to exploit transboundary hydrocarbon resources. The two most notable deviations are in allowing either nation to unilaterally exploit the shared resource, if no unitization agreement can be achieved, and the absence of an effective third party dispute settlement mechanism under some circumstances. Concretely, the Article analyzes how the latest instrument signed by these two nations for the exploitation of these resources, the 2012 Agreement on the Exploitation of Transboundary Hydrocarbon Resources, modifies international practice in several aspects and has the potential of complicating the efficient exploitation of the resources for the benefit of both nations. In reaching its conclusion the Article reviews the ratification processes of the agreement, the legal implications on the way both states perceive the use of these resources, and the effects that the 2014 reform in the energy sector in Mexico has on the binational treaty regime. (1)

  2. INTRODUCTION

    The United States and Mexico have exploited hydrocarbon resources from their respective offshore areas of the Gulf of Mexico (GOM) for many decades. Nevertheless, this has been done in a diametrically opposite way due to the legal frameworks surrounding the development of the hydrocarbons industry on both sides of the border. It would be difficult to find two bordering nations that have had such contrasting energy industries and regulatory cultures. Market diversity and global competition is the distinguishing feature of the U.S. model, while the Mexican model for more that seventy-six years rested on an opposing principle: the monopoly of the State-owned company Petroleos Mexicanos (PEMEX). These differences have generated dramatically different technical, commercial, and regulatory developments of each nation's energy sector, making bilateral cooperation in energy development difficult.

    Today, with more than 3,500 currently existing structures and 33,000 miles of pipelines, the GOM is the world's most extensively developed offshore production area. (2) Until relatively recently, little discord existed between the two nations regarding the development of offshore hydrocarbon resources because all of the production areas were located in relatively shallow waters quite distant from the maritime boundaries in the remote deepwater areas of the GOM. (3) Mexico's monopolistic legal framework made it almost impossible for its national company, PEMEX, to develop the appropriate technology to develop these unconventional fields. Nevertheless, with decreasing production from Mexico's easily accessible onshore and offshore hydrocarbon fields PEMEX has been forced to expand its exploration activities even if it lacks the technology necessary to exploit the deepwater fields. At the same time, growing demand in the United States for more drilling in the GOM and technological advances in exploration and exploitation have led to drilling further into the U.S. side of the GOM at depths of 1,000 feet or more below the water's surface. (4) In fact, of the more than (567) million barrels of oil produced in the U.S. GOM in 2009, deepwater wells provided more than 80%. (5) Between three billion and fifteen billion barrels of oil may be recoverable in the deepwater area of the GOM that is open to U.S exploitation, making it the biggest U.S. discovery since Prudhoe Bay in Alaska nearly forty years ago. (6)

    Accelerating this process has been huge new discoveries of hydrocarbons in the deepest waters near the U.S./Mexico maritime boundary coupled with technological advances that allow for commercial production in waters of 9,000 feet or deeper. (7) Much of the energy industry's interest in the deepwater areas of the GOM is focused on a series of recent discoveries in a large geologic structure known as the Lower Tertiary Wilcox Trend. This huge, 34,000 square mile structure lies across a large portion of the GOM offshore of the states of Texas and Louisiana and extends seaward beyond the maritime boundary between the United States and Mexico. (8) A portion of the Lower Tertiary Wilcox Trend of special importance is the Perdido Fold Belt Region. PEMEX has estimated that the Perdido Fold Belt Region near the maritime boundary in the northwestern part of the GOM holds between (8) and (13) billion barrels of oil alone. (9) In 2012 the Mexican government announced the discovery of several fields in this area, as shown in the following map. (10)

    As the above map shows, this fold belt is a series of northeast-southwest trending anticlines that extend south more than 100 miles beyond the maritime boundary. (11) On the U.S. side of the boundary, international oil companies including Shell, BP, Chevron and Statoil are already producing large quantities of hydrocarbons and have plans to expand production in coming years. (12) According to PEMEX, two existing U.S. oil fields extend south across the boundary into Mexican waters. (13) Although specific reservoirs that straddle the U.S./Mexico maritime boundary have not been formally identified, it is quite likely that such reservoirs exist and may be exploited in the future.

    Any developments in deep and ultra-deep waters bear substantial risks and require extraordinary amounts of investments, sophisticated legal expertise, and considerable time to reach commercial scale, even when the project does not involve transboundary deposits. (14) The possibility that transboundary hydrocarbon reservoirs will be exploited in the near future radically changes the legal landscape and forces the two nations to contemplate the international legal implications of exploiting shared natural resources. In fact, when hydrocarbon reservoirs straddle the boundary between two or more sovereign nations a series of potentially unsettled legal issues emerge. (15) Transboundary oil and gas deposits "do not conform to property lines, licensing demarcations, or political boundaries." (16) In such circumstances, governing laws assume a seminal role. Only a clear, undisputed, and well-established legal framework will provide investors with the certainty required to undertake such costly and risky projects.

    After seventy-six years of state control, in (2014), Mexico enacted the constitutional and legislative reforms necessary to open its vast oil and gas reserves to foreign investment. (17) These remarkable changes were brought about after Mexico recognized that it needed additional investment and technology to fully exploit its domestic oil and gas production and to reverse its decade long decline in crude oil production. (18) Of special interest to Mexico is technical assistance and foreign investment to develop the deepest and most remote offshore deposits in the GOM. A simple look at the current blocks that are being offered for the bidding process in the Mexican side of the GOM exemplifies how unexploited deepwater reservoirs are, as shown in the following map. (19)

    In contrast, significant quantities of hydrocarbons are being produced on the U.S. side of the maritime boundary in a number of widely dispersed deepwater plays. (20) For purposes of contrast, one only needs to see the current exploited blocks of the U.S. side, as shown in the following map. (21)

    The Mexican and U.S. governments have expressed special concern over the potential production of oil and gas in the maritime boundary region. For quite some time, current and future commercial production in this region has caused unease, particularly in Mexico, because of the possible existence of hydrocarbon reservoirs that may straddle the existing maritime boundary between the two nations. (22) The possibility that production on the U.S. side of the boundary may siphon oil from Mexico triggered a series of diplomatic negotiations beginning over ten years ago to address these concerns. As a result of these discussions, on February 20, 2012...

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