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: III. Transboundary Hydrocarbon Development Under International Law D. State Practice: Agreements Used to Coordinate Development of Transboundary Reservoirs through VI. 2012 Transboundary Agreement and Its Implications Under International Law D. Determining the Existence and Allocation of a Transboundary Reservoir, p. 720-756

4. State Practice: Agreements Used to Coordinate Development of Transboundary Reservoirs

   Once nations agree to jointly develop the transboundary hydrocarbon reservoir(s) or field(s) they can enter into a variety of agreements. The two most commonly used forms of agreements are cross-border unitization agreements and joint development agreements.

   1. Cross-Border Unitization

      Cross-border unitization is the joint and coordinated exploitation of a transboundary hydrocarbon reservoir by the interested nations so that the reservoir is developed as if it were owned and controlled by a single unit. (127) Cross-border unitization requires an established boundary agreement between the affected governments. (128) Professor Jacqueline Weaver describes the following typical attributes of cross-border unitization:

      * Cross-border unitization is only required once a discovery is made.

      * The area covered by the unitization agreement is defined by the extent of the individual reservoir or field.

      * The two countries collaborate (through a treaty or other international agreement) on issues related to optimum field development (including, for example, safety), but maintain their sovereign rights on each side of the border.

      * The groups of licensees prepare a single development plan and a unit operating agreement, which are then subject to the approval of both countries.

      * Each license group's share of production and costs is based on the proportionate share (called the participation factor) of the field's oil and gas in place underlying its license, regardless of the physical location of the production facilities. Each licensee pays its taxes and royalties in accord with the terms of its own contract as if its unit share of production had been produced from its own contract area.

      * The legal framework maintains two separate sets of regulations and fiscal terms. (129)

      In general terms, a transboundary unitization treaty addresses production allocations and costs among tracts; regulation; the cooperative work plan for the field agreed upon by the operating investors; and a dispute-resolution plan. (130) Unitization also requires the licensees on each side of the boundary to enter into a unit operating agreement. This agreement will govern the rights and obligations between the licensees and the selected unit operator, who manages the day-to-day operations of the unit. Both governments must approve these agreements in order to assure that they are consistent with the terms of the treaty. (131)

   2. Joint Development Agreements

      Another way to develop transboundary hydrocarbon reservoirs is to establish a joint development zone, within which cooperative development of petroleum occurs despite disputes over sovereignty and the delimitation of the boundary between two or more nations. Joint Development Agreements authorize the cooperative development of petroleum resources in a geographic area that has disputed sovereignty, despite the delimitation of the boundary between two or more sovereigns. (132) Although existing agreements vary in structure, key issues in joint development agreements can be identified as being particularly important, as described by Ana E. Bastida:

      1) Sharing resources: contractual provisions establish the basis for sharing production. There is overwhelming support for the principle of equal sharing, but there are exceptions. (133)

      2) Management of joint development: three categories of management structures have been identified--single State model; two States/joint venture model, and joint authority model.

      3) Applicable law: this provision is necessary to clarify which legal regime will apply in the joint development zone. It should include the petroleum licensing regime, laws governing civil and criminal jurisdiction over individuals in the zone, and rules and regulations governing health, safety and environmental issues.

      4) Operator and position of contractors: provisions that point out who has the authority to develop rules for selecting contractors to undertake petroleum exploration and exploitation activities on behalf of the two States.

      5) Financial provisions: it establishes the taxation regime applied to contractors in the joint develop zone.

      6) Dispute resolution: normally, it provides for some sort of internal mechanism of conflict resolution prior to resorting to third party resolution, such as consultation, negotiation, conciliation, and binding commercial arbitration. (134)

      There are areas in the Gulf of Mexico where a Joint Development Agreement may be warranted in the future, such as in the portion of the Eastern GOM where maritime boundaries between the United States, Mexico, and Cuba have not been formally delimited. (135) However, the U.S. and Mexico have already agreed to a framework agreement to jointly develop hydrocarbons along most of the maritime boundary between the United States and Mexico in the GOM. (136) This framework agreement, described in the next sections, establishes the procedures to move forward on transboundary unitization in the event that a shared reservoir is discovered.

   3. Examples of Transboundary Agreements that Protect the Efficient Exploitation of the Resource

      One of the most used models for joint exploitation agreements was the one celebrated by the United Kingdom and Norway in 1965, where the basic principle of joint exploitation was enshrined in Article 4:

      If any single geological petroleum structure or petroleum field, or any single geological structure or field of any other mineral deposit, including sand or gravel, extends across the dividing line and the part of such structure or field which is situated on one side of the dividing line is exploitable, wholly or in part, from the other side of the dividing line, the Contracting Parties shall, in consultation with the licensees, if any, seek to reach agreement as to the manner in which the structure or field shall be most effectively exploited and the manner in which the proceeds deriving therefrom shall be apportioned. (137) The same type of provision was contained in the delimitation of the continental shelf agreement between Sweden and Norway in 1968 and between the United Kingdom and Norway of 1965. It is important to note that the latter even made it mandatory to sign a unitization agreement ("shall be concluded") between the licensees on both sides of the border upon the request of the States. (138) Similar clauses and principles were proposed by the Jan Mayen Conciliation Commission between Iceland and Norway, where the commission suggested the adoption of a joint development zone and the unitization of deposits for the overlapping areas of the continental shelf that cross the boundary. (139) Iceland and Norway took the recommendations and in (1981) adopted the Agreement on the Continental Shelf Between Iceland and Jan Mayen. (140)

      In the Asian continent, similar provisions have been found regarding the sharing of transboundary resources where the principle of joint development and of agreeing on the most effective method of exploitation is present. For example the 1974 Japan and South Korea Agreement provides in Article XXIII:

      If any single geological structure or field of natural resources extends across any of the lines specified in paragraph 1 of article II and the part of such structure or field which is situated on one side of such lines is exploitable, wholly or in part, from the other side of such lines, concessionaires and other persons authorized by either Party to exploit such structure or field (hereinafter referred to as "concessionaires and other persons") shall, through consultations, seek to reach agreement as to the most effective method of exploiting such structure or field. (141) A similar article is found in the Australia-Indonesia Agreement of 1989:

      If any single accumulation of petroleum extends across any of the boundary lines of Area A of the Zone of Cooperation as designated and described in Article 1 and Annex A of this Treaty, and the part of such accumulation that is situated on one side of a line is exploitable, wholly or in part, from the other side of the line, the Contracting States shall seek to reach agreement on the manner in which the accumulation shall be most effectively exploited and on the equitable sharing of the benefits arising from such exploitation. (142) And then in more detail in the Annex A of the Agreement it states that unitization shall be the rule for this type of resources:

      Where a petroleum pool is partly within a contract area and partly within another contract area, but wholly within Area A, the Joint Authority shall require the contractors to enter into a unitization agreement with each other within a reasonable time, as determined by the Joint Authority, for the purpose of securing the more effective and optimized production of petroleum from the pool. If no agreement has been reached within such reasonable time, the Joint Authority shall decide on the unitization agreement. Without limiting the matters to be dealt with, the unitization agreement shall define or contain the approach to define the amount of petroleum in each contract area, the method of producing the petroleum, and shall appoint the contract operator responsible for production of the petroleum covered by the unitization agreement. The Joint Authority shall approve the unitization agreement before approvals under Article 17 of this Petroleum Mining Code are given. Any changes to the unitization agreement shall be subject to approval by the Joint Authority. (143) The sources of international law presented in this Part show a clear trend on what the State obligations are when they face the natural phenomenon of transboundary resources: they must cooperate to find a method of exploitation where the resources are exploited in an efficient way benefiting and respecting the rights of both States. Exploiting a resource unilaterally without respecting and recognizing the rights of...