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

Author:Garcia Sanchez, Guillermo J.
Position:VI. 2012 Transboundary Agreement and Its Implications Under International Law E. Unitization through VIII. Conclusion, with footnotes, p. 756-792
  1. Unitization

    Chapter 2 deals with the exploration and exploitation of a transboundary reservoir or unit and it is here that the Agreement's emphasis on the principle of unitization is explained. Article 6 requires that any joint exploration or exploitation of a transboundary reservoir pursuant to a unitization agreement must be approved by both the United States and Mexico, with the possibilities that one or both governments make recommendations to the agreements before they are approved. The designated agencies of the States must develop one or more unitization agreement models that can be used by the licensees in their negotiation. (222) In both the models and the approved agreements, the executive agencies will have to compare the guiding principles of the agreement with the substantive rights contained in the particular agreements. In the event that the executive agencies cannot reach a consensus for the approval of the agreements after a particular period of time, the agreements are to be considered as rejected by the States. (223) In addition, the executive agencies are required to make a joint determination estimating the amount of recoverable hydrocarbons in the transboundary reservoir and the allocation on either side of the maritime boundary. (224) Along with this estimate the parties will have to jointly determine the associated allocation of production (225) and in the event the executive agencies are unable to reach this determination, the question will be submitted to expert determination. (226)

    Although it highly encourages unitization, it is possible under the Agreement for a licensee to proceed with exploitation of a transboundary reservoir without having to unitize. If either of the parties does not approve a licensee's unitization proposal or if any licensee fails to sign a unitization agreement after it has been approved, then either nation may authorize its licensee to proceed with the exploitation of the reservoir. (227) The non-unitizing licensee however, will, among other things, still be subject to the determination of allocation of production mentioned above and required to share production data on a monthly basis. (228) Regardless of this requirement, there is no explicit obligation in the Agreement to share the profits of the exploited resources in case the licensee proceeds unilaterally with the exploitation of the reservoir. The same situation is present for those fields that were already licensed before the Agreement was ratified. In case the existent licensee determines that the fields that it had been exploiting for the period prior to the Agreement contains transboundary resources, there is no obligation to compensate the State or the other licensee for the already exploited resources. The inclusion of a compensation clause in this type of agreements is not rare, for example the Agreement Between the Netherlands and Germany of 1971 states in the section related to transboundary resources that "[i]f any mineral resources have previously been extracted from the deposit extending across the boundary, the regulations shall also include provisions for appropriate compensation." (229) Nevertheless, the 2012 Agreement is silent on this.

    Redetermination of the allocation of production on a fair and equitable basis is provided pursuant to an approved unitization agreement or by separate agreement, if no unitization agreement has been approved. (230) Consequently, each State must include in their license agreements a chapter related to unitization. The way the licenses are assigned on each side of the border, particularly the fiscal regime applicable to it, will have an impact in the negotiation of the unitization agreements. If, for example, on one side of the border the royalties to be paid to the government X are fixed regardless of sudden increases on the price of oil, but on the other side of the border the potential unitization partner has a royalty rate that can be increased yearly depending on the price of oil, the business model, return rate and production plans of each company can be diametrically different. Consequently, it will affect the way they negotiate the unitization agreement.

    In this regard, it is important to note some aspects that the 2013 energy reform in Mexico bring to the negotiation table of the licensees that face a transboundary resource and potential unitization negotiation. According to the 2013 reform private companies can only exploit deepwater fields in Mexican territory by signing four types of contracts with the government: joint production, profit sharing, license and service contracts. (231) In each of these contracts the royalties, taxes, bonuses, national content and exploration fees are different. (232) It is up to the Ministry of Energy to determine in each field, which type of contract will be the most appropriate one in terms of the benefit that it will yield to the State. (233) Furthermore, the rate of the royalty depends on the price of barrel, it is determined on a yearly basis, and there is an adjustment mechanism in case there is extraordinary profitability of a particular field. (234) All these factors are determined and controlled by another governmental entity, the Ministry of Finance. (235) Finally, the reform forces the Ministry of Energy to impose a minimum of 20% of participation of PEMEX in any project that has the potential of having a transboundary field or that ends up having one. (236) Consequently, at least on the Mexican side of the border, the private licensee must also negotiate with PEMEX and then engage with the licensee on the U.S. side. Unitization agreements are complex on their own and the regulatory framework, at least from the Mexican side, does not make them any easier.

  2. Fiscal Regime

    The Agreement states that each licensee will pay the corresponding amount of taxes as determined by the State that authorized the exploitation of the fields. In other words, the percentage of royalties and other taxes paid by the Mexican or the American licensed company will be determined by the license agreement that each one has from their governments. Consequently, the profits of a particular field could be different depending on the fiscal regime that each company is subject to. As mentioned above using the example of the Mexican energy reform, this will impact the negotiation of the unitization agreement drastically. A company with a higher royalty by one of the sides will have a more delicate business plan and less space to negotiate a unitization agreement with the other company. This affects directly the incentives from each side to negotiate an agreement. The fiscal regime of each licensee will have to consider this fact in order to attract particular investments in the deepwater fields of the borderline.

  3. Cooperation and Facilitating Access to Facilities

    The 2012 Transboundary Agreement calls for parties to facilitate cooperation between the licensees in carrying out the exploration and exploitation of a Transboundary Unit, (237) which includes facilitating access to pipelines and facilities near the maritime boundary for those workers participating in activities related to the Transboundary Unit. (238) Provisions facilitating cooperation near the delimitation line significantly enhance opportunities for U.S. and Mexican business collaboration far beyond the six statutory miles on either side of the maritime boundary that defines a "Transboundary Reservoir." In fact, the Agreement requires the two nations, in the area extending fifteen statute miles on either side of the boundary, to use "best efforts" to facilitate cooperation and "not impede such cooperation by unreasonably withholding necessary Permits." (239) Article 12 is an especially important incentive for cooperation for a couple of reasons. First, the obligation of the governments to use "best efforts" to facilitate cooperation has specific legal meaning that requires the obligation to be completed in a diligent manner that is stronger than a mere "good faith" obligation. (240) This means that businesses operating within fifteen miles of either side of the boundary that are incidental to a "Transboundary Unit" will be provided with preferences in governmental assistance and permitting. Second, these governmental preferences should provide an incentive to actually engage in exploration and exploitation of transboundary reservoirs pursuant to a unitization agreement as opposed to developing reservoirs in other deepwater areas located outside of the three-mile boundary zone subject to the Transboundary Agreement. (241) Importantly, in the case of Mexico, the new energy reform created an agency, the Energy Regulatory Commission, that, among other powers related to hydrocarbon, has the duty to regulate the use of the existing pipelines for the benefit of the private companies. Currently this agency is not the executive agency designated by Mexico and leaves open the possibility of an inter agency dispute on how to enforce this particular section of the agreement without contradicting domestic legislation.

  4. Dispute Resolution

    The Agreement also establishes mechanisms for resolving disputes, more specifically a Joint Commission, arbitration and expert determinations. The Agreement establishes the Joint Commission as the competent body that will examine any dispute or matter referred to it by the executive agencies relating to the interpretation and implementation of the Agreement. (242) The Joint Commission is a permanent body composed of one representative and one alternate representative from the United States and Mexico. (243) It is important to note that the composition of the Joint Commission prevents it from being an autonomous, impartial or, as in the case of the IWBC inland, a commission with the nature of a bilateral international organization. Each party not only designates one representative, without stating particular qualifications of...

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