Unitized we stand, divided we fall: a Mexican response to Karla Urdaneta's analysis of transboundary petroleum reservoirs in the deep waters of the Gulf of Mexico.

• Author: Grunstein, Miriam
• Position: Houston Journal of International Law, vol 32, p. 333, 2010

1. INTRODUCTION II. TRANSBOUNDARY RESERVOIRS CAN BE ADEQUATELY ADDRESSED WITHOUT OVERARCHING MEXICAN ENERGY REFORM III. TRANSBOUNDARY RESERVOIRS CAN BE ADEQUATELY ADDRESSED THROUGH OVERARCHING ENERGY REFORM, BUT A CONSTITUTIONAL AMENDMENT IS UNNECESSARY IV. TRANSBOUNDARY RESERVOIRS CAN BE ADEQUATELY ADDRESSED THROUGH DIPLOMACY . V. ONCE THE LEGAL FRAMEWORK IS READY FOR UNITIZATION, SO WILL EVERYONE AND EVERYTHING ELSE VI. CONCLUSION I. INTRODUCTION

   Two very different energy industries exist on each side of the U.S.-Mexico border. Market diversity is imprinted on the U.S. model, but the Mexican model rests on exactly the opposite principle: monopoly. (1) Thus, one of the things Mexican travelers often notice in the United States is the variety of names and colors in U.S. gas stations. Some Mexicans may even be confused by the price variations between one gas service station and the next; the idea of a competitive fuel market is alien to them. (2) Those who have never lived outside Mexico know Petroleos Mexicanos (Pemex), the national oil company, as their life-long and sole hydrocarbon producer and supplier. (3) Pemex's green and red logo guards every well, refinery, and service station in Mexican territory. (4)

   The dichotomy between a monopoly on one side of the Gulf of Mexico and a fully open market on the other has clearly delineated technical, commercial, and regulatory development of each national industrial setting. On the U.S. side, there has been vigorous activity. (5) The companies working there have founded a new world above and beneath the surface of the Gulf of Mexico. (6) The landscape on the U.S. side of the maritime border is awesome in the strict meaning of the word: One is overtaken by awe seeing the animated cities of steel floating in the middle of the ocean. (7)

   On the contrary, from the perspective of its petroleum industry, the view of the Mexican side of the Gulf is full of unexploited potential. (8) This side of the Gulf is virginal, untouched as it was on the day of the continental divide. (9) This is the result of many complex factors. History, politics, and constitutional and legal reasoning in Mexico are often referred to when explaining why Mexico has drawn the line so clearly between its side of the Gulf and the other. (10)

   In her article on transboundary reservoirs between the United States and Mexico, Karla Urdaneta accurately notes and intricately describes the differences between each country's hydrocarbon legal regime, (11) and she provides an impeccable reconstruction of the existing bilateral instruments governing the U.S.-Mexico maritime boundaries. (12) Urdaneta deftly describes the legal challenges that would arise if transboundary hydrocarbon reservoirs were discovered between the two countries, (13) and she presents a series of interesting cooperative solutions based on international law and commercial practice. (14)

   Because Urdaneta has compiled comprehensive research and provides rigorous insight on the international and domestic legal frameworks concerning U.S.-Mexico transboundary reservoirs, this response will address some complementary issues which may provide further insight about the challenges bound to be faced if hydrocarbons are indeed found in transboundary reservoirs. The existence of transboundary reservoirs would require the negotiation and execution of unitization treaties, agreements, and other related legal instruments between the countries and companies on both sides of the Gulf of Mexico. (15)

   Upon reading Urdaneta's article, the first issue that comes to mind is the author's apparent certainty that transboundary reservoirs exist. (16) Commercial hydrocarbon deposits do exist near the maritime boundary on the U.S. side, (17) but there is no conclusive evidence that those deposits extend into Mexico's jurisdiction. (18) In fact, the governments of both countries recently denied any knowledge of scientific data proving the presence of transboundary deposits. (19) Moreover, Great White, one of the oilfields in the Perdido fold belt that had caused considerable concern in Mexico, (20) has been determined to be entirely within the U.S. jurisdiction. (21) Thus, fears that starting production in Great White could lead to the "straw effect" that would siphon oil from Mexican reserves into U.S. territory (22) have been quieted, at least for now. (23) Mexico's current stance on transboundary reservoirs is that something must be done in case there are some. (24) This is hardly a message of urgency, much less of despair.

   This is also a far cry from the position held by the Mexican government a few years ago when the energy reform discussion began:

   In 2006, then[-]Pemex CEO Luis Ramirez Corzo called for a constitutional change allowing for shared equity companies to develop border reserves. "The porosity and permeability of these structures makes it possible for the oil to flow to the (U.S.) side, and we will be left with no chance of recovering those hydrocarbons," he said. (25) Throughout 2007 and 2008, the administration of Mexican President Felipe Calderon raised the specter of the straw effect to build public support for broader partnerships between Pemex and the private sector. (26) By way of an intense media campaign, (27) the Calderon administration described the Gulf in much the same terms Urdaneta uses in her essay: intense activity and development on the U.S. side, emptiness on the side of the Mexican maritime boundary. (28)

   As it promoted the 2008 energy reform, the Calderon administration attributed the markedly asymmetrical status of deepwater exploration and production in either side of the Gulf to the equally marked asymmetries between the two countries' hydrocarbon legal framework. (29) As it promoted legal reform with extreme political caution, the Mexican government underscored certain features of the U.S. model that are anathema in Mexico. (30) The most salient one is the array of partnerships available for companies operating within the United States. (31) As noted in Urdaneta's essay, such partnerships have allowed companies to exchange information, to manage geological risk, to achieve technological developments, and to distribute the impact of potential financial hazard. (32) Thus, while joint ventures, joint operation agreements, unitization and other cooperative arrangements are common practice in the United States, in Mexico the legal model forbids any type of arrangement that would render a horizontal, non-subordinate relationship with Pemex. (33) The rationale underlying Mexican hydrocarbon law and policy is that partnerships with private companies would weaken Mexico's sovereignty over its natural resources by putting Pemex on the same legal footing as those companies. (34) Therefore, as Urdaneta notes, the only interactions with private companies permitted under Mexican law are "service contracts," (35) which place those companies in the position of subordinates vis-a-vis Pemex. (36)

   Today, Mexico is facing a sharp decline of its Gulf reserves as the Cantarell fields reach maturity, (37) and the policy of maintaining Pemex's upper hand through the exclusive use of service contracts has backfired. (38) Pemex's exclusive use of service contracts has prevented private companies from acquiring title over the Mexican hydrocarbons, but it has also annulled whatever incentives companies may have to bear financial and geological risks and to share technology jointly with Pemex. (39) This arrangement may have worked during peak production in the Cantarell super-giant offshore fields, which were much more comfortably situated at the unchallenging drilling depth of 180 feet. (40) As Pemex tiptoes towards deepwater activity, however, the company has begun to appear vulnerable, if not helpless. (41) In view of this, the government urged the people of Mexico to become open to partnerships for deepwater exploration and production. (42) The government warned that if Pemex continued being barred from partnering with other companies, it would likely lose its resources to the companies working on the other side of the maritime boundary. (43)

   The resulting message contained a perplexing contradiction: On one hand, the Calderon administration called on Pemex to develop closer contractual relationships with companies on the U.S. side of the maritime boundary; on the other hand, it suggested that those companies would steal the nation's resources if it did not. (44) This is hardly a reassuring message for the Mexican people whose industry has remained hermetic for over seventy years, significantly as a result of mistrust of foreign capital. (45) Logically, the legislative proposal of partnering with potential plunderers did not ease the way toward collaborative--rather than service-based--contractual arrangements. (46)

   The Western Gap Treaty (47) itself played a role in the Calderon administration's push for reform. (48) As Urdaneta points out in her article, the Western Gap Treaty was a result of several years of political negotiations. (49) It fully demarcated the maritime boundaries between the United States and Mexico, and it established a temporary moratorium on the exploitation of any hydrocarbons found near that maritime boundary. (50) This moratorium was originally scheduled to expire January 17, 2011, (51) but it was recently extended to prohibit oilfield development in the "buffer zone" until at least 2014. (52)

   The original ten-year moratorium was established to allow the United States and Mexico to exchange information and prepare a robust framework for cooperative efforts should transboundary reservoirs be discovered. (53) However, the two countries have communicated only sporadically, (54) and Mexico is far from having an adequate framework for executing the required unitization treaties and agreements. (55) Superficial amendments to the Regulatory Law of Article 27 of the Constitution in the Petroleum Sector (the Regulatory...