Transboundary offshore oil and gas resource governance frameworks

Cross-Boundary Offshore Oil & Gas Resources

Joint Development Agreements & Frameworks

1/6/2014

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Table of Contents

1. Introduction 3

2. The rule of capture 3

3. The CooperationApproach 4

4. Legal framework to develop trans-boundary offshore O&G resources 5

4.1 Cross-border unitization agreements 6

4.2 Joint Development Agreements (JDA) 6

4.3 National law and its application in Co-operative Agreements 7

4.4 Bilateral treaties for trans-boundary oil and gas exploration 7

4.5 The Framework Agreement Approach 9

4.6 The Third Party approach to dispute resolution 10

5. Conclusion 10

Bibliography 11

Treaties & Conventions 11

Books 11

Articles 12

Websites 13

1. Introduction

Subsea resources such as petroleum and natural gas are important sources of meeting the energy demand of countries. Cross-territory disputes are arising among different countries. Advancement in technology in exploration and extraction of subsea resources has expedited the overall procedure of competitive drilling. This is due to aggressive efforts by each country to explore its subsea resources. Since oil and gas reserves migrate towards lower pressure areas, whenever one country exploits its undersea resources the implications are also for the other country.[footnoteRef:1] The recent conflict of China and Japan over the Senkaku/Diaoyu Islands in East China Sea is an example of conflict over the use of cross-territory subsea resources.[footnoteRef:2] A rather old episode of conflict due to cross-territory undersea resources was between Iraq and Bahrain.[footnoteRef:3] The first approach is the rule of capture approach that is an internationally recognized approach where subsea resources are beneath the territory of their country or with their Exclusive Economic Zone (EEZ). Other approach that involves cooperation from both of neighboring states is the cooperation approach. There are particular frameworks that include treaties, industry practice, and guidance. Cross border unitization agreements, joint development agreement (JDA) and framework agreements are three main types of cooperative styles to work out the development, exploration, and cessation plans. [1: Benvenisti, Eyal. Sharing trans-boundary resources: international law and optimal resource use. (Vol. 23. Cambridge University Press, 2002).] [2: Salameh, Mamdouh G. "China, oil and the risk of regional conflict." Survival37.4 (1995): 133-146. ] [3: A. Perry, Oil and gas deposits at international boundaries - New ways for governments and oil and gas companies to handle an increasingly urgent problem (Vol. 5 OGEL 2007) 17 ]

2. The rule of capture

This approach is based on the famous United Nation Convention of the Law of the sea (UNCLOS). The law enables the states to exercise full exploration and extraction of mineral and other deposits within their maritime boundary. The government will not be obliged to seek permission for initiating exploration operations. Licensees have to exploit the oil and gas reserves within the country of origin's boundary.[footnoteRef:4] Supporters of this approach argue that 'the rule of capture' is essential to ensure the economic interests of licensees and the sovereign rights of governments. If a company is exploring subsea resources based on the rule of capture approach, the requirements are that is should closely work with the host government. However, excessive exploration and extraction works result in alteration of oil and gas pressure on the other side of the boundary. This may alter the pressure of subsea oil and gas resources on the other side of sovereign border. This causes violation of the sovereign rights of a state.[footnoteRef:5] In this context, Africa is the most hard-hit area from international border conflicts. Tribes and non-state actors in African countries have always tried to restrict exploitation of their subsea resources. The international disputes and application of the rule of capture approach is derived by an economic incentive rather than mere territorial concerns. The Bakassi Peninsula conflict between Nigeria and the Republic of Cameroon is an example of how neighboring states can develop differences due to the rule of capture approach. The peninsula is said to be rich in subsea resources specifically petroleum. The issue between both of the African countries culminated in form of a case in International Court of Justice (ICJ) where Cameron won the case.[footnoteRef:6] Trans-boundary disputes in African countries have their theoretical ground in the fact that all of the African countries did not demarcate the international maritime boundaries by themselves. In fact it was the legacy of Colonialism and the Colonial powers had demarcated the boundaries before leaving the region. Thus, agreement on the validity of these boundaries remains a major point of concern between the African countries.[footnoteRef:7] It is after a significant number of cross-country oil and gas disputes that alternative methods for exploiting resources were chalked out. Alternative methods for cross-territory O&G exploration are as follows. It is after a significant number of cross-country oil and gas disputes that alternative methods for exploiting resources were chalked out.[footnoteRef:8] Alternative methods for cross-territory O&G exploration are as follows. [4: Perry, A. "Oil and Gas deposits at International Boundaries - New ways for Governments and Oil and Gas companies to handle an increasingly urgent problem," Oil, Gas & Energy Law Intelligence, 2007. vol. 5, no. 2, pp. 6-36. ] [5: E. Benvenisti: 'Efficiency, equity and fairness: contradiction or affinity?', in Sharing Trans-boundary Resources: International Law and Optimal Resource Use (Cambridge University Press, 2002)] [6: Washington Post, "Oil Rich Bakassi Sparks military conflict" Sept. 8th 1995, P. 23. ] [7: C.E. Carrington, "Decolonization: The Last Phase," 38 International Affairs (1962), P. 34.] [8: Bundy, R.R. 'Natural Resource Development (Oil and Gas) and Boundary Disputes' in GH Blake (ed), The Peaceful Management of Trans-boundary Resources' (Graham & Trotman/Nijhoff Press, 1995)]

3. The Cooperative Approach

Neighboring countries develop multi-layered frameworks to cooperate with each in development, exploration, and extraction of cross-territory undersea resources.[footnoteRef:9] Cooperation agreements are signed when undersea reservoirs of neighboring countries straddle across the boundary. Cooperation agreements are also an appropriate tool of starting exploration work when international borders are not properly delimited. These agreements are also useful when there is a conflict on exact demarcation of maritime boundaries.[footnoteRef:10] Multi-functional and multi-stakeholder agreements are signed in this approach. The agreements determine the mechanism through which states will jointly explore and exploit the undersea oil and gas resources. The agreements include terms and conditions for the whole lifecycle of joint cooperation. Different lifecycle stages of cooperation include auctioning licenses, exploration, financial return settlements, and cessation of oil or gas field.[footnoteRef:11] The cooperation agreements are known as joint development agreements, cross-boundary unitization agreements, and framework agreements. State appointed joint regulating body, state-run oil & gas companies, and international oil companies as licensees can be parties to such agreements. An important point that researchers and neighboring states should not ignore is that trans-boundary co-operative approach for exploiting subsea resources is an evolving subject. Only a few countries such as the United Kingdom and Australia have extensive experience of applying this model of cooperation. It is important for neighboring states to understand the scope of this model. Kendall Freeman authored a research in which he elaborated eight broad points on which the international consensus exists. The first point is that extreme application of the rule of capture is not permissible under national or international laws. Coastal states are under obligation to cooperate in the matter of trans-boundary subsea resource exploitation. The international law also binds neighboring states to enter into negotiations for signing co-operative agreements. However, the neighboring states entering into negotiation phase are not time-bound to conclude the negotiation process. Neighboring states cannot avail remedy through ICJ until a reasonable time has passed in the negotiations process. The aggrieved party should also present sufficient evidence that non-complaint state had jeopardized the negotiations process. Another area of consensus is that neighboring coastal states are to recognize the co-relative rights of other states. [9: Lagoni, Rainer. "Oil and gas deposits across national frontiers." The American Journal of International Law 73.2 (1979): 215-243. ] [10: Ong, David M. "Joint Development of Common Offshore Oil and Gas Deposits:" Mere" State Practice or Customary International Law?" American Journal of International Law (1999): 771-804.] [11: White, David A. "Assessing oil and gas plays in facies-cycle wedges." AAPG Bulletin 64.8 (1980): 1158-1178.]

The most desirable aim of co-operative agreements is to avoid competitive drilling. Sometimes neighboring coastal states authorize licensees to extensively drill petroleum reserves from their side of the trans-boundary resource. Same practice is followed by the neighboring state and this result in both sides ending up as losers. When co-operative agreements are signed, both states and their representatives analyze that which side of the reserve is better suited for exploration. Technical and commercial aspects are considered and the decision is to be made by addressing concerns of each party.[footnoteRef:12] [12: Freeman, Kendall. "Oil and Gas deposits at International Boundaries: New ways for governments and oil & gas companies to handle an increasingly urgent problem." (Oil, Gas and Energy Law Intelligence OGEL, vol. 5, no. 2, 2007). ]

4. Legal framework to develop trans-boundary offshore O&G resources

Unitization is defined as "an agreement by two or more persons owning operating mineral interests to have such interests operated on a joint basis and share in production on a stipulated percentage or fractional basis." [footnoteRef:13] [footnoteRef:14] The main aim of unitization of trans-boundary oil and gas resources is to explore and exploit maximum amount of resources to the use of neighboring countries. The unitization agreements are quite voluminous and different yet overlapping laws are applicable on these agreements. For instance, a unitization agreement will be based on international laws that include treaties, UN conventions, and international customs.[footnoteRef:15] There are national laws and regulation of host countries that apply on unitization agreements. Host governments apply these laws when signing contracts with its licensees. The third tier of this legal framework is a private contract signed between licensees and third parties. The agreements formed to operate trans-boundary oil and gas resources are also called the Unitization and Unit Operating Agreement (UUOA).[footnoteRef:16] [13: Levin, Curtis C. "Oil and Gas Federal Income Taxation." NDL Rev. 31 (1955): 225.] [14: STEPHEN L. MCDONALD, PETROLEUM CONSERVATION IN THE UNITED STATES: AN ECONOMIC ANALYSIS (Johns Hopkins Univ. Press for Resources for the Future, 1971).] [15: Asmus, David F., et al. 'International Unitization of Oil and Gas Fields: The Legal Framework of International Law, National Laws, and Private Contracts' Oil, Gas & Energy Law Intelligence OGEL, vol. 5, no. 2, pp. 1-44 (2007, April). ] [16: N. Macleod Unitization in G. Gordon, J Paterson and E. Usenmez Oil and Gas Law- Current Practice and Emerging Trends (2nd Ed Dundee University Press 2011) pp. 419- 432. ]

4.1 Cross-border unitization agreements

The broad set of principles that encourage neighboring states to sign trans-boundary unitization agreements include avoiding unilateral costs of exploration. Unitization agreements also allow the bordering states to share development infrastructure.[footnoteRef:17] These agreements allow the maximum recovery of oil and gas reserves through input from multiple stakeholders from both countries.[footnoteRef:18] The need for trans-boundary unitization agreements is ever increasing. This is due to the conflicts that arise in the rule of capture approach. The U.S. has private ownership of mineral resources whereas U.K has state sovereignty over the trans-boundary resources. Unitization agreements also provide an alternative to competitive drilling.[footnoteRef:19] [17: Libecap, Gary D., and James L. Smith. "Regulatory remedies to the common pool: The limits to oil field unitization." ENERGY JOURNAL-CAMBRIDGE MA THEN CLEVELAND OH- 22.1 (2001): 1-26. ] [18: McDonald, Stephen L. "Unit Operation of Oil Reservoirs as an Instrument of Conservation." Notre Dame L. 49 (1973): 305. ] [19: T. Daintith, Discretion in the Administration of Offshore Oil and Gas: A Comparative Study (AMPLA, Limited 2006) 5406-5412]

4.2 Joint Development Agreements (JDA)

Joint development agreements (JDA) are signed by the two neighboring states to explore and exploit subsea resources. The resources are in overlapping maritime territories and, hydrocarbon reserves are jointly owned by the countries.[footnoteRef:20] To implement JDA, both countries form a joint development zone (JDZ) where a joint management body is established. JDAs contain petroleum regulation, license the boundary for the unitization agreement, fiscal terms and conditions, and other terms related to operations of the field. Gulf countries have established the JDZs to implement their JDAs. Kingdom of Saudi Arabia, Bahrain, Qatar and Abu Dhabi are examples of countries that have established JDZ. JDA is legally entitled under Article 74(3) of United Nations Convention on the Law of Sea (UNCLOS).[footnoteRef:21] There are different formats of JDA that countries can sign with each other. Single state model involves management of subsea resources by either one of the country. Example of such JDA model is an agreement between Saudi Arabia and Bahrain in 1958. Another format of JDA is a joint venture in which both the governments name two contractors from each side as operators. Countries such as UK, Spain, Netherlands, Japan, and South Korea have entered into a joint venture agreements with each other. The third and most successful model according to current requirements of states is the joint authority model. In this format of JDA, a single authority is established that has legal mandate from both countries. The authority is responsible for agreement implementation. [20: Simmons, Beth A. "Rules over Real Estate Trade, Territorial Conflict, and International Borders as Institution." Journal of Conflict Resolution 49.6 (2005): 823-848.] [21: UNCLOS. Article 74(3) obliges states to enter into provisional arrangement. It is applicable on states that have not agreed with each other on boundaries of Exclusive Economic Zones (EEZs) and continental shelf boundaries. ]

4.3 International law's role in JDAs

United Nations Convention on the Law of the Sea (UNCLOS) is the baseline framework that is applied internationally. The Convention gives exclusive rights to coastal states. These rights include the sovereign right to explore, manage, and sublet the natural resources within the declared international boundary of that state. UNLCOS encourages neighboring states to cooperate with each other where subsea resources stride across one boundary to another. There are other international convention and treaties as well. These include the Charter of Economic Rights and Duties of States 1974 and United Nations Environment Program (UNEP). The underlying theme of international legislation is to bind sovereign states not to exploit common deposits of natural resources before negotiating with the neighboring state. Thus, the international frameworks of cooperation in exploitation of subsea resources restrict member states to unilaterally exploit the shared deposits.

4.4 National law and its application in Co-operative Agreements

International and national laws are supportive of the cooperative arrangement agreements between neighboring countries. The agreements should cover stages of exploration, decommissioning, and cessation of operations. Different countries have formulated legislation on the national level to effectuate the unitization agreements through licensed operators. China and Angola are examples where detailed provisions of JDA are present in their model contracts. In context of national laws regarding unitization and cross-country cooperation, different countries have adopted distinct approaches to enacting laws. Brazil has enacted substantive laws for entering into unitization agreements whereas the U.S. has promulgated several statues while entering into partnerships for unitization agreements.

4.5 Bilateral treaties for trans-boundary oil and gas exploration

Bilateral treaties aimed at forging cross-border cooperation are significantly larger in scope than standalone joint development agreements. For instance, bilateral treaties explicitly incorporate the dispute resolution mechanism and structures. It also includes detailed discussion on procedures of arbitration and its scope in context of current treaty. Areas such as taxation, transportation, cessation of operations, decommissioning of structures, and safety of employees is provisioned in detail. United Kingdom is one such country that has extensive experience in signing bilateral treaties with the European and non-European countries. Netherlands and Norway are the two countries with which U.K has signed long-term trans-boundary resource exploration agreements.

Australia & East Timor: Australia and East Timor signed a JDA for unitization of subsea resources in the Zone of Cooperation (ZOC).[footnoteRef:22] It was later named as Joint Petroleum Development Area (JPDA). The agreement required both countries to cooperate with each in exploring and exploiting subsea resources in Timor Gap. Another trans-boundary treat singed between Australia and East Timor was Australian-East Timor Treaty on Certain Maritime Arrangements in the Timor Seas (CMATS). East-Timor obtained 20.1%, and Australia obtained 79.9%[footnoteRef:23] of the area share generated from JPDA. Important provisions of this agreement were that revenues from Greater Sunrise Fields to distributed on 50:50 percentage between both countries. Maintenance of Unit Area under CMATS was to be ensured through free movement of materials, men, and ships. Articles 18-21 guide the countries on developing joint mechanism for health and safety of employees in the Unit Area. [22: Treaty, Timor Sea. "Agreement between the Government of Australia and the Government of the Democratic Republic of Timor-Leste relating to the Unitization of the Sunrise and Troubadour fields Department of Foreign Affairs and Trade, Canberra (Dili, 6 March 2003)(1)."] [23: Australian Treaty Series. "Agreement between the Government of Australia and the Government of Democratic Republic of Timor-Leste relating to the Unitization of the Sunrise and Troubadour Fields. Accessed from: ]

U.K and Norway: Unitization treaty for Cross-boundary petroleum exploration: U.K and Norway have historical relationship in managing cross-boundary undersea resources. First cross-border treaty between the two countries was signed in 1976. In 2005 another framework agreement was signed by the two countries.[footnoteRef:24] The proposed agreement will enable the establishment of a dry gas link between U.K and Norway. According to the agreement, cessation of operations and decommissioning of installations require prior approval of both governments. The regulating agency should ensure that timing of decommissioning is determined by representatives of both governments. The agreement is related to Ormen Lange Field in the mid Norway area.[footnoteRef:25] [24: Cross boundary petroleum cooperation between the UK and the Kingdom of Norway 2005. ] [25: Crook, Jeff. "Getting gas to Britain." Power Engineer 18.2 (2004): 14-17.]