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...

[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…