Exploitation of Common Petroleum Deposits
Joint Development and Unitization
IFLOS, 31 July 2009
Will Thomas, Eversheds LLP
williamthomas@eversheds.com
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Introduction (1)
•
Two basic scenarios to distinguish:
–
Petroleum prospects in areas subject
to competing boundary claims:
‘disputed-border deposits’
–
Oil/gas fields which straddle existing
international
boundaries:
‘crossborder deposits’
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Introduction (2)
• Implement
cooperative
arrangements?
exploitation
• Where there is no agreed boundary: joint
development agreement (JDA) - growing
State practice
• Where a deposit straddles a fixed boundary:
unitization agreement - growing, but more
limited, State practice
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Introduction (3)
• Why develop jointly / unitize?
• Avoid risks associated with unilateral
exploitation:
-
Technical risks (inefficient development)
Financial risks
Political (or even military?) risks
Legal risks
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Introduction (4)
•
Today’s presentation:
–
Analyse: the essentials of JDAs / unitizations
(with examples)
–
Consider: to what extent are States obliged
under international law to enter into JDAs /
unitization agreements? Applicability of the
‘Rule of Capture’?
Joint Development Agreements (JDAs)
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Joint Development Agreements (1)
• A definition:
An agreement between two States to develop, so
as to share jointly in agreed proportions by
interstate cooperation and national measures,
the offshore oil and gas in a designated zone of
the seabed and subsoil of the continental shelf to
which either or both of the participating States
may be entitled in international law
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Joint Development Agreements (2)
• Articles 74(3) / 83(3) of the 1982 United Nations
Convention on the Law of the Sea (UNCLOS):
“Pending agreement as provided for in paragraph 1, the
States concerned, in a spirit of understanding and
cooperation, shall make every effort to enter into
provisional arrangements of a practical nature and, during
this transitional period, not to jeopardize or hamper the
reaching of the final agreement. Such arrangements shall
be without prejudice to the final delimitation.”
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Joint Development Agreements (3)
• More than 20 JDAs around the world
• A wide variety of shapes and sizes - each one is
unique
• But certain key issues are common to most JDAs
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Joint Development Agreements (4)
•
•
•
•
•
•
•
•
Area subject to JDA – ‘Joint Development Zone’
What is being jointly developed?
Financial split: 50/50 or otherwise?
Management structure (three basic models:
single State, two State, Joint Authority)
Fiscal regime / Applicable law
Basis for licensing (and dealing with pre-existing
licence holders)
Dispute resolution
Unitization (what if a field straddles the JDZ?)
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Joint Development Agreements (5)
• Main advantage – non-competitive exploitation:
“…[in a JDA] the focus would be placed where it
belonged: on a fair division of the resources at
stake, rather than on determination of an
artificial line, thus … eliminating competition
over the ownership of resources … especially
where the resources are unknown.”
(E.Richardson)
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Joint Development Agreements (6)
• But don’t underestimate the complexity of
negotiating a JDA; not necessarily a guaranteed
‘fast-track’ alternative to delimitation:
“The conclusion of any joint development
arrangement, in the absence of the appropriate
level of consent between the parties, is merely
redrafting the problem and possibly complicating
it further.”
(W.Stormont and I.Townsend-Gault)
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Joint Development Agreements (7)
•
To what extent are States obliged to enter into JDAs
with respect to disputed-border deposits?
- Increasingly accepted that, under customary
international law, States (i) have an obligation to
cooperate in seeking to reach agreement, and (ii)
in the absence of such agreement, have an
obligation to exercise mutual restraint
- But also generally agreed that there is no
obligation under customary international law
specifically to enter into a JDA (due to lack of
settled State practice and opinio juris)
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Joint Development Agreements (8)
•
Guyana / Suriname arbitration (2007): the first case to examine
the meaning of Articles 74(3) and 83(3) of UNCLOS
•
Both States found to have breached positive obligation (to make
every effort to enter into provisional arrangements) and negative
obligation (not to jeopardize/hamper the reaching of a final
agreement)
•
A “delicate balance” to be struck between not stifling economic
development, and avoiding unilateral activity that might
permanently affect a party’s rights: what States can and can’t do
•
States encouraged but not obliged to enter into JDAs
•
Do above UNCLOS obligations reflect customary international
law?
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Joint Development Agreements (9)
• The ‘Rule of Capture’
“A fundamental principle of oil and gas law holding that
there is no liability for drainage of oil and gas from under
the lands of another so long as there has been no trespass
and all relevant statutes and regulations have been
observed.” (Black’s Law Dictionary)
“The legal rule of non-liability for (a) causing oil or gas to
migrate across property lines and (b) producing oil or gas
which was originally in place under the land of another, so
long as the producing well does not trespass.” (Williams
and Meyers, Manual of Oil and Gas Terms)
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Joint Development Agreements (10)
• Increasingly agreed that the Rule of Capture
should not apply to disputed-border deposits:
– precluded by States’ obligations under
customary international law to cooperate and
exercise mutual restraint in the event of a
dispute?
– precluded by UNCLOS obligation not to
jeopardize or hamper the reaching of an
agreement? (see Guyana/Suriname)
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Joint Development Agreements (11)
• But questions remain with respect to the arguable nonapplicability of the Rule of Capture in areas of overlapping
claims. For example:
– What remedies/fora are available to an injured State?
– What rights do injured non-State actors have (e.g.,
IOCs)?
– What if one State simply refuses to negotiate in good
faith, thereby stifling exploitation? Could this justify a
right of capture for the other State?
Unitization
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Unitization (1)
• A definition:
An agreement between two or more persons,
holding exploitation rights in common petroleum
reservoirs, by which these reservoirs are
exploited as a single unit
International
unitizations
are
agreements
between States applying unitization procedures
to deposits which straddle an international
boundary
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Unitization (2)
• Key advantage – efficient exploitation:
“…independent, non-cooperative exploitation of
the separate parts of a straddling reservoir, will
lead to costly defensive or competitive drilling…”
(B.Taverne)
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Unitization (3)
• For an international transboundary unitization, the usual
approach is preparation of two agreements:
–
a cross-border treaty between the relevant States
–
a cross-border unitization agreement between the
relevant IOCs
• The treaty generally takes precedence
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Unitization (4)
• Key issues to be addressed:
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Agree the relevant straddling field
Provide that relevant field to be developed as single unit
Agree location/delimitation of relevant field
Define and estimate reserves
Apportionment
Development plan
Redeterminations
Dispute resolution
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Unitization (5)
• To what extent are States obliged to enter into unitization
agreements with respect to cross-border deposits?
• Some commentators argue that States owe effectively the
same obligations as with regard to disputed-border
deposits:
“…any legal distinction between these rights where the
deposit straddles a continental shelf boundary and where
the deposit is located within an area of overlapping claims
is less significant than initially surmised … the applicable
international law in both situations remains essentially the
same.” (D.Ong)
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Unitization (6)
• As regards cross-border deposits, such commentators
therefore argue that:
–
States (i) have an obligation to cooperate in seeking to
reach agreement, and (ii) in the absence of such
agreement, have an obligation to exercise mutual restraint
–
There is, however, no obligation under customary
international law for States specifically to enter into a
unitization agreement (again, due to lack of settled State
practice and opinio juris)
–
The Rule of Capture should also not apply to common
deposits which straddle an international boundary
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Unitization (7)
• But not everyone agrees …
• Other commentators have suggested that the Rule of
Capture can, in certain circumstances, justifiably apply to
cross-border deposits:
“… in the absence of an agreement to the contrary, a State or
international oil company is free to maximise production from its
side of the boundary line notwithstanding the policies of
neighbouring States which share the same field.” (R.Bundy)
• Note in this respect Article 77, UNCLOS: a coastal State
exercises exclusive sovereign rights over its continental
shelf for purposes of exploitation of natural resources; no
restrictions applied
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Unitization (8)
•
Might the correct position perhaps lie somewhere in-between?
– With regard to cross-border deposits, development of which is
disputed, States should certainly seek to cooperate/consult in
good faith
– But should the extent of such obligations arguably be more
limited than the obligations which apply to disputed-border
deposits?
– If two States have equal access to a common deposit, and if
one State simply refuses to negotiate in good faith, should
the other State be permanently blocked from exploiting from
its side of an agreed boundary?
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Unitization (9)
“…the potential for divergence of interest among the
States concerned remains considerable, even among
States that have begun efforts at enhanced cooperation.
Where such divergence occurs, it is submitted that States
have no obligation to do more than act ‘in a reasonable
and responsible manner’. In practice, this may include the
submission of proposals to neighbouring States … A failure
to secure a timely response to these practical proposals
may lead the initiating State to conclude that having
behaved reasonably it is justified in proceeding with
development of the resource. Such an approach is
certainly one that carries with it some risks. However,
given the economic interest at stake, a reasonable and
good faith exercise of judgment may well be justified in
such circumstances.” (emphasis added)
(P.Cameron)
Conclusion
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Some concluding thoughts
• Where
petroleum
deposits
straddle
international
boundaries, whether disputed or delimited, JDAs and
unitizations can be useful tools - avoiding disputes and
fostering cooperation
• Used appropriately, JDAs and unitizations can both
promote efficient and effective exploitation of natural
resources
• But don’t underestimate their complexity; one size will not
fit all …
• Under international law, States are encouraged
obliged to enter into such agreements
but not
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