CHAPTER 22 FRAMEWORK AGREEMENTS FOR THE UNITIZATION OF TRANSBOUNDARY HYDROCARBON RESERVOIRS: THE EXPERIENCE IN LATIN AMERICA

• Jurisdiction: Derecho Internacional

International Mining and Oil & Gas Law, Development, and Investment
(Apr 2013)
CHAPTER 22
FRAMEWORK AGREEMENTS FOR THE UNITIZATION OF TRANSBOUNDARY HYDROCARBON RESERVOIRS: THE EXPERIENCE IN LATIN AMERICA
Pablo Ferrante
Partner, Mayer Brown
Houston
Fernando Alonso-De Florida
Partner, Nader, Hayaux & Goebel
Mexico City

PABLO C. FERRANTE is a partner in Mayer Brown's Global Energy and Latin America practice groups. Pablo advises clients in structuring, negotiating and documenting global corporate and energy transactions, with a focus on Latin America. He has extensive experience representing oil and gas companies in domestic and cross-border mergers and acquisitions, joint ventures, exploration, drilling and production contracts, construction and development projects, and other international upstream and downstream transactions. He has also significant experience representing financial institutions and companies across a wide range of industries in cross-border financings and business transactions across Latin America, as well as advising companies on compliance with anticorruption and embargo laws. Pablo is an active member of the Association of International Petroleum Negotiators (AIPN), where he participates as a member on several of its drafting committees. He was recently honored as an "Energy Rising Star" by Law 360 for his work on some of the most innovative deals in the energy industry. Pablo has been recognized as a leading energy professional by Chambers Global, which ranked him for his work in the area of Energy & Natural Resources (Foreign Experts Spotlight Table) in 2013, as well as by Law 500, which praise him for his work in Latin America Projects & Energy. Pablo earned his JD from Universidad Católica Argentina in 1998, a Postgraduate Degree in Regulated Industries from Universidad Austral in 2001, and an LLM from Northwestern University School of Law in 2003. Pablo is fluent in English and Spanish. He is licensed in Argentina and New York.

FERNANDO ALONSO-DE-FLORIDA is a partner at Elías-Calles y Alonso-de-Florida, S.C. in Mexico City. Fernando specializes in project finance, energy, M&A, and real estate. Fernando has broad experience in transactions in the mining and energy sectors. He is also active in project finance and secured financing transactions in the real estate sector, where he advised the lender in the structuring and negotiation of the largest real estate financing ever in Mexico. Fernando has strong international experience. He speaks fluent English and regularly advises multinational clients, international financial institutions and foreign investors on cross border and local transactions in the Mexican market. Fernando advised Petroleos Mexicanos (Pemex, Mexico's national oil company) in connection with the legal framework involved in the negotiation and validity of the US-Mexico Transboundary Hydrocarbon Deposits Agreement. Until recently, Fernando was a partner at Mexican law firm Nader, Hayaux y Goebel (a spin-off from Jáuregui y Navarrete). Fernando spent a year working in the Chicago office of international law firm Mayer Brown. He received his LL.M. in Banking & Finance Law from the London School of Economics and Political Science. He graduated as an attorney (with honors) from the Universidad Panamericana in Mexico City. Fernando is a Chevening Scholar.

TABLE OF CONTENTS

1. Introduction

2. International Borders and Cross-Border Unitization

a. Maritime Borders, Exclusive Economic Zones and the Continental Shelf

b. Cross-Border Framework Agreements, Unitization Agreements and Joint Development Agreements

3. Transboundary Reservoirs Framework Agreements in Latin America

4. Framework Agreements: Selected Issues

a. Definitions of Transboundary Reservoir and Hydrocarbons

b. Exploitation as a Unit and Potential Unilateral Exploitation of Transboundary Hydrocarbons

c. Binding Dispute Resolution

d. Reserve Redetermination

e. Environmental Issues

5. Conclusions

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1. Introduction

Countries that share common maritime boundaries may enter into framework unitization agreements for the development and exploitation of transboundary or cross-border hydrocarbon reservoirs. These agreements seek to establish the regulatory framework for the development of hydrocarbon reservoirs that extend across their common delimitation borders. The primary goal for such agreements is to provide for the exploitation of transboundary reservoirs as single units. By exploiting a reservoir as a single unit, both countries can ensure each country's fair participation share of such reservoir, efficiency in exploitation, the prevention of waste and revenue maximization.

Two framework unitization agreements have been executed in Latin America: the 2012 U.S.-Mexico Framework Agreement¹ and the 2007 Trinidad-Venezuela Framework Agreement.² This paper discusses certain selected issues related to these two framework agreements and the unitization of transboundary hydrocarbon reservoirs in Latin America.³

2. International Borders and Cross-Border Unitization

a. Maritime Borders, Exclusive Economic Zones and the Continental Shelf

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Under the United Nations Convention on the Law of the Sea of 1982 (UNCLOS), a country's territorial sea extends outward to a distance of 12 nautical miles from its coastal baseline.⁴ In addition to having sovereign rights over its territorial sea, according to UNCLOS, each country has the right to develop the natural resources within its "Exclusive Economic Zone" (EEZ), an area that extends outward to a distance of 200 nautical miles from its coastal baseline.⁵ In addition, coastal states have sovereign rights over their continental shelf for purposes of exploring and exploiting their natural resources,⁶ including the exclusive right to authorize and regulate drilling on their continental shelf for all purposes.⁷ The continental shelf comprises the seabed and subsoil of the submarine areas that extend beyond a costal state's natural prolongation of its land territory to the outer edge of the continental margin,⁸ to a maximum of 350 nautical miles from the baselines from which the territorial sea is measured or 100 nautical miles beyond the 2,500-meter isobath.⁹

Disputes can arise when the EEZs or the continental shelf of two (or more) countries overlap. In these cases, UNCLOS provides that the delimitation of the EEZ and the continental shelf between the countries shall be effected by agreement on the basis of international law.¹⁰ If the countries involved agree to negotiate and subsequently reach an agreement, the agreement is usually in the form of a maritime delimitation treaty. Otherwise, the countries involved can resort to the dispute settlement procedures established pursuant to UNCLOS.

b. Cross-Border Framework Agreements, Unitization Agreements and Joint Development Agreements

The agreements between countries providing for the joint exploitation of cross-border hydrocarbon reservoirs can be grouped into two general groups: agreements regulating situations where the border between the countries involved is under dispute, which are generally referred to as "joint development agreements," and agreements regulating situations where the border between the countries involved is settled and the countries involved agree to cooperate for the joint exploitation of cross-border hydrocarbon reservoirs.¹¹

In situations where common maritime borders have been settled, it is possible to distinguish between agreements that apply to an specific field or reservoir and agreements that establish the framework for the future unitization of one or more fields or reservoirs that extend across the delimitation line. In this paper, we refer to the first group of agreements as "unitization agreements" and to the later group as "framework agreements."

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The most basic form of framework agreement can be found in certain delimitation treaties pursuant to which the countries involved simply agree to cooperate and to jointly exploit cross-border hydrocarbon reservoirs that extend across the delimitation line. While seemingly simple in form, these agreements establish the most important principles for the unitization of cross-border hydrocarbon reservoirs: an obligation to cooperate and a commitment to jointly develop hydrocarbon reservoirs that extend across the delimitation line. Cooperation is of utmost importance, considering that, under international law, countries are not obligated to cooperate for the joint development of transboundary hydrocarbon reservoirs. It has been said that, "although there seems to be a global trend with regard to exploitation of cross-border deposits in favor of cooperative development, the rule of customary international law requiring unitization is not yet established."¹² Further, "international law cannot compel a state to accept the idea of unitization with regard to exploitation of common petroleum deposits if the state is not willing to do so."¹³

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An example of a basic form of a framework agreement can be found in the 1993 Colombia-Jamaica Delimitation Treaty,¹⁴ which provides that, if a transboundary hydrocarbon reservoir is found on both sides of the delimitation line, it "shall be exploited in a manner such that the distribution of the volumes of the resource extracted from said deposits or fields is proportional to the volume of the same which is correspondently found on each side of the line."¹⁵ Another example can be found in the 2000 U.S.-Mexico Delimitation Treaty,¹⁶ which provides that the "parties shall seek to reach agreement for the efficient and equitable exploitation of transboundary reservoirs"¹⁷ in the area covered by said agreement. Another example is the 1965 U.K.-Netherlands Treaty,¹⁸ which provides that, "[i]f any single geological mineral oil or natural gas structure or field extends across the dividing line [...], the Contracting Parties will seek to...