Joint Petroleum Development Area

Is Unitization A Total Solution To The Issue Of Common Petroleum Deposit In A Joint Petroleum Development Area? Nigeria-Sao Tome And Principe; And Australia-East Timor Leste, As Case Studies

Abstract:

Unitisation and Joint Development are different forms of co-operative mechanisms for the development of petroleum resources across boundaries. Unitisation was necessitated by the need to stop competitive drilling and wastages due to the rule of capture which impacted negatively on a State. Unitisation occurs within a country’s internal boundaries, whilst the migration of petroleum resources across a country’s international boundaries is called Cross border unitisation. Joint Petroleum Development occurs where states have overlapping claims regarding their boundaries and as a temporary measure agree to develop and share the petroleum resources in the disputed area under dispute by setting up a Joint Development Zone (JDZ).

Unitisation can occur within the internal boundaries of a JDZ and across the boundaries of a JDZ into a State’s exclusive area. There are alternatives to unitisation either because of difficulties in negotiating a unitisation Agreement or simply because Parties prefer not to unitise.

This paper will examine the concepts and objectives of Unitisation, Cross Border Unitisation and Joint Development, the role of International Law in cross boundary co-operation, the drawbacks of unitisation and its alternatives. This paper will also examine the legal regimes of the survey states to identify which development forms between unitisation and its alternatives have been provided for. This paper will make findings of fact based on an examination of the legal regimes of the survey states and conclude whether in spite of the drawbacks of unitisation and available alternatives, Unitisation is a total solution to the issue of joint development.

1. Introduction

Unitisation is a form of co-operation between licence holders by which a petroleum deposit which extends across its field into an adjoining land as a single continuous unit is developed as single unit for the purpose of joint development.

lt was necessitated by the need to stop competitive drilling and wastages which were common because of the rule of capture, which had an adverse effect on a state due to lower recoveries from a field and reduced income.

However, when petroleum deposits extend beyond international boundaries of States or in the case of the UK continental shelf, the median line of international maritime delimitation, the issue of sovereignty of states and authority of states becomes inadequate to deal with the legal issues and the relevant boundary agreements often advocates the approach to be adopted. There are two approaches to this issue depending on whether or not there are boundaries between the States.

The first approach is where the petroleum deposits extend across an international boundary between states; the states will agree to come to an agreement on how the deposit will be most effectively developed and how to share the proceeds. This is referred to as Cross Border Unitisation or International unitisation and they are accomplished by Treaties between States followed by International Unitisation Agreements between the respective Oil Companies and this has become a common practice. Onorato describes a Cross Border Unitisationas a situation where a common reservoir lies across a delimited boundary line between two states and deals with the treatment of an identified deposit which is either a specific petroleum reservoir or field.

The Second situation is the Joint development Zone (JDZ) where the petroleum deposit is located in a disputed boundary area and both states have overlapping claims to it and desire a temporary solution to enable them exploit and share the resources located within a disputed area. Joint Development has been described as an arrangement between two states to develop and share in agreed proportions the petroleum found within a geographical area, whose sovereignty is disputed; and the geographical area is an overlapping area under dispute with undefined boundaries to which the two states are entitled under International Law.

lnternational law has shown its relevance on the issue of boundary delimitation. The United Nations Law of the Sea Convention 1982 (UNCLOS) obliges States which have not been able to agree boundaries of their continental shelves and exclusive economic zones, to make efforts to enter into provisional arrangements of a practical nature to develop the Petroleum deposit located in the overlapping geographical area under dispute whilst not forgoing their sovereignty or sovereign rights to the deposits in place in its territory or continental shelf.

Both approaches are geared towards one end: co-operation.

This paper is however interested in how these development mechanisms have been used in the survey states where there are boundary disputes, and to ascertain the mechanisms utilised in those survey states to guarantee efficient maximum petroleum recovery.

This paper will examine the relevant legal regimes in the case studies of the 1989 Australia and Indonesia Timor Gap Zone of Co-operation Treaty and the 2001 Nigeria-Sao Tome and Principe Joint Development Treaty) viz Treaty, Petroleum Legislation and other Agreements to ascertain the development mechanisms provided for and the circumstances these mechanisms have arisen.

Cross Border Unitisation and Joint Development Zones share similar features between them because aside from the two layer inter-state agreements of Treaty and International Unitisation Agreement, a Joint development Zone can be divided into separate contract areas where deposits can cross the internal boundaries of those contract areas and those that cross the joint development Areas into third party States.

Situations arise where parties chose to go independently and not to unitise either because of the difficulties associated in negotiating Unitisation Agreements, expensive and time wasting redeterminations of tract(a key feature of unitisation) or for other reasons. These other approaches are not without their limitations because in an effort to avoid re-determinations, parties might be venturing into more expensive options.

Finally, this paper will make findings of fact that because the respective case studies have made provisions for unitisation in their respective treaties, legislations, regulations or agreements and not the alternative devices shows that unitisation is the preferred method of joint development.

This paper will therefore conclude that based on the examination of the legal regimes in the case studies ,Unitisation is a total solution to the issue of common petroleum deposit in a Joint Development, aside from being widely regarded as being one of the most efficient contractual methods for the development of migratory petroleum deposit.

2. Concept Of Unitisation

Meaning

Unitisation is a response to the common Law rule of capture which emanated in the United States of America where private ownership of petroleum resources gave rise to a scramble to exploit petroleum resources in complete disregard of good oil field practices; well were located and drilled close to the boundary of a block so as to draw sufficient petroleum deposits from the adjoining area.

Under the rule of capture, title to petroleum belongs to the owner who physically extracts it from a well on his land, even if the petroleum has migrated underground from neighbouring lands.

In line with the USA approach, Professor Daintith has submitted that the owner of a tract of land acquires title to the oil and gas which is to be produced from wells drilled thereon, although it may be proved that part of the oil and gas migrated from adjoining lands, when he defined the common law rule of capture ‘’as the rule of non liability for (a) causing oil or gas to migrate across property lines and (b) producing oil and gas which was originally in place under the land of another, so far as the producing well does not trespass”.

The resultant effect was a scramble by various land owners to drill more than their neighbours to enable them secure the maximum yield from the underground resource regardless of the source of the resource, which culminated in competitive and uncoordinated drilling and production which led to massive economic and physical wastage and unnecessary expense.

Petroleum deposit by virtue of its fugacious nature moves from place to place and the exploitation and development of the deposit in a co-ordinated manner by respecting the common nature of petroleum reservoirs, was seen as the ideal strategy to undertake their development from a technical, conservation and environmental perspective.

Unitisation has been described as one of a number of legal devices which seek to remove the destructive competitive element stimulated by the rule of capture, with the effect that the petroleum deposit is exploited as a whole, expenditure is reduced and recovery is maximized.

Weaver describes unitisation as the joint, co-ordinated operation of a petroleum reservoir by all the owners of rights in the reservoir, a process of combining the separately held portions of the reservoirs or field into a large unit.

Taverne defined Unitisation Agreements between two or more persons or groups of persons holding exploitation rights in common petroleum reservoir by which these reservoirs will be exploited in an integrated manner as a single unit.

Unitisation may either be compulsory or voluntary.

Voluntary unitisation is when the adjoining license holders freely agree to develop their respective adjoining interests as a single unit.

Compulsory Unitisation is when there is an enabling law under which the relevant government compels the license holders or contractors to agree to a unitisation plan amongst themselves or have a unitisation plan imposed upon them by the government. The United Kingdom Petroleum Act 1998 and the 1988 Petroleum (Production) (Seaward Areas) Regulations; the Nigerian Petroleum Act 1969 and the 1969 Petroleum (Drilling and Production) Regulations); all impose an obligatory statutory requirement to co-operate if and when a straddling reservoir must be developed as long as it is in the national interest to secure efficient maximum recovery of petroleum and to avoid unnecessary competitive drilling.

Objectives Of Unitisation

Arising from the lack of supervision and co-ordination in the exploitation of petroleum deposits, the resultant effect was competitive drilling which under the rule of capture was legally permissible

The associated consequences were economic and physical wastages, disorderly operation, lower recoveries, lower revenue income and multiplicity of expenditure.

Unitisation was therefore adopted to regulate and/or prevent wastages, reduce duplication of expense and maximize efficient recovery of petroleum deposits.

Aside from the main objective of increasing the ultimate recovery of hydrocarbons, the other objectives of unitisation include minimizing disputes which may arise between competing license holders and endanger or hinder efficient exploration of the license area, allowing the sharing of the best technical information held by different license holders, reducing and rationalising cost and making the best use of equipment.

Taverne has described co-operation in the exploitation of a migratory petroleum deposit as a legal necessity when so instructed by the competent authority and a technical necessity, where the adjoining interest holders aim or are obliged in the context of good oilfield practice to aim at a maximum efficient recovery of petroleum.

Cross Border Unitisation

Meaning

When Petroleum deposits extend across International boundaries of states or in the case of the UK Continental Shelf, the median line of International maritime delimitation, this raises more complex and far reaching problems because such a deposit will be subject to different legal regimes and different terms and conditions for exploitation and transportation.

Under the application of the fundamental principle that the territorial sovereignty or exclusive sovereign rights of states do not extend beyond their border, each state exercises exclusive authority over its territory and any infringement across the International boundary constitutes a violation of another state’s territorial sovereignty or exclusive sovereign rights. Thus no single state can order a mandatory unitisation of a cross border petroleum deposit nor can the operators in different state freely enter into a unitisation agreement of contract areas in different countries.

An amicable solution to avoid dispute and harmonise the conflicting interests of the different interest holders from different states is for the concerned states to enter into a co-operative arrangement to develop the deposit and in doing so being guarded by the principle of respect for the preservation of the “unity of deposit”.

Commentators have argued that it is in the interest of the states to co-operate as the absence of agreements to co-operate in the development of petroleum deposits straddling international boundaries raises thorning legal issues because “there is no developed, crystallised” or express rule of custom under International law requiring unitisation for apportioning such common petroleum deposits.

Features Of Cross Border Unitisation

An essential feature of a Cross Border Unitisation is that both states must agree to co-operate in the development of the straddling petroleum deposits. To achieve this, two layers of Agreements have to be entered into

i. A Bilateral Agreement (Treaty) between the relevant States which will set out the right and obligations of the each state regarding the development and various development and areas of co-operation

States will enter into.

ii. An International Unitisation Agreement (Unit Operating Agreement) between the relevant International Oil Companies from both States which will be subject to the provisions of the Treaty and contain such issues subject to the agreement of the States, like selection of unit operator or redetermination of tract participants.

Bilateral Treaty

The purpose of the Bilateral Treaty is to set out the rights and obligations of the relevant states with respect to the field development and incorporate procedures to minimise conflicts. This Treaty will then form the basis of an International Unitisation Agreement among the various license holders.

In negotiating a Bilateral Treaty, the interest of the relevant State must be aligned to that of the relevant interest holder because the Government has an interest in the maximum interest of the interest holder as it will have a bearing on the Government’s revenue.

The Treaties are between the relevant governments and as such has no direct effect on the interest holders.

An example of is the Bilateral Delimitation Agreement between the United Kingdom and the Netherlands signed on October 6th 1965, to establish the boundaries of the Dutch Continental Shelf. Alongside the Bilateral Delimitation Agreement, the States entered into an agreement to govern the exploitation of any field which cross the international border.

Article 1 of this Agreement provides that ‘’where a field extends across the border, the states “shall seek to reach agreement as to the manner in which the structures or fields shall be most effectively exploited and the manner in which cost and proceeds relating thereto shall be apportioned, after having invited the licensees concerned, if any, to submit agreed proposal to this effect”

In furtherance to the above agreements, the Markham Field was the first Cross-Border field to be developed between the United Kingdom and the Netherlands as a Unitised Field.

The United Kingdom and Norway entered into various treaties as successful examples of Cross Border Unitisation. The United Kingdom and Norway signed a Bilateral Delimitation Treaty on March 10, 1965 and this agreement constitutes the first detailed provision for action to be taken in the event of a cross border straddling of petroleum deposit.

This Treaty provided the framework for the three Cross Border Unitisation Agreements entered into since the treaty was signed and these are the Frigg, Stratfjord and Murchinson Field Agreements signed in 1976, 1979 and 1979 respectively

lnternational Unitisation Agreement

After the relevant states have entered into a bilateral Treaty, the respective operators in the different states will prepare a single development plan and enter into an International Unitisation Agreement which will usually follow the normal pattern in most respects.

It will however be subject to the provisions of the relevant treaty, such that, for example the selection of the unit operator or a determination of tract participants will require the agreement of the respective states;

The International Unitisation Agreement itself will require the approval of the relevant states in order to ensure that it contains the requirements of the Treaty.

Each Contractor’s share of production and costs will depend on agreed sharing formula of the field’s oil and gas in place underlying its license, regardless of the physical location of the production facilities. Each Contractor will pay its tax and royalties in line with the terms of its own contract as if its unit share of production had been produced from its own contract area. The legal framework will maintain two separate sets of regulations and fiscal terms.

The desired common exploitation of such a Cross Border petroleum deposit is what drives an agreement between the States concerned. In an International Agreement dividing and demarcating a Continental Shelf between two coastal states and establishing the dividing line, the possibility that petroleum deposit may extend beyond the dividing line, is often times taken into consideration and provisions made for it.

An lnternational unitisation Agreement is similar in content with a unitisation agreement for deposits situated in the same country, the difference being that the International Unitisation Agreement is concluded within a bilateral Treaty between the states that share the common petroleum deposit

In the case of the UK-Norway Unitisation Treaties, there were also deeds signed between the contractors and their respective states binding the contractors to uphold the obligations placed on them by the Treaty because they were not parties to the treaty itself.

Unitisation Agreements are unique in their focus on Petroleum conservation and the use of technical factors and reservoir models to ascertain the equitable distribution of petroleum underlying each separate contract area. Unitisation Agreements are also more complex because they combine two or more International Petroleum Agreement under which the different contractors may have different rights and obligations to the relevant site.

Unitisation agreements only come into being because of the geological discovery of a common petroleum deposit underlying the several International Petroleum Agreements and so are not negotiated in advance of such discovery.

Finally, Unitisation Agreements receive the legal authority from the bilateral delimitation agreements entered into and signed between the relevant states.

Role Of International Law To Co-Operative Agreements

International law has played a pivotal role in advocating for co-operative arrangements in the exploitation and exploration of Cross Boundary deposits.

International Law primarily confers on coastal States sovereign rights to explore, conserve and manage the natural resources.

Article 77 (1) and (2) of the UNCLOS 1982 grants the coastal States inherent and exclusive sovereign rights to explore the seabed and exploit its natural resources; thus no one can undertake activities of exploration and exploitation without the express consent of the Coastal State.

The UNGA Res 3129 (XXVI) and UNGA Res 328 (XXIX) prescribes the necessity for co-operation between countries in the exploitation of natural resources common to two or more states in order to achieve optimum use of such resources without causing damage to the legitimate interest of others.

It has been concluded therefore that a rule of Customary International Law requiring co-operation is now applicable to common hydrocarbon deposits.

“Ong argues that the principle that States have a general obligation to co-operate in the exploitation of their shared natural resources can be reformulated into two rules of customary international law. The first being an obligation to co-operate in reaching agreement on the exploration and exploitation of the resource and the second being that in the absence of such an agreement, there is an obligation to exercise mutual restraints with respect to the unilateral exploitation of the resource.

“Lagoni argues that ‘’the practice of negotiating and seeking agreement on the exploration and exploitation of a common deposit and the apportionment of the minerals is not mere usage but has given rise to a customary rule of current international law. As a result, he argues, this means that no State may exploit a common deposit before having negotiated on this matter with the neighbouring State or States concerned”.

Professor Cameron has contended that the international legal regime advocating co-operation in the development of natural resources is no more than ‘rules of engagement’ as opposed to precise rules and procedures for co-operation

Although the global trend with regards to exploitation of cross-border deposits is in favour of cooperative development, the rule of customary international law requiring unitization is not yet established. 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.

Alternatives To Unitisation

Unitisation has been described as one of a number of legal devices which seek to remove the destructive competitive element stimulated by the rule of capture, which implies that there are other devices.

Unitisation simply put involves supervision and co-ordination of petroleum exploitation for migratory deposits as a consequence of the Rule of Capture.

Situations arise however where parties choose to not to unitise or regulate. This is a fall out of the difficulties involved in negotiating Unitisation, complicated and expensive redetermination of tract participation, a key component of Unitisation.

Jones has observed that the human resource and opportunity cost involved in protracted unitisation and redetermination procedures, far outweighs the benefits gained from minor increases in unit interest.

lt has been argued that depending on the factual circumstances, there may be very well be occasions when approaches other than full unitisation are merited

How useful these approaches will be and whether the benefits will outweigh unitisation can be ascertained upon a close scrutiny of the different alternatives.

1. 1. Where a field extends beyond its block into an unlicensed territory, the natural thing to do is to make an out of rounds application and if granted, both fields can be developed by the same owners and unitisation will therefore be unnecessary.

2. 2. There are situations when a small part of a field crosses into a licensed field and unitisation is not necessarily the option. This happens because of the huge Capital involved in oil exploration and exploitation, which necessitates interest holders to enter into co-operation Agreements like the Joint Operating Agreement (JOA) to mitigate their risk and minimise their financial contributions.

3. 3. A third alternative is for one group to purchase the adjourning field extending into its block from another group and develop it on its own without the necessity of Unitisation.

This arrangement looks simple, but it can only be attractive to either group if the extension into the adjoining block is a small one. If the extension is sizeable, commercial considerations are likely to favour unitisation in view of the huge economics of exploration and exploitation.

4. 4. Other variations on full unitisation exist such as fixed interest agreements and cross-license agreements.

Fixed interest is an attempt to avoid the difficulties of redeterminations in tract participation and fix the percentage interests of the parties at the commencement of development, but it is essential for the parties to agree on the technical details without drilling a development well. This is of course a high risk option which may have negative financial implications on the parties, which is why it is preferred in the case of small developments.

Cross licensing on the other hand involves the license holder taking a cross assignment of each other’s interests and becoming parties to the entire unitised area.This option also requires that the parties agree on the sharing ratio of reserves and it is of course rare.

The above options to unitisation have clearly shown that they are only useful in cases of small developments. Oil and gas developments are by nature highly capital intensive with huge upfront costs which is a major incentive for oil and gas companies coming together under a co-operative arrangement to mitigate their risk and minimise their costs.

Taverne has contended that the alternative to unitisation i.e. independent, non- co-operative exploitation of the separate parts of a straddling reservoir will lead to costly, defensive or competitive drilling.

Concept Of Joint Development

Joint development occurs when each State lays claim to an overlapping area and pending delimitation of the boundary area, the two states agree to form a Joint Development Zone (JDZ) as a temporary solution while not foregoing their respective territorial sovereignty for the purpose of jointly developing and sharing the petroleum deposits in the disputed area as quickly as possible.

The objective of a JDZ is in the delimitation of boundary areas, but in several cases, a JDZ may be a permanent solution in place of a delimited boundary.

Several commentators have proffered their respective views on the concept of a JDZ.

Lagonisees a JDZ strictly from the point of view of co-operation between states based on an agreement regarding the exploration for and exploitation of certain fields or accumulations of non living resources that either extend across a boundary or lie in an area of overlapping claims.

Miyoshi defines joint developments as “a (n) inter governmental arrangement of a provisional nature, designed for functional purposes of joint exploration for and/or exploration of hydrocarbon resources of the seabed beyond the territorial sea”

The JDZ arrangement advocates co-operative mechanisms in the resolution of dispute in the absence of boundaries.Article 74(3) of the United Nations Convention on the Law of the Sea (UNCLOS) 1982 obliges states which have not been able to resolve the boundaries of their continental shelves and exclusive economic zones to make efforts to enter into provisional arrangements of a practical nature to develop the petroleum deposit located on the overlapping geographical area under dispute, without foregoing their territorial sovereignty.

The Features Of A Joint Development

The Concept of Joint Development is a pragmatic solution to allow mutually beneficial petroleum exploration and development whilst putting aside conflicting claims of sovereignty over them.

• It is an arrangement between two countries;
• It is naturally concerned with overlapping maritime area;
• It is a temporary arrangement pending the settlement of the boundary delimitation disputed between the countries concerned.

There are different models of joint development zone. The first is the single state model where one state manages the resources on behalf of both states and a clear example of their arrangement is the Bahrain-Saudi Arabia Agreement of 1958.

Second, is the two states/joint venture model where each state is entitled to nominate its own contractor which enters into joint venture with the contractor of the other State. An example is the Japan-South Korea JDZ.

Third, is the Joint Authority model where both states delegate power to a single body, which becomes responsible for the overall supervision of petroleum activities in the Zone.

This model differs from state to state with respect to the powers given to the Joint Authority; it can be strong, likened to a separate state or a weaker, purely administrative entity, it can contain more than one level of authority for example, the administration of the Timor Sea Treaty is based on a Three-tier structure; a ministerial council, a joint commission and a designated authority.

The Timor Gap Treaty of 1989 is important because it combines two of the models of authority; the area of the agreement is subdivided into three parts of which Area A is based on a JDZ model, and Areas B and C are consistent with the Single State model.

Unitisation In A Joint Development

Although a joint development zone will solve certain problems associated with boundaries, it will not remove the need to deal with the situation where a petroleum deposit crosses a boundary. In fact, since the perimeter of a JDZ is inevitably longer than the section of boundary that would otherwise be present, the likelihood of unitisation being required is in a sense even greater than in the case of conventional boundary

A JDZ covers a large geographical area which can contain several fields and contract areas. If separate contract areas held by different contractors are found to extend over a petroleum deposit within the JDZ, a unitisation agreement will naturally be entered into among the different license holders in that particular field. Additionally, a field may cut across the boundary of the JDZ and intrude into the exclusive territorial area of a State as is the case with the Greater Sunrise Field Unitisation Agreement; where the field will be subject to a cross border unitisation agreement between the JDZ and the State..

ln situations like this, the joint development agreement would provide for States to co-operate.

The International Unitisation Agreement (IUA) between the Government of Australia and the Government of the Democratic Republic of East Timor provides a comprehensive framework for the joint exploitation of the Sunrise and Troubadour Fields.