UK: Settlement of Offshore Boundary Disputes

Joint development agreements – a solution?
Last Updated: 11 October 2002

International decolonisation and the end of the cold war at the close of the twentieth century resulted in the emergence of a large number of new nation-states. These developments resulted in a dramatic change to existing international boundaries. This process of redefining territorial and maritime boundaries has implicated the energy industry and, in particular, ongoing exploration and development in the oil and gas sectors. This has often been driven by developments in extraction and transportation technology. New territorial limits have had to be agreed and, where applicable, boundaries delimited. It has proved no easy task, especially when there are clear indications that the disputed area is resource rich such as in the Caspian Sea. This article will look at the ways in which these problems have been addressed, and in particular at the growing popularity of Joint Development Agreements as a means of states cooperating to exploit disputed maritime areas.

The starting point on all these issues is the United Nations Convention on the Law of the Sea 1982 ("UNCLOS") (www.UN.org/depts/los).

UNCLOS

UNCLOS came into force on 16 November 1994. At present it has 138 state parties, (including the UK and most western states except for the US). UNCLOS sets out the international legal regime on which each coastal state may determine its maritime claim. Each state has a right to establish a territorial sea of 12 nautical miles and an exclusive economic zone that "shall not extend beyond 200 nautical miles from the baselines …" (Article 57).

UNCLOS also provides all coastal states with a legal claim or "sovereign rights" over the continental shelf (under Part VI). UNCLOS confers sovereign rights on the coastal state "for the purpose of exploring and exploiting, conserving and managing the natural resources." (Article 56(1)(a)) No exploration activities can take place in a coastal state’s continental shelf without the consent of that state. Problems can arise where adjoining or adjacent states overlap. There is an underlying presumption that such overlapping legal claims are both legitimate where there is less that 400 nautical miles between the states involved. Article 15 provides that ordinarily the dividing line between two states territorial sea will be a line equidistant from the baseline of the two contending states. The UNCLOS envisages that the "delimitation of the continental shelf between States with opposite or adjacent coasts shall be effected by agreement on the basis of international law…in order to achieve an equitable solution." (Article 83). In the Qatar/Bahrain case no agreement could be reached between the states on the disputed maritime areas. The International Court of Justice (ICJ) ultimately decided the matter and drew a single boundary dividing the various maritime zones of the State of Qatar and the State of Bahrain specifying a series of geodesic lines along identified co-ordinates. (www.icj-cij.org)

The states, if they fail to reach a negotiated agreement, must resort to the dispute settlement provisions of UNCLOS. It is noteworthy that the UNCLOS sets out a mechanism for mandatory dispute settlement. Part XV sets out the dispute settlement provisions. The parties can choose from a number of options to have their dispute on the interpretation and application of UNCLOS decided. These include taking a claim to the International Tribunal for the Law of the Sea (ITLOS), the ICJ or an arbitral tribunal constituted in accordance with Annex VII. To date, disputes relating to delimitation matters have either been brought before the ICJ in The Hague or dealt with by arbitration as in the Eritrea/Yemen case (www.pca-cpa.org). ITLOS has not yet had to determine any delimitation cases nor have there been any final decisions made by an arbitral tribunal set up under Annex VII.

Joint development agreements

Thus, although ultimately states need to delimit their maritime boundaries either through diplomatic agreement or (failing that) through international dispute resolution, these processes can be slow and difficult. Thus, particularly in recent years, states have increasingly turned to a consensual model for energy exchange Autumn 2002 9 energy exchange Autumn 2002 8 joint exploitation of disputed areas. This process has gathered pace as a result of two developments, one legal and one practical. The legal development was the recognition under UNCLOS of the potential for 200 mile Exclusive Economic Zones. The practical development has been the dramatic improvements in sub-sea bed exploration and drilling technology. These have made viable oil exploration projects in parts of the sea-bed which were formerly inaccessible. There is nothing new about the technique of a joint development agreement. Indeed, early examples in the Gulf date from the 1950’s and 1960’s. But the scale and pace of conclusion of new treaties has been much more pronounced in the last 20 years.

Timor Gap agreement

One of the most sophisticated and comprehensive joint development regimes ever negotiated is the treaty between Australia and Indonesia relating to what is known as the ‘Timor Gap’, which was concluded in 1989 (www.austlii.edu.au/au/other/dfat/treaties/19 91/9.htm). It related to an area between the former Indonesian Province of East Timor and Northern Australia. The two countries were keen to enter into the agreement because the sovereign rights over the Timor Gap had not been determined in earlier treaties. By doing so the state parties were able to bypass the question of having to agree a definitive delimitation of the continental shelf between the countries and instead allowed them to exploit the petroleum resources in the area.

The agreement created a ‘Zone of Cooperation’ which was divided into three distinct parts, Area A, B and C. Article 2 of the agreement provided that within Area A there would be joint control between the states for the exploration and exploitation of petroleum resources. The revenue would also be shared equally. The other two areas are subject to the jurisdiction of the closer state. Area B therefore fell under the jurisdiction of Australia subject to paying Indonesia 10% of the gross tax revenues from petroleum production. Area C was subject to similar provisions imposing obligations on Indonesia to pay an equal percentage of tax revenues to Australia.

The control and responsibility for all exploitation of petroleum resources in Area A of the Zone of Cooperation was vested in a Ministerial Council and Joint Authority set up under the agreement. The agreement set out in detail a wide range of issues from the framework to be set up to manage the area, to employment, health and safety issues as well as clarifying questions of criminal jurisdiction of the areas. The Timor Gap Treaty establishes the most detailed and complex offshore joint development arrangement in the world. The treaty has been the subject of two separate legal challenges The first challenge was a domestic Australian case taken by an East Timor activist, Horta v. Commonwealth 181 CLR 183. The second was an ICJ challenge by Portugal as the ‘legitimate sovereign’ of East Timor, East Timor (Portugal v. Australia) 1995 ICJ Reports 90. But it has emerged unscathed and significant exploration work has been carried out. It has proved a successful mechanism to encourage investment in oil exploration in an area where previously it had been impossible. On 14 March 1997 Australia and Indonesia signed a Treaty establishing an Exclusive Economic Zone Boundary and certain Seabed Boundaries. This agreement contains careful delimitation of the maritime boundaries between the two states through the Timor and Arafura Seas. The rights and obligations of the parties under the Zone of Cooperation agreement are not affected. This confirms that the parties view the agreement as having been a success. This new boundary agreement has not yet entered into force.

East Timor no longer forms part of Indonesia and an arrangement was entered into with Australia in July 2001 with the United Nations Administration in East Timor. The "Timor Sea Arrangement" will govern petroleum operations in the Timor Sea between East Timor and Australia1. This arrangement now forms the basis of the agreement to be entered into with East Timor having achieved independence. Article 2 of the Timor Sea Arrangement confirms that in accordance with the provisions of UNCLOS the states want to make an effort to enter into provisional arrangements of a practical nature pending agreement of the final delimitation of the continental shelf. The Timor Sea Arrangement proceeds to set up a joint petroleum development area (JPDA), in the Timor Sea within the area designated in Annex A. East Timor and Australia will jointly control, manage and facilitate the exploration of the petroleum resources of the JPDA. Under the terms of the arrangement East Timor will receive 90% of the oil and gas production in the JPDA and Australia will receive the remaining 10%.

The Timor Sea Arrangement also provides for a continuation of contracts held by companies under the 1989 Timor Gap Treaty for the Bayu-Undan field (operated by Phillips Petroleum Company) and the Greater Sunrise Field (operated by Woodside Australian Energy). The former oil field lies wholly within the JPDA so East Timor will receive 90% of production from that field. However, the Greater Sunrise Field straddles the JPDA. In accordance with Article 9(b) of the Timor Sea Arrangement and Annex E the Greater Sunrise field will be unitised on the basis that 20% lies in the JPDA and 80% is attributed to Australia. Therefore, East Timor will receive 90% of 20% of the Greater Sunrise production. East Timor achieved independence on 20 May 2002. Negotiations for entering into a final agreement between Australia and East Timor based on the terms of the Timor Sea Arrangement are still ongoing. However, it is clear from the Timor Sea Arrangement that the form of joint development agreements are becoming more complex and sophisticated.

Other examples

Many other joint agreements have been completed, for example the Memorandum of Understanding between Malaysia and Vietnam of 5 June 1992. The two state parties agreed to cooperate in the exploration and exploitation of petroleum resources in a small sliver of overlapping continental shelf. The agreement was entered into on the understanding that it was without prejudice to the legitimate claims of both parties over the defined area. The agreement is a somewhat more simplified version of the Timor Gap Treaty. All costs incurred and benefits derived from the area are divided equally. The parties agreed that their national oil companies, Petronas (Malaysia) and Petrovietnam (Vietnam) would carry out the exploration work. Subject to the approval of both governments, the oil companies entered into an agreement to exploit the disputed area. In this way no concessions as to title had to be made by the states yet it was possible to continue to exploit the oil reserves.

Other key modern examples include:

  • Nigeria and Sao Tomé Joint Development of petroleum and Other Resources in respect of the Exclusive Economic Zone, 21 February 2001
  • Agreement between the UK and Norway concerning the Exploitation of Frigg Field Reservoir, 25 August 1998
  • UK and Argentina Joint Declaration of Cooperation over Offshore Activities in the South West Atlantic, 27 September 1995
  • Senegal and Guinea-Bissau Management and Cooperation Agreement, 14 October 1993
  • Nigeria and Equatorial Guinea Joint Development, transport and marketing Agreement including Zafiro-Ekanga oil fields, 3 April 2002.

The British Institute of International and Comparative Law, London has also carried out extensive research into the form and content of joint development agreements.

It has prepared a Model Agreement which is available through their publications office. It is useful as a starting point in any negotiations, though the final agreement will depend on the circumstances of each case.

The need for further solutions

These examples of practical diplomacy show how otherwise intractable territorial disputes have been put to one side as states find a common interest in exploitation. Elsewhere, however, the lack of certainty in maritime delimitation continues to act as a brake on development. This is not a merely academic issue.

There are a large number of outstanding disputed territories and maritime areas. The Report of the Secretary General on Oceans and the Law of the Sea estimated that approximately 100 maritime boundary delimitations throughout the world still await some form of resolution by peaceful means. One of the better-known ongoing ones is the Spratley Islands dispute. This is of particular interest as the islands and their surrounding seas are estimated to be extremely rich in natural resources including oil and gas. The Spratley Islands is a disputed area in the South China Sea, 900 miles South of the Chinese Island of Hainan, 230 miles east of Vietnam, 120 miles west of the Philippine island of Palawan and 150 miles northwest of Malaysia. They consist of hundreds of small islets, coral reefs and sand bars covering 180,000 km2. They are referred to by different names and Brunei, China/Taiwan, Malaysia, the Philippines and Vietnam have all claimed rights to some or all of the Spratley Islands. This is an area of interest for many reasons not least of which is that the estimated worth of the oil reserves in the South China Sea is one trillion US dollars. There is also believed to be large natural gas deposits.

The difficulties faced by an oil exploration company wanting to invest in oil exploration off the Spratley islands are immediately clear. It is uncertain as to which government authorities they should be negotiating with to commence exploratory works. The difficulties presented by the multiple parties to this dispute makes it difficult if not impossible for any consensus to be reached on the terms and conditions of an offshore joint exploration and exploitation agreement. There would be lengthy negotiations on how the proceeds should be divided among all of the countries claiming rights over the islands. It is almost inconceivable that a solution could be found without the territorial and delimitation questions being addressed. The effectiveness, however, of joint development agreements should not be underestimated. These agreements can prove successful in circumstances where there are two or three parties who want to jointly exploit their offshore resources but have not yet reached agreement on the exact maritime delimitation. The problems are even more complex and intractable when there are multiple states involved in long running disputes.

Other unresolved maritime boundary delimitations include Morocco and the Canary Islands, Iran and Kuwait, Guyana and Venezuela, the Caspian Sea and Russia and the Ukraine over the Strait of Kerch. These are in addition to the plethora of unresolved maritime boundaries in oil-rich regions of the Caribbean, the Arctic Sea, the West Africa littoral, Asia and South America. The Caspian Sea has had a long history of oil and gas development. After the collapse of the former Soviet Union however the surrounding Republics had to agree to delimitation of the Caspian Sea. To realise its full potential and ensure continued foreign investment the littoral states must reach a final agreement on the delimitation or joint exploitation of the Caspian Sea. Alternatively, some or all of the Sates could enter into a joint development agreement to exploit the national resources.

Conclusion

Investment in hydrocarbon extraction and transportation requires a stable legal regime. One way to accomplish this is by negotiating or arbitrating a boundary delimitation. However, where possible, a joint development regime may be the most practical way forward. There are many international legal issues involved in entering into an offshore joint development agreement. However, the considerations are not just legal. Political and economic incentives are also likely to play a major role in the project and during negotiations. The costs involved in carrying out offshore exploratory work are immense and no corporate entity would want to incur such costs unless they can be sure it is likely to yield a viable return. In situations where maritime boundaries have not been finalised a joint development agreement between the relevant parties should be considered. Different concerns will arise depending on the circumstances. In the case of Tunisia and Western Sahara, for example, oil companies interested in exploration and production activity can not just deal with the Moroccan government. However, it may be difficult if not impossible to be able to finalise an agreement if exploration was made conditional on obtaining the consent of the representatives of Western Sahara.

The economic reality is that maritime areas are of interest mainly for the purposes of resource extraction. This process is facilitated by a state holding good title as certainty of title is necessary to ensure sufficient economic return on investments without risk of challenge to title or competition within the same concession area. To facilitate this certainty the joint development agreement is often the only viable solution.

1 This is the first time the United Nations has negotiated a bilateral treaty on behalf of a UN protectorate pending independence. The negotiating teams on behalf of East Timor were made up of East Timorese representatives and UN officials.

© Herbert Smith 2002

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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