Miriam Grunstein

Exploitation of Mexico-US Transboundary Reservoirs

Wed, 01/22/2014 - 11:02

Oil and gas do not respect the chasms that exist between the US and Mexico’s industrial practices and legal frameworks. The boundary line in the Gulf of Mexico does not prevent hydrocarbons from lying on both sides. However, despite their geographic proximity, no two countries in the world have oil models that are so fundamentally opposed. The oil expropriation in Mexico, which set forth the statist nature of oil and gas operations here, began the schism between the neighbors. Faced with the likelihood of transboundary reservoirs, the two countries have been compelled to negotiate rules regarding the development and exploitation of shared hydrocarbon resources. The negotiations for what became the “Agreement between the United States and Mexico Concerning Transboundary Hydrocarbon Reservoirs in the Gulf of Mexico” ended in January 2011, just when the moratorium for the Western Polygon would have expired, allowing the US to drill in the area. Delegations from both countries held technical meetings to review and modify the base proposal made by the Mexican government. In the setting of these negotiations, and prior to the expiration of the term of the moratorium, both countries agreed to extend its term to January 17, 2014, with the possibility of extending it further until an agreement on exploitation is reached.

The Mexican Senate ratified the Agreement on April 12, 2012, despite opposition from left leaning parties, which perceived the Treaty as a surreptitious way for foreign players to drill in Mexico. The US House of Representatives passed a bill on June 27, 2013, that ratified the Agreement with Mexico. However, the approved adjustments to the US legal framework excluded a rule that forced public companies to reveal what they pay to other countries for oil and gas exploitation. According to the American Petroleum Institute, the obligation to make payments transparent would put public companies at a disadvantage against foreign companies or non-listed companies. On August 18, 2013, coinciding with the submission of the Mexican Energy Reform proposal, the US Congress approved the Agreement, allowing for the development of oil and gas deposits straddling the maritime border. The Agreement establishes a cooperative process for managing oil and gas reservoirs along the border in the Gulf of Mexico. Along with Mexico’s Energy Reform, this will grant legal certainty to US companies while providing Mexico with new possibilities of exploiting shared resources.

The fact that the Agreement was approved on the day when President Peña Nieto submitted the Energy Reform proposal was no coincidence. The Reform was a necessary step to implement the Agreement, as the latter document requires cooperation schemes, such as unitization agreements, which might have been deemed unconstitutional without a major overhaul in Mexico’s legal framework. The Reform allows for the reconciliation of the differences between the legal frameworks of Mexico and the US and provides legal certainty for reservoir unitization, the preferred technical solution for reservoirs crossing international borders. This technique consists of the joint development of such reservoirs as one unit. This sees one operator being chosen to develop the reservoir for all the parties entitled to production. Due to the legal negotiations involved, reaching a unitization agreement is a long process in which incentives must be aligned to overcome complexities. Apportionment formulae, which distribute the barrels accrued to each party, are hard to settle upon as these require more than mere goodwill from countries and companies. For international unitization to succeed, legal and technical measures must be adopted that define equal benefits for all parties involved in the exploitation of the shared resources.

The Mexican government is currently considering the secondary legislation of the Energy Reform. The proposed text of this legislation shows significant progress in having Mexico adopt modern schemes of cooperation in line with international practices, while other provisions maintain Mexico’s staunch adherence to allowing the state to intervene, potentially hindering some companies from investing here. It is now legally permissible to enter into a unitization agreement in Mexico. However, the proposed legislation states that PEMEX must have a stake in any such unitization agreement, although its presence is not mandatory in other joint ventures. This is a politically motivated move. For the Mexican government, transboundary reservoirs contain more than hydrocarbons, they are a powerful political symbol. Today, Mexico’s exploratory data concerning the deepwater areas of the Gulf of Mexico is scarce. But should Mexico be swift in implementing its Reform, there is a chance exploratory work on the Mexican side could be accelerated by new companies. For that to happen, the secondary legislation will have to provide clear incentives. This is the backdrop against which the current political debate is raging. It is to be hoped that the Mexican government will be receptive to industry concerns, so that joint cooperation, in transboundary reservoirs and beyond, will be a real success.