Reservoirs that cross country lines need special agreements

Since nationalization of the Mexican oil industry in 1938, US and Mexican oil industry activities in the Gulf of Mexico (GoM) have remained distant and independent, in spite of the significant investments made in each country during the last four decades. Now, however, the depletion of reserves onshore and in shallow waters is driving both countries to explore for new resources in deeper offshore areas close to their common borderlines.

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Javier H. Estrada Estrada - Analitica Energética S.C.

Since nationalization of the Mexican oil industry in 1938, US and Mexican oil industry activities in the Gulf of Mexico (GoM) have remained distant and independent, in spite of the significant investments made in each country during the last four decades. Now, however, the depletion of reserves onshore and in shallow waters is driving both countries to explore for new resources in deeper offshore areas close to their common borderlines.

Mexico and the US signed a treaty in 1970 to establish the maritime boundaries of each country to 12 mi (19 km). In December 1970, Resolution 2749 on the Law of the Sea Convention was adopted by the United Nations to give each country the right to develop natural resources in its Exclusive Economic Zone (EEZ), a 200-mi (322-km) area off its coast. Should zones overlap, the Law of the Sea requires the countries sign separate marine boundary treaties.

The Mexican and the US governments each stated their sovereignty and jurisdiction over the zone. In 1976, a provisional recognition agreement of the Marine Frontiers between Mexico and the US was signed, and in 1977 both countries agreed to upgrade the provisional agreement to a treaty. That treaty was approved by the Mexican Senate in December 1978 and ratified by the Mexican government in 1979.

On Jan. 23, 1979, the President of the US sent the treaty to the Senate for ratification. While the Senate’s Foreign Relations Committee favorably reported the treaty to the full Senate, in 1980, the Senate declined to ratify it.

Apparently the treaty on the EEZ settled only seven points of delimitation, formalizing the provisional maritime boundaries between the two nations. When mapping the 200 mi and the extended jurisdictions of both countries beyond those limits, the border lines overlapped in two portions of the GoM and it became necessary to accommodate each country’s full claim. These two portions were called the “doughnut holes” or “gaps” or “polygons”, representing more than 200 km (124 mi) of frontier pending for negotiations.

The western doughnut hole represented a surface of 17,467 sq km (6,744 sq mi) and the eastern doughnut hole around 20,000 sq km (7,720 sq mi). This last one is contiguous also to the EEZ of Cuba. The Eastern Polygon is off Yucatan, New Orleans, and Cuba.

In 1980 the US Senate asked the US Geological Survey (USGS) to evaluate mineral resources in the GoM. The USGS study included the whole border region and the “gaps” beyond the 200 mi. However, the USGS extended the scope of the study to the 23 parallel and to the 96 meridian (Mexican coasts of Tamaulipas).

According to the USGS, resources in situ at the border and at central regions in the GoM could be from 2.4 Bboe to 22 Bboe, and from a minimum of 5 bcf of natural gas to a maximum of 44 bcf. In short, the study anticipates the presence of hydrocarbons in the border region as well as in the neighboring territorial waters on the other side of the border extending to the “Mexican Ridges.”

Western Polygon and the nearby areas

During the 1990s, exploratory activities developed in the US part of the GoM: Mickey drilled by Exxon, Gemini by Texaco, and Crazy Horse (name changed to Thunder Horse) by British Petroleum. In 1995, the US amended its federal laws governing the royalty payment system on offshore oil and gas production to encourage petroleum exploration in the GoM, through the Deep Water Royalty Relief Act. Drilling technology also evolved to engage in deeper waters. In 1996, the Baha 1 well was drilled 35 km (22 mi) from the Mexican border at the Perdido foldbelt in the Alaminos Canyon, and in 1998, the same consortium drilled the Baha 2. These seem to confirm the hypotheses of analogous geologic formations on both sides of the border at Keathley, Alaminos, Walker, and Sigsbee areas.

The increased exploration and leasing activity raised questions over the territorial boundary between the US and Mexico as well as the jurisdiction over the Western Gap. In 1997, MMS announced that it would offer offshore leases in the Western Gap contingent upon a successful agreement between Mexico and the US. The government of Mexico indicated that no agreement on the Western Polygon could be considered until the US first ratified the boundary treaty.

The political reactions in Mexico were important. It was mentioned that companies operating from the US could extract the Mexican resources using directional drilling. The Senate decided to start negotiations on the Mexican rights in the Western Polygon. However, the knowledge about the hydrocarbon and mineral resources in that region was diffuse. In August 1998, Pemex hired a Canadian company to evaluate the potential resources in the Western Polygon. That study concludes that the Sigsbee escarpments were only planes and that the overall hydrocarbon resources in the Western Polygon could be 2,500 Bboe.

The 1978 Mexico-US Mexico Maritime Limits Treaty was ratified by the US Senate in 1997, enabling negotiations between Mexico and the US to resolve ownership of the Western Gap. A territorial and marine delimitation treaty solely for the Western Polygon became effective Jan.1, 2001. The final sharing of the Western Polygon was: 62% for Mexico, keeping the Abyssal plain (3,700 m or 12,139 ft water depth in some areas), and 38% for the US, keeping the Sigsbee escarpments (more than 4,000 m or 13,123 ft water depths in some areas). This is the only treaty where Mexico makes reference to the trans-boundary petroleum fields based on international law.

Both nations should begin negotiating oil and gas developments in that area to implement the rules set forth in the treaty. The treaty also established a 10-year drilling moratorium in a 1.4 mi (2.6 km) buffer zone on each side of the new boundary.

Soon the Canadian company’s estimates were questioned by the facts. In August 2001 Unocal started drilling Trident in Alaminos Canyon 6 km (3.75 mi) from the Mexican border and not far from the Western Polygon. Geological interpretations indicate that the Sigsbee escarpments could be the continuation of the large structures from fields already discovered at BP’s Thunder Horse.

Technology is needed

Producing hydrocarbons in the deep waters of the GoM is complex. Pressures are high and seabed temperatures are low. According to MMS, in the US, 285 fields have been discovered in deep waters (greater than 1,000 ft [305 m] since 1975, of which 65 are in more than 5,000 ft (1,524 m) of water. It can take 10 to 15 years to start production from these structures, even for giant fields as Thunder Horse. On the other hand, the prospects for new discoveries are high. In February 2009, Chevron reported a discovery at the Buckskin prospect, 190 mi (306 km) southeast of Houston and 44 m (71 km) west of Chevron’s 2004 discovery Jack, which is also in the Lower Tertiary. The well is at 6,920 ft (2,109 m) water depth and drilled to 29,404 ft (8,962 m) deep.

Since those prospective works signal that some reservoirs are in the adjoining border areas, probably extending beyond the Mexican maritime boundaries, Mexico could apply to the United Nations Organization to claim title over the reservoir based on the 1982 Convention.

The matter is quite relevant to Mexico because, if activities are carried out from the US side of the field, and considering the flow dynamics of the reservoirs, the Mexican resources could be affected due to the hydraulic communication of the structures.

The US sector of the GoM has seen increased exploratory activity stimulated by advanced 3D seismic, new drilling technologies, and deepwater production systems. Continued implementation of the deepwater royalty relief legislation, signed by President Clinton in November 1995, is beginning to have effect as well. Lease sales held by MMS are reaching record totals. With moratoria on new leasing in effect previously for the Eastern GoM as well as the Atlantic and Pacific coasts, exploration has focused on the Central and Western GoM and on Alaska.

Meanwhile, Pemex also is preparing to approach these challenges. The Mexican oil company concluded eight deepwater wells over the last few years offshore Campeche, Veracruz, and Tamaulipas, which indicate Mexico’s high interest in the hydrocarbon potentials of the GoM.

The Perdido foldbelt

Recent discoveries at Great White, Baha, Trident, and Tobago fields establish the Perdido foldbelt as a significant new petroleum province in the initial stages of development. The discovery during 2001 at the Trident 1 wildcat proved the exploration viability of the Perdido foldbelt in Alaminos Canyon. It is an area characterized by water depths reaching more than 10,000 ft (3,048 m), difficult drilling conditions, and risk of hurricane damage. Geologic insights so far include the discovery of high-quality light oil, the recognition of multiple hydrocarbon source rocks, the age of key seismic markers, and the presence of abundant and well-developed sandstone reservoirs.

Pemex also announced potential significant resources in the Mexican part of the Perdido foldbelt, and it is preparing for the first deepwater exploratory well in the area, not far from the Baha and Trident fields. Pemex plans to use the Muralla III platform to drill exploratory wells at Magnánimo (2,520 m or 8,268 ft) and Máximino (2,891 m or 9,485 ft). However, Pemex considers that the challenges to explore for and to produce these resources will be better managed through cooperation, using state-of-the-art technologies and existing infrastructure.

The issue

The treaty establishes that neither of the two countries will execute its sovereign rights or jurisdiction on the seabed or on the subsoil at the Western Polygon. The treaty states that due to the possible existence of oil or natural gas fields that could extend through the established limits in the continental shelf, during a 10-year period after the treaty took effect, the parts will not authorize nor will allow the drilling or the exploration of oil and natural gas in the continental shelf within the established stripe of 2.8 mi (4.5 km). The moratorium concludes on Jan. 16, 2011.

Since the treaty signing, MMS has announced leases for the OCS in multi-sale processes covering the Central and Western GOM. The announcements properly inform the “Areas Excluded from this Call” by explaining that the Central GoM is bounded on the south to the continental shelf boundary with Mexico while the Western GoM is bounded on the south to the maritime boundary with Mexico established by the same treaty.

Although the treaty does not authorize drilling or production in the Western Gap, both countries should allow each other to conduct geological and geophysical studies, to determine the possible presence and distribution of trans-boundary reservoirs. Furthermore, the US and Mexico must share geological and geophysical information and notify one another of possible trans-boundary resources.

Based on the foregoing, since Sept. 6, 2005, the Mexican Senate has announced the follow up of these issues, to know the progress on the studies on the trans-boundary fields, the progress in the negotiations between Mexico and the US on the efficient and equitable exploitation of the trans-boundary fields in that area, and to know about other trans-boundary fields not included in the treaty. So far, however, no new agreement has been announced by Mexico or the US on possible cooperation concerning the trans-boundary reservoirs.

Similar international experience

In petroleum provinces where cross-border reservoirs have been discovered, for example fields across Norway and Britain in the North Sea, the governments agreed on a common framework to develop these resources. There are many other examples of joint production agreements between countries sharing common hydrocarbon resources: Kuwait and Saudi Arabia (1922); Austria and Czechoslovakia (1960); the Federal Republic of Germany and the Netherlands (1962); Abu Dhabi and Qatar (1969); Iran and Sharjah (1971); Japan and Korea (1974); France and Spain (1974); Saudi Arabia and Sudan (1974); Australia and Papua New Guinea (1978); Malaysia and Thailand (1979); Iceland and Norway (1981); Bahrain and Saudi Arabia (1958 and 1983); Australia and Indonesia (1989); Malaysia and Vietnam (1990); Guinea Bissau and Senegal (1993); Australia and West Timor (2003), as well as examples in Latin America in agreements involving Brazil-Colombia and Ecuador, or Venezuela-Trinidad and Tobago.

The arrangements in joint development areas range from simple schemes of cooperation to highly complex and structured systems of jurisdiction and revenue sharing. The question of competing sovereignty or jurisdictional claims or boundaries usually leads to establishment of joint development zones. When boundaries exist, agreements help avoid potential infraction of rights such as the production of resources from the opposite side. The agreement also can help define boundary limits by separating the issue of underlying resources, which will be dealt with through a joint regime. Based on the solutions found to similar problems in other regions of the world, an agreement on the issue of trans-boundary petroleum reservoirs could:

  • Establish common deposits of oil and natural gas, not referring to a particular geographical area but to a certain deposit, the extent of which would be determined by the States Parties through a mixed Technical Commission, empowered to calculate the resources in situ (Austria-Czechoslovakia 1960)
  • Define precise geographical areas in connection with the resources (Norway-UK, 1976)
  • Establish a joint development zone, divided by a provisional line separating two sub-zones, one for each country (Federal Republic of Germany-the Netherlands, 1962) or as many sub-zones as needed (Japan-Korea, 1974)
  • Establish a joint development area (Bahrain-Saudi Arabia, 1958) or a joint regime (Iran-Sharjah, 1971) or a Common Zone (Saudi Arabia-Sudan, 1974)
  • Define a delimitation scheme setting up a protected zone (Australia-Papua New Guinea, 1978) or a Cooperation Zone, defined by geographical coordinates and divided into areas (Australia-Indonesia, 1989).

Unitization

International experience shows that technology exists to produce the oil and gas from either side of the border, although the optimal way might be carried out from sites belonging to one country or the other. Before the resources are divided between the countries the governments must agree:

  • That the petroleum field is a trans-boundary reservoir and should be developed
  • The reservoir shall be operated as a single unit
  • To individually grant the authorizations required by their respective national laws
  • In the event that a trans-boundary reservoir is to be exploited as a single unit by making use of a host facility, the two governments must agree on the procedures used to develop that trans-boundary reservoir.

Calculating the shares between both countries usually is done through a procedure known as “unitization” which requires a thorough knowledge of the reservoir, particularly if it is to be exploited as a single source. In the Norway-UK agreement on the Frigg field, each government required the acknowledgment of the counterpart to establish a contract with the licensees of the neighbor country to appoint a common operator. The agreement regulates the free movement of persons and materials, safety issues, inspections, taxation, transfer of rights, and other matters, but does not affect the rights and jurisdiction of each country.

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“Western Gap”. Source: Pemex. Courtesy the Oil & Gas Journal Research Center report “Mexico’s Deepwater Gulf of Mexico: Potential and Pitfalls.”

More complex schemes are possible such as the case between Australia and Indonesia. The countries established a cooperation area divided by sectors within which different rules can apply. In one sector, activities can be carried by a common authority, while in another section development can be by joint venture companies. This requires numerous rules on supervision, safety, environmental protection, and much more. Unitization also may be needed when the reservoirs stretch along two or more sectors.

An alternative to unitization is the joint-venture, as was the case between France and Spain. Each country retains its sovereignty and jurisdiction in a common area where the companies can operate together.

In general, all the schemes require an institutional setup to administer the system. The setup can be simple or complex depending on the trust of each other’s authorities and institutions in matters related to border lines, permits, norms, and arbitrage, to name a few. Otherwise, the schemes must include a full regime of authorities and institutions to manage the issues.

The Mexico-US case

At present, neither the US nor Mexico has defined a scheme for a common agreement in joint petroleum operations.

In Mexico there is urgency to settle the dispute as an essentially defensive measure. Mexico’s deepwater drilling program will not be able to match the US efforts near the maritime border. Thus, while the US stands to benefit immediately from the delimitation of the Western Gap or from insufficient definition in the Perdido foldbelt, Mexico is technologically behind the US petroleum industry and needs to protect its reserves from private development.

Mexican Secretary of Energy Georgina Kessel Martinez and her US counterpart, Steven Chu, met on April 9, 2009, to underline the urgency of Mexico-US talks on cross-border fields. In Mexico some propose the government partner with the US to co-develop border fields or risk losing those deposits.

To allow joint development of national hydrocarbons, Mexico must develop the legal means to defend this patrimony. Pemex is the only oil company allowed as investor and operator under the Mexican system. The constitution prohibits foreign control of oil and gas production. This limits the ability of Mexico and the US to create a joint development scheme in the Western Gap buffer zone or at the Perdido foldbelt.

Thus, the solutions to the trans-boundary reservoirs need to be separated from the monopolistic structure of the petroleum industry. This seems to be the decision taken by Mexico during modifications to the Petroleum Law adopted on Nov. 28, 2008. There are two articles where the trans-boundary fields are mentioned:

Article 1 confirms the sovereignty on hydrocarbon resources in the national territory, including the continental shelf and the EEZ. In this context the trans-boundary fields are defined as those where the nation has national jurisdiction and where the reservoir has physical continuity outside that jurisdiction, shared with other countries, based on treaties signed by Mexico or based on the UN Convention on the Law of the Sea.

Article 2 states that only the nation (through Pemex) can carry on hydrocarbon exploitations. The trans-boundary fields can be exploited in terms of the treaties to which Mexico forms part, signed by the president of the Republic and approved by the Chamber of Senators.

The text onArticle 2 of the Petroleum Law opens the door for a treaty with the US specifically for the trans-boundary fields. This means that in the cases of such cross-border fields, Mexico and the US each could appoint companies to form a joint development effort and, within that agreement, to allow Pemex and a foreign company to supervise the sharing of resources. However, as mentioned, neither of the countries as of yet has indicated the possible characteristics or guidelines in such a treaty or on the schedules for its negotiations and approval.

TheFramework Agreement between the Government of the United Kingdom of Great Britain and Northern Ireland and The Government of the Kingdom of Norway concerning Cross-Boundary Petroleum Co-operation, represent good examples for Mexico and the US. This scheme reduces administrative costs but gives the parties enough control to safeguard all sovereignty, requiring the parties to agree on the most effective development plan and the way in which the proceeds are to be apportioned.

Closer to the US experience and considering prior treaties signed in North America such as those existing between Cuba-Bahamas, US-British Virgin Islands, and US-Canada, maybe the last one could provide elements for a joint solution offering quicker access to the reserves, while giving Mexico the necessary resources to develop its own GoM reserves.

The GoM is one of the last remaining prolific petroleum provinces in the world. So far the resources have been identified and produced in the shallow waters of Mexico. In the US, exploration and production in the GoM has taken place since the 1940s and now is extending southwards near to the border with Mexico. At the same time, technology has evolved to produce at 3,000 m (9,842 ft) water depths, though at very high costs.

Mexico, the US, and Cuba share the GoM which may hold trans-boundary reservoirs, including the Western and Eastern gaps. Mexico and the US executed a bilateral Treaty in the year 2000, to define the area in which the Western Gap reservoir lies, with a 10-year moratorium that soon will conclude. Thus, Mexico and the US must reach sharing and unitization schemes pursuant to international practice. Mexico also faces a major challenge in implementing international practice due to its constitutional and legal framework for hydrocarbons. Both countries have much to gain by solving this issue fairly, promptly, and functionally. The authorities in both countries are aware of the issue and seem ready to draw a treaty both countries can live with.

About the author

Javier Estrada Estrada is president of the consulting company Analitica Energética S.C. in Mexico City. He has 27 years experience in oil and gas in Mexico, Norway, and the US.

The commentary expressed in the preamble reflects the personal views of the editors, and should not be construed as representing the official positions of the editors’ employers.

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