Strategies for Development of Cross-Border Petroleum Reservoirs
Philip Weems, Archie Fallon
If countries share a common hydrocarbon reservoir across an established border, and are unable to agree on a definitive unitization agreement after making reasonable efforts to cooperate, international law does not require them to unitize the reservoir. Most countries, however, prefer a cooperative approach rather than unilateral approach for economic and political reasons, not necessarily legal reasons.
A Delimitation Agreement Can Require Neighboring Countries to Cooperate to Towards Agreements to Exploit a Common Reservoir
A hydrocarbon deposit may create complex legal issues if it underlies the territory of two different countries. At the time of discovery, three different factual scenarios may exist: (i) the countries have entered into a definitive agreement, such as a joint development or unitization agreement, that governs the manner in which they jointly develop a cross-border hydrocarbon deposit; (ii) the countries have entered only a delimitation agreement with respect to the boundary that addresses the contingency of cross-border hydrocarbon deposits in a non-definitive way, or (iii) the countries have no delimitation agreement in place and/or dispute the boundary. With respect to the first scenario, such a definitive agreement or treaty would be the primary source of international law governing the countries’ respective development obligations for such deposit.
This article focuses on the second scenario, which assumes that the countries have an agreed boundary, but have not agreed on the framework for unitizing or jointly developing the reservoir. If such boundary is not agreed upon, a boundary dispute is a common complicating factor in the analysis of countries’ obligations with respect to developing a cross-border reservoir. Frequently, countries disputing such a boundary litigate the delimitation of such boundary based on the United Nations Convention on the Law of the Sea of 10 December 1982 (UNCLOS) in the International Court of Justice (ICJ) (if such boundary is found offshore) and/or enter a joint development agreement that covers a broad geographic territory proximate to the disputed boundary, rather than entering into a unitization agreement covering development of a discrete cross-border reservoir. It should be noted that, in a strict sense, Cross-border unitization covers situations where a reservoir lies across a delimited boundary between two countries, and it involves the treatment of a specific petroleum reservoir or field as a single deposit. By contrast, joint development agreements refer to arrangements between two countries to develop and to share jointly in agreed proportions the petroleum found within a geographic area that has disputed sovereignty.
Under the second scenario, the relevant boundary delimitation agreement between two countries will often include a provision outlining the procedure to be followed if a common deposit of oil or gas straddles the boundary.  In one early and influential example, the United Kingdom and Norway agreed, with respect to their continental shelf boundary in the North Sea, that if a single petroleum field was found to extend across the dividing line, the two countries would seek to reach agreement on how the field could be most effectively exploited.  Such a delimitation agreement typically imposes a “cooperation” standard, but not an affirmative obligation, on the neighboring countries with respect to joint development of the reservoir.
Secondary sources of international law have addressed the obligation to cooperate in the specific context of a cross-border reservoir. Leading commentators have described such a “cooperation” standard as a “procedural obligation” to “negotiate in good faith (i.e., ‘in a spirit of understanding and co-operation’) to seek agreement on provisional arrangements of a practical nature for the exploitation of a common deposit.” 
Several United Nations instruments and resolutions by the General Assembly have addressed the cooperation standard with respect to shared natural resources. General Assembly Resolution 3129 (XXVIII) declares that: “it is necessary to ensure effective cooperation between states through the establishment of adequate international standards for the conservation and harmonious exploitation of natural resources common to two or more states in the context of the normal relations existing between them” (emphasis added). This resolution imposes no affirmative obligation beyond cooperation. Further, Article 3 of 1974 United Nations Charter of Economic Rights and Duties of States provides that cooperation would include a “system of information” and “prior consultation” between countries with a common hydrocarbon deposit “in order to achieve optimum use of such resources without causing damage to the legitimate interests of others.”  It should be noted, however, that most western countries either abstained (Austria, Canada, France, Ireland, Israel, Italy, Japan, the Netherlands, Norway and Spain) or voted against (Belgium, Denmark, Germany, Luxembourg, the United Kingdom) this charter.
In a 2007 International Court of Justice case between Guyana and Suriname over a disputed maritime boundary, the ICJ explained how the countries failed to act cooperatively.  In the case, a gunboat of Suriname challenged an exploration vessel owned by a contractor of Guyana exploring for hydrocarbon deposits in disputed territorial waters. The Tribunal’s holding is distinguishable from situations in which the boundary is delimited, but the Tribunal made several comments that help illustrate the means by which countries may cooperate. The Tribunal found that Guyana could have taken efforts to enter into “provisional arrangements” including “(1) giving Suriname official and detailed notice of the planned activities, (2) seeking cooperation of Suriname in undertaking the activities, (3) offering to share the results of the exploration and giving Suriname an opportunity to observe the activities, and (4) offering to share all the financial benefits received from the exploratory activities.”  Further, the Tribunal indicated that one measure reflecting cooperation between the countries was the meeting between the respective presidents and senior leaders of both countries to discuss the common reservoir. 
If Neighboring Countries Do Not Reach an Agreement to Exploit a Common Reservoir, International Law Does Not Require the Countries to Unitize the Reservoir
If neighboring countries subject to a “cooperation” standard do not reach a definitive agreement regarding unitization, there is no international convention that requires unitization between them.
Secondary sources of international law, including international court decisions and comments by scholars of international law, have specifically addressed the absence of a cross-border unitization obligation in connection with the “cooperation” standard. One leading scholar, Mr. David M. Ong,  has stated “it would be a mistake to construe the more stringent requirement of joint development as an inevitable consequence of the procedural rule requiring cooperation. While this rule obliges the parties to negotiate in good faith, it does not necessarily imply a duty to reach a specific type of agreement.”  Other scholars have noted that despite the increase in international practice in concluding joint petroleum development agreements, “there is no legal obligation for countries to cooperate and agree to jointly develop in a disputed area…[t]herefore, the concept of joint petroleum development cannot be said to be international customary law.” 
The International Court of Justice decision in the North Sea Continental Shelf Cases of 1969 is supportive of the view of such scholars. In the Case, the Tribunal held that the obligation of countries to negotiate international border disputes, including negotiations around development of common hydrocarbon reservoirs, does not require the countries to enter an agreement, but instead to “pursue them as far as possible with a view to concluding agreements.” 
Secondary Sources of International Law Provide Support the Proposition that a Country Could Unilaterally Exploit a Cross-border Reservoir after Not Reaching a Unitization Agreement with an Adjacent Country
Given the absence of international law requiring unitization or joint development if countries, after cooperation, do not reach an agreement with respect to a cross-border reservoir, there is a logical question of what rights a country has to exploit the portion of the reservoir located in its delimited territory. Some commentators emphasize the sovereign rights of a country to explore for and exploit natural resources in its sovereign territory, and have suggested that the “rule of capture” applies to such situations.  We view this line of reasoning as supportable based on the scholarship and publicly available practice examples, though it should be pointed out that there is no international convention or International Court of Justice decision directly addressing the rule of capture.
The rule of capture has been defined in terrestrial terms as follows: the right to drill for and produce oil and gas from a particular tract of land even though doing so will drain the hydrocarbon concerned from beneath the land of another party.  In an English case Acton v. Blundell, the rule of capture was applied in relation to groundwater rights.  There, the Court of Exchequer Chamber held that a mine owner was not liable in damages to a miller whose wells he had pumped dry. The rationale of Acton was not so much that the mineowner had proprietary rights in the water migrating from the miller's well as that there was a preclusion of tortious liability.
In one case study that supports the application of the rule of capture in a cross-border reservoir context, a scholar and practitioner Mr. Rodman Bundy described a situation in which an oil company was producing oil from an Abu Dhabi offshore field called the Sassan field that straddled a delimited international boundary between Iran and Abu Dhabi.  During the Iranian Revolution, a shutdown of production on the Iranian side occurred. Because of the petrophysical characteristics of the Sassan field, Iran's shut-down resulted in a substantial migration of oil to the Abu Dhabi side of the field, where production continued. Iran thus lost significant quantities of crude. In the circumstances, Abu Dhabi did not curtail its own production or reimburse Iran. Mr. Bundy reasoned Abu Dhabi had no obligation to do so because “the exploitation of international oil and gas reserves is still based largely on the law of capture...This means that, in the absence of an agreement to the contrary, a State or international oil company is free to maximise production from its side of the boundary line notwithstanding the policies of neighbouring States which share the same field.”  In the Abu Dhabi-Iran example, Abu Dhabi actually increased its production from the field when Iran's production was shut down. Indeed, even when Abu Dhabi curtailed its overall production in compliance with OPEC (Organization of Petroleum Exporting Countries) quotas, it made a deliberate decision to exclude the field from any prorated decrease. Clearly, this exacerbated the migration problem from Iran's point of view. Yet, Abu Dhabi apparently took the position, with which Mr. Bundy agreed, that Iran had no cause of action against Abu Dhabi under international law. 
In an additional example, Qatar’s North Field straddles that country’s median line boundary with Iran, where it is known as South Pars. Qatar is said to be aggressively developing the North Field without having a unitization or other joint development arrangement in place with Iran. Qatar’s production in the North Field is reducing Iran’s ultimate liquids recovery.  It is uncertain whether Iran may ultimately decide to voice an objection under international law to such activities.
Further, although not directly on point, International Court of Justice decisions have upheld the rights of a country to explore for hydrocarbons in disputed territorial waters. These decisions suggest that a country with a delimited boundary would have inherent sovereign rights to produce hydrocarbons from a reservoir extending across a delimited boundary after exercising its duty to cooperate (but is unable to reach a unitization agreement). In the Guyana / Suriname maritime border dispute case, the Tribunal found that Guyana, despite having an obligation to cooperate with Suriname to resolve the border dispute, retained the right to engage in exploratory drilling activities while the border dispute was pending because “international courts and tribunals should also be careful not to stifle the parties’ ability to pursue economic development in a disputed area during a boundary dispute.” 
In a separate boundary dispute case, the ICJ declined to restrict the rights of Turkey to conduct exploration activities in territorial waters subject to a boundary dispute with Greece.  The ICJ declined to grant Greece injunctive measures on the basis that the exploration activities did not involve “any risk of physical damage to the seabed or subsoil or to [Greece’s] natural resources…no suggestion has been made that Turkey has embarked upon any operations involving the actual appropriation or other use of the natural resources of the areas of the continental shelf which are in dispute.” The decision by the ICJ implies that although exploration activities may be permitted during the settlement of a boundary, production activities would not be permitted pending settlement of an international boundary. This implication appears distinguishable from the case where countries have already delimited their boundary and have agreed to “cooperate,” but have not affirmatively promised, to jointly develop a reservoir a reservoir.
Although there is support for the application of the rule of capture in the international context, most countries instead prefer a cooperative approach, primarily for practical economic reasons. A country may be interested in a cooperative approach because:
- It prevents its neighboring countries from unilaterally extracting petroleum from the common petroleum reservoir;
- It lowers their extraction costs and achieving maximum production rates; and
- Countries may also be incentivized to cooperate in situations where it is the only viable way to protect their sovereign rights to the petroleum in place, without prejudicing their rights against one another.