Choice of legal framework applicable to the joint development zone: options

Single state model

Probably the most challenging task when negotiating a joint development regime is to configure a mutually acceptable administrative structure through which participating States’ may co-exercise their sovereign rights in the joint development zone.[1] A key challenge in this effort is to agree mutually on the body of rules and regulations that will apply on petroleum operations in the joint development zone. This body of rules and regulations will require transposition into the domestic legal systems of States if it is to be binding upon States and private-sector oil companies operating in the joint develop-27 ment zone.

From the oil industry’s perspective, in the context of a joint development zone, it is important to have a clear and comprehensive petroleum regulatory framework that provides for applicable jurisdiction and articulates the responsibilities sufficiently among the participating governments. To potential investors, it is indispensable to obtain a valid and secure title before undertaking any exploration or exploitation investments in the area in question. In the case of a joint development regime, because neither State forfeits its sovereign rights, the title cannot be based on the exclusive jurisdiction of one State, unless the States have explicitly opted for this arrangement. In all

Beyond delimitation questions 221 other cases, investors would derive title from a legal system that encompasses the sovereign rights of both States in the joint development area. Therefore, to give the agreement, and any development contracts concluded pursuant to it, legal effect vis-a-vis private-sector parties whilst avoiding problems of dual or overlapping jurisdiction, it is necessary to select a specific set of laws, implemented at a municipal level, to govern petroleum operations in the joint development zone.[2]

Private-sector investors also require certainty as to the regulations with which they should comply, in other words, the law applicable in the area in question. If one State alone is responsible for the management of the joint development zone (‘clean state’ approach), the issue of applicable law is much more straightforward. Where two States opt to share the management and regulation of petroleum activities in the development zone, there is uncertainty as to which State’s laws apply, meaning that the applicable law may be that of one or other of the States or even a combination thereof.

The choice, and implementation, of the petroleum legal framework applicable to the zone of cooperation is vital to the success of joint petroleum operations; it is also a highly sensitive political issue.’13 In practice, whether or not joint development goes ahead will depend on the willingness of one of the parties to accept the petroleum laws of the other party to govern operations in the joint development zone. Where interested States are prepared to transpose an existing legal system belonging to either of the parties to the joint development area, as opposed to creating a new set of laws by combining elements of both parties’ domestic petroleum laws, the creation of a joint development regime is a relatively clear-cut task. This is possible, for instance, where one State has greater knowledge of, and experience in, offshore petroleum regulation and management, whereas the other State has none. This was the case, for example, with Norway and Iceland in the Norwegian Sea. There, at the time of bilateral negotiations on joint development in the early 1980s, Norway already had in place a tested and robust petroleum legal system as well as the required funds and technical expertise to undertake offshore petroleum operations, whereas Iceland did not have any of these. Thus, for Norway to carry out all necessary exploratory surveys on its own, with Icelandic experts monitoring ongoing surveys and assessing resulting data, meant that Iceland was able to gain important technical expertise which progressively created a stronger basis for cooperation (Figure 7.3).

Iceland-Norway Joint Development Zone

Figure 7.3 Iceland-Norway Joint Development Zone.

Source: Agreement on the Continental Shelf between Iceland and Jan Mayen (Iceland/Norway) (adopted 22 October 1981, entered into force 2 June 1982).

As another example, under the 1974 Japan/Korea joint development agreement, the issues of jurisdiction and applicable law are settled in an ‘Operator formula’: the party that authorises an oil company designated as the ‘operator’ with respect to a specified oil block (referred to in the agreement as a subzone) has jurisdiction in that subzone and applies its law there. Article XIX of the Japan/ Korea joint development agreement provides as follows:

Except where otherwise provided in this Agreement, the laws and regulations of one Party shall apply with respect to matters relating to exploration or exploitation of natural resources in the subzones with respect to which that Party has authorized concessionaires designated and acting as Operators.

Therefore, Korean law is applied in a certain subzone where a Korean oil company works as the operator, whereas in an adjacent subzone Japanese law is applied because the operator there is a company authorised by the Japanese government; the choice of the operator lies with the participating petroleum companies. Whilst this ‘operator formula’ has made it unnecessary to choose a single domestic petroleum legal system that will govern the whole joint development zone (be it the Korean, the Japanese or even a third State’s legal system), it is not free from ambiguities.

Considering that petroleum operations are divided into two phases, exploration and exploitation, if the operator alternates in the two phases between the two companies authorised by the parties, the jurisdiction and applicable law in a given subzone might shift from one to the other with the shift of development work from exploration to exploitation. This is a very unique and, to a large extent, untested system so no safe conclusions can be reached regarding its functionality.

Importantly, even under the clean state approach, where one State’s domestic legal system applies to and regulates petroleum operations in the joint development zone, participating States may choose to set out certain controls and qualifications in order to ensure that the other States maintain an equal level of control over petroleum operations and can still participate in the management of the joint development zone.[3] Such controls and qualifications may include, for example, that certain petroleum activities (e.g. drilling) can only be carried out with the joint approval by the governments of the participating States, the duty to consult each other on matters relating to the protection of the marine environment and the duty to allow participation of oil companies of both States in exploration and exploitation operations in the joint development zone. Despite the above controls and qualifications, typically, neither State is prepared to allow the other State to regulate, on a sole basis, the day-to-day petroleum operations in the joint development zone. Indeed, Fox and others take the view that ‘the acceptance by one State of the petroleum development system of another is not a precedent likely to find general application’.

That said, opting for a basic clean state development model in the East China Sea and the Aegean is not likely to be politically feasible. Rather, it seems more likely that the interested States pursue a comprehensive joint development model, based, for example, on a joint venture or joint authority structure, with a view to ensuring an equal level of operational control and management of petroleum activities within the zone of cooperation.

  • [1] David Lerer, ‘Other Important Issues Loom in JDA Negotiations’ (2003) 101 Oil and Gas Journal 44, 45; Ernst Willheim, ‘Australia-Indonesia Sea-Bed Boundary Negotiations: Proposals for A Joint Development Zone in the “Timor Gap’” (1989) 29 Natural Resources Journal 821,832; Robert Beckman, ‘Factors Conductive to Joint Development in Asia - Lessons Learned For the South China Sea’ in Robert Beckman and others (eds) Beyond Territorial Disputes in the South China Sea: Legal Frameworks For the Joint Development of Hydrocarbon Resources (Edward Elgar 2013)292. 2 David Lerer, ‘Other Important Issues Loom in JDA Negotiations’ (2003) 101 Oil and Gas Journal 44, 45. 3 Hazel Fox and others (eds) Joint Development of Offshore Oil and Gas( 1st edn, BIICL 1989) 263. 4 Jon M Van Dyke, ‘Summary Thoughts: Workshop on Joint Exploration and Development of Offshore Hydrocarbon Resources in Southeast Asia’ (Bangkok, 25 February 1985) cited in Masahiro Miyoshi, ‘The Joint Development of Offshore Oil and Gas in Relation to Maritime Boundary Delimitation’ (1999) 5(2) International Boundaries Research Unit 1,4 Appendix 3. 5 Hazel Fox and others (eds) Joint Development of Offshore Oil and Gas (1st edn, BIICL 1989) 263.
  • [2] Ibid. 2 Ibid., 265-6. 3 Ibid., 273. 4 Ibid., 266. 5 Robert Beckman and Leo Bernard, Framework far the Joint Development of Hydrocarbon Resources (Centre for International Law, National University of Singapore, 2014) 21. 6 See Chapter 6 of this book.
  • [3] For instance, in the Nigeria/Sao Tome joint development agreement, one factor that overrode the rest in the negotiation of this agreement was Sao Tome’s desire for a measure of equality, see David Lerer, ‘Joint Development Zones: Negotiating and Structuring a Joint Development Agreement’ (2003) 1(5) Oil, Gas and Energy Law Intelligence 1-2. 2 See, for example, Art 7, Iceland/Norway 1981 Agreement; see also Annex II, Convention Between France and Spain on the Delimitation of the Territorial Sea and the Contiguous Zone in the Bay of Biscay (adopted 29 January 1974, entered into force 5 April 1975) 996 United Nations Treaty Series 355 (France/Spain 1974 Agreement). 3 Hazel Fox and others (eds) Joint Development of Offshore Oil and Gas (1st edn, BI ICL 1989) 148. 4 Tn situations where states truly desire political equality, one of the two joint structures is more likely to result’, see David Lerer, ‘Joint Development Zones: Negotiating and Structuring a Joint Development Agreement’ (2003) 1(5) Oil, Gas and Energy Law Intelligence 1-2.
 
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