International arbitration law watch

As technological developments and economic conditions continue to favour exploration and extraction of undersea oil and gas in ever deeper waters, disputes over the delineation of maritime boundaries and entitlements to the hydrocarbon resources are grabbing headlines again. The recent stand-off between Japan and China over the Senkaku/Diaoyu Islands in the East China Sea has once again shone a spotlight on the issue of maritime boundaries and delineation.

The contested islands are thought to have oil reserves beneath the seabed and the exploration of these reserves remains difficult whilst the political stand-off between Japan and China remains in place. Such stand-offs lead to some difficult issues for companies engaged in offshore exploration and development regarding the rights of states to exploit or lay claim to sub-sea resources even where international boundaries are not in dispute, interesting questions arise in connection within the exploitation of reserves that span national borders.

The acrimonious exchanges between China and Japan are only the most recent event in a series of conflicts surrounding maritime boundaries affecting natural resource exploration in the seas. Recently, tensions have risen in the eastern Mediterranean between Cyprus and Turkey in connection with oil and gas exploration off shore Cyprus. Turkey insists that Cyprus should halt all oil and gas exploration and drilling and has sent war ships to patrol the area. The long-standing dispute between the UK and Argentina over the Falkland Islands is in the headlines ones again. Argentina is threatening to take legal action against any companies involved in oil exploration asserting that exploration and drilling activities are illegal since the area is contested. Further disputes have arisen between Nicaragua and Colombia, India and Bangladesh and Trinidad & Tobago and Venezuela amongst others. The correlation between technological advances in deep-sea exploration and drilling, and legal and political acrimony is hardly surprising.

Deliniation of maritime boundaries

Customary international law provides that each country exercises seniority over twelve nautical miles from its coastline as its Territorial Waters. A further twelve miles form the Contiguous Zone, and countries can claim up to 200 miles from the edge of the territorial waters as their Exclusive Economic Zone (EEZ) in which they have special rights of exploration and use of the marine resources. Furthermore, countries have special rights to exploit their “continental shelf”. This extends to the natural prolongation of the land territory to the continental margin’s outer edge, or 200 nautical miles from the coastal state’s baseline, whichever is greater, up to a limit of 350 nautical miles.

Where the EEZ of two countries overlap, it is up to the states in question to delineate the actual boundary, though the general position is that any point within an overlapping area defaults to the nearest state. Agreement is normally achieved through negotiations. For example the continental shelf to which Turkey lays claims (mentioned above) was delineated by Cyprus and Israel in a 2010 agreement in which the two states agreed to demarcate their respective EEZ’s, divide the benefits and costs of exploration according to the percentage of  the asset located within their maritime territory.

Utilization/Joint development zones

This process of sharing the benefits and costs of exploration/protection according to the percentage of the asset located within its maritime territory undertaken as a single development scheme is often referred to as “unitisation”. The cross-border unitisation process was cemented through the Frigg Unitisation Agreement between the UK and Norway, which in 1976 provided the industry model that is still in use. The unitisation process and utilisation agreements continue to form common practice in relation to the exploration and development of cross-border and cross-block deposits. This process was recently adopted in connection with the exploration and exploitation of the Loran/Manatee natural gas field between Venezuela and Trinidad & Tobago.

In situations where the geographic area remains disputed, countries can still work together towards the development of oil fields by establishing a Joint Development Zone (JDZ) in the disputed area. This is done by agreeing on contribution and returns shares previous to any exploration and subject to the later establishment of boundaries. Unitisation reservoirs and joint petroleum development programmes are not mutually exclusive since a JDZ might be subdivided into separate contract areas and deposits may lie across its internal boundaries. In addition, deposits may be found that cross the boundary of the JDZ into an area where one of the states exercises exclusive sovereign rights.

International arbitration

Where disputes cannot be resolved amicably the parties may turn to international arbitration or other dispute resolution processes.

International tribunals have the power to impose similar arrangements on disputing parties.

Countries that have signed the United States Convention on the Law of the Sea (UNCLOS), which defines the rights and responsibilities of nations in their use of the world’s oceans, may have recourse to the International Tribunal for the Law of the Sea (ITLOS), while bringing claims before the International Court of Justice (ICJ), or international arbitration under UNCLOS are also viable options.

Issues for companies in the oil and gas industry

Cross boundary exploration/exploitation rights are set to become an issue of increasing importance to companies seeking to develop natural resources in the seas, whether they are fish stocks or subsea oil and gas reserves. Companies engaged in the exploration or development of resources in disputed territories, they may find themselves in a disruptive tug of war potentially causing significant losses. When that occurs, such companies may have enforceable contracted rights, as long as the disruption to their business is not categorised as a ‘Force Majeure Event’. Other remedies might be available pursuant to Bilateral Investment Protection Treaties or by seeking diplomatic protection from their home state. To safeguard against potential losses, companies operating in high-risk areas ought to:

  • Seek advice on the strength of the respective claims and potential ramifications should a dispute ensue.
  • Investigate the availability of political risk and other relevant insurance.
  • Seek to secure appropriate contractual frameworks (such JDZ or Unitisation Agreements) between the relevant parties.
  • Where losses have already occurred, companies might have no choice but to seek to recover competition under the relevant PSA or other applicable instruments.

We acknowledge with thanks the kind assistance of Jorge Klien ([email protected]) and Olivia Ralevski ([email protected]) in preparing this note.