Cross-border unitization and joint development agreements: an international law perspective.

1. Sharing of Resources

The sharing of resources from the JDZ is a key element to the success of the joint agreement as the perception that the basis for sharing is equitable and fundamental to the ongoing relationship between the two states. There is overwhelming support for the principle of equal sharing. (400) In practice, this is the most common arrangement, though variations do exist. For example, the Senegal-Guinea-Bissau agreement of 1993 (85:15 split in favor of Senegal for petroleum resources, but 50:50 for fishing rights); the 2001 Nigeria-Sao Tome e Principe JDZ (60:40 split in favor of Nigeria) and the 2002 Australia-Timor-Leste Timor Sea Treaty (90:10 split in favor of Timor-Leste). (401)

2. Management

Since the JDZ is generally an area where jurisdiction is disputed, the management structure must provide a satisfactory basis for the protection of the rights (and obligations) of both states. This includes the management of exploration and exploitation activities within the JDZ. Three categories of management structure have been identified:

(i) Single state model: (402) One state managing on behalf of both states. (403) An example of this arrangement is the Bahrain-Saudi Arabia agreement of 1958. As part of the delimitation agreement, the border was positioned to avoid crossing the Fasht Abu-Sa'fah field which, as a result, became wholly within the jurisdiction of Saudi Arabia. (404) However, in return, Saudi Arabia was obliged to grant to Bahrain fifty percent of the net revenues from the field; (405)

(ii) Two states/joint venture model: (406) Each state nominates its own concessionaire, which enters into a joint venture with the concessionaire of the other state. An example of this type of agreement is the Japan-South Korea JDZ; (407)

(iii) Joint Authority model: (408) Both states delegate power to a single body, which becomes responsible for the overall supervision of petroleum activities in the zone. It may be given a legal personality. This model can vary significantly with respect to the powers given to the Joint Authority: it can be strong, almost like a separate state, or a weaker, purely administrative entity. Developing international practice has favored the Joint Authority approach, including the Thailand-Malaysia agreement (1979/1990), (409) the Australia-Indonesia Timor Gap Treaty (1989), (410) the Nigeria-Sao Tome e Principe JDZ (2001) (411) and the Australia-East Timor Sea Treaty (2002). (412) This model may also contain more than one level of authority. For example, administration of the Timor Sea Treaty is based on a three-tier structure: a ministerial council, a Joint Commission and a designated authority. (413)

The Timor Gap Treaty of 1989 is noteworthy in that it actually combines two of the above models. The area covered by the agreement is subdivided into three parts of which Area A is a JDZ based on the Joint Authority model. (414) Areas B and C, however, are consistent with the single-state model described above. (415) In these two areas, jurisdiction is exercised solely by one state but with an obligation to share with the other state a proportion of benefits (ten percent of petroleum taxation revenues) arising from petroleum activities in that area. (416)

3. Applicable Law

Because each state will have its own legal system, including a petroleum fiscal regime that encompasses production sharing contracts, which will very likely be significantly different from each other, it is necessary to establish the legal system that will apply within the JDZ in the agreement. This should include the petroleum licensing regime, laws governing civil and criminal jurisdiction over individuals in the zone, and rules and regulations governing health, safety and environmental issues.

The petroleum licensing guidelines and other regulations may be specified in the agreement or could be left to the Joint Authority to establish. Criminal jurisdiction is generally handled by applying the criminal law of the state corresponding to the nationality of the individual if that individual is a national of either of the two states, or by other agreement between states, (417) but it may be applied by separating the JDZ into two parts with each state exercising criminal jurisdiction in its side of that boundary line. (418)

4. Operator/Position of Contractors

The joint petroleum development agreement will either specify the basis for licensing the area of the JDZ or will designate to some body, for example the Joint Authority, the obligation to develop the rules for selecting contractors to undertake petroleum exploration and exploitation activities on behalf of the two states.

For example, the Nigeria-Sao Tome e Principe JDZ agreement defines "contractor" as a party to a development contract other than the Joint Authority. (419) "Development contract" means any agreement, including leases, licenses, production sharing contracts, and concessions entered into between the Joint Authority and a contractor in relation to a development activity. (420) It also defines "operator" as a contractor appointed and acting as operator under the terms of an operating agreement. (421) In this JDZ agreement, the functions of the Joint Authority include, for example:

(i) [T]he division of the Zone into contract areas, and the negotiation, tendering for and issue and supervision of contracts with respect to such areas;

(ii) [E]ntering into development contracts with contractors, subject to the approval of the [joint ministerial] [c]ouncil;

(iii) Oversight and control of the activities of contractors[.] (422)

5. Financial Provisions

States may agree to adopt the taxation regime of the other or apply a contractor to the regime of the state that approved the contractor. Alternatively, they may delegate to the Joint Authority the obligation to formulate and negotiate the fiscal terms applying to petroleum activities. In the latter case, the Joint Authority will develop and apply its own tax regime. Where this is not the case, and the contractor has financial obligations to both states, taxation will apply at a discounted rate, such that the contractor is liable for taxes only on a proportion of its profits to one state and the remainder to the other state.

6. Dispute Resolution

Each joint petroleum development agreement should provide for a dispute resolution mechanism. This will usually involve internal mechanisms that should be pursued prior to resorting to external or third party resolution. These agreements and treaties utilize a wide range of mechanisms, including consultation, negotiation, conciliation, and binding commercial arbitration.

The Nigeria-Sao Tome e Principe JDZ agreement of 2001 illustrates a possible approach. The Treaty covers the resolution of deadlocks and settlement of disputes in Articles 47, 48, and 49. (423) Article 47 refers to the "settlement of disputes between the [joint] authority and private interests." (424) This is subject to binding commercial arbitration under the UNCITRAL rules sitting in Lagos, Nigeria. (425) Article 48 refers to the resolution of disputes arising in the work of the Joint Authority or Joint Ministerial Council. (426) Where such a dispute arises (with respect to the functioning of the treaty), the first attempt to resolve it should be by the board that governs the Joint Authority. (427) If this is unsuccessful the matter is to be referred to the Joint Ministerial Council, and if it is still unsuccessful it is referred to the heads of the states. (428) Under Article 49, where there are unresolved disputes between states, it will be referred to an arbitral tribunal for a decision that is final and binding on the states. (429) This tribunal is expected to sit at the Permanent Court of Arbitration in The Hague. (430) Each state is to appoint an arbitrator and then both arbitrators appoint a third to act as president. (431) Where this is not possible, it falls to the president of the ICJ to appoint the third arbitrator. (432)

IV. SUMMARY AND CONCLUSIONS

The concept of cross-border unitization is the outcome of two principles:

(i) [T]he principle of unitization as developed in the domestic law of the U.S. and subsequently practiced in other parts of the world; and,

(ii) [T]he principle of cooperation between neighboring states that is emerging in international law and the provisions of international law relating to exploitation of cross-border common natural resources having physical properties analogous to those of petroleum. (433)

There are no binding rules or customs under international law governing unitization, but there is a trend towards an international consensus on an acceptable practice to that end. Unitization is a specialized form of cooperative development where "[a] strong degree of political consensus is a prerequisite for [its implementation]." (434) Under international law, states are not obligated to develop a disputed zone jointly. There is a general obligation, however, to consult and negotiate, with encouragement to "enter into provisional arrangements of a practical nature" (435) pending final delimitation. But, it remains the prerogative of each state to choose to consent to a joint development agreement.

Several international cases decided before the ICJ and persistent international practice indicate that JDZs are strongly recommended as suitable provisional arrangements to avoid inaction or the uncertainty of third party dispute resolution on boundary delimitation where petroleum resource potential is known or believed to exist.