Panel Presentation on the US-Mexico Transborder Hydrocarbon Agreement

 

 

 

 

 

 

George Baker

Publisher

Energia.Com & Mexico Energy Intelligence

(Houston, TX)

 

A panel session on the U.S.-Mexico Transborder Hydrocarbon Agreement of 2012 was conducted at the 31st USAEE/IAEE North American Conference.  The presenters were: Juan Carlos Zepeda, president of Mexico's National Hydrocarbon Commission (CNH); Lourdes Melgar, a specialist on international energy policy with a long involvement in issues related to cross-border negotiations - in Dec. 2012, Dr. Melgar was appointed Undersecretary of the electricity sector in Mexico's Energy Ministry (SENER); and George Baker, the moderator, who has written on the gaps in the text of the agreement, and the impediments to be overcome for a timely and effective implementation.

Juan Carlos Zepeda, speaking first, reviewed Pemex’s drilling activities planned for the Perdido Area, where cross-border oilfields are likely to be found,


Exhibit 1

 

emphasized the importance for his agency of an early US approval of the agreement by a treaty ratified by the Senate (it has already been approved by the Mexican Senate) . He emphasized that US approval of the treaty would strengthen the authority of his regulatory agency. “The approval of the agreement by the U.S. would establish CNH safety requirements as a matter of international law; whereas today, our safety directives have a weak legal support.”

Additionally, he observed that CNH has been severely understaffed and under-budgeted, which has resulted in little leverage with Pemex in relation to deepwater operations.  “In our directives and regulations we say, repeatedly ‘Pemex should’; but the truth is that we seldom learn for sure if Pemex ever complies with the ‘should’ or not. We don´t have any inspectors to verify compliance of our regulations.”

He observed that at present his agency has little leverage with Pemex in relation to deepwater operations. “In our directives and regulations we say, repeatedly that ‘Pemex should’; but the truth is that we seldom learn if Pemex ever complies with the ‘should’ or not. Further, should we learn that Pemex is in non-compliance, what then? We can do little or nothing about it.”

The commissioner concluded that having an international agreement would—independently of the discovery or not of cross-border oilfields—lead to higher levels of industrial and environmental safety in the Gulf of Mexico. “Pemex will have greater incentives to operate by global standards, and Mexico as a society will benefit from greater public oversight.”

Lourdes Melgar reviewed the history of maritime agreements between Mexico and the U.S, noting that nineteen years elapsed between the signing of the treaty of 1978 and its ratification in 1997.

There were two immediate impulses for the treaty signed in 2012: From the Mexican side, the incentive was the expiration in 2011 of the ten-year moratorium on drilling in the area in the Gulf of Mexico known as the Western Gap (Areas designated as #2 and #4 are the Western and Eastern Gaps, respectively).

 

 

 

Exhibit 2

 

The expiration of the moratorium meant that drilling on the US side could proceed without any protection for the mineral interests of Mexico.

From the US side, the big motivation was the Macondo accident of April 20, 2010, and its long, expensive aftermath. From these two very different senses of urgency, the agreement was negotiated in less than a year, and represents a diplomatic break-through for both countries, as neither had previously signed an agreement that required the joint administration of cross-border mineral deposits.

George Baker observed that the Obama administration has not yet submitted the agreement for approval, either as a treaty to be ratified by the Senate (it has already been approved by the Mexican Senate) or as implementing legislation to be approved by both houses.

From the U.S. perspective, the text of the treaty was crafted in such a way so as to serve as a generic template for similar agreements with Russia, Canada and Cuba.

Baker cautioned that the agreement, even when (presumably, not if) approved on the US side, cannot presently be implemented. He noted that the while the agreement calls for the unitization of cross-border oilfields, there is no definition of “unit operator” in the agreement’s definitions. As Pemex is neither certified, nor (as yet) qualified, as a deepwater operator in US waters, it cannot be the unit operator for a unitized field. It follows that the unit operator must be a company other than Pemex and that, in that capacity, must have investment and operational authority in Mexican waters.

He observed that the language of the treaty is ahead of both law and public opinion in Mexico; and unless adjustments are made in both realms, the treaty cannot be implemented, as unitized field cannot have two unit operators, one on each side of the border.

He pointed to an incompatibility between the concept of a licensed block for purpose of oil and gas exploration: On the US side, a block is defined in two dimensions, as a square or rectangle, with the lease owner having commercial mineral rights for deposits at any depth

 



 

Exhibit 3



According to the language of the treaty, however, for purposes of unitization, each cross-border reservoir should be the object of a separate unitization agreement.

 

 

Exhibit 4

 

Baker made reference to a what he described as an innovative argument that Dr. Melgar had made in Senate testimony during the Energy Forum held during the summer of 2008

 

 

Exhibit 5

 

Dr. Melgar had argued that as Constitutional Article 27, which establishes State ownership of hydrocarbons, applies only to those deposits where the State has exclusive jurisdiction.  Mexico, in signing the UN Convention of the Law of the Sea, committed itself to the joint administration of cross-border resources; and in so doing effectively declared that the reach of Article 27 stops at the point where a cross-border reservoir begins.[1]

As there is no way to know, in advance, how far a cross-border field may extend into Mexico, the solution would seem to be to choose a distance from the maritime border (say, 100 km) beyond which a Hydrocarbon Free Trade Zone would be established with laws and regulations appropriate to it alone.

Meanwhile, there is the legal legacy of Ixtox-1, the oil spill that occurred on Jun 3, 1979. Oil reached Texas beaches in the late summer, but Pemex was not held liable on the strength of an argument that adduced sovereign immunity.  Mexico, through Pemex and its contractor (the argument went), was not engaging in a commercial act; rather the act was one of defining the national hydrocarbon patrimony (hence covered by sovereign immunity). Baker asked, What is the status of this legal recourse today?  Could it be used by Pemex, or a contractor working for Pemex, to walk away from liability claims in the event of a deepwater blow-out?

The Obama administration has not yet decided the form in which the Agreement is to be presented to the Congress; we believe, however, that the odds favor its being submitted as a package of implementing legislation that mainly concern the Department of the Interior.

Legislative action on the agreement is likely to be deferred until after a commercial discovery of a cross-border oilfield, “an event,” as Pemex Director General Juan José Suárez Coppel said at a breakfast in Houston with the energy media in March 2011, “that tends to clear the mind.”

Meanwhile, the lack of legal and commercial certainty regarding the administration of a potential cross-border field on the US-Mexico maritime border will be a disincentive for prospective operators on the U.S. side to bid for blocks that are adjacent to the border.

 

 


[1] http://www.senado.gob.mx/reforma_energetica/content/foros/docs/05junio2008_3.pdf.

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