UNITIZING OIL AND GAS FIELDS AROUND THE WORLD: A COMPARATIVE ANALYSIS OF NATIONAL LAWS AND PRIVATE CONTRACTS
by Jacqueline Lang Weaver David F. Asmus in Energy Politics Archives Winter 2007
As part of the Energy Politics Working History Series, this article explores the evolution of unitization practices in global energy sectors. Since 2007, national laws surrounding unitization have seen notable updates, reflecting increasing international collaboration, regulatory standardization, and environmental considerations in cross-border petroleum reserves.
INTRODUCTION:OVERVIEW AND SCOPE OF ARTICLE
Unitization is the joint, coordinated operation of a petroleum reservoir by all the owners of rights in the separate tracts overlying the reservoir. Unitization of oil and gas fields is commonplace in the United States where private ownership of minerals has often resulted in fractionalized ownership of the oil and gas in a common reservoir, such that tens, hundreds, and even thousands, of private landowners (who have leased their tracts in exchange for royalty interests) and their lessees (workinginterest owners) have interests in the same reservoir. Without unitized operation of the reservoir, the common law “rule of capture” results in competitive drilling and production with consequent economic and physical waste, as each separate owner attempts to secure his or her “fair share” of the underground resource by drilling more and pumping faster than his neighbor.1 To conserve its petroleum resources, the United States became the “unitization capital” of the world as measured by the enactment and use of domestic (in international terms “municipal”) unitization lawsOutside of the United States, unitization has not been as prevalent simply because it has not been as necessary to the sound development of petroleum resources. Oil and gas resources in most countries are owned by the country, not by private individuals or entities.2 When a country, as the single lessor or licensor, issues licenses or enters into production sharing agreements or similar contracts with enterprises to develop these resources,3 the contracts awarded often cover large areas comprised of many thousands of acres.4 In addition, government agencies may have used seismic surveys to define the license area to cover an entire geological structure or other trap, thus limiting the possibility of competitive drilling by rival licensees awarded adjacent acreage over a common reservoir.5
Nonetheless, interest in unitization outside of the United States has been growing in the past three decades for several reasons. First, the 1973 OPEC oil embargo imposed by Mideastern producing nations against many of the industrialized, oil-importing countries, led to a rapid rise in the price of oil. Western nations and their multinational oil companies sought to diversify their sources of oil imports. Exploration proceeded apace in many new areas of the world, such as the North Sea, South America, and Africa, and many new companies entered the international arena to compete for development rights against the major oil companies that had long dominated the global market. Additionally, state monopolies over exploration and production in host countries were loosened in the 1980s and 1990s, so more competitors could successfully enter to engage in resource development.6 Second, over the years, exploration blocks offered by host governments have become smaller as host governments have sought to maximize revenue through a greater number of signing bonuses and more rapid development of reservoirs (more likely if there are fewer reservoirs per block). Third, relinquished areas from existing blocks have also increased the number of smaller blocks available.7
As a result of all of these factors, increasing numbers of reservoirs are being discovered in locations outside the United States that underlie several license areas with different licensees on each area. Some of these reservoirs cross the borders between two or more countries. In addition, as offshore areas have become the new frontier promising the highest potential for large field discoveries,8 licensees have moved into areas with undefined boundaries contested by rival coastal nations. For all these reasons, the development of petroleum resources between different licensees and different countries through cooperative rather than competitive mechanisms has assumed great importance globally.
1. Legal Framework for Unitization: Overview
Internationally, unitization takes place within a multi-layered framework of law. When a reservoir straddles the boundaries of two or more sovereign countries, whether the boundaries are defined (often termed “delimited”) or undefined, the layers look like this:
(i) international law—treaties, conventions, and international custom;
(ii) national laws and regulations of the host governments, and contracts between the host governments and the licensees, notably agreements authorizing development (such as a license agreement, concession, or production-sharing agreement). In some countries, the host-government contract has the force of law; and
(iii) private contracts among the licensees and interested third parties, such as operating agreements, farmout and acquisition agreements, and production sales contracts.
This Article examines this multi-layered legal framework from two different perspectives. Parts II and III analyze the unitization provisions of the national laws, regulations, and model contracts of a twelve country survey9 and describe the private framework of commonly used contracts that are affected by unitization. Parts IV and V review the unitization process, key issues addressed in a unitization agreement, and the typical treatment of those issues.
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Where to now?
Since 2007, national laws surrounding unitization have seen notable updates, reflecting increasing international collaboration, regulatory standardization, and environmental considerations in cross-border petroleum reserves. Here are a few notable updates to national laws on unitization since 2007:
United Kingdom (2010): The UK introduced the "Hydrocarbon Licensing and Unitization Framework," which set out clearer guidelines for unitization agreements between operators in shared reservoirs to ensure fair and equitable development of cross-boundary resources.
Norway (2017): Norway implemented stricter rules on unitization for offshore oil and gas fields under the revised Petroleum Act. It emphasized the need for operators to cooperate in the development of resources that straddle borders, particularly in the Barents Sea.
Australia (2018): The Australian government introduced new regulations for unitization agreements in the Timor Sea. The legal framework made it easier for both Australian and Timorese authorities to collaborate on shared reserves while addressing environmental concerns.
United States (2020): The U.S. revised its unitization laws in the Gulf of Mexico to clarify the roles of federal and state authorities in unitizing oil and gas fields that extend across jurisdictional boundaries, ensuring fair distribution of revenue and resource extraction.
Oman (2021): Oman updated its unitization guidelines to address the development of fields that cross into neighboring countries. The new regulations emphasized joint ventures and agreements with neighboring nations, specifically aimed at maximizing recovery from shared fields.
These updates highlight the global trend towards cooperation and regulation, aimed at optimizing resource extraction while addressing environmental and political challenges.
References.
1. WEAVER, supra note 2, at 21.
2. The term “country” is used in preference to “state” or “nation” throughout this Article, in part to avoid confusion with references to the individual states within the United States of America.
3. In the United States, development rights are granted by an oil and gas lease, and the oil company, or grantee, is commonly called the lessee. Outside of the United States, the company granted contractual development rights by host governments is typically called the licensee, contractor, or concessionaire.
4. For example, the Turkish petroleum code authorized licenses of 123,500 acres, or 50,000 hectares. Ernest E. Smith, Ownership of Mineral Rights, in INTERNATIONAL PETROLEUM TRANSACTIONS 262 (Rocky Mountain Mineral Law Foundation 2d ed. 2000).
5. Al Hudoc & Van Penick, British Columbia Offshore Oil and Gas Law, 41 ALBERTA L. REV. 101, 102 (2003).
6. Sandoval Amui & Marienne L. R. Melo, Unitization of Oil and Gas Reservoirs, AIPN ADVISOR, May 2003, at 8 (describing Brazil’s experience).
7. Id. at 8, 15. Brazil’s new regulations dictate smaller block sizes and have created “great expectations” that unitization may occur in Brazil in the near future. Id.
8. Roger Knight et al., Deep Water: How West Africa Compares with Gulf of Mexico, OIL & GAS J., May 5, 2003, at 42 (reporting that as shallow water reserves are being steadily depleted worldwide, the major oil companies’ dollars are targeted at deepwater reserves—almost U.S. $58 billion in capital expenditures on deepwater developments are forecast in 2003–2007, double the amount spent in the previous five years). Secondary recovery projects in mature, shallow water areas are also occurring. See Hector Igbikiowubo, ExxonMobil Awards $1.7b Oil Recovery Contracts, VANGUARD (Nigeria), July 10, 2003 (announcing $1.7 billion investment in oil recovery project offshore Nigeria which will also eliminate gas flaring and increase recovery by more than 500 million barrels).