East Asia: Stop Squabbling, Start Drilling

Large oilfields often don’t fall neatly within national boundaries. Intent on securing underground or undersea reserves, nations contest territorial claims. China battles Japan for the Diaoyu/Senkakku Islands and ASEAN members for large sections of the South China Sea. Settling disputes quickly is in the interest of all claimants, particularly those with less technological expertise, suggests Will Hickey of SolBridge University. Rapid drilling can cause oil to migrate within a reserve, and horizontal drilling for several kilometers is also possible. Countries with sophisticated technology collect product more quickly. Hickey urges countries to rely on unitization – devising agreements to divide shares, map boundaries, administer operations and collect revenues. “Unitization is usually undertaken to achieve the most efficient and economical exploitation of reserves to benefit all parties,” he explains. Surface boundaries are left intact, thus eliminating the contentious issue of sovereignty. Hickey lists several models of unitization, including a partnerships between the US and Mexico. Of course, the devil is in details, and the stronger contestants have least incentive to compromise or share. – YaleGlobal

East Asia: Stop Squabbling, Start Drilling

Unitization – sharing oil revenues – might alleviate disputes in East Asian waters
Will Hickey
Friday, December 14, 2012

Troubled waters: As China sends its domestically manufactured deepwater rig to exploit oil in the South China Sea (top), Vietnamese protest

DAEJEON: As naval patrol vessels of China, Japan, South Korea and other Southeast Asian nations shadow one another and tension mounts, it’s time to consider peaceful alternatives. At stake are marine resources and possible large reserves of oil and gas underneath the waters, rocks and shoals claimed by East Asian countries. If a solution can be worked out for sharing the proceeds among concerned parties: Japan, Vietnam, Malaysia, China and the Philippines while tactfully avoiding the contentious sovereignty issues, confrontation can be avoided.

In the oil industry, border disputes between countries are resolved with joint development areas, or the oil and gas mechanism of “unitization.” Essentially, unitization lets each nation access undersea resources that cross borders, but leaves national boundaries, or overlapping claims to boundaries, intact. There’s much at stake regarding recent territorial disputes with the Diaoyu/Senkakku Islands between China and Japan and the Spratly/Paracel Islands in the South China Sea overlapping borders with China and ASEAN members. Since 1947 and the revolution, China has linked maritime territorial claims with national sovereignty, pointing to historical maps showing a “9 dotted line” stretching throughout the South China Sea. Through collaboration and unitization, China versus Japan, Vietnam, Malaysia, the Philippines, Brunei and others could develop the resources. But no incumbent government would lose credibility with its citizens over sovereignty rights.

Disputed Region in South China Sea.Enlarge Image

Oil reservoirs that cross national frontiers need special agreements. In petroleum states where cross-border reservoirs have been discovered, for example fields straddling Norway and the UK in the North Sea, the governments agreed on a common framework to develop these resources. With unitization, owners of operating and nonoperating interests pool property interests in a producing area, normally a field, to form one cohesive operating unit. In return, claimants receive a pre-negotiated percentage of interest. Unitization is usually undertaken to achieve the most efficient and economical exploitation of reserves to benefit all parties.

ASEAN countries, in particular, have urgent need to settle disputes quickly as a defensive position. Over the past 30 years, China has gained international competence in oil drilling. Companies operating from China could now theoretically extract resources under disputed borders or exclusive economic zones by using directional drilling, which can reach near 90 degrees horizontal and extend out several kilometers. ASEAN members, except for Malaysia, technically lag the Chinese petroleum industry and need to protect reserves from private development. Additionally, oil and gas reserves can move underground from areas of high hydraulic pressure to low pressure – meaning a well operating under Chinese production could cause undeveloped oil or gas reserves under the Philippine side to migrate toward the China side. Unitization requires thorough mapping and accounting of the reservoir, particularly if it’s to be exploited as a single source. Without unitization, the “rule of capture” usually prevails; oil and gas that has migrated from underneath adjacent borders can be readily appropriated without compensation to others by producing entities.

US Extended Continental Shelf in Gulf of Mexico, the "Western Gap."Enlarge Image

A unitization agreement can help define boundary limits by separating the issue of underlying resources, dealt with through a joint regime, from sovereignty. Based on the solutions found to similar problems in other regions of the world, an agreement on the issue of transboundary petroleum reservoirs has

  • Established common deposits of oil and natural gas, not referring to a particular country area but to certain deposits, the extent determined by the states parties through a mixed technical commission, empowered to calculate the resources in situ (Austria-Czechoslovakia 1960);

  • Defined precise geographical areas in connection with oil resources (Norway-UK, 1976);

  • Established joint development zones, divided by provisional medians separating two sub-zones, one for each country (Federal Republic of Germany-the Netherlands, 1962) or as many subzones as needed (Japan-Korea, 1974);

  • Established joint development areas (Bahrain-Saudi Arabia, 1958) or joint regimes (Iran-Sharjah, 1971) or common zones (Saudi Arabia-Sudan, 1974);

  • Defined delimitation schemes setting up protected zones (Australia-Papua New Guinea, 1978) or a cooperation zone, defined by geographical coordinates and divided into zones (Australia-Indonesia,1989).

In the Norway-UK agreement, for example, each government required the acknowledgment of the counterpart to establish a contract with the licensees of the neighboring country to appoint a common operator. The agreement regulates the free movement of persons and materials, safety issues, inspections, taxation, transfer of rights and other matters, but does not affect rights and jurisdiction in each country. This framework represents a good model for China and its neighbors. The scheme would reduce administrative costs, but give the parties enough control to safeguard sovereignty, requiring nations to agree on the most effective development plan and the way in which the proceeds are to be apportioned.

The Mexico-US case in the Gulf of Mexico serves as another possible prescient model for China and members of ASEAN.

At present, neither the US nor Mexico has defined a scheme for common agreement in joint petroleum operations. To allow joint development of national hydrocarbons, Mexico has developed a legal means to defend its patrimony. Pemex, the Mexican national oil company, is the only oil company allowed as investor and operator under the Mexican system. The Mexican constitution prohibits foreign control of oil and gas production – a case similar to China and ASEAN countries, which monopolize control to state-owned oil companies.

Nonetheless in 2012, the US and Mexican governments signed an agreement to exploit the resources in the Western Gap under a unitization agreement.  Previously there was a 10-year moratorium on drilling in this 5000-square-nautical-mile maritime area, with continental-shelf and exclusive economic zone claims disputed by the two countries.

The depletion of oil reserves onshore and in shallow waters, such as Gulf of Siam bordering Vietnam and Thailand, is driving Asian countries to explore for new resources in deeper offshore areas close to common borders. In 2010, Israel announced the largest offshore natural gas discovery in its history, the Leviathan field with 16 trillion cubic feet of natural gas. Yet this field straddles contested boundaries with Egypt, sovereignty issues will eventually be raised.

In general, the schemes require institutions to administer the system. These can be simple or complex depending on the level of trust inthe other’s authorities and institutions in matters related to border lines, permits, norms and drilling standards, to name a few. Otherwise, the schemes should include a full regime of authorities and institutions to manage issues.

Finally, the solutions to the transboundary reservoirs must be separated from the historically monopolistic structure of the petroleum industry. Different countries have varying stages of development and technological ability. Thus, in the cases of such cross-border fields, China and, say, Vietnam each could appoint companies to form a joint-development effort within contested boundaries and, under that agreement, allow PetroChina and PetroVietnam to supervise the sharing of resources. However, as mentioned, neither of the countries has yet indicated possible characteristics or guidelines for such a treaty or schedules for negotiation and approval.

The implications of successful unitization agreements with China are huge. Namely, conflict could be avoided. State actors with economic interests would have immediate access to resources. It may also set a precedent for future regions of the world in regards to resource extraction such as the Arctic Sea, Greenland, or the Antarctic, where China seeks to broaden its footprint as an emerging superpower.


Will Hickey is an associate professor and chair of Global Management at SolBridge University.

Copyright © 2012 Yale Center for the Study of Globalization

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