The awaited legal amendments to the Mexican regime of hydrocarbons may finally have to take place. In view of the declining hydrocarbon reserves in Mexico the development of shared hydrocarbon resources may be unavoidable in the medium term, if not sooner. Read on and find out why this is so: Mexico and the United States share a vast marine area in which lies a transboundary reservoir. For the purpose of  defining the area in which the reservoir lies, the US and Mexico executed a bilateral treaty in the year 2000. The bilateral treaty, which delimitates the transboundary reservoir, establishes a 10 year moratorium during which neither country may “permit oil or natural gas drilling or exploitation of the continental shelf within one and four-tenths (1.4) nautical miles of the boundary.” However this moratorium will end in 2010. As the end of the moratorium is near, and in the present state of oil & gas reserves, both countries must begin negotiations regarding oil & gas development in that area. For that purpose, both an oil sharing and unitization schemes must be reach by the parties pursuant to international practice. Mexico’s constitutional and legal hydrocarbons framework is a major challenge in implementing international practice.
Regional Regime
Background Information
In1976 potential conflict arose between Mexico and the United States when their extended jurisdictions overlapped in the areas of the Gulf necessary to accommodate each state's full claim. On November 24, 1976, by way of an exchange of diplomatic notes, the two nations agreed, to provisional maritime boundaries. Subsequently, they entered into negotiations that led to the 1978 treaty on maritime boundaries. The two countries signed the Treaty on Maritime Boundaries between the United States of America and the United Mexican States in 1978. In 1979 Mexico ratified the treaty. On January 23 of the same year, the President of the United States transmitted the treaty to the United States Senate to gain the necessary advice and consent via the domestic ratification process. While the United States Senate's Foreign Relations Committee held hearings and favorably reported the treaty to the full Senate for its advice and consent in 1980, the Senate declined to ratify it. As a result, the treaty lingered in limbo for another nineteen years. In October 23, 1997, the United States Senate finally ratified a maritime boundary treaty with Mexico that had lain frozen for nearly two decades. The bilateral Treaty of 1978 had the effect of formalizing the provisional maritime boundaries between the two nations. The agreement draws a line through much of the western and central Gulf of Mexico where claims of the two countries might have otherwise overlapped. However, this treaty left out the Western Polygon of the Gulf of Mexico, in which lie at least one of the so called, oil rich, Doughnut Holes. The so called Doughnut Holes in the Gulf of Mexico are oil rich submarine areas. One is located in front of the Mexican coastline of Tamaulipas and the United States coast of Texas. This area is known as the Western Polygon, while the other one, the Eastern Polyugon is in front of the Mexican coast of Yucatan, the coast of New Orleans and the coast of Cuba. In the year 2000, Mexico and the United States signed another territorial and marine delimitation treaty, this time specifically for the Western Polygon (The 2000 Treaty). This treaty was enacted with the purpose of setting the minimal rules for the exploitation of the shared oil fields. The two nations must soon begin negotiations regarding oil and gas development in that area in order to effectively implement the rules set forth in such Treaty. Since the execution of the treaties, the oil industry has undertaken prospection works both in the area delimitated by the treaties and in adjacent areas. It has been concluded that the major reservoirs are not in the delimitated zone, but in other border areas of the Mexican Exclusive Economic Zone. As riches are to be found in areas other than those established in the Treaties, it is expected that Mexico will soon initiate the applicable procedure before the United Nations pursuant to United Nations Convention on the Law of the Sea, 1982 (UNCLOS) to claim title over the oil resources in the abovementioned border areas.
Some relevant features of the Treaty
AVOIDANCE OF TERRITORIAL DISPUTES THROUGH DELIMITATION (ARTICLE 3) South of the continental shelf boundary set forth in Article I, the United States of America shall not, and north of said boundary, the United Mexican States shall not, claim or exercise for any purpose sovereign rights or jurisdiction over the seabed and subsoil.  MORATORIUM (ARTICLE 4) “Due to the possible existence of oil or natural gas reservoirs that may extend across the boundary set forth in Article I (hereinafter referred to as “transboundary reservoirs”), the Parties, during a period that will end ten (10) years following the entry into force of this Treaty, shall not authorize or permit oil or natural gas drilling or exploitation of the continental shelf within one and four-tenths (1.4) nautical miles of the boundary set forth in Article I. (This two and eight-tenths (2.8) nautical mile area hereinafter shall be referred to as “the Area” (…)  COOPERATION AND INFORMATION INTERCHANGE “From the date of entry into force of this Treaty, with respect to the Area in its entirety, each Party, in accordance with its national laws and regulations, shall share geological and geophysical information in its possession in order to determine the possible existence and location of transboundary reservoirs. From the date of entry into force of this Treaty, if a Party has knowledge of the existence or possible existence of a transboundary reservoir, it shall notify the other Party.”
International Practice
Key Concepts
General Regime.- The delimitation of the exclusive economic zone and that of the continental shelf between States, with opposite or adjacent coasts, shall be effected by agreement on the basis of international law in order to achieve an equitable solution. Boundaries.- Established according to geographical principles set forth by UNCLOS or by negotiation or arbitration pursuant to equity. In general, the accepted legal rule for settling a maritime boundary when two countries’ Exclusive Economic Zones overlap is the Median Line Principle. It mandates that the boundary should be drawn halfway between the coastlines of the two countries. Oil sharing and Unitization.- When a field is developed as one project, it would be impractical for different regulations to apply on different sides of an imaginary line in the middle of the ocean. Taking this into account, an International Unitization Agreement (IUA) is entered into between two countries to develop an oil field or fields crossing a boundary as a single entity, applying a single system of laws, taxes, environmental standards, safety codes, labor rules, etc. to that field. The Oil Sharing Agreement and the IUA are the two basic instruments for jointly exploring and producing oil & gas. Although they normally derive from a Maritime Treaty on Maritime Boundaries, this practice is not necessarily the case in all regions, as in the precedents set by Australia and East Timor.
Oil sharing
Formation of a Joint Oil Development Area (JODA): Both countries shall jointly control, manage and facilitate the exploration, development and exploitation of the oil resources of the JODA; Oil activities shall be carried out pursuant to a contract between a common Designated Authority and a limited liability corporation specifically established for the sole purpose of contracting related services; Both countries make it an offence for any person to conduct oil activities in the JODA otherwise than in accordance with the treaty. The JODA is composed of a number of Unit Reservoirs that are developed according to a Development Plan. Sharing of Oil Production: Any reservoir that extends across the boundary of the JODA shall be treated as a single entity for management and development purposes. Both countries shall have titled to all Oil produced in the JODA. A determined percentage of the Oil shall belong to each country. The percentage is determined by formulas and negotiations than may change during the time the treaty is in force. The associated costs are met according to the sharing formula.
Governing law
Oil Mining Regulation.- The instrument (a code or a similar instrument) governs the exploration, development and exploitation of oil within the JODA, as well as its exports. The Code is elaborated by the Designated Authority and adopted by the Joint Commission. Other Applicable Rules. - The treaty establishes the applicable rules and regulations on a number of areas. It may directly refer to specific laws and regulations of one of the countries or establish the Designated Authority’s obligation to develop a certain aspect. Among the areas duly covered by the treaties are the following: taxing; marine environment; employment; health and safety; criminal; customs; migration; hydrographic and seismic; operational surveillance; security; search and rescue; air traffic services and others.
Regulatory Bodies
Three-tiered joint administrative structure: (i) a Designated Authority; (ii) a Joint Commission and (iii) a Ministerial Council. The Joint Commission nominates the Designated Authority, which is accountable to the Joint Commission and carries out the day-to-day regulation and management of oil activities. The Ministerial Council is the political-governing body in charge of the application of the set of treaties referred to by any of the governments. In the event that the Ministerial Council were unable to resolve a matter, either country may invoke the dispute resolution procedure set out by the applicable treaty.
Contractual development
Development Plan: Pursuant to the Oil Mining Regulations and to the decision making process agreed to between the Designated Authority and the Joint Commission, the development of the JODA is driven by a Development Plan, which covers one or more fields. Should the regulatory bodies so decide, a number of plans can coexist. The plan is a description of the proposed oil reservoirs development and management program that includes details of the sub-surface evaluation and production facilities, the production profile for the expected life of the project, the estimated capital and non-capital expenditure covering the fabrication, installation and pre-production stages of the project, and an evaluation of the commerciality of the development of oil from the unit reservoirs. Private contractors and development All Marine Contracting Joint Venture Agreements for the development of specific unit fields shall comply with the treaties, the Oil Mining Regulation, as well as other applicable regulations. These agreements provide for all the necessary types of services to be rendered in accordance with the international practices of the oil industry. The agreements are drafted by the Designated Authority, which also calls for bids in the international marketplace, makes the awarding decisions and has the ownership rights, regulatory and oversight functions over each project. A single Joint Venturer, a Unit Operator, is appointed as the agent of the remaining corporations for the purposes of exploiting the Unit Reservoir in accordance with the treaties. The appointment and obligations of the Unit Operator are determined by the regulatory bodies.
Incompatibility of Mexican Law with International Practice
The Mexican Constitution strictly prohibits the participation of private persons in E & P if it involves the appropriation of the domestic hydrocarbons, as it establishes that “With regard to oil and all hydrocarbons, whether liquid or gaseous, neither concessions nor contracts will be granted, nor will any existing ones subsist. The Nation will undertake the exploitation of these resources, in the terms of the applicable Regulatory Act.” As the Mexican Constitution considers the hydrocarbons to be strategic elements for the pursuit of the collective needs of the nation, the participation of private persons in any activity that would result in the appropriation by private parties of these resources is deemed unconstitutional. This view of the hydrocarbon resources is highly incompatible with the pursuits of international oil business practice and with any scheme of oil sharing. Notwithstanding the above, in Mexico today an in depth analysis of the legal and policy measures necessary to implement international oil sharing practices is being undertaken, as the oil and gas proven reserves have shown to be in an alarming short supply. This may be why recently the Mexican press has reported that Pemex is holding meetings with several of the leading international companies to agree on a “strategic alliance scheme” for deep water E & P.  In these circumstances, sensibility may have to prevail over politics and the rigidity of the Mexican legal framework may just have to give.
For further information, please contact :
	David Enriquez Maritime Offshore Goodrich, Riquelme y Asociados www.goodrichriquelme.com Paseo de la Reforma 265 Cuauhtemoc Mexico, D.F. 06500 Mexico +52.55.5533.0040 +52.55.5525.1227 (fax) denriquez@goodrichriquelme.com		Miriam Grunstein International Energy Thompson & Knight Abogados www.thompsonandknight.com Paseo de las Palmas 405 - 1901 Lomas de Chapultepec Mexico, D.F. 11000 Mexico +52.55.5002.8100 +52.55.5002.8110 (fax) miriam.grunstein@tklaw.com