How to negotiate and structure a joint development agreement

Sept. 8, 2003
The end of June 2003 witnessed public "roadshows" in London and Houston for the inaugural licensing round of the 35,000 sq km Nigeria-Sao Tome e Principe (STP) Joint Development Zone.

The end of June 2003 witnessed public "roadshows" in London and Houston for the inaugural licensing round of the 35,000 sq km Nigeria-Sao Tome e Principe (STP) Joint Development Zone.

In recent times, joint development zones (JDZs) have become more prevalent than ever. In many cases, governments see them as the best way to deal with boundary disputes with their neighbors, in situations where there is a desire to reap the benefits of resources located within a disputed area, particularly oil and gas.

The negotiation of new joint development agreements is almost inevitable, not least because a large number of international maritime boundaries have yet to be fixed. Indeed, it was also announced in June 2003 that the governments of Congo (Brazzaville) and Angola were setting up a zone similar to the JDZ set up by Nigeria and STP,1 which has also attracted the attention of other governments.

As well as governments, oil companies may well be interested in the structure and regime that will apply to any new JDZ, as these matters will directly affect the terms under which companies will be able to carry out activity within the zone.

This three-part article outlines the basic structure of joint development agreements, which are the underlying basis of JDZs. At the same time, it will consider various issues that may arise during the negotiation of such agreements. In doing so, it will make reference in particular to the author's own experience in advising on setting up the Nigeria-STP JDZ (Fig. 1).

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There are no hard and fast rules as to the precise structure and contents of a joint development agreement, or indeed the number of agreements that are required. However, it is hoped that this article gives some indication of the issues that may need to be considered in relation to the setting up of a joint development zone, some of which are more important than others.

Definition of a JDZ

Before plunging into a survey of the contents of such agreements, it might be appropriate to start off by recalling what exactly is meant by joint development and why joint development zones come to exist.

In the context of intergovernmental relations, joint development can mean a number of things. In the context of delimitation of territory and sovereign rights, it means cooperation between countries to develop and share certain resources in a specified zone, in respect of which both countries claim rights. The zone in which such cooperation takes place is the joint development zone. The definition is, of course, important in considering the contents of agreements.

A somewhat different but connected concept is cross-border unitization. Although in a sense it does involve "joint" development between two countries, it is in many ways like any other unitization. As such, the arrangement will normally only apply to a specific oil or gas field, and–crucially–unitization must be preceded by agreement as to where exactly the international boundary is located (Fig. 2).

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In view of that important distinction, cross-border unitization will not be considered further in this article. However, it is worth noting that certain features are or may be common to both JDZs and cross-border unitizations. These include the need for an international agreement to be signed by the relevant governments, and–in some cases (including the Nigeria-Equatorial Guinea unitization)–for there to be agreement as to which rules and regulations will apply in the zone concerned.

Location of JDZs

In principle, joint development zones may be located either on land or offshore. However, this article puts more emphasis on offshore zones.

There are two main reasons for this. The first is that joint development zones are normally offshore rather than on land. This is due to the fact that undelimited maritime boundaries are now much more common than undelimited land boundaries; and furthermore, in relation to land boundaries, the solutions to disputes will normally need to deal with more problems than just division of resources, not least the inhabitants of any disputed territories.

The second reason for the offshore emphasis is that the author's main direct experience of joint development zones came in relation to the Nigeria-STP JDZ, which is located offshore. That zone, located in the Gulf of Guinea off West Africa, was set up by a treaty signed on Feb. 21, 2001, by the governments of Nigeria and Sao Tome e Principe, a country comprising a number of islands.

However, despite this article's emphasis on offshore zones, the basic principles are similar whether the zone is located on land or offshore, provided that the focus is on resources rather than territorial sovereignty issues.

Reasons for setting up a JDZ

How do joint development zones come about?

In most cases, they are the direct result of the difficulties which neighboring countries experience in agreeing on a common boundary. The JDZ is, in essence, a compromise in a situation where both countries claim rights to the same area and are both reluctant to concede any part of that area.

If neither country is willing to make a concession in terms of area, both have a number of choices. They might choose to do nothing for the time being. While this is a viable option in some cases, it is not in others: In particular, where one or both of the governments wishes to exploit the natural resources of such an area, the existence of a dispute might effectively prevent such exploitation.

Investors may be unwilling to invest until the situation is clarified. Judicial resolution of the dispute by recourse to an international court or arbitration is also possible, but of course there are real risks in resorting to third party resolution, not least the possibility that the result will be less favorable than expected.

Therefore, as against inaction and the uncertainty of third party resolution of a boundary dispute, the creation of a joint development zone can be a very useful way of allowing both governments to proceed with exploitation of resources. Although neither of the governments will be able to exercise full rights over all resources in the area, the compromise of the joint development zone at least allows them to proceed to reap some of the benefits of developing resources, without delay.

This, together with the fact that governments normally reserve their sovereign rights when entering into the joint development agreement, makes such agreements relatively popular from a political point of view, since technically, any concessions made are temporary and not long term.

Such temporary arrangements in cases of dispute are in fact encouraged by Articles 74 and 83 of the 1982 United Nations Law of the Sea Convention, which call on countries that have not been able to agree the boundaries of their continental shelves and Exclusive Economic Zones (i.e., the offshore areas in which they have exclusive rights in relation to natural resources), to make efforts to enter into "provisional arrangements of a practical nature." The creation of a joint development zone is indeed such an arrangement.

Structure of agreements

With this background, the joint development agreement itself can be considered.

In practice, there is no reason why the entire system of joint development needs to be contained within a single document, and indeed this will probably not be the case. There is some room for flexibility here.

The initial agreement signed by the two governments will of course have to cover certain issues as a minimum; but the extent of the initial agreement may vary, and–particularly in order to reach at least initial agreement as soon as possible–the governments may decide to postpone formal agreement on a range of issues for a later stage, or indeed a number of stages.

Having said that, there are obvious advantages in agreeing as much as possible up front, not least certainty. In the case of some joint development zones, a lack of initial certainty may have caused problems later on. But even where certain matters are postponed for later agreement, the initial agreement will often contain at least passing reference to most of these issues, if only to mark them out for further discussion.

In any event, there are certain issues which will almost invariably need to be considered and agreed upon at some point when setting up a JDZ, either in the initial agreement or subsequently, and it is those issues which this article examines.

Joint development agreements are international agreements between two or more countries (or, more properly, states), and as such they will be governed by international law; in particular, the rules set out in the Vienna Convention on the Law of Treaties, which are now also generally considered to be a statement of customary international law, will be applicable even to states which are not parties to the convention.

While the JDZ agreement is intended as a binding agreement creating legal obligations between states, it may–depending on the states concerned–be necessary for the parties to enact legislation in order to incorporate the terms of the treaty into their internal laws. Such incorporation and implementation of the JDZ agreement will be particularly important to the extent that its terms modify—or even wholly cancel—the application of already existing national laws to the zone and its resources.

When it comes to actually negotiating and structuring a JDA, there is some benefit in resorting to precedents, of which a large number are now in existence. A study of such precedents is useful, not only to see how their main provisions concerning joint development are structured, but also as a reminder of less obvious provisions which might usefully expand the areas of agreement.

Having said that, resort to precedents may prove to be of limited benefit. In particular, complications may well arise if the parties attempt to force their requirements into a predetermined format. Apart from the fact that no two situations will be the same, there are usually real advantages–as in any commercial contract–in first ascertaining what the parties' real needs are and then formulating an agreement based on those needs.

In practice, constructing the agreement on this basis, with careful legal drafting and perhaps making use of the precedents for reference purposes, may prove to be the most satisfactory way to proceed and will probably make the negotiations run more smoothly.

With that background, the remainder of this article will consider those provisions which joint development precedents have in common—since this is more indicative of the structure of such agreements—rather than carefully examining individual existing JDZ agreements. In doing so, it will first deal with the main provisions of a JDA that are particularly fundamental to it.

These provisions are so fundamental that the parties would have them in the forefront of their minds when agreeing to resort to the creation of a JDZ in order to resolve their dispute. Indeed, it is difficult to envisage such issues not being dealt with in the initial agreement. There are at least five such main issues and possibly as many as seven.

Next: Seven fundamental issues frame JDA negotiations.

Reference

1. "Angola, Congo set up joint oil zone, end dispute," Reuters, June 5, 2003.

Bibliography

Umar, Taju, "The Nigeria-Sao Tome & Principe Joint Development Zone—A Unique Investment Opportunity," AAPG annual convention, Houston, Mar. 13, 2002.