Forum urges US and Mexico to resolve gulf boundary dispute

by Nick Snow

The US and Mexico are becoming more aware of the potential for disputes over deepwater Gulf of Mexico oil resources, experts agreed at an Apr. 23 forum at the Woodrow Wilson International Centre for Scholars in Washington, DC. But some of the participants suggested that discussions between the two countries could be severely limited unless Mexico finds a way to make the transboundary resource question a binding international matter separate from oil's place in the national constitution.
"International law is the only vehicle that can effectively deal with this issue," said David Enriquez, a partner in the Goodrich, Riquelme, and Associates law firm in Mexico City. He suggested that the United Nations Law of the Sea could provide a basis for a Mexican-US transboundary oil resources agreement and said the countries should form bilateral working groups soon.

But Miriam Grunstein, an associate in the Thompson & Knight law firm's Mexico City office, said the transboundary oil resource question may ignite a drive for broader energy reforms, which could take years to achieve.
"It not only would be crossing national boundaries but also boundaries involving industry practices," she maintained.
Lourdes Melgar, an independent energy consultant who served in various diplomatic positions in Mexico's foreign affairs ministry during 1993-07, said the two countries agreed to a boundary in the Gulf under a 2000 treaty, which included a 1.25-mile leasing buffer on each side.

"Mexico needs to act"
No discussions have been held since, and there could be a rush to lease tracts on the US side when the agreement expires on Jan. 1, 2011, because of significantly higher crude oil prices and improved deepwater exploration and production technology, she continued.
"There very likely are significant fields in the Perdido Belt between the Western Gap and the coast. Mexico urgently needs to act or it will lose its share of these resources," Melgar said.

But a US Minerals Management Service official said that exploration activity near the boundary has been modest in the 10 years that the Department of Interior agency has been issuing leases.
"It's still largely a wildcat area at its initial stage of geologic evaluation. Only one development is proceeding, about 10 miles from the boundary which is far enough to not raise drainage questions, and it would not produce before 2010," said Chris Oynes, associate director of the offshore minerals management program at MMS.

"Currently, the US government does not have a mechanism to acquire data from Mexico to enhance our understanding of the region. There are indications that the faulting is complex, which mitigates the risk of the resources migrating. The question could arise with leases closer to the boundary," he added.
"Time is running out," declared Joseph M. Dukert, an independent energy consultant who is president-elect of the US Association for Energy Economics. "When producers talk about drilling wells in water 2 miles deep and not stopping until they've gone 5 miles down, sometimes through a layer of salt, they're not talking about producing conventional oil."

He noted that Mexico's national oil company, Petroleos Mexicanos, has not had the financial resources to develop deepwater drilling expertise and consequently is unprepared to produce much of Mexico's remaining oil resources.
Dukert said that he does not expect Pemex to be privatized but added that the boundary agreement of 2000 has set the stage for bilateral cooperation which could be extended to the transboundary resource question.

"Constitution doomed us to isolation"
Other participants questioned whether the issue can be addressed without major reforms at Pemex that could require a constitutional amendment.
"In my view, constitutional change would be preferable. Our constitution has pretty much doomed us to isolation," said Grunstein, who noted that in the 5 years since Vicente Fox became Mexico's president, there have been 500 constitutional trials. Felipe Calderon succeeded Fox on Dec. 1, 2006.

Grunstein said that energy reform proposals currently before Mexico's congress are "a sliver of a solution" because they simply give Pemex authority to negotiate transboundary agreements without requiring it to provide contract arrangements to attract the necessary foreign partners to evaluate, explore, and develop deepwater oil resources. The bill acknowledges that the transboundary question exists but provides no legal framework to reach and implement agreements, she said.
Melgar conceded that the bill actually is a very limited oil sector reform proposal but added that the national constitution said that international law can apply when transboundary questions arise.
"That could form the basis for talks and agreements," she said.

Foreign companies see it as a very timid effort, Grunstein responded.
"They think it's interesting that the government is starting to discuss this question. But they still want to be able to book reserves if they help develop the resources," she said. The problem extends to refining because building and operating a plant for Pemex without having title to the property and equipment, to the feedstock, or to the products is not appealing, she added.

"There is a political consensus that the transboundary reservoir issue needs to be addressed," Enriquez said. But he also expects that it will be necessary for the courts to rule on any reforms that pass Mexico's congress and become law to provide a possible legal basis for contracts.
Grunstein said that this would pose a risk.
"If the [Mexican] Supreme Court does not rule in favour of the reforms, we're toast. We'll be confronting not only the constitution but also a judicial opinion which would be setting a legal precedent," she warned.