U.S.-Mexico Agreement Update on the Transboundary Hydrocarbon Reservoirs

by Holland & Knight LLP

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  • The governments of Mexico and the United States signed an agreement in 2012 to set up the rules regarding transboundary hydrocarbon reservoirs, putting an end to the established moratorium.
  • The agreement opens up the possibility for both countries to jointly develop and allocate oil and gas production.

The current moratorium on oil exploration and production in the Western Gap portion of the Gulf of Mexico will end shortly. This development will help to kick start cooperative agreements between countries as well as spur business deals. Current oil and gas reservoirs crossing the international maritime boundary between the two countries in the Gulf of Mexico contain as much as 172 million barrels of oil and 304 billion cubic feet of natural gas, according to the U.S. Department of the Interior's (DOI) Bureau of Ocean Energy Management (BOEM). Back on February 20, 2012, Mexico and the United States entered into an agreement regarding the exploitation of oil and gas reservoirs crossing the international maritime boundary in the Gulf of Mexico. The agreement aimed to jointly manage areas for offshore drilling operations and set up rules for the allocation of production. Now the excitement turns to the moratorium being lifted and next steps for companies to capitalize on this development.

Application of the agreement is limited in scope to those reservoirs that extend beyond the maritime boundaries of both countries and are entirely located nine nautical miles beyond the coastline of either party. The agreement also seeks to "encourage the establishment of cooperative agreements based primarily on the principles of unitization," which allows companies licensed in the United States to operate as one entity with Mexican oil company Petróleos Mexicanos (PEMEX). Any potential unitization agreement must be approved by both countries and should jointly estimate the amount of recoverable hydrocarbons in the transboundary reservoir and how production is allocated.

The agreement also allows exploration and exploitation activities to be carried out without a unitization agreement. In some cases, a unitization agreement may fail to get signed due to lack of approval of any of the parties or failure of the licensee to sign a unitization agreement after it has been approved. When this occurs, either nation may authorize its licensee to proceed with the exploitation of the reservoir. Regardless, such exploitation remains subject to the determination of allocation of production, and the licensee is still required to share production data on a monthly basis.

Both countries must then exchange information and written notices in the event that any party is aware of a transboundary reservoir. When a licensee has submitted an exploration plan within three nautical miles of the boundary, a written notice must be provided. However, if any licensee submits a plan for development or production in this area, the plan must be disclosed to the other party.

Meanwhile in the United States, the House of Representatives considered and passed initiative H.R. 1613 – titled "Outer Continental Shelf Transboundary Hydrocarbon Agreements Authorization Act" – on June 27, 2013. The initiative exempts U.S. firms from certain reporting requirements of the Securities Exchange Act of 1934, which requires publicly traded companies to disclose information regarding the extraction of natural resources and related dealings to investors through filings with the Securities and Exchange Commission (SEC). H.R. 1613 includes a section titled "Exemption from Resources Extraction," which provides that actions taken under any transboundary hydrocarbon agreement shall be exempt from such disclosure. This initiative effectively demonstrates the effort of the U.S. government to promote activities and the implementation of the agreement.

In July 16th, the agreement between the United States of America and the United Mexican States Concerning Transboundary Hydrocarbon Reservoirs in the Gulf of Mexico became effective and in the upcoming 18 months, both countries shall determine the corresponding percentage of hydrocarbons – depending in part on location. Once this agreement is authorized and in place, a distinct operation agreement should be signed to define the company that will work on a specific reservoir and terms under which it will carry out oil and gas exploration.

To ensure compliance with Treasury Regulations (31 CFR Part 10, §10.35), we inform you that any tax advice contained in this correspondence was not intended or written by us to be used, and cannot be used by you or anyone else, for the purpose of avoiding penalties imposed by the Internal Revenue Code.

Written by:

Holland & Knight LLP

Holland & Knight LLP on:

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