The Deeper Meaning of the US-Mexico Transboundary Agreement


Our new report on the US-Mexico Transboundary Hydrocarbon Agreement (TBA) asks about how a venture would be structured in which Pemex and US-licensed oil companies were partners in a joint-venture that would develop a cross-border reservoir.

The agreement was signed Feb. 20, 2012. It gave the first possibility of legal force to an idea that had been advanced in the Energy Hearings and Reform Legislation of 2008. That idea was that Pemex and IOCs could operate on either side of the maritime border of a unitized, transboundary reservoir; that is, on the condition that the oil produced would be divided among the parties according to the respective percentages on each side of the maritime border.

An amendment to Article 2 of the Petroleum Law modified Article 27 of the Constitution by limiting its application to only those areas where the State has exclusive jurisdiction over petroleum in situ. The amendment specified that for all other reservoirs, the exploitation would be carried out jointly, in accord with treaties to which Mexico was a party.

At the time, there were no such treaties, and not until 2012 would the first such treaty be signed. For Mexico, the US was the most important of several neighbors with whom cross-border oil treaties could be negotiated. (Other maritime neighbors include Cuba, Belize and Guatemala). The Mexican Senate gave its approval to the agreement, in March, some five weeks after the accord had been signed.

Article 2 of the Petroleum Law still lacks legal force, however, as the US Congress—a year later—has not yet formally received the agreement from the Obama State Department. Approval of the Senate is needed if the agreement is submitted as a treaty; otherwise, if submitted as an Executive Order, then both houses of congress need to approve it by enacting implementing legislation.

In this latest report (Market Note 157), we observe something new: The agreement has heuristic value independently of the benefit of any volume of oil that may be produced as the result of a future joint development of a cross-border reservoir.
How so? The agreements that must be entered into by the commercial parties on both sides of the border are fundamentally the same as for any equity-based joint venture anywhere. Among other activities, the parties must prepare a development plan, a facilities plan, a subsurface plan, a marketing plan and select an operator. All of these requirements are the same anywhere; only a few details are different in a cross-border project where there is a requirement of the involvement of government agencies on both sides of the border.

The TBA has heuristic value as an exercise in imagining how an equity-based joint venture with Pemex could be successful.

As for a JV in the Perdido area, it can scarcely be expected that any future discovery of a cross-border reservoir will add significantly to Mexican oil production; and the discovery will certainly not cut into more than a tiny sliver of the 500,000 square kilometers of prospective oil acreage that await serious exploration.

From this, it follows that the serious benefits to be derived from the exercise of a successful, equity-based joint venture with Pemex will not be realized until such ventures are permitted and carried out beyond the cross-border area; that is, when IOCs have JVs with Pemex elsewhere in Mexico, or when Pemex has JVs with IOCs elsewhere in the Gulf of Mexico.

From all of the above, it follows that the agreement should be submitted to the US Congress for its timely evaluation and—pending points of possible renegotiation—eventual approval.

I believe that I have uncovered an angle to the cross-border agreement with Mexico that previously has not received our collective attention: the agreement requires the commercial parties to go through all the steps that would be needed in a joint venture anywhere. The benefit for Mexico is that, when a cross-border reservoir is eventually discovered, both Pemex and the government will learn to expect success from such ventures. Pemex will learn to operate as an equity partner, and eventually become qualified to operate in the U.S. portion of the Gulf of Mexico in the footsteps of other NOCs like Statoil and Petrobras.

This outcome would be the real upside to the agreement, not the n-number of new barrels of oil that would be produced from the development of a cross-border reservoir in the Perdido Area. Another upside would be a reconsideration of the destruction of economic value that comes from excluding petroleum mineral rights from commerce. Said differently, the development of cross-border reservoirs—and the collateral benefits that come with it—is predicated on the existence of mineral rights. No mineral rights, no joint development. It’s that simple.

Download the outline to MEI Market Note 157: Transboundary Hydrocarbon Agreement (Part IV).

Give me a ring if you want to talk about any of this.

Contact: George Baker
+1 (71) 3255-0000

Written by

Mexico Energy Intelligence

Baker & Associates offers niche-market business and policy intelligence related to Mexico's oil and gas, power and chemical industries. Over 1,000 reports have been issued in the last 20 years. Subject matter expert and publisher George Baker, who directs the firm, has carried out consulting assignments starting in the late 1970s at the height of the Oil Boom in Mexico. He brings bilingual and bicultural skill-sets to understanding and responding to challenges of business and public policy, coupled with a deep familiarity with the history and idiosyncrasies of the Mexican operating environment.