MARKET REVIEW – ASIA Originally Published in International Oil & Gas Finance Review 2005 OFFSHORE PETROLEUM ACTIVITIES AND MARITIME BOUNDARY DISPUTES: AN ASIAN PERSPECTIVE By Emad Khalil, Bruce Schulberg, and Alex Cull, Jones Day In determining whether to invest the considerable sums required for conducting offshore petroleum activities, oil companies invariably undertake a detailed risk-benefit analysis to ascertain whether the expected returns on investment justify the anticipated risks. A critical part of such analysis is determining the potential for political risk, including risks associated with sovereign events such as expropriation, nationalisation, changes in law and failure to honour sovereign commitments. This analysis also includes the risks associated with appropriate baseline. The baseline is generally the low- disputes over, and changes in sovereignty due to the water line of the coast, but this may vary where the realignment of, international borders. Where coastline is characterised by certain features, such as a delimitation of an international boundary is disputed, deep indentation, the entrance to a bay, an island or any negotiated or adjudicated resolution could result in archipelago, or low tide elevation. A coastal state has a concession holder being subjected to a very different territorial sovereignty in respect of its territorial sea fiscal, political and concessionary regime, or having and therefore has the right to explore and exploit the significant sunk costs and ongoing commitments in a natural wealth in that area. country which is subject to home-country sanctions, or even losing its concession entirely. An on-going dispute Exclusive Economic Zone (EEZ) or a non-peaceful resolution could also lead to The exclusive economic zone, or EEZ is a zone which suspension of operations, destruction of infrastructure, extends beyond the outer limit of a coastal State’s 1 up to loss of reserves, expropriation, criminal and civil territorial sea to the extent declared by the State, penalties, and potentially even loss of life. 200 nautical miles from the baseline used to measure the State’s territorial sea. Within its EEZ, a State has sovereign rights and functional jurisdiction for the SOVEREIGN RIGHTS OVER OFFSHORE purpose of exploring and exploiting the natural PETROLEUM RESOURCES resources of the seabed and its subsoil. The right to explore for and exploit offshore petroleum resources is codified in the United Nations Continental Shelf Convention on the Law of the Sea (UNCLOS). UNCLOS The continental shelf is the area of seabed and subsoil provides that a coastal State has exclusive sovereign extending beyond a State’s territorial sea to the rights to exploit petroleum resources located in the farthest of: (i) the extent of the natural prolongation of subsoil of the seabed in the following three adjacent the State’s land territory to the outer edge of the territorial zones: continental margin; or (ii) a distance of 200 nautical miles from the baseline from which the territorial sea Territorial Sea is measured (i.e. coinciding with the limit of the EEZ). The territorial sea is a twelve nautical mile belt of sea As with its EEZ, a State has sovereign rights and adjacent to the State’s coast measured from the functional jurisdiction for the purpose of exploiting 34
International Oil and Gas Finance Review Originally Published in International Oil & Gas Finance Review 2005 mineral resources in the seabed subsoil of the DELIMITATION OF MARITIME BOUNDARIES continental shelf. No state may conduct petroleum activities in the Coastal States are not conveniently positioned at least area which falls beyond the limits of national 400 nautical miles apart. The sovereign claims of jurisdiction described above. UNCLOS declares that all adjacent coastal States and coastal States situated rights in that area’s resources are vested in mankind opposite each other may therefore overlap. as a whole. Petroleum activities in the area are to be Article 15 of UNCLOS sets out the provisions for conducted under the supervision of the International determining the boundary of the territorial seas of Seabed Authority and in accordance with the opposite or adjacent states. Unless otherwise agreed, the provisions set out in Part XI of UNCLOS. boundary line will be “ the median line every point of The provisions of UNCLOS will only regulate those which is equidistant from the nearest points on the States which are party to the convention. However, as baselines from which the breadth of the territorial seas of at November 16, 2004, of the 191 member States of the the two States is measured ”. This equidistance rule will United Nations, 146 were party to UNCLOS and a not apply however where reasons of historic title or other further 11 had signed but not yet ratified the special circumstances require the territorial seas to be convention. Non-parties to the convention have also delimited in another manner. This principle is commonly followed many of the obligations contained in UNCLOS, referred to as the ‘equidistance/special circumstances’ so that UNCLOS is now considered by many people to rule, and requires the prescribed equidistance line to be 2 perhaps with the embody customary international law, provisionally drawn before consideration is given as to exception of Part XI, and therefore represents the whether special circumstances require the line to be 3 obligations binding on all States. adjusted to obtain an equitable result. A Leading Light in Oil and Gas Projects in Asia Seeking investment opportunities can be an exercise in exploration – the further you look, the more you will discover. As one firm worldwide and with eight locations in Asia we bring you a wealth of knowledge, a local view of the business climate and a global perspective on an industry in transition. 2200 lawyers in 30 locations. One firm worldwide. www.jonesday.com 35
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