HOUSTON—About once a week Robert Sebastian’s phone rings and a frantic caller is on the other end, desperately seeking the answer to a question. Nearly nine out of 10 times, it’s about the transboundary agreement between Mexico and the U.S. concerning oil and gas operations in the Gulf of Mexico.

As special assistant to the chief for the Bureau of Ocean Energy Management’s Office of Strategic Resources, Sebastian is fielding questions and sharing information about the agreement that allows the two countries to enter unitizing agreements to jointly explore and develop hydrocarbon resources.

The agreement, which was signed into law December 2013 as part of the Bipartisan Budget Act about three years after the countries agreed to work together to develop reservoirs, applies to a 885-km (550-mile) strip that spans east beyond Texas waters through the Western Gap to the Eastern Gap’s western edge. The area includes blocks that are within three miles of the U.S.–Mexico maritime boundary.

“Implementation is still ongoing. It is really just beginning,” Sebastian told people gathered at Rice University’s Baker Institute to learn more about Mexico’s energy reform. “The agreement is really, to me, just a framework. It’s a very good one, but there are many details, processes and procedures to work out.”

Among these are developing the model unitization agreements that will be used, putting in place Joint Commission rules of procedure and establishing dispute settlement mechanisms such as mediation, arbitration and expert determination if the parties cannot reach agreements, he said. The to-do list also includes establishing procedures for joint inspection of facilities as well as reviewing oil spill preparedness and response plans to ensure operations are conducted in accordance with harmonized safety and environmental standards.

This comes with the next Central GoM lease sale about three weeks away.

Sale 235 will be the first sale in the area offering blocks in the former 2.6-km (1.4-mile) moratorium area where leasing was prohibited until the transboundary agreement took effect.

According to Sebastian’s presentation, the transboundary 4.8-km (3-mile) line includes some blocks in the Port Isabel, Alaminos Canyon, Keathley Canyon, Sigsbee Escarpment, Amery Terrance, Lund South and South Padre Island areas.

Any block that is located, either fully or partially, in these areas would be subject to the agreement. He said that 13 leases were in place before the agreement became effective and are exempt, but the U.S. must make an effort to bring the leases—three of which have since been relinquished and another expired—in terms with the agreement. So far, none of the leaseholders have either turned down or opted into the agreement.

“I think they are taking a wait-and-see attitude to see how things develop,” Sebastian said, noting unitization doesn’t extend to these leaseholders. “Any new leases will automatically be subject to the agreement that started with Sale 233 in the western GOM in 2013.”

Currently, 27 leases must comply with the agreement. Sale 233 in August 2013 had three blocks within the transboundary area, and all three leases were awarded to Exxon Mobil. The next lease sale in the area, Sale 238, proved to be more robust, he said, as it came in Aug. 20, 2014, after Congress approved the agreement removing legal uncertainty among investors. This sale had 24 blocks within the transboundary area, all of which were awarded to BP, BHP, Stone Energy and Exxon Mobil.

The Obligations

“The first thing that the treaty stipulates is there is an obligation to report from both sides and share information,” said Guillermo J. Garcia Sanchez, an affiliated scholar at the University of Houston’s Center for U.S. and Mexican Law. This includes exploration or development plans, the filing of seismic and drilling permits and upon determining the likely existence of a transboundary reservoir. “They have to start negotiating a unitization agreement. This means that the field has to be treated as a unit. Both sides can cross the border technically and do exploration of wells.”

After the private parties have reached an agreement, regulators on both sides—the U.S. Bureau of Ocean Energy Management and Mexico’s SENER and National Hydrocarbons Commission—must approve the unitization agreement and allocation of resources, Garcia said. A joint commission is also established as part of the agreement with representatives from each country to interpret the agreement and resolve disputes. If an agreement cannot be reached, the issue can be taken to an arbitrator, but he pointed out that the agreement doesn’t state whether arbitration is mandatory or binding. If there is still no resolution, each party can exploit the field unilaterally.

“Technically, it is very hard to achieve an efficient exploitation of a particular field when you cannot actually see the whole field, because you are not allowed to cross the border. You cannot share the cost of the exploration well. You cannot share the information,” Garcia continued. “Each party is going to be operating on its own. There is a risk of collapsing the field if they don’t do it in a coordinated way. So basically the treaty is leaving the possibility of an inefficient exploitation of the field. There are a lot of steps before we reach that point, but it is a possibility.”

Like the U.S., Mexico will be offering blocks in the transboundary area as part of Round One.

“The Gulf of Mexico is quite developed on the U.S., but on the Mexican side there are a lot of possibilities,” he added.

Existing developments near the transboundary area include Perdido and Trident with Hammerhead and Toledo being closest to the boundary line on the U.S. side. On Mexico’s side, the Trión, Maximino, Exploratus fields are within the area.

BOEM has estimated that the transboundary area could hold up to 172 MMbbl of oil and 8.6 Bcm (304 Bcf) of natural gas.

Contact the author, Velda Addison, at vaddison@hartenergy.com.