Fundamentals of Oil & Gas Law

658 Pages·2016·10.845 MB·English

by  William Hughes

Acknowledgments
Many persons have helped bring this book into being, but several merit special
recognition.
My colleague, mentor, and Oklahoma oilman R. Dobie Langenkamp, Esq., served as
a source of industry information and wise sounding board on issues addressed herein.
I am also profoundly grateful to Sandra Scharf, LLM, my research assistant and former
graduate student for her analytical judgment, drafting suggestions, and attention to
detail in the many hours she spent reviewing and discussing manuscript revisions with
me. Her contributions on civil and EU energy law could have been made by few other
lawyers or scholars.
Several of my colleagues at the University of Tulsa College of Law have been helpful on
the project, including Dean Lyn Entzeroth and Professor Marla Mansfield. In addition,
Professor Rex Zedalis read and made valuable suggestions on the chapter 4 discussion
of sanctions and export controls. Tom Seng, assistant professor of energy business at
the university’s School of Energy, was kind enough to read and comment on chapter 25
relating to energy markets and derivatives.
Reading and commenting on my draft on maritime pollution treaties in chapter 17
were William W. Pugh, Esq., and his colleague, Carlos Moreno, both at the Liskow &
Lewis law firm in Houston. Bill Moore of Statoil and the University of Houston read and
rendered valuable suggestions on current US offshore bidding systems. Robert Boyd,
CPA and finance consultant in Tulsa and my teaching colleague at PetroSkills, gave
me suggestions on oil and gas accounting issues discussed in the book. And Jacqueline
L. Weaver, the A. A. White Professor of Law at the University of Houston Law Center,
pointed me in the right direction with suggestions on readers for selected issues.
Special thanks need to go to Ford Brett, PetroSkills CEO, whose encouragement
and patience for this book project kept it going; to Karmen Valverde for assistance in
putting my manuscript into tangible form by giving me suggestions on diagram and
map design and by tolerating my endless changes, revisions, and rearrangements; to
my friend Laura Gonzalves, who talked me into starting this project; and to my wife,
Cherie, for her counsel and support. Complaints about lack of good editorship in the
publishing industry are common, but the editors at PennWell have been avatars of what
xix
Fundamentals of International Oil and Gas Law
good editors can do, especially Chris McCullough for his careful reading and parsing
of the manuscript.
Finally, I am grateful for a generous research grant from the Rocky Mountain Mineral
Law Foundation, without which the book would not have been possible.
xx
FUNDAMENTALS OF
INTERNATIONAL
OIL & GAS LAW
William E. Hughes
Disclaimer. The recommendations, advice, descriptions, and the methods in this
book are presented solely for educational purposes. The author and publisher assume
no liability whatsoever for any loss or damage that results from the use of any of the
material in this book. Use of the material in this book is solely at the risk of the user.
Copyright© 2016 by
PennWell Corporation
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Book Designer: Susan E. Ormston
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Library of Congress Cataloging-in-Publication Data
Names: Hughes, William E., 1944- author.
Title: Fundamentals of international oil and gas law / William E. Hughes.
Description: Tulsa, Oklahoma : PennWell Corporation, 2016. | Includes bibliographical
references and index.
Identifiers: LCCN 2015048436 | ISBN 9781593703615
Subjects: LCSH: Petroleum industry and trade. | Petroleum law and legislation. | Natural
gas--Law and legislation. | International law.
Classification: LCC K3915 .H84 2016 | DDC 343.07/72--dc23
LC record available at http://lccn.loc.gov/2015048436
All rights reserved. No part of this book may be reproduced,
stored in a retrieval system, or transcribed in any form or by any means,
electronic or mechanical, including photocopying and recording,
without the prior written permission of the publisher.
Printed in the United States of America
1 2 3 4 5 20 19 18 17 16
Illustrations
Figures
2–1 Models of US and international law ......................................28
3–1 Trading relationships between nations have numerous levels ................36
4–1 Offshore Cuban blocks have been explored by several national oil
companies............................................................105
9–1 Bordering states may have conflicting claims over a territory................200
10–1 UNCLOS zone scheme ................................................221
10–2 Coastal zones create complex borders for countries. .......................221
10–3 Nearly 5% of the world’s oil production passes through the Suez Canal via
tankers. This makes it a critical international shipping lane. ................223
10–10 A joint development zone is one way countries can resolve a disputed
boundary and still develop and profit from offshore resources...............246
12–1 Concession license model..............................................282
13–1 Wells on blocks A and B may drain resources below blocks C and D. ........314
21–3 The natural gas value chain ............................................462
25–1 A typical hedge position ...............................................588
25–2 Typical put and call options on the spot market...........................594
Tables
14–1 Gross revenue shared by parties .......................................322
14–2 The allocation of production to the parties..............................326
24–1 A simplified company balance sheet ...................................551
24–2 Simplified balance sheet..............................................560
xvii
Contents
List of Illustrations..................................................... xvii
Acknowledgments......................................................xix
1 National Laws...........................................................1
Introduction .............................................................1
National Laws............................................................3
Applications: Clarity, Stability, Transparency, and Fairness in the Content
and Procedures of National Laws........................................3
Applications: National Law Variations regarding Retail Gasoline (Petrol)
Sales: The US, Indonesia, China, Nigeria, and Venezuela....................5
Families of National Legal Systems.........................................10
The Common Law System ................................................11
The Civil Law (Code) System..............................................11
Islamic Law.............................................................12
Applications: The Place of Islamic Law in a Modern National Legal System...13
Applications: The Impact of Islamic Law on Oil- and Gas-Related Finance .... 14
Do Contracts Make Law?.................................................17
Additional Resources ....................................................17
Problems ...............................................................19
Notes ..................................................................19
2 International Law.......................................................21
What Is International Law, of What Does It Consist, and What Are Its
Practical Limitations for International Oil and Gas? .....................21
Limitations of International Law in Its Present Form.........................23
Is International Law Really Law?...........................................25
Applications: Unilateral Changes in or Revocation of Treaty of Contract
Obligations: Argentina, Venezuela, and Saudi Arabia......................25
International Law and National Law in the Hierarchy of Law..................27
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Fundamentals of International Oil and Gas Law
Applications: A State’s Treaty and Contract Promises: Bolivia, Ecuador,
and Venezuela .......................................................29
Additional Resources ....................................................30
Problems ...............................................................31
Notes ..................................................................31
3 Treaties Promoting International Trade and Producer-, Consumer-,
and Investor-State Interests.............................................35
International Trade Agreements...........................................35
The World Trade Organization (WTO).....................................35
Applications: The WTO and the Energy Industry..........................37
Applications: Exceptions to the WTO’s Antidiscrimination Rules............39
Applications: World Trade and the Economic and Financial Crisis of
2007–2009...........................................................40
Free Trade Area Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .40
The European Union (EU)................................................41
Applications: EU Law Regulation of Europe’s Energy Industry ..............43
NAFTA and the Latin American Regional Trade Agreements .................44
The Organization of Petroleum Exporting Countries (OPEC) .................46
Applications: The Workings of OPEC....................................49
The International Energy Agency (IEA) ....................................51
Applications: National Strategic Petroleum Reserves .....................53
Applications: Problems of Statistical Compilations........................56
Additional Resources ....................................................58
Problems ...............................................................59
Notes ..................................................................60
4 National Export Controls, Foreign Investment Restrictions, Sanctions,
Embargoes, and Boycotts ...............................................67
General Considerations ..................................................67
Export Controls .........................................................69
Foreign Investment Restrictions...........................................74
Applications: Mexico’s Restrictions on Foreign Ownership.................76
Applications: Investment Restrictions on Russia’s Oil and Gas Resources
and Companies.......................................................80
Applications: The EU and European Member State Foreign Investment
Restrictions: A Family Feud? ...........................................81
Applications: European National Golden Share Laws Restricting Foreign
Ownership or Control of National Companies.............................82
US Law Restrictions on Foreign Investments................................83
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Contents

Applications: Private Ownership of US Oil and Gas Assets by a
Foreign State? The CNOOC Bid for Unocal ...............................85
Sanctions, Embargoes, and Boycotts .......................................90
Informal National Boycotts: The Case of Royal Dutch Shell in Argentina
in 2005 ..............................................................92
Applications: Iran: US Sanctions and Regulatory and Enforcement
Jurisdiction Issues ...................................................96
Applications: Libya and the Unwinding of US National Sanctions ..........101
Additional Resources ...................................................105
Problems ..............................................................106
Notes .................................................................106
5 Dispute Resolution and Its Varieties ....................................115
Varieties of Dispute Resolution Methods...................................115
Government Court Litigation as an Important Alternative...................116
Applications: Examples of Nonarbitrable Litigation.......................117
Comparing Common Law System Litigation with Civil Law (Code) System
Litigation..........................................................118
Noncriminal Litigation in a Common Law System..........................118
Applications: The US 2010 Macondo Oil Spill Common Law Litigation
in Government Court, and Pretrial Discovery............................119
Contrasted with Litigation in a Civil Law (Code) System.....................123
Advantages and Disadvantages of Each Litigation System....................124
Additional Resources ...................................................125
Problem...............................................................125
Notes .................................................................125
6 Dispute Resolution Continued: Arbitration...............................127
General Characteristics of Arbitration.....................................127
Applications: Oil and Gas Arbitration Cases.............................128
Laws and Treaties Favoring Arbitration....................................129
Applications: National Laws that Allow a Freeze of Bank Accounts to
Secure Arbitration Awards: Venezuela in British Courts ..................129
Applications: Argentina: National Refusals to Recognize Arbitration
Agreements or to Pay Awards.........................................133
Applications: WTO Arbitration in Practice ..............................136
Established Arbitration Institutions.......................................137
Drafting the Arbitration Provision........................................139
The Institutional Procedures .............................................144
Applications: Arbitrating the US Macondo Oil Spill Compensation Claims ...145
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Fundamentals of International Oil and Gas Law
Summary of Advantages and Disadvantages of Arbitration ..................147
Applications: The Uncertainties of Arbitration...........................149
When Arbitration May Be a Bad Choice...................................149
Additional Resources ...................................................150
Problem...............................................................152
Notes .................................................................152
7 State Jurisdiction to Regulate, Enforce, and Adjudicate ..................157
The Meanings and Categories of State Jurisdiction ..........................157
Regulatory Jurisdiction..................................................158
Applications: Doing Business as a Presence ............................158
Enforcement Jurisdiction ................................................160
Applications: Can US Courts Regulate Working Conditions in Myanmar? ...161
Adjudicatory Jurisdiction and Related Issues ...............................163
Applications: Does Doing Business Locally Mean Submitting to Local
Court Jurisdiction in All Things?.......................................165
Applications: Russia’s OAO Yukos and the US Bankruptcy Court’s
Jurisdiction.........................................................165
Applications: Recognition and Enforcement of Foreign Court Judgments:
The Case of Chevron and Ecuador .....................................170
Four Important Treaties that Set Standards for Adjudicatory Jurisdiction ......175
Applications: The Race to the Courthouse as Establishing Court
Jurisdiction in the EU ................................................176
Recognition and Enforcement of Arbitration Awards........................178
Additional Resources ...................................................178
Problems ..............................................................179
Notes .................................................................180
8 Special Defenses for States and State-Owned Oil and Gas Companies ....185
Sovereign Immunity ....................................................186
The Act of State Doctrine................................................189
Applications: The Special Defenses for States and State-Owned
Companies in Oil and Gas Cases.......................................190
Contract and Treaty Waivers of Special Defenses ...........................191
Additional Resources ...................................................192
Problems ..............................................................192
Notes .................................................................193
9 Sovereignty Over and Ownership of Onshore Oil and Gas—Sovereignty
Disputes between States...............................................195
General Patterns of Sovereignty and Onshore Oil and Gas Ownership.........195
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Contents

Applications: State Sovereignty over Onshore Oil and Gas................195
Applications: State Ownership of Oil and Gas (or, Are Iran’s Revolutionary
Guards a Full Service State Oil Company?)..............................196
Factors Complicating the US Pattern of Private Ownership ..................196
Applications: Drilling for Gas in the City of Fort Worth, Texas..............198
Applications: The Significance of Government Ownership of Land in the US...198
Factors Complicating the Pattern of State Ownership .......................198
Sovereignty Disputes between States ......................................200
Applications: The Western Sahara Case................................201
Applications: Ambiguities Due to Federal Structures of Government in Iraq ...204
Applications: What Happens with a Failed or Failing State? The Case
of Sudan ...........................................................209
Effects of a Land Dispute Continued into the Offshore Waters and Seabed .....211
Applications: The Cases of Cyprus and Turkey and of Scotland and Britain ...211
Additional Resources ...................................................214
Problems ..............................................................215
Notes .................................................................216
10 Sovereignty Over and Ownership of Offshore Oil and Gas—The Law of
the Sea and Joint Development Zones...................................219
Introduction ...........................................................219
Pre-UNCLOS History...................................................219
The UNCLOS Water and Seabed Zones....................................220
States’ Rights and Obligations within the Zones ............................222
Applications: A Coastal State’s Right to Ban Use of Its Ports: The Case
of Turkey and Cyprus.................................................224
Applications: Potential Bottlenecks and Disputes Involving Straits.........227
Applications: Federal Structures of the US Government and their Effect
on Sovereignty over the US Continental Shelf ...........................232
Applications: Vessel Registration and Iran Sanctions 2012................233
Applications: Five Law of the Sea Disputes: East China Sea, South China
Sea, Timor Sea, Western Sahara, and the Caspian Sea...................234
The Deep Seabed Regime, Developed States’ Objections, and Present Status....243
Joint Development Zones................................................245
Applications: JDZs for Nigeria-São Tomé, Malaysia-Brunei,
Trinidad-Venezuela, and Mexico-US ...................................247
Additional Resources ...................................................248
Problems ..............................................................250
Notes .................................................................251
ix