Offshore Oil and Gas Resources: Economics, Politics and the Rule of Law in the Nigeria-Sao Tome e Principe Joint Development Zone

There is an axiom in the oil industry that reserves produced must be replaced; otherwise, the continued sale of a company's reserves will result in its eventual liquidation. (1) As a result, companies with upstream operations (i.e., exploration and production) are evaluated by Wall Street as much on their reserve replacement record as on their ability to generate earnings. (2) In the first decade of the 21st century, the scramble for reserve replacement has become increasingly intense. The causes are two-fold: a relentless increase in global oil demand, fueled in particular by China's rapid economic growth, coupled with a failure of the industry to develop new reserves to replace those being consumed and to meet the growing demand. One of the more ominous explanations for this failure of supply to keep up with demand is that global oil production has peaked. As a consequence, future discoveries will be inadequate even if demand were eventually to level off. (3) A different explanation advanced by some oil companies is that restrictions on access to new imposed by host governments in some of the most prospective regions of the world have had the effect, if not the purpose, of preventing these countries from realizing their full productive potential. These factors have put pressure on the oil industry to take maximum advantage of technological advances that permit exploration and production of oil and gas in remote, frontier areas, both on land and at sea, including offshore drilling in deep water. (4) The first offshore well out of sight of land was drilled nearly 60 years ago. (5) More recently, steady advances in technology have led companies to consider drilling in water as deep as 10,000 feet. (6) The technology to permit such drilling has been steadily improving over the past 50 years, but its cost, compared to that of on-shore exploration, has made it problematic, especially in times of relatively low oil prices. In the past few years, with crude prices well above $30 per barrel, accompanied by predictions that they could remain at or above that level indefinitely, the economics of using this technology have improved dramatically. The recognition that a new economic reality may now apply to offshore oil and gas exploration and production is reflected ill the growing number of wells being drilled offshore, many beyond the territorial waters of the states off whose coasts the wells were drilled. (7) Some of these wells are approaching the limits of the states' offshore jurisdiction-for example, the Hibernia Field platform off the coast of Newfoundland is 195 miles southeast of St. John's. (8) Prior to 1958, the legal status of wells drilled offshore beyond a coastal state's territorial limits was uncertain. Despite the Truman Proclamation of U.S. sovereignty over its continental shelf and similar assertions by a number of other states, customary international law had not developed generally accepted principles with respect to the status of such ventures on the high seas. (9) In 1958, however, the UN Convention on the Continental Shelf was finalized. (10) It provided clear recognition of the right of a coastal state to construct and maintain or operate on the continental shelf installations and other devices necessary for its exploration and the exploitation of its natural resources, and to establish safety zones around such installations and devices and to take in those zones measures necessary for their protection. (11) Twenty-five years later, the 1982 UN Convention on the Law of the Sea (UNCLOS) expanded states' rights over their continental shelves to cover structures and installations potentially capable of interfering with those rights. (12) Moreover, it provided that a coastal state had sovereign rights [over its continental shelf] for the purpose of exploring it and exploiting its natural resources for a minimum of 200 nautical miles (nm) from the baseline of its territorial sea, regardless of the physical characteristics of the continental shelf, and up to 350 nm if the outer edge of the continental margin extended beyond that 200-nm limit. …

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