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Citation: 25 J. Energy Nat. Resources L. 303 2007

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Unitisation and
Redetermination:
Right or Obligation?
By Michael Polkinghorne*

This article deals with the issue of unitisation, the process by which licensees
of oil and gas reserves in a fieldstraddling different licences pool their individual
interests in return for an interest in the overall unit (which is then operated by
a single company on behalf of the group).' In many of these arrangements,
there is a subsequent opportunity for the parties to modify the relevant
participations by way of equity redetermination.

Examples of the unitisation of oil (and gas) reservoirs are increasingly

common. From the original, relatively small-scale ad hoc unitisations in the
United States, through to the North Sea experience of the late 20th century,
the stage has now been reached where one can in fact speak of industry
practice, varied as it might be. In fact, the Association of International
Petroleum Negotiators (AIPN) has gone so far as to document this practice
in its excellent paper on the subject (the 'AIPN Study').2 It also produced a
Model Form International Unitization and Unit Operating Agreement in
2006 (the 'AIPN Model Agreement').

* Michael Polkinghorne, White & Case, Paris (mpolkinghorne@paris.whitecase.com).

1 A typical clause might read: 'All fights and interests of the Parties under the Licences are
hereby unitised in accordance with the provisions of this Agreement insofar as such rights
and interests pertain to the Unitised Zone and each of the Parties shall own all Unit Property
and Unitised Petroleum in undivided shares in proportion to its Unit Equity.'
2 AIPN, InternationalUnitization of Oil and Gas Fields: The Legal Framework of InternationalLaw,
National Laws, and PrivateContracts (undated).

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304 JOURNAL OF ENERGY & NATURAL RESOURCES LAW Vol 25 No 3 2007

One thing the AIPN Study has demonstrated is the marked manner in
which the legal framework for unitisation varies from one country to
another. Thus, while the industry is developing its own ways and means to
deal with unitisation, in many countries the underlying legal framework is
still in its infancy.
This leaves a substantial degree of uncertainty, notably where the parties
are in fact unable to agree on whether, and if so how, to unitise. As will be
seen, it is highly unlikely that a given state's legal or regulatory framework
will provide much support or guidance on the issue. This means that - as
current practice confirms - it is really for the parties to agree as much as
they can in advance. And if not handled properly, the old truism that
arbitrations are illustrations of cases where there were too few lawyers at the
beginning of a contract and too many at its end could clearly apply.
Some questions, of course, arise before any agreement can be negotiated,
particularly where even the need to unitise is not known at the time of the
relevant petroleum agreement's conclusion. It is important to know what
right the state possesses to compel unitisation, and the means by which it
may do so. Extra care must be taken where there is a state partner to a
potential unitisation. If the neighbouring block is vacant, it may be critical
to determine whether the existing developer has any priority right to exploit
the same, or whether the state or its national oil company (NOC) possesses
such a right. And where a state has legislative or regulatory power to compel
unitisation, questions can arise as to the identity of the final arbiter of any
disputes arising out of the negotiation of the relevant agreement: the state,
its courts, an expert or an arbitral tribunal.
And once an agreement is finalised, the parties need to consider how
and when they can revisit the agreed terms. Contracts frequently provide
for redetermination of the parties' ownership interests, but provision needs
to be made for the situation where they cannot agree. Should they go to
expert determination, arbitration or both? If there is no provision for
redetermination, it is still important to know whether a party can nevertheless
seek redress where the parameters of the initial arrangement are found to
be wildly awry of the new situation.

3 See also Bede Nwete, 'Mitigating Redetermination Problems in Unitised Hydrocarbon Fields'
(2005) 9 IELTR 228.

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UNITISATION AND REDETERMINATION: RIGHT OR OBLIGATION?

Unitisation: the legal framework (or lack thereof?)

Right(?) to unitise:Algeria and the Russian Federation

Imagine a situation in which an operator discovers that the accumulation in
which it is involved stretches into that of its neighbour. In its search for
guidance as to how to protect its rights in the future development of its
reserves, it looks to the legal framework in which it operates. This, of course,
can be found in several sources. The petroleum agreement it has signed is
the obvious first port of call, but what if - as is still surprisingly often the
case - this is silent on the question? The parties will obviously look to see
(sometimes too late) what guidance can be found in substantive law and
4
regulations.
With such wide disparities in practice, it is difficult to speak of a 'typical'
case. Nevertheless, this article looks to two topical examples: Algeria and
Russia.

Algeria
Algeria has recently brought on to its books a new Hydrocarbons Law, which
does in fact deal with this question.' On the issue of unitisation, one finds
article 49 obliging the 'Contractor ... to use those methods enabling an
optimal conservation of the Fields'. However, a more important, express
provision can be found in article 54, which states:
'In the event of a Field declared commercial extending over at least
two Areas subject to distinct contracts, the concerned contractors,
following notification by the National Agency for the Development of
Hydrocarbon Resources (ALNAFT), must draw up a joint plan for
development and Exploitation of the Field. Such plan shall be designated a
"unitization plan". It shall be submitted to the National Agency for the
Development of Hydrocarbon Resources (ALNAFT) for approval.
In the event of the contractorsnot agreeingon the unitization plan six (6)
months following notification of the National Agency for the
Development of Hydrocarbon Resources (ALNAFT), for the purpose
of preparing a unitization plan, or if the National Agency for the

4 To the extent that no express provision exists, one could look for indirect guidance or
obligation through, for example, legal or regulatory provisions on conservation. As the
AIPN Study put it, where 'broader provisions on conservation [exist], unitisation is arguably
required when necessary to prevent waste' (p 18). One writer has suggested that rules relating
to health safety and the environment may provide the state with implicit authority to compel
unitisation as well (Nwete, n 3 above, at 229).
5 Loi No 05-07 du 19 Rabie El Aouel 1426, correspondant au 28 avril 2005, relative aux
hydrocarbures.

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Development of Hydrocarbon Resources (ALNAFI') does not approve

the unitisation plan submitted by the contractors, the National Agency
for the Development of HydrocarbonResources (ALNAFT) shall engage, at the
expense of the contractors,an independentexpert, chosen from a list appearing
in the contract, to draw up a unitization plan which shall come into force as
from its completion.
In the event of such Field extending over one or several other Areas
which are not under Contract, the National Agency for the
Development of Hydrocarbon Resources (ALNAFT) shall issue a
competitive tender for the purpose of entering into an Exploitation contract
concerning the extension of the Field.
The signatory or signatories of this contract shall be required to
comply with the procedure for drawing up a unitisation plan as
established above.
If the Field declared commercial extends over two or several Areas,
the applicable tax system shall be determined on the basis of the
parameters for calculation applicable to each Area, prorated to the
original hydrocarbon volumes originally contained in each Area.' 6

6 Emphasis added. The original French version reads as follows:

'Dans le cas ois un gisement dclar6 commercial s'6tend sur au moins deux p~rimtres,
objet de contrats distincts, les contractants concern~s doivent, apr!s notification par
I'agence nationale pour la valorisation des ressources en hydrocarbures (ALNAIFT), 6tablir
un plan conjoint pour le d~veloppement et l'exploitation du gisement. Ce plan est d~sign6
par "plan d'unitisation". II est soumis A l'approbation de l'agence nationale pour la
valorisation des ressources en hydrocarbures (ALNAFT).
Dans le cas off les contractants ne s'accordent pas sur un plan d'unitisation, six (6)
mois aprs la notification de l'agence nationale pour la valorisation des ressources en
hydrocarbures (ALNAFI), A leffet de preparer un plan d'unitisation, ou si l'agence
nationale pour la valorisation des ressources en hydrocarbures (ALNAFT) n'approuve
pas le plan d'unitisation soumis par les contractants, l'agence nationale pour la valorisation
des ressources en hydrocarbures (ALNAFT) engage, A la charge des contractants, un
expert ind~pendant choisi sur une liste figurant dans le contrat, pour 6tablir un plan
d'unitisation qui entre en vigueur ds son achvement.
Dans le cas o6i ce gisement s'6tend sur un ou plusieurs autres p~rim~tres qui ne soient
pas sous contrat, l'agence nationale pour la valorisation des ressources en hydrocarbures
(ALNAFT) proc~de i un appel a la concurrence en vue de conclure un contrat
d'exploitation concernant cette extension du gisement.
Le ou les signataires de ce contrat sont tenus de se conformer au processus d' laboration
du plan d'unitisation comme d~fini ci-dessus.
Lorsque le gisement declare commercial s'6tend sur deux ou plusieurs zones, le regime
fiscal applicable est d~termin6 A partir des paramtres de calcul applicables A chaque
zone, au prorata des volumes originaux d'hydrocarbures contenus originellement dans
chaque zone.'

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UNITISATION AND REDETERMINATION: RIGHT OR OBLIGATION?

These clauses appear to establish that:

* an obligation exists to draw up a unitisation plan once a commercial field
extends over at least two areas under different grants;
* if a unitisation plan is not drawn up within a given time limit, or if the
relevant state agency (the National Agency for the Development of
Hydrocarbon Resources, ALNAFT) rejects the same, the state can bring
in - at the contractors' expense - an independent expert to draw up a
plan; and
" that plan will come into force as from its completion, meaning that the
state appears to have vested the final decision in the hands of an
independent third party.
At the same time, several points should nevertheless be noted. In the first
place, the Hydrocarbons Law states that the expert must be chosen from a
list 'appearing in the contract'. This begs the question: which contract? If it
refers to the petroleum agreement, one should remember that frequently
there are two of these (hence the need for unitisation in the first place) and
there may be no agreement between the two as to expert candidates. Perhaps
one will find an agreed list in all future agreements, although only time will
tell.7
In addition, one must note that the decision of an expert is not expressed
to have contractual effect; accordingly, one might therefore enquire as to
its precise legal character. The question that follows naturally is: is there any
right of recourse from the decision of the expert? This is a point to which
this article returns further below. One final point is that, if the adjacent
field is not under contract, the existing operator does not have any pre-
emptive right to the neighbouring lot.
Thus while the obligation to unitise appears clear, one does not know at
present whether a right of appeal, or arbitration, exists from the decision of
an expert. And if no right to arbitrate exists, do any other remedies for
review of that decision exist?
In this regard, article 58 of the Hydrocarbons Law provides a broad right
of access to international arbitration:
'All disputes between the National Agency for the Development of
Hydrocarbon Resources (ALNAFT) and the Contractor, arisingfrom
the interpretationand/or non-performance of the contract or the application of
this Law and/or its enacting provisions, shall be the subject of a prior
conciliation under the terms and conditions agreed on under the

7 One would, of course, hope that the potential for unitisation has been sorted out in existing
arrangements, which in many respects should be grandparented under art 101 of the
Hydrocarbons Law, but one can readily see the potential for confusion here.

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contract. In the event of the conciliation procedure failing, the dispute

may be submitted to internationalarbitrationunder the terms and conditions
agreed on under the contract.
Nevertheless, if SONATRACH S.P.A. is the sole contractor, the dispute
8
shall be settled by decision of the Minister for Hydrocarbons.
The laws of Algeria, in particular this Law and its enacting provisions,
shall be applied to settle disputes.' 9
One should not, however, assume a right of recourse from a state decision
to appoint, or the subsequent determination of, an expert. While article 58
is broadly drafted, this reference is somewhat circular. This is because the
applicable law will obviously include the Hydrocarbons Law itself, and article
54 is unqualified; ALNAFT 'shall engage' an expert, and the expert's
unitisation plan 'shall come into force as from its completion' (emphasis
added). It is accordingly unclear whether article 58 has priority over article
54 (thereby allowing arbitration), or not." The writer submits that article
58 is sufficiently broad to allow a right of recourse but that the matter is
hardly black and white.
As to the question of whether a right of recourse is desirable or not, that
is in many respects a commercial matter. Suffice it to say that in the writer's
experience, a developer's fear of an 'expert gone crazy' often overrides the
understandable desire for finality. This is a matter, of course, on which
reasonable persons can differ.

8 It should be noted that, in an Ordinance dated 29 July 2006, there is a proposal to modify
this clause to state: 'In all cases in which SONATRACH is a participant, the international
arbitration procedure will involve only these entities other than SONATRACH.' This looks
highly problematic, notably when we consider that the new Ordinance provides
SONATRACH with the right to take at least a 51 per cent (hence controlling) interest as
part of this new 'reform'. The author would like to thank Mostefa Trari-Tani, Maitre de la
Conference at the Oran Law Faculty of Algeria, for his reflections in this regard.
9 Emphasis added. The original French version reads as follows:
'Tout diff~rend, opposant l'agence nationale pour la valorisation des ressources en
hydrocarbures (ALNAFT) au contractant, n de l'interpr~tation et/ou de l'excution du
contrat on de l'application de la pr~sente loi et/ou des textes pris pour son application,
fait l'objet d'une conciliation pr~alable dans les conditions convenues dans le contrat.
En cas d'6chec de la procedure de conciliation, le diffrend peut tre soumis Al'arbitrage
international dans les conditions convenues dans le contrat.
Cependant, quand SONATRACH - S.P.A. est le seul contractant, le diff~rend est rgl
par arbitrage du ministre charg6 des hydrocarbures.
Le droit alg~rien, notamment ia pr~sente loi et les textes pris pour son application,
sont appliques au r glement des diffrends.'
10 One could even envisage the potentially problematic situation where the parties have -
and apply - their rights to arbitrate but at the same time are obliged to implement the
expert's plan (which 'shall come into force' according to art 54). A party's only recourse
here may be reference to a national court for a stay of implementation of the expert's
plan.

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UNITISATION AND REDETERMINATION: RIGHT OR OBLIGATION?

To the extent that parties wish to have a right of recourse to arbitration,

this is clearly a matter that should be clarified in the underlying petroleum
contract (in which case, article 58's arguably limitative reference to
'interpretation and/or non-performance' of the contract could helpfully
be struck in broader terms in any arbitration agreement, although even
here issues of compliance with the Hydrocarbons Law could arise').
One matter that gives cause for concern in Algeria involves the recent
Ordinance ofJuly 2006 (see n 8 above), which purports to vest SONATRACH
with a 51 per cent interest in all new licences. Given that SONATRACH
appears not to have a right of recourse to international arbitration vis-d-vis
ALNAFT, the above discussion could become academic even for the
(minority) partners on any new licence. One could justifiably ask when, for
example, could a minority partner complain of non-respect of the greater
entity's rights? And given that SONATRACH, the majority partner, has no
right to arbitrate, the minority partners may have very limited options (or
at least more complicated ones). Any consideration of a dispute would have
to involve discussion as to whether the minority partners have individual
rights under the licence on the basis of which they could sue, or whether
they would have nothing but treaty arbitration to consider (see the third
part below). Such musings are beyond the scope of this article.

Russia
In Russia, the position concerning unitisation is in many respects less clear
than in Algeria.
The Subsoil Law is silent on this issue, and hence contains no requirement
to unitise. The Regulations on the Licensing of Subsoil Use, 2 on the other
hand, do address this issue. An informal translation of the relevant provisions
provides as follows:
'6.2. Licenses for subsoil exploration certify the right to carry out
prospecting and evaluate mineral deposits and facilities used for the
construction and operation of underground structures that are not
related to the extraction of minerals.

Ifa mineraldepositidentified in the course of prospecting and evaluation

is beyond the bordersof the geologicalallotment grantedunder the license, then,
upon request of the license holder and provided that no license has

11 While this phrase is somewhat limitative, there remains scope for broadening the reference
by virtue of art 58's inclusion of matters concerning 'the application of this Law'.
12 Law No 3314-1 dated 15July 1992.

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been issued with respect to the relevant cross-border territory by the

license issuing authority, the subsoil area may be extended in such a way as
to include the entire deposit.

6.3. Licenses for the extraction of minerals grant their holders the
right to the exploration and development of deposits and to the
processing of mining and related waste, unless otherwise stated in the
license.
Such licenses may be issued with respect to the development of an
entire mineral deposit or its separate part. The development of a single
field by several subsoil users must be carried out on the basis of an agreed
technologicalscheme preventing the inefficient use of subsoil. The activities
of the different subsoil users shall be coordinated, according to their
decision, by one of the enterprises, whom the other enterprises entrust
with the functions of a coordinator. The said condition shall be specified
in the licenses for the right to develop such deposit.' (Emphasis added.)
This suggests that an agreed technological scheme must be in place and
that one of the users must be appointed as a coordinator. If no scheme is in
place, development cannot, presumably, take place.13
It further appears that an existing developer's right to seek extension of
a licence area exists where the relevant adjacent block is vacant (but note
that the language appears to fall short of an absolute right).
In addition, and as some writers have pointed out:
'One should also note that Clause 5.8 of the technological document
form (applicable both to technological schemes and to exploration
projects) attached to the 'Rules for the Preparation of Technological
Project Documents for the Development of Oil and Gas Deposits' (RD
153-39-007-96) specifies that in the event a deposit is developed by several oil
and gas-producingcompanies, the technical and economic indicators of
the recommended development option are to be stated separately for
each company. This requirementmay be interpretedas an obligationfor these
companies to jointly submit development options within the set of project
documents (technological scheme and exploration project).'14

13 For a more detailed discussion, see AA Bardin and S V Dubyrin, 'Concerning Regulation
under Russian Federation Legislation ofJoint Development by Several Subsoil Users of a
Single Deposit of National Resources' (2005) 6 Mineral Resources of Russia (original in
Russian).
14 Ibid, at 5 (emphasis added).

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UNITISATION AND REDETERMINATION: RIGHT OR OBLIGATION?

But what if the parties cannot agree a technological scheme? Does

development stop? Or can the state impose its will by way of executive
decision or mandatory recourse to an expert? What recourse would an
unhappy developer have? Would it be limited to its rights under its licence
(hence, in the writer's experience - once outside the PSA regime - recourse
to the Russian courts) ?15

Contractual scheme
It is largely as a result of the uncertainties mentioned above that the issue of
unitisation is dealt with (and best dealt with) in the petroleum agreement
itself. Frequently, model or negotiated agreements contain an undertaking
by the developer to unitise on the occurrence of joint ownership of a
common reservoir, but the reference in many of these cases is quite cursory.16
In these circumstances it appears critical to pay heed to the following
issues:
(1) It is necessary to identify the 'trigger event'. In other words, on what
event does the obligation to unitise arise? The most common example
is if a hydrocarbon-bearing structure extends into another contract area
(the situation can be complicated, of course, if the other developer has
no obligation to unitise), although in some countries the issue comes
to a head for consideration where fields within a contract area require
17
joint operation to be rendered commercial.
(2) One must consider the nature of the obligation to negotiate. How long
must a period of negotiation last, for example, before other measures -
state intervention, expertise or arbitration - arise? In light of doubts in
many common law jurisdictions as to the enforceability of undertakings
to negotiate, care always has to be taken to have a clear cut-off point
after which the relevant default post-negotiation mechanism/measure
clicks into place.
(3) Attention should be given to the factors to be taken in account in any
negotiation. Apart from the three arguably 'standard' considerations -
prevention of physical waste, prevention of economic waste and
protecting correlative rights 18 - other factors could include health, safety

15 See, however, the third section below.

16 The AIPN Study lists a number of these including model agreements found in Angola,
China and Colombia, to which one could add Mozambique's production sharing agreement
for the Sofala Bay development.
17 See AIPN Study at 20 (Angola).
18 Ibid, at 24.

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and environmental considerations. In any event, the more details

provided, the clearer the negotiation 'road map' for the parties (and -
if necessary - any third party adjudicator or expert).
(4) Thought should be given to what happens if the neighbouring block is
vacant. Does the developer - or the state - have a priority right over the
neighbouring area?
(5) Consider whether one should unitise in the case of (notably non-
associated) gas.
(6) One should turn to the question of how the state should undertake to
compel any other counter-party to a potential unitisation to abide by
the same scheme. (Otherwise, one might find oneself in a situation
where one contract provides for detailed procedures or a unitisation,
but the potential partner is under no such corresponding obligation.)
(7) Finally, an important issue to bear in mind is: if there is to be an expert
determination, is there any right of appeal or recourse from that
determination? It seems reasonably clear that if parties do desire the
opportunity to arbitrate issues arising out of an expert determination,' 9
this should be spelled out, particularly as local law alone may be of little
assistance. Under French law, for example, there is little an unsatisfied
party can do but wait for the 'successful' party to seek specific
performance of the determination, and then seek to challenge the
expert's decision. And even here relief lies only in respect of errors of
the most egregious sort. English law limits the grounds for any review in
similar fashion.2 °
A thorny question arises as to the effects of a failure to agree a plan. Usually,
the state will assert a right to intervene, usually by way of an expert
determination, but the parties involved will obviously want as much
involvement in the process as possible. One issue the writer has encountered
is the situation in which the parties wish to prolong the negotiation period
but the state finally cries foul and seeks to impose a third-party determination.
Whose will prevails: that of the state or that of the parties? And as mentioned
above, in what circumstances can parties challenge a state decision in this
regard?

19 Unless indicated otherwise, references to a binding expert determination involve cases in

which it has been agreed that the decision of that expert will have contractual force. This
has traditionally been the means by which parties have sought to exclude national court
or other review of such decisions, although this can have particular ramifications that are
discussed below.
20 SeeJim Ross, 'Industry Practice in Equity Redenominations' (May 2004) 1 (2) Transnational
Dispute Management 4.

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UNITISATION AND REDETERMINATION: RIGHT OR OBLIGATION?

As noted earlier, recourse to an expert alone is an attractive proposition,

but one may still question whether parties are prepared to entrust their
future to an individual (or individuals) in this fashion. For better or worse,
parties often retain the ultimate remedy of recourse to arbitration as a kind
of last resort (but we all know how popular resorts are to overworked
professionals).
One compromise could be to have an expert determination that would
be binding until an arbitration is commenced, after which it would still be
presumed as appropriate unless and until the party wishing to overturn or
modify the same prevails. Ordinarily, one would in these circumstances
include an obligation to comply with the determination until an adverse
ruling by the arbitral tribunal itself. This, of course, may not always be
practical in the case of a unitisation; in one case, we provided for immediate
implementation of the expert's plan (indeed, local law may require this)
subject to a party's right to seek a stay by way of either pre-arbitral or state-
court reference.
One other point to keep in mind is that great care must be taken in
drafting - and conducting - the mission of the expert, particularly if one
seeks finality. Under various systems of law, notably French, national courts
are prepared to redefine an expert's mission as 'arbitral' (thereby affording
a right of recourse against the determination) where an expert strays from
purely technical into the realm of the 'juridical' (which could easily occur
when dealing with construction of contractual terms, for example). Common
21
law courts have at times taken a similar view.
At a minimum, any clause providing for expert determination should
address the following:
" how and in what time frame the expert will be appointed;
" the required experience and qualifications of the expert (with care being
taken not to be too specific: the writer has recently had to deal with a
clause providing for a partner of a now-defunct accounting firm, and

21 In the Australian decision in Baulderstone HornibrookEngineeringPty Ltd v Kayah Hdgs Pty

Ltd (1997) 14 BCL 227 (based on the decision in Scott v Avery (1856) 10 ER 112) the court
held that expert determination, which was final and binding, was beyond the allowable
scope of the expert; by giving the expert power to determine any dispute, it extended to
damages, which was beyond the scope of his expertise and powers. Issues of breach of
contract, damages and statutory breach, it was held, can be determined only by the courts
and arbitrators. (See also Straits Exploration (Australia)Pty Ltd & Another v Murchison United
NL and Another [2005] WASCA 241.) Australian authority is divided on this issue, with the
result that various clauses are in fact struck down. This can be compared in certain respects
to the arguably more supple position in the United Kingdom, where these clauses are
given more autonomy.

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another calling for a national of the relevant state, with a certain number
of years' experience and bearing dual qualifications ... 22);
" what happens if the parties fail to agree on an expert (ie who then decides
for them?);
* the basis on which the expert should act (ie as arbitrator or expert, with
all that this entails);
" the issues that the expert will decide;
* whether the expert's decision is binding and, if not, on what basis it can
be challenged; and
* who will pay for the expert.

Redetermination: where unitisation has taken place

Frequently - but not always - a unitisation agreement provides the parties

with the right to revisit at a later date the contractually-agreed share of the
overall production and costs arising with respect to those shares. The reason
for this is the obvious one that unitisations frequently take place when a
given reservoir's characteristics are not fully known. Accordingly, the parties
reserve the right to a redetermination of the parties' interests on (1) a given
period of time, (2) the election of a participant in a party to an agreement,
or, the most common alternative, (3) the occurrence of a certain event
such as the drilling of a certain number of wells or achievement of a certain
level of production.

Should the right exist and, if so required, who ultimately decides on

redetermination?

As a starting point, one should again assume that - subject to indirect support
- local law will be of little assistance.
This would be particularly problematic where no right to a
redetermination exists in the unitisation agreement. 24 The question arises
as to whether a party can nevertheless force the other to a redetermination.

22 We found three such individuals, one of whom was on the arbitral tribunal and the other
two of whom had already given advice to each of the parties.
23 Redetermination can be described as the process by which previous unit or tract costs and
production are subsequently reapportioned or reallocated between parties to an unitisation
agreement based on new data on reservoir characteristics and properties.
24 One question arises here: can an expert entrusted with the task of making an initial
determination provide for redetermination subsequent to his or her ruling? Should this
issue be raised in the expert's terms of reference?

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Domestic law may have something - but not much - to say. Under common
law, the notion of frustration appears highly unlikely to assist, although one
could argue the common or civil law doctrine of mutual mistake may have a
role to play in revisiting the initial determination. The problem, of course,
is that usually the parties know full well that the solution imposed at the
outset may be arbitrary, but take a position in the full knowledge that the
result may aver arbitrary in the future.
It is worth querying whether certain legal systems - such as those following
Dutch law - could permit a claim based on hardship.25 This notion seems
the most likely (albeit limited) candidate to compel redetermination, even
if one often needs to remember that solving one party's hardship is not an
answer if itjust creates hardship for the other. It is submitted that the grounds
for asserting hardship in the case of a redetermination may be easier to
establish than applications for revision in the case of long-term power
purchase agreements or gas sales agreements where readjustments sought
as a result of, for example, the failure of end markets have traditionally
been resisted. The reason for this (although much will obviously turn on
the facts of any given case) is that a redetermination involves a redistribution
of both cost and benefit.
That is not to say that such a course is a straightforward one. A number of
modern unitisations forego the right to a redetermination and so any recent
unitisation agreement that is silent on the issue could readily be construed
as one in which the parties have considered the issue and elected not to
maintain this right. Such a finding of assumption of risk could well nigh
end the debate.

Contractual scheme
One turns to the case where the parties have in fact addressed the issue of
redetermination, which is the product of the parties' recognition that, at
the time of a unitisation, much of the relevant accumulation is to a certain
extent unknown and unpredictable. Rather than waiting until more reservoir
information becomes available (and some can frequently only become
available during development), the parties hence choose rather to agree a
certain share with the knowledge that either party may seek a reallocation
of costs and production once more is known.

25 For example, Indonesia's Civil Code appears to allow courts or tribunals to intervene in
circumstances where the circumstances have changed to such a degree as to render
performance unconscionable (see discussion in Himpurna CaliforniaEnergy Ltd v PT
PerusahoanListruik Negara (December 1999) 14 Mealey's ArbitrationReport pp A1-A58).

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This being said, the industry's experience with redetermination has been
a painful one in terms of time, costs and relations. 26 For this reason, there is
a discernible trend away from redetermination with some recent unitisations
avoiding them altogether.
The obvious concern is that of time and cost: the Prudhoe Bay
redetermination, for instance, cost the partners millions of dollars in legal
and experts' fees. And the stakes can, of course, be high, notably where a
field is marginal or where a party has entered into a long-term partnership
to meet commitments that may be threatened by loss of production-share.
Other problems arise from technical issues, of which there are a myriad.
Interpretation of the data is frequent; the writer has seen disputes over the
tools to be employed to collect the data. In addition, many issues arise once
a redetermination has been finalised. Some of these are discussed briefly
below. As it is hoped can be seen, the issues can quickly become very, very
complex.
Accordingly, matters that may warrant contractual attention in a
redetermination include the following:
" the 'trigger' for any redetermination exercise, as well as the number and
timing of such redeterminations;
* agreeing a common database (in other words, which raw data will be
supplied from the unit area and made available);
" a cut-off date after which no new data will be allowed;
• if a redetermination is to occur, what figures will be given to depreciation
and/or any uplift on the amount redetermined;
* whether any redetermination is retroactive or not;
* adjustments to take account of price differences for the product when
allowing a party 'catch-up' on past production, including possible
consideration of after-tax values at the time of original production as
compared to those at the time of adjustment (parties frequently avoid
this tortuous exercise);
" whether the operator can be removed if the new proportions cross an
agreed threshold;

26 Examples of disputes include: the Australian case of CrusaderResources NL v Santos Limited

and Others (1991) 58 SALR 74; Amoco (UK) Exploration Co v Shell (UK) (unreported, 21
December 1989); Arco Britishv Sun OilBritain(reported in the Financial Times, 20 December
1988); Amoco (UK) ExplorationCo vAmerada Hess Ltd [1994] 1 Lloyd's Rep 330, Neste Production
Ltd andAno v Shell UKLtd and Others [1994] 1 Lloyd's Rep 447; and in the United States,
PennzoilExploration and Production Co v Ramco Energy Ltd, 139 F 3d 1061 (5th Cir, 13 May
1998).

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" whether recouped past production is to be given in kind or in cash, and

what percentage is to come out of future production over what time; and
" whether allowance should be made in order to compensate 'for
disproportionate risk borne' by one of the parties in its exploration and
development activities, which is a sensible but ultimately uncertain
concept.
The AIPN Model Agreement provides a very useful list of trigger-points
before a redetermination can take place (Article 5.5(D)). These include
completion of development wells, a given anniversary of the commencement
of commercial production, or cumulative production reaching a certain
point. Redetermination can be automatic on occurrence of the relevant
event, or still contingent on a participant's or class of participants' proposal.
Given the pain of this exercise of contractually providing for
redetermination, a number of 'disciplinary' measures are often found to
cover situations where agreement is not reached and the matter is referred
to an expert or arbitration. For example, a threshold level of variation is
agreed in advance, and if a party seeking redetermination does not succeed
in meeting or passing this level, that party pays the costs of the exercise
(this can be coupled with, or independent from, a rule that no change will
arise unless the ultimate variance is over a given threshold). In another
reference, the parties agreed to a 'shotgun' style exercise, where the expert
was confronted with two alternatives - one from each of the parties - and
had to select one (an arguably effective means of controlling exorbitant
claims).
Here again, the issue of the appropriateness of arbitration or expert
determination arises, although in the case of a redetermination - where
one is amending rather than creating a scheme by which the parties will live
- the arguments for limiting the question to a binding expert determination
are more readily apparent. AsJim Ross stated in an article for Transnational
Dispute Management in May 2004:
'[a] lso, the authors of [a recent] article stated that many disputes arose
in the redetermination process, both in the agreement of the
redetermined equity split and in its implementation, "often resulting
in arbitration and/or litigation". However, industry practice in the
North Sea in particular, and also in examples seen elsewhere, is to use
expert determination rather than arbitration or litigation as the dispute
resolution mechanism where the redetermination of tract participations
cannot be agreed.
As mentioned above, in the North Sea (and elsewhere) the primary
mechanism for dispute resolution with respect to the redetermination
of tract participations is almost invariably expert determination and

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not litigation or arbitration. This form of dispute resolution process

recognizes that the issue is primarily a technical one and is therefore
best addressed by an independent technical consulting company rather
than lawyers (though lawyers are still likely to have some involvement).
The process is, in almost all cases, explicitly addressed in the UUOA
[Unitisation and Unit Operating Agreement]as not constituting
arbitration and is therefore purely a matter of contract. Arbitration
law does not apply to the process to be followed by the expert or to his
decision which would typically be stated in the agreement to be "final
and binding". Expert determination is a well-established process under
English law, being used to resolve many different types of disputes.
However, there may be significant differences in the way the courts
view the process under other legal systems.'
And one may again ask as to whether a right of review of an expert
redetermination exists under applicable law (in which case note the
comments in the 'seventh' issue listed in 'Contractual scheme' above). As
with the question of unitisation, this appears very limited. AsJim Ross recently
stated in respect of the United Kingdom:
'jt]here have been a few examples of litigation in the UK where the
expert's decision in an equity redetermination has been challenged in
the courts but, under English law, such challenges will only be successful
on extremely limited grounds (eg where the expert is found to have
departed from his instructions in a material way or, where the UUOA
specifically allows such a challenge, has made a "manifest mistake").' 27
But, here again, the opinions of wise men may vary. The AIPN Model
Agreement opts for binding expert determination, with an express carve-
out of such disputes from the draft's arbitration clause (save for arbitration
of questions of interpretation of, or compliance with, the contractual expert
procedures) .28
And, as a matter of drafting, confusion can reign where multiple
agreements provide different means of recourse. 29

Dispute resolution 'outside' the parties' agreement

What if a party is unhappy with the state for one reason or another but it
appears to have come to the end of the road in terms of contractual or

27 Ross, n 20 above.
28 See Art 20.2(D) of the AIPN Model Agreement.
29 See Pennzoil v Ramco, n 27 above, where the entire battle was over whether the relevant
dispute was covered by an arbitration clause or not.

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private law remedies? This could occur in a variety of situations.

If recourse has been had to an expert, we have already discussed the issue
of arbitral or national court recourse against an unsatisfactory decision on
unitisation, expert determination or redetermination. Rights of recourse
to national courts may exist but these will apply in only limited circumstances.
In these cases, where the state has had recourse to an independent expert,
any recourse will ordinarily be against the expert and his or her decision,
rather than the state itself.
But what if this state itself is allegedly guilty of some misconduct? This
can arise in a number of guises. A state may refuse to compel unitisation or
refuse to allow development (even after an agreed unitisation plan is put to
it). It could impose its own solution (in favour, for example, of an NOC). A
party might seek redetermination and be refused or be unhappy with any
state/state expert imposed redetermination.
An alternate avenue is, of course, recourse to a treaty claim. In this regard,
the principal candidates remain any relevant bilateral or multilateral
agreement (such as the Energy Charter Treaty or 'ECT'), whose provisions
(1) provide investors with a direct right of recourse against a host-state, and
(2) protect, inter alia, a party's right to enjoy its investment.
So how could a treaty apply? Questions will involve consideration as to
whether the state's action was unfair or discriminatory, or contrary to
undertakings in the petroleum agreement. This writer is not aware of any
treaty case in respect of a unitisation but the potential is there. Potential
bases for claim include the following.
First, there is the so-called 'umbrella clause' pursuant to which a state
undertakes to respect obligations it has assumed or agreed with respect to a
given investment. 30 Although there is currently stirring debate as to the
precise legal nature of umbrella clauses and the extent of their reach, one
interpretation is that in certain circumstances they 'transform' violations of
contractual obligations in agreements between investors and states into
violations of the applicable BIT. Accordingly, breaches by a state of its
contractual undertakings in a petroleum agreement could in fact give rise
to liability under a treaty that contains an umbrella clause.
Issues could arise, for example, where a state partner/NOC refuses to
follow an agreed redetermination procedure, or fails to honour its

30 An example of one such clause is found in Art 11.2(c) of the United States-Russian
Federation bilateral investment agreement (BIT), which reads: '[e] each Party shall observe
any obligation it may have entered into with regard to investments of nationals or companies
of the other Party.'

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obligations as an operator. This writer has, in addition, had to consider the

potential treaty claim where the state partner has purportedly repudiated
its obligations under a pre-emption clause.
Issues of attribution of a NOC's acts in an action against the state arise
here, as they do in respect of other grounds of treaty-based complaint. The
situation is, of course, more straightforward in those cases where the state
itself is the party to the relevant agreement, and/or the state itself is the
instigator of the investor's woes (ie by imposing an unjust solution in the
context of a unitisation, or refusing to recognise an investor's priority right
on a neighbouring field).
Secondly, there is fair and equitable treatment. Close to all international
investment agreements require states to treat investments fairly and equitably.
For example, Article 10(1) of the ECT provides that, as part of creating a
'stable, equitable, favourable and transparent' investment environment,
Contracting Parties 'shall include a commitment to accord at all times to
Investments of Investors ... fair and equitable treatment'. Similarly, Article
1105(1) of NAFTA stipulates that signatories 'shall accord to investments
... treatment in accordance with international law, including fair and
equitable treatment and full protection and security'. 1
Application of the fair and equitable provision turns considerably on all
of the facts and circumstances of each case.32 Breach of this provision has
been found in a wide range of cases, including where revocation of a waste
confinement licence was based not on purported environmental grounds
but rather on political grounds,3 and where the legislative arrangements
put in place to induce investment were later eviscerated. 34 The potential
scope of this standard is very broad indeed and could cover a variety of

31 Article 5 of the United States' model BIT, which reads' [ejach Party shall accord to covered
investments treatment in accordance with customary international law, including fair and
equitable treatment and full protection and security,' is elaborated such that 'fair and
equitable treatment' 'includes the obligation not to denyjustice ... in accordance with the
principle of due process'.
32 In spite of the somewhat uniform language of fair and equitable treatment clauses, it is
difficult to distil the exact content of this obligation; hence, no clear objective standard
exists against which the behaviour of a state can be gauged. This is evident in the fact that,
regardless of its ordinary meaning, Art 1105(1) of NAFTA was subject to varying
interpretations by arbitral tribunals and to an interpretative declaration stipulating that
fair and equitable treatment is limited to the 'minimum standard of treatment of aliens'.
33 Tecnicas Medioambientales Tecmed SA v Estados Mexicanos (ICSID Case No ARB (AF)/00/2
(2003) Award dated 29 May 2003).
34 CME Czech Republic BV (The Netherlands)v The Czech Republic (Partial Award of 13 September
2001).

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situations where a foreign investor feels hard done by when dealing with a
state in the context of a potential unitisation." Cases could vary from the
imposition of participating shares by a state agency, refusal to implement
an agreed unitisation or discrimination generally in favour of an NOC or
other local partners.
Thirdly, there is the issue of expropriation. Expropriation clauses are
among the more lengthy of the general provisions in investment agreements.
The salient part of Article 13 of the ECT, which is representative of most
expropriation provisions, stipulates that '[i]nvestments ... shall not be
nationalized, expropriated or subjected to a measure or measures having
effect equivalent to nationalizing or expropriation ... except where [it] is:
(a) for a purpose which is in the public interest; (b) not discriminatory; (c)
carried out under due process of law; and (d) accompanied by the payment
of prompt, adequate and effective compensation'. Expropriation clauses
usually also set down a standard for compensation (eg fair market value
immediately before expropriation, payable without delay in a freely usable
currency, etc).
It is widely-recognised that a state will be liable not only for overt or direct
and intentional ('dejure') taking of property or other assets, such as through
nationalisation of an industry. A state will also be liable for covert or indirect
('de facto' or 'creeping') expropriation that effectively deprives an investor
of the use or enjoyment of its investment. In these cases, even legitimate
reasons behind the actions of a state (eg for environmental purposes) do
not generally bear on a determination whether such actions amount to
expropriation.
Thus, for example, arbitral tribunals have found expropriation where a
state broadcasting authority compelled an investor inter alia to give up
exclusive licensing rights it was specifically accorded at the outset of its
investment,36 and where a state wrongfully refused to permit an investor to
open and operate a waste facility that had been built in response to the
invitation of officials from the state. In the context of the oil industry, the
Iran-United States Claims Tribunal found that expropriation had occurred

35 Relevant to the oil and gas industry is the 2004 Occidentaldecision in which a state arbitrarily
and discriminatorily announced abruptly that an entrenched tax reimbursement scheme
no longer applied to foreign oil companies: see OccidentalExplorationandProductionCompany
v Republic of Ecuador (Case No UN 3467 Final Award dated 1July 2004).
36 CMIE Czech Republic BV(The Netherlands) v The Czech Republic (Partial Award of 13 September
2001).
37 Metalclad Corp v United Mexican States (ICSID Case No ARB(AF)/97/1 Award dated 30
August 2000) (2001) 16 ICSID Review-Foreign Investment LawJournal168.

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when, following nationalisation of the Iranian petroleum industry, the

Iranian state oil company terminated a joint structure agreement it had
38
previously concluded with a consortium of oil companies.
In the context of unitisation, one could see arguments arising where an
investor is prevented from developing a field on the basis of state inaction
or where a state party is given an overly generous participating right in a
common reservoir.
The fourth potential base for claim is national treatment and most-
favoured nation (MFN) treatment. Investment agreements commonly set
standards or levels of protection relative to that afforded to other investments
by obliging states to treat an investor no less favourably than its own national
investors ('national treatment') or investors from third countries ('MFN
treatment'). Article 3 of the United Kingdom-Venezuela BIT contains typical
language in this respect: '[n] either Contracting Party shall ... subject
investments or returns of nationals or companies of the other Contracting
Party to treatment less favourable than that to which it accords investments
or returns of its own nationals or companies or to investments or returns of
nationals or companies of any third state.'
Arbitral decisions have shown that, as a relative standard of protection,
determining the national and MFN levels of treatment varies from case to
case. In any event, however, MFN clauses serve to import beneficial provisions
from other investment agreements to the agreement at hand, thereby
offering investors an added and not-so-readily apparent level of protection.
It follows that an investor, when considering whether a state has failed to
respect that investor's rights in respect of a unitisation with a given NOC,
should have regard to other unitisations conducted by that state to determine
whether it has been subject to discriminatory treatment (although a fine
line may have to be drawn between discrimination and simply a poorly
negotiated agreement!). In addition, the national treatment standard could
be breached if a local or state-owned company is given undue priority in the
context of unitisation.
The final base is full protection and security, 9 which is usually coupled
with fair and equitable treatment in the same clause of an investment

38 PhillipsPetroleum v Iran (Case No 39, Chamber No Two, Award No 425-39-2, Iran-US Claims
Tribunal (June 1989)).
39 One issue that could arise is: can the actions of a state-imposed expert - for the purposes
of a treaty claim - be considered to be the actions of ajudicial authority the proper conduct
of whom/which can give rise to state responsibility? A case related to this issue is Loewen
Group, Inc and Raymond L Loewen v United States ofAmerica (ICSID Case No ARB(AF)/98/3,
Award dated 26June 2003) 7 ICSJD Reports, in which an arbitral tribunal recognised that a
state could be held liable for problems in its administration ofjustice.

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agreement (see examples cited above). Normally, a full protection and

security clause serves to safeguard investments against damage caused
by armed forces/law enforcement agencies 40 or insurgencies/civil
disturbance. 4' However, some decisions suggest that such a clause may extend
to situations where an investor suffers loss due to administrative (in)action
of the state, such as changes to legislation vital to an investment 42 or failure
to take court action to protect an investment. 43 Thus, in the context of
unitisation, full protection and security could translate into protection against
arbitrary administrative decisions of oil/gas licensing authorities (see the
second part above).

Conclusion

Unitisation is a phenomenon with which the petroleum industry is well

aware. However, the legal framework regulating unitisation varies markedly
from country to country. What is clear is that the legal framework evolving
to regulate unitisation and (re)determination remains riddled with
uncertainty, notably in those situations where the industry partners are
unable to agree. As unitisations become - as they promise to do - more
commonplace, the industry in its need for guidance will look increasingly
to experts, national courts and arbitral tribunals to play a more positive role
in building a more coherent and robust legal framework.

40 See American Manufacturing& Trading, Inc v Republic of Zaire (ICSID Case No ARB/93/1
Award of 21 February 1997) (1997) 36 InternationalLegalMaterials1531. Indeed, Art 5(2) (b)
of the United States' model BIT specifies that 'full protection and security' 'requires each
Party to provide the level of police protection required under customary international
law'.
41 See Asian AgriculturalProducts Ltd v Republic of Sri Lanka (Award of 27June 1991) 4 ICS1D
Reports 246; Wena Hotels Ltd v Arab Republic ofEgypt (ICSID Case No ARB/98/4, Decision of
2000) (2002) 41 InternationalLegal Materials896.
42 See the related cases of Ronald S Lauder v The Czech Republic (UNCITRAL Final Award of
3 September 2001) and CME Czech Republic BV (The Netherlands)v The Czech Republic (partial
award of 13 September 2001).
43 See generally Case ConcerningElettronicaSicula, SpA (ELSI) (United States v Italy, judgment
of 20 July 1989) (1989) InternationalCourt ofJustice Reports 15.

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