CENTRE FOR ENERGY, PETROLEUM AND MINERAL LAW AND POLICY

STATEMENT OF ORIGINALITY

FOR RESEARCH PAPERS

NAME OF STUDENT: Zaid Mahayni

MATRICULATION NUMBER: 009943036

PROGRAMME: LL.M. in Petroleum Law and Policy

TITLE OF THE RESEARCH PAPER:

The Protection of Ultimate Oil Recovery and the

Applicability of the Concept of Sustainable Development

ABSTRACT OF THE RESEARCH PAPER:

The protection of ultimate oil recoveries is achieved by restricting oil production so that

natural drive mechanisms are maintained. It is a form of oil conservation, but applied at

the production stage. This paper will address the following issues. Can the concept of

sustainable development impose any restrictions on production in order to maximize oil

recoveries? If production restrictions are indeed imposed, what form would these

restrictions take?

WORD COUNT: 4,811

PRESENTED TO: Professor Sergei Vinogradov

TITLE OF THE COURSE: International Law of Natural Resources

I, Zaid Mahayni, have read the Code of Practice regarding plagiarism contained in the

Students’ Introductory Handbook. I realise that this Code governs the way in which the

Centre for Petroleum and Mineral Law and Policy regards and treats the issue of

plagiarism. I have understood the Code and in particular I am aware of the consequences,

which may follow if I breach that code.

Signed:________________

Date:__________________

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Table of Contents

Table of Abbreviations ----------------------------------------------------------------------- 2

1. Introduction --------------------------------------------------------------------------------- 3

2. The Geology of Oil Reservoirs ---------------------------------------------------------- 3

2.1 Natural Drive Mechanisms ------------------------------------------------------------- 3

2.2 The Maximum Efficiency Rate of Production --------------------------------------- 5

3. The Applicability of the Concept of Sustainable Development --------------------- 6

3.1 The Evolution of Sustainable Development ----------------------------------------- 6

3.2 The Applicability of the Concept in the Protection of Ultimate Oil Recovery -- 8

3.2.1 The Conservation of Oil as a Natural Resource ----------------------------------- 8

3.2.2 Oil and the Principles Specific to Environmental Protection -------------------- 9

3.3 The Legal Status of the Concept ------------------------------------------------------- 12

4. Rules for Monitoring Ultimate Oil Recovery ------------------------------------------ 13

4.1 Production Allowables or Prorationing Rules --------------------------------------- 14

4.2 Gas/Oil Ratio and Water/Oil Ratio Rules -------------------------------------------- 16

4.3 Well Spacing Rules ---------------------------------------------------------------------- 16

4.4 Unitisation --------------------------------------------------------------------------------- 17

4.5 Economic and Policy Instruments ----------------------------------------------------- 18

5. Conclusion ---------------------------------------------------------------------------------- 18

Bibliography ----------------------------------------------------------------------------------- 20

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List of Abbreviations

ILM ----------- International Legal Materials

MER ---------- Maximum Efficiency (Production) Rate

UK ------------ United Kingdom

UNCED ------ United Nations Conference on Environment and Development

UNGA -------- United Nations General Assembly

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1. Introduction

Oil reservoirs will normally contain natural drive mechanisms that will displace

oil to the surface. Without the proper exploitation of these mechanisms, large quantities

of oil will be locked in the reservoir with no potential for extraction.

It is mainly by overproduction that natural drive mechanisms lose efficiency. It is

therefore important to control oil production in order to achieve maximal recoveries of

oil.

This research paper will be divided in three main parts. In the first part, we will

explain the internal energies typically found in oil reservoirs and describe to the reader

the geological facts that give rise to the issue.

In the second part, we will examine if the concept of sustainable development can

impose restrictions on production towards greater ultimate oil recoveries. This section

will first discuss the evolution, elements and legal status of sustainable development.

Finally, in the third part, we will identify possible measures, mainly used by

national legal systems, to achieve higher ultimate oil recoveries.

2. The Geology of Oil Reservoirs

2.1 Natural Drive Mechanisms

In order to successfully extract oil, there must be more pressure within the

reservoir than at the well. The rate at which the oil will flow towards the well will depend

not only on pressure but also on other factors such as permeability, layer thickness, and

level of oil viscosity.1

Usually, the pressure in the reservoir is initially sufficient to lift the oil to the well.

However, as production advances, this pressure will gradually diminish. This is due to the

loss of natural drive mechanisms that exercise pressure on oil. As we will see, there are

1 Shell International Petroleum Company, The Petroleum Handbook, p. 92.

4

three essential displacement mechanisms: dissolved-gas drive, gas-cap drive and water

drive. A reservoir may contain various combinations of these mechanisms.2

First of all, dissolved-gas drive necessitates the presence of a certain quantity of

gas into solution with the oil inside a reservoir. With the progress of production and the

resulting pressure decline, the gas will take an active role and temporarily maintain

reservoir pressure. Basically, lower reservoir pressure will lead the dissolved gas to

bubble-up. The expansion of these gas bubbles will move the whole oil/gas mixture

towards the well. Eventually, dissolved-gas drive is lost. As enough gas bubbles join, gas

will liberate itself from the oil and will move into voided pore space. This gas liberation

will turn the oil more viscous. The liberated gas may flow to the well or may take a role

in a gas-cap drive. Dissolved-gas drive is characterized as being inefficient, with

recoveries generally ranging between 10 to 25% of the oil initially in place.3

Gas-cap drive assumes the presence of free fluid gas between the reservoir ceiling

and the oil layer. Essentially, the well will be deep into the oil at a point lower than the

gas layer. By its expansion and through the forces of gravity, the gas-cap will help

maintain reservoir pressure and compress some of the remaining oil into the well.4

Generally, the recoverable portion of oil initially in place will rarely exceed 50% with

gas-cap drive.

Finally, water-drive consists of the displacement function of aquifers present

beneath the oil layer. As production advances, the water will enter the reservoir and will

help maintain reservoir pressure. Since the size of aquifers tend to be greater than that of

the oil reservoir, water-drive is described as a very powerful oil-displacing agent.5 This

drive mechanism generally allows for recoveries of up to 75% of the oil initially in

place.6

2 Ibid. 3 E. W., Zimmermann, Conservation in the Production of Petroleum, p. 63. 4 S. L., McDonald, Petroleum Conservation in the United States: An Economic Analysis, p. 17. 5 Shell International Petroleum Company, supra note 1, p. 92. 6 S. L., McDonald, supra note 4, p. 18.

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2.2 The Maximum Efficiency Rate of Production

Ultimate recovery of oil is sensitive to the rate of production, especially in the

case of reservoirs with gas-cap-drive or water-drive. For instance, in a water-drive

reservoir, production of oil must be slow enough to allow water to invade the tighter

sections of rock and to flush out the oil there. Also, water must be given time to segregate

from oil and to uniformly advance through the reservoir.7

When it comes to a gas-cap reservoir, the rate of production must be slow enough

to allow for proper segregation of gas and oil. Otherwise, the highly mobile gas will

bypass the oil and rapidly reduce reservoir pressure.8

In response to these facts, reservoir engineers have developed the notion of

maximum efficient rate (MER). The MER of a reservoir is defined as

“the most efficient rate at which a well can produce without impairing the efficiency of

reservoir drive with consequent physical, underground waste. MER is the upper limit of

production beyond which any increase will mean a decrease in the amount of oil ultimately

recoverable.”9

The MER will differ from one reservoir to another and will change throughout the

development of a field. It is usually precisely calculated, with a margin of error rarely

exceeding 5 to 10%.10

It should be noted that if natural drive mechanisms are not properly exploited,

some of the lost oil may not even be extracted through secondary and enhanced recovery

techniques. Consequently, since oil is a scarce resource, it should be protected through

efficient conservation programs. The production of oil should be regulated in such a way

that the maximal quantities of oil can be extracted.

7 Ibid, p. 19. 8 Ibid. 9 E. O., Kuntz, et al., Cases and Materials on Oil and Gas Law, p. 87. 10 E. W., Zimmermann, supra note 3, pp. 69-71.

6

It is important to remind the reader of the importance of proper ‘production’

conservation laws. If existent, they allow a field to yield far more oil over a much longer

period of time. Otherwise, as it was seen in the American experience, reservoirs will be

exhausted in five or ten years, after yielding a mere 10 to 25% of the original oil in

place.11

In the following section, we will investigate if the concept of sustainable

development can impose the use of the production methods maximizing oil recovery. In

order to address this question, we must first examine the history and definition of the

concept. We must also consider if it is legally binding at all.

3. The Applicability of the Concept of Sustainable Development

3.1 The Evolution of Sustainable Development

The concept of sustainable development began to evolve through the 1972

Stockholm Declaration on the Human Environment12, (hereafter referred to as the

Stockholm Declaration). It was later explicitly endorsed by the Brundtland Commission

Report of 1987 (hereafter referred to as the Brundtland Report) and in the work of various

intergovernmental conferences and organizations.13 As we will explain, the existing

definition of sustainable development is the object of considerable controversies.

In 1989, the UN General Assembly convened the UN Conference on Environment

and Development in 1992.14 In 1992, the UN Conference took place in Rio and lead to

the adoption of the Rio Declaration on Environment and Development15 (hereafter

referred to as the Rio Declaration) and Agenda 21, an 800-page document embodying

guidelines in the field of environment and development.16 The concept of sustainable

11 Ibid, p. 27. 12 21 UN Doc. A/Conf.48/14, 1972, reprinted in 11 ILM 1416 (1972). 13 A., Boyle and D., Freestone, Introduction, in, A., Boyle and D., Freestone, (eds.), International

Law and Sustainable Development, p. 5. 14 UNGA Resolution 44/228 (1989). 15 UNCED Doc. A/Conf. 151/5/Rev.1, 14 June 1992, reprinted in ILM 874 (1992). 16 K., Hossain, Evolving Principles of Sustainable Development and Good Governance, in, K.,

Ginther, et al., (eds.), Sustainable Development and Good Governance, p. 18.

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development is closely associated with the core values and normative prescriptions

embodied in the Rio Declaration.17

The Rio Declaration has often been described as an uneasy political

compromise.18 It was divided in bipolar North-South positions, with the Group of 77 and

China presenting the developing countries’ position. On one hand, the industrialized

countries wanted the developing countries to adopt sustainable models of development.

On the other hand, the developing countries stressed the right for their development.19

Actually, the Rio Declaration placed, just as the Stockholm Declaration did,

human beings instead of the environment at the centre of concerns for sustainable

development.20 As it was noted by Professor Philippe Sands:

“To the G-77, […] placing human beings at the center was of fundamental importance. To

allow human beings to be placed at the service of the environment was to subjugate

development needs to environmental needs. To provide for an environmental right or admit

to an environmental responsibility was to open the door to international interference with

their development plans.”21

As observed by Professor Sands, four recurring elements appear to comprise the

legal elements of the concept of sustainable development:22

1. The need to preserve natural resources for the benefit of future generations;

2. The aim of exploiting natural resources in a manner which is ‘sustainable’, or

‘prudent’, or ‘rational’, or ‘wise’ or appropriate;

3. The Equitable use of natural resources. Basically, this means that a State must

take into accounts the needs of other States;

4. The need to integrate environmental considerations and economic and

development plans.

17 Ibid. 18 P., Sands, Greening International Law, p. 23. 19 Ibid. 20 Please refer to Principle 1 of the Rio Declaration. 21 Ibid, p. 24. 22 P., Sands, Principles of International Environmental Law I: Frameworks, Standards and

Implementation, p. 199.

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Let us now examine, which specific dispositions might be applied to the issue at hand.

3.2 The Applicability of the Concept in the Protection of Ultimate Oil Recovery

We believe that the concept of sustainable development is large enough to include

the protection of ultimate oil recovery. Indeed, reservoirs, if unsustainably developed will

yield much lower oil quantities. As we will demonstrate, production above the MER

seems prima facie contradictory with the dispositions of various international

instruments. Firstly, it is against the spirit of conservation and secondly, as we will plead,

oil should be protected on the same level as the environment.

3.2.1 The Conservation of Oil as a Natural Resource

If we start with the idea of conservation, Article 7 of the World Charter for

Nature23 declares that:

“In the planning and implementation of social and economic development activities,

due account shall be taken of the fact that conservation of nature is an integral part of

those activities”. (emphasis added).

In addition, Principle 3 of the Rio Declaration stipulates that:

“The right to development must be fulfilled so as to equitably meet developmental and

environmental needs of present and future generations.”

Since oil is a non-renewable and scarce resource, future generations should also be given

the right to benefit from its various utilisations. Essentially, oil conservation has to

protect oil not only downstream but at its upstream stages as well. As Erich Zimmermann

observes:

“The essential feature of early conservation in the United States was that those living

should be restrained on behalf of the yet unborn. Conservation practice of the present day

generally requires a reduction in the rate of speed at which reservoirs are exploited

(‘produced’)…To that extent conservation as now practiced does contribute to future

supplies.”24

Furthermore, on the subject of oil conservation, some principles of the Stockholm

Declaration also seem pertinent.

23 UNGA Res. 37/7, reprinted in 22 ILM (1983). 24 E. W., Zimmermann, supra note 3, p. 27.

9

For instance, Principle 2 may be applied to oil conservation at both the production and

consumption levels. It stipulates that:

“The natural resources of the earth including the air, water, land, flora and fauna and

especially representative samples of natural ecosystems must be safeguarded for the benefit

of present and future generations through careful planning or management, as

appropriate.” (emphasis added).

As we demonstrated earlier, reservoir engineers and geologists have developed the MER

as a calculation of the maximum sustainable level. Its use by the industry would,

effectively, constitute ‘careful planning and management’ in accordance with the above

Principle. Similarly, conservation at the consumption stage could take the form of, for

instance, the use of more energy-efficient cars.

Additionally, Principle 5 of the Stockholm Declaration reiterates that:

“The non-renewable resources of the earth must be employed in such a way as to guard

against the danger of their future exhaustion and to ensure that benefits from such

employment are shared by all mankind.”(emphasis added).

This last Principle is aimed to protect non-renewable resources as a whole. It is

demonstrative of the broad nature of the Stockholm and Rio Declarations. They are

written in such a way that basic rules can be applied to a wide range of scenarios.

On a different note, we believe that oil should be comprised within the term

environment, as used in numerous international legal instruments. This contention will be

the focus of our next section.

3.2.2 Oil and the Principles Specific to Environmental Protection

When we speak of the environment, oil is often perceived solely as polluter but

seldom as a natural resource that needs to be conserved. Such a change in conception

might be undesirable to the eyes of the oil industry. Promoting the idea of oil as being a

scarce natural resource that needs protection might be to some a sign that world oil

reserves are on the verge of depletion. The presence or absence of adequate oil supplies

to satisfy the world demand for oil is beyond the topic of this paper. It should however be

10

noted that any resource, even if abundant, should be managed and developed in the way

that will cause the least amounts of waste. As Principle 10 of the World Charter for

Nature states:

“Natural resources shall not be wasted, but used with a restraint…”

Should oil benefit from environmental protection? Is oil comprised in the term

environment? The Webster’s International Encyclopedia (1999) defines the environment

as:

”The totality of the physical conditions on the earth or a part of it, especially as affected by

human activity.”

We believe that oil, as a natural resource, is part of the environment and should

benefit from all notions specific to environmental protection. If this contention is

embraced by international law then ultimate oil recoveries could be protected by more

recognized and more influential dispositions.

For instance, Principle 4 of the Rio Declaration is said to absorb environmental law into

economic law as it reads:

“ In order to achieve sustainable development, environmental protection shall constitute an

integral part of the development process and cannot be considered in isolation from it.”

This Principle somewhat echoes Principle 13 of the Stockholm Declaration. The practical

relevance of this Principle cannot be undervalued. Indeed, since as early as 1989, the

World Bank and other development banks have sought to integrate environmental

considerations into their lending policies. The environment has also been central issue

affecting international trade.25

Environmental protection also employs the preventive and precautionary

principles. Essentially, the preventive principle requires the prohibition of activities that

will damage or pollute the environment beyond a certain acceptable extent. If pollution or

damage to the environment is expected and cannot be avoided and if economic interests

exceed environmental interests, then all reasonable measures must be taken to reduce the

11

impacts that the proposed activities will have on the environment. An extensive body of

domestic environmental protection legislation and conventions supports the preventive

principle. Actually, the wide acceptance of this principle has offered it a binding effect.26

When it comes to the precautionary principle, it seeks to impose on any proposed

activity the burden to prove that it does not harm the environment. It imposes the

implementation of a cost-benefit element in the evaluation of any project.27 This

obligation is enunciated in Principle 15 of the Rio Declaration:

“In order to protect the environment, the precautionary approach shall be widely applied by

States according to their capabilities. Where there are threats of serious or irreversible

damage, lack of full scientific certainty shall not be used as a reason for postponing cost-

effective measure to prevent environmental degradation.”

In addition, Principle 17 of the Rio Declaration is also pertinent as it establishes the duty

to conduct environmental impact assessments. Principle 17 declares that:

“Environmental impact assessment, as a national instrument, shall be undertaken for

proposed activities that are likely to have a significant adverse impact on the environment

and are subject to a decision of a competent national authority.”

The above principles on environmental protection are more and more followed.

However, it is still obscure as to when they have to be applied. As we saw, they are built

around notions with controversial and ambiguous definitions. What are the exact

boundaries of the word environment? To what extent must it be protected?

Oil, if trapped in a reservoir is not of much use. If oil displacement mechanisms

necessary to extraction are taken away by overproduction, then have we affected the

‘environment’? If yes, have we affected it enough to uphold environmental protection? In

response to these questions, at the present, only argumentation can be presented.

Let us now go back to the general concept of sustainable development and examine its

overall legal status.

25 A., Boyle and D., Freestone, supra note 13, p. 10. 26 M., Sunkin, et al., Sourcebook on Environmental Law, p. 30.

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3.3 The Legal Status of the Concept

Scholars agree that neither the Stockholm nor the Rio Declarations have raised the

concept of sustainable development to the level of a legally binding principle.28

“It is difficult to see an international court reviewing national action and concluding that it

falls short of a standard of ‘sustainable development’. Normative uncertainty, coupled with

the absence of justiciable standards for review, strongly suggest that there is as yet no

international legal obligation that development must be sustainable, and that decisions on

what constitutes sustainability rest primarily with individual governments.”29

Moreover, as Vaughan Lowe points out, the concept of sustainable development

should receive the same interpretation given by the Court of Justice to the equidistance

rule in the 1969 North Sea Continental Shelf cases30. Basically, the Court of Justice

estimated that there was simply no point in looking for State practice and opinio juris.

The equidistance rule was not only the subject of too many controversies but it also

lacked indispensable norm-creating character. Similarly, the concept of sustainable

development suffers from this same ambiguity and also lacks necessary norm-creating

character. Hence, without even searching for state practice and opinio juris, it seems clear

that sustainable development cannot qualify as a binding principle of customary law.31

However, in the case of the Rio Declaration, it is believed that since it takes on a

normative character and since it has been adopted by the consensus of 176 States, it

rather constitutes a body of soft law. 32 At this point, it is crucial to make the two

following remarks:

First of all, the rules and principles enunciated in the Rio Declaration, even if not

legally binding, may nevertheless influence judicial or arbitral decision-making. They

could, therefore, constitute persuasive interpretation arguments.33

27 Ibid. 28 P. W., Birnie, and A., Boyle, (eds.), Basic Documents on International Law and the

Environment, p. 9. 29 A., Boyle and D., Freestone, supra note 13, p. 16. 30 (1969) ICJ Reports 3. 31 V., Lowe, Sustainable Development and Unsustainable Arguments, in, supra note 13, p. 24. 32 P. W., Birnie, and A., Boyle, supra note 27, p. 9. 33 P., Malanczuk, Sustainable Development: Some Critical Thoughts in the Light of the Rio

Conference, in, K., Ginther, et al., (eds.), supra note 16, p. 42.

13

Secondly and more importantly, even though sustainable development is not

required under international law, development decisions cannot be taken without at least

some consideration of the concept. In other words, even if development projects do not

have to be effectively sustainable, considerations for sustainability must be taken into

account prior to the approval of any development strategy.34 This obligation is supported

by ample state practice and has been implicitly confirmed in the Case Concerning the

Gabcikovo-Nagymaros Dam35.

4. Rules for Monitoring Ultimate Oil Recovery

Again, the concept of sustainable development is too broad to impose specific

legal restrictions on oil production. It is questionable that it can impose restrictions on

development and production at all. Actually, on the specific topic of oil conservation, no

particular international legal obligations seem to be imposed on states. Therefore, it is at

the discretion of individual governments to enact conservation rules and restrictions on

oil production. It is enunciated in Principle 2 of the Rio Declaration that:

“States have, in accordance with the Charter of the United Nations and the principles of

international law, the sovereign right to exploit their own resources pursuant to their own

environmental and developmental policies…” (emphasis added).

It may be observed that the developed countries will often tend to establish the

needed conservation rules. Besides, they will provide the proper mechanisms of

enforcement. However, in some developing countries, even if adequate legislation is

existent, they are not supported by effective enforcement mechanisms. According to the

actual position of international law, as long as damage is not caused to other states and as

long as sustainable development strategies are considered, developing countries do not

have to ensure ultimate oil recoveries. As we previously underlined, they have the

sovereign right to develop their resources as they wish.

34 A., Boyle and D., Freestone, supra note 13, p. 16. 35 (1997) ICJ Reports 7.

14

Nonetheless, let us examine in the following sections the legal and regulatory

framework that could be introduced to insure ultimate oil recoveries.

4.1 Production Allowables or Prorationing Rules

Production allowables or prorationing rules establish daily, weekly or monthly

limits on the production of oil to prevent overproduction. The limits may be set around

market demand prorationing, which is calculated according to an estimation of the

demand for oil.36

Interestingly, for market demand prorationing in the Texas experience, an

administrative agency would use the oil demand estimations to calculate the total oil

production allowables. This number is then divided among the reservoirs in the State, and

the allowable of each reservoir is then divided among the wells producing from the

reservoir. Each well is then assigned a specific schedule allowable. A statewide

percentage factor may be then applied to calculate the well’s actual allowable. 37

Market demand prorationing, even if it might indirectly protect ultimate oil

recoveries, is not tailored for the purpose. Even more effective would be to regulate

production according to the MER itself. It is important to remember that each reservoir

will have its own unique MER. Therefore, a State may not impose statewide MER-based

production allowables. If we take the Canadian example, the field operator has the

responsibility to adjust production in accordance with the MER. Indeed, Article 28 of the

Canada Oil and Gas Production and Conservation Regulations38 clearly states that:

“(1) Every recovery method included in the development plan in respect of a

pool or field shall provide for the maximum recovery of oil and gas from the

pool or field.

(2) The operator of a pool or field shall locate wells so as to provide, to the

extent possible, for the maximum recovery of oil and gas from the pool or field.

(3) An operator of a pool or field shall carry out and submit to the Chief

36 J. S., Lowe, Oil and Gas Law in a Nutshell, Second Edition, p. 26. 37 W. O., Huie, et al., Oil and Gas: Cases and Materials, Second Edition, p. 36 38 SOR/90-791

15

infill drilling studies, where the operator has reason to believe that infill

drilling could result in an increased recovery of oil or gas from the pool or

field.”

Prior to the commencement of production, the operator must have a development

plan approved by the Canadian National Energy Board. The development plan will

establish a calculated MER and provide for a specific pressure level to be maintained.

This pressure cannot be lowered except with the prior approval of a government official

(the Chief).39

If the pool performance or new geological information shows that the recovery

method needs to be changed to achieve the maximum recovery of reserves of oil, then the

operator must apply for an amendment of the development plan.40

If increased ultimate oil recovery from the field would be economically btainable

by adopting new technology, then the operator must also amend the development plan.41

To the above responsibilities vested on the operator, Article 35 of the Canada Oil

and Gas Production and Conservation Regulations adds that:

“… the operator of a pool or field shall produce oil or gas from the pool or field in

accordance with good production practices to achieve the maximum recovery of oil or gas

from the pool or field and at the applicable rate consistent with the rate specified in the

approved development plan relating to the pool or field.”

In the United Kingdom, licence controls over production and development are

found in Clauses 17 and 1842. Restrictions on oil production may be imposed either at the

time of initial approval of the development plan or at any time thereafter through a

limitation notice, delivered in accordance with an implemented depletion policy. Yet,

such restrictions have seldom been imposed and will only be justified by national interest.

39 Article 29 of the Canada Oil and Gas Production and Conservation Regulations. 40 Article 6(b) of the Canada Oil and Gas Production and Conservation Regulations. 41 Article 6(c) of the Canada Oil and Gas Production and Conservation Regulations. 42 Petroleum (Production) (Seaward Areas) Regulations 1988, (S.I. 1988 No. 1213), Schedule 5.

16

Therefore, it is interesting to note that the United Kingdom does not impose automatic

production restrictions based on the MER.43

4.2 Gas/Oil Ratio and Water/Oil Ratio Rules

As we previously explained, Gas/oil ratio and water/oil ratio rules are necessary

to maintain reservoir pressure. For example, when there is a great demand for oil but a

little demand for natural gas, producers may wish to flare natural gas so they can produce

oil. If flaring is permitted, reservoir pressure will be lowered in a way that oil will be

trapped beneath the ground forever.44

Gas/oil ratios and water/oil ratios require that producers cease production when

the production ratio of gas or water to oil is exceeded.45

In Denver Producing & Refining Co. v. State46, the Court wrote the following on the

subject of gas/oil ratios:

“The application of conservation measures necessarily results in curtailment of production

of oil, gas or both in order to prevent waste and to obtain the greatest ultimate recovery

from the pool. Experience has taught us that the heedless dissipation of gas reservoir

energy of oil pools has resulted in the loss of many millions of barrels of oil…In striking a

balance between conservation of natural resources and protection of correlative rights, the

later is secondary and must yield to a reasonable exercise of the former.”47

4.3 Well Spacing Rules

Well spacing serves many purposes. First of all, spacing prevents underground

waste, as fewer wells manage better natural reservoir energies. Secondly, it protects

correlative rights against unfair drainage by preventing competition for the oil in place.48

Well spacing could either imply the regulation of space between wells and/or the

space between wells and licence boundary lines.

43 T., Daintith, and G.,Willoughby, Manual of United Kingdom Oil and Gas Law, pp. 115-117. 44 J. S., Lowe, supra note 35, p. 26. 45 Ibid. 46 199 Okl. 171, 184 P.2d 961 (1947), reported in, E. O., Kuntz, et al., supra note 9, p. 97. 47 E. O., Kuntz, et al., supra note 9, p. 97. 48 Ibid, p. 59.

17

For instance, Article 20 of the Petroleum Production Regulations 1988 imposes that:

“No well shall except with the consent in writing of the Minister be drilled or made so that

any part thereof is less than one hundred and twenty-five metres from any of the

boundaries of the licensed area.”

Well spacing rules, to be effective and equitable, must allow the possibility of

granting exceptions. Indeed, exceptions may be permitted to prevent underground,

surface or economic waste. The geology of a reservoir may justify the granting of an

exception to maximize oil recovery. Exceptions may also be permitted to prevent

topographical and environmental problems at the surface. Besides, it could be

economically wasteful to spend money on the drilling of a non-productive ‘legal’ well.

Breaking the rule and drilling in contradiction of the specified distance may cause no

harm to the recovery potential of a reservoir.49

4.4 Unitisation

Under the rule of capture, the oil at the wellhead will legally belong to the

producer. When an oil reservoir underlies various licence areas, the producers on each

licence area might enter into competitive drilling in order to first seize possession of the

oil. This competitive drilling will deplete reservoir pressure and significantly reduce the

recovery potential of a reservoir. Unitisation aims for the production of an oil reservoir as

if it was under the same licence area. Therefore, licensees from various blocks will have

to negotiate and work under one single (unit) operating agreement.50

Unitisation might be voluntary or compulsory. A responsible government body

may also impose a unit operating agreement on the licensees producing a common

reservoir. Usually, the licensees will prefer to negotiate their own terms.51

In the United Kingdom, Model Clause 2852 gives discretion to the Minister to

impose unitisation on licensees if:

49 Ibid, p. 85. 50 T., Daintith, and G.,Willoughby, supra note 42, pp. 121-123.

18

“…it is in the national interest in order to secure the maximum ultimate recovery of

petroleum and in order to avoid unnecessary competitive drilling”.

4.5 Economic and Policy Instruments

As many scholars noted it, the concept of sustainable development encompasses

not only the legal, but also the economic and political fields. The successful application

of the Concept therefore would require not only legal measure, but also economic and

policy instruments.53

As an example, the use of sliding-scale royalties can encourage the extension of

the life of a reservoir. Diminishing variable costs may create an incentive to prolong the

life of a field.

The threat of the stick is sometimes as effective as the carrot. Hence, governments

may fine overproducing companies or cancel any subsidies they receive. They may also

threaten to revoke their licences. In the UK example, the Minister has the power of

revocation under Clause 2154 and may do so, for instance, in the case of:

“(2)(b) any breach or non observance by the Licensee of any terms and conditions of this

licence.”

Basically, it is not the enforcement instruments that lack. What is important is,

first, for the law to prohibit overproduction and second, that the chosen enforcement

device is indeed applied to discourage offences.

5. Conclusion

Oil is a vital natural resource to our society. Unfortunately, it is a scarce and a

non-renewable resource. There maybe sufficient reserves of it today, however, as the

principle of intergenerational equity imposes, this resource must be conserved as much as

possible for the benefit of future generations.

51 Ibid. 52 Petroleum (Production) (Seaward Areas) Regulations 1988, (S.I. 1988 No. 1213), Schedule 5. 53 M., Sunkin, et al., supra note 25, p. 26.

19

We have proposed in this paper the focus of conservation on the production stage.

Production if too rapid, perhaps motivated by short-term desire for profit, will harm the

oil recovery potential of a reservoir. This is the example of production patterns that need

to be restricted.

Finally, it can be concluded that the protection of ultimate oil recoveries is

definitely comprised in the large concept of sustainable development. However, the

broadness of sustainable development also constitutes a fault. Indeed, the Concept is so

vague that it has kept it from constituting an overall binding principle. The concept of

sustainable development is hence unable to impose restrictions on production.

Nevertheless, some national legislatures, especially those of developed countries, have

introduced some of these ‘argued for’ production restrictions.

In our case, it is more likely to see national law create international law than

international law creating national law.

54 Petroleum (Production) (Seaward Areas) Regulations 1988, (S.I. 1988 No. 1213), Schedule 5.

20

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