UK: International Law Regime of Transboundary Pipelines

In recent years, technology has dramatically improved the distances that pipelines can carry hydrocarbons underwater and overland. As a result, the potential for exporting hydrocarbons from isolated production centres to consumers via pipeline has expanded. The number of long-distance pipelines has increased as a result of this and other, often geopolitical, factors.

Exporters, consumers, and the global energy industry have become increasingly and mutually dependent on the transportation of hydrocarbon products through long-distance pipelines. Indeed, it is estimated that over half of the world’s oil production is now traded across at least one border. Many of these pipelines – sometimes referred to as "transboundary pipelines" – cross international frontiers, and as a result implicate the rules of public international law.

The international legal regime applicable to these transboundary pipelines is developing quickly to match the commercial practice. There are a number of existing international legal norms and treaties that deal with issues related to transboundary pipelines. Many of these sources of law arise from general public international law sources, and so are often not known to general commercial lawyers.

There are two basic models under public international law that can be used as the framework for a transboundary pipeline project: the Interconnector model and the Unified Project model. Which one is chosen can have significant legal implications for political and business relationships of the States and commercial players involved in such a project.

The Interconnector model is really two separate pipelines that are joined together at the common boundary between two States. Each State retains separate and distinct sovereignty over that part of the pipeline that lies within its territory. National laws on taxation, employment, health and safety and so on are applied separately by each country on "its" part of the pipeline. An analogy would be a highway that started in one country and continued into another country. The two interconnected pipelines are usually (but not necessarily) built by two separate entities. There is no requirement for an interstate agreement for an Interconnector model pipeline, although the commercial execution of such a project will be greatly simplified by a properly crafted agreement. The legal regime applicable will be the national laws of the relevant States, and any coordination can be accomplished by way of a host government agreement.

The Unified Project model is a true international pipeline. It is a single pipeline that straddles one or more boundaries. One single legal regime is created between the relevant States that applies to the entire length of the pipeline and all coordination problems (such as a common fiscal, safety and employment regime) are resolved by way of an IGA. This model has many other advantages for commercial actors and governments in simplifying the rules to be applied to the construction and maintenance of the pipeline.

The most significant difference between the two models revolves around the issue of national jurisdiction over the pipeline. In the Interconnector model, there must be a prior agreement as to the location of the common boundary. Without that agreement, the delineation of sovereignty by virtue of control over a segment of the pipeline will in practice prejudice the territorial claims of the countries concerned. By way of contrast, the Unified Project model enables countries to by-pass sovereignty issues and isolate territorial and boundary disputes, without prejudicing a State’s territorial or boundary claims. Because the Interconnector model requires the two governments to agree on a physical separation of the pipeline into two national sectors, over which their separate national sovereignty and control would be exercised, to our knowledge, this model has never been used in situations where a pipeline would be required to traverse disputed territory.

Mostly as a result of the growing awareness from industry players of the relevance of public international law to their international business activities, and transboundary pipelines in particular, the past five years or so have witnessed an increase in the use of interstate agreements to facilitate pipeline projects regardless of the particular model used. In some instances, it may be possible to rely on the same international law principles that are applied to joint development zones. Partners in our Public International Law group have experience in negotiating and drafting these types of agreements.

One obvious distinction has to be drawn in the international law applicable to transboundary pipelines is between offshore pipelines and land-based pipelines. The United Nations Convention on the Law of the Sea (UNCLOS) has a number of provisions that specifically deal with transboundary pipelines. In particular, Article 79 of UNCLOS clearly states that, subject to certain conditions:

1 all States are entitled to lay submarine pipelines on the continental shelf (i.e., beyond the usually 12-mile territorial sea limit); and

2 a coastal State may not impede the laying or maintenance of such pipelines.

The consent of the coastal State is required for the delineation of the particular course of a seabed pipeline, but not for the fact of the pipeline being built.

Intra-field pipelines connecting the sub-sea well to the production installation, or bringing oil and gas onshore, are often regulated by interstate agreement. Examples of these include:

• Agreement between Norway and UK relating to the Ekofisk Oil and Gas Pipeline System 1973
  This provided for the building of a pipeline from Ekofisk field across Norway’s continental shelf to the UK. The UK agreed not to object and relevant license were to be issued when needed. The pipeline was to be operated by a International law regime of transboundary pipelines continued from page 11 Norwegian company. The tariff had to be fair and agreed to by Norway (the party transporting the oil and gas from its continental shelf).
• Agreement between the UK and Ireland relating to the transmission of Natural gas by Pipeline 1993
  This provided for an interconnected pipeline between the two states. Jurisdiction in accordance with Article 16 is divided between the States along the continental shelf delimitation. The owner or operator must seek the approval of the Irish Minister for Transport, Energy and Communications. Although each State is obliged to maintain the pipeline to uniform safety standards in their jurisdiction there is a right of inspection of the other States part of the pipeline.
• Agreement between UK and Belgium relating to the transmission of natural gas through a pipeline 1998
  This agreement also provides for a split of jurisdiction between the States’ boundaries. The operator has to be approved by both States. The safety measures are determined by each state though there is provision for consultation to ensure that uniform standards are implemented. The states agree that, provided there is sufficient capacity and a contractual arrangement has been entered for transportation, ‘fair commercial terms’ will be imposed.

Land-based transboundary pipelines in general have no international legal regime equivalent to UNLCOS. As such, each particular land pipeline and transit arrangement depends on the particular circumstances involved. There are a number of key public international law considerations to be kept in mind when energy companies negotiate the legal regime for a transboundary pipeline. These include:

• Security/freedom of Transit
• Commercial Tariffs
• Government Fees
• Environmental Protection
• Safety and Inspection
• Quality control of petroleum
• Operation of pipeline
• Security of the pipeline (non-interference or siphoning in transit States)

Transit pipelines cross more than one international border, thus usually transporting oil or gas from a producer State through one or more States into the final consumer State. There have been some interesting developments in the area of transit pipelines. The EU has adopted a directive (EC Council Directive 91/296/EEC (1991)) which allows for the free and unimpeded transit through the EU. Although this has less relevance for cross-border pipelines as it focuses primarily on establishing a single energy market within the EU it was still a significant step.

After the collapse of the Soviet Union, the question of energy transit gained new significance. As a result the European Commission in 1994 launched an Interstate Oil and Gas Pipeline Management Project, which analyses and reviews the situation of regional pipeline transport in Central Asia and the Caucasus. Its objective was to design and implement an acceptable institutional framework for interstate oil and gas transport and transit. As part of this review an umbrella agreement on the Institutional Framework for the Establishment of Interstate Oil and Gas Transport Systems was adopted Public international law group subsequently by 10 CIS states (Commonwealth of Independent States) by December 1998. The Energy Charter Secretariat through its transit working group has made some significant progress in refining the international legal regime of transnational pipelines.

No discussion of transboundary pipelines would be complete without reference to the Energy Charter Treaty (ECT). The ECT is the only multilateral instrument of general application that creates a general legal framework for securing unimpeded transport of energy products through pipelines. Forty-six States have ratified the ECT and, although it is Euro-focused, it has members outside Europe. Indeed, Japan became the forty-sixth signatory to ratify the treaty on 23 July 2002.

The ECT deals with a number of aspects of transboundary pipelines. It is not possible to discuss all the relevant provisions of the ECT here, but it might be helpful to note a few. For example, the ECT imposes an obligation on all member States to facilitate the transit of energy materials and products without distinction as to the origin, destination or ownership of such products and without imposing any unreasonable delays, restrictions or charges. It also imposes a minimum standard on transit States by providing that they must impose the same treatment and conditions to their own imports and exports.

Perhaps the most important provision of the ECT in this respect is Article 7, which deals specifically with the issue of energy transit. Article 7(6) of the ECT imposes an obligation on the State parties not to interrupt or reduce the existing flow of energy in the event that a dispute arises over such transit prior to the conclusion of the dispute resolution procedures set out in article 7(7).

A working group on transit was established in December of 1998 by the ECT member States to try to deal with outstanding problems related to transit in transboundary pipelines that had not been entirely resolved in the ECT. The transit working group has identified critical issues to be resolved, including the sanctity of energy transit, the prevention of diversion or any form of illegitimate redirection from transit to domestic markets not provided for in the contract, the efficient use of available capacity and existing infrastructures, the transparency of tariffs and the avoidance of discrimination. The ECT signatories are currently negotiating a Transit Protocol to supplement and refine the transit obligations set out in the ECT. Key issues currently under negotiation include (i) the criteria which should be applied when setting transit tariffs (ii) the obligation on states to prevent any unlawful taking of energy materials passing through their territory in transit and (iii) what constitutes ‘available capacity for transit’.

The Energy Charter Secretary has recently confirmed that in preparing transparent rules for "interstate cooperation in energy transit, the Energy Charter process (through the draft protocol) is pursuing not only an economic objective but also the political objective that energy transit will play a significant role in promoting regional stability and security."

The number of long-distance, transboundary pipelines is clear evidence of the growing importance of the unimpeded transport of energy products around the world. The ability of oil and gas producing States and companies to transport energy products unimpeded and without risk of siphoning or contamination to consumers via transit States is perhaps one of the most significant international legal issues for the energy industry in the 21st Century. Public international law is a critical – and indeed unavoidable – component of the legal framework necessary to build and maintain such a transboundary pipeline system successfully.

© Herbert Smith 2002

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