Why Joint Development Agreements Fail: Implications for the South China Sea Dispute.

• Author: Xue, Song

Joint development represents an effective mechanism for contesting states to benefit from the exploitation of hydrocarbon resources in disputed areas without risking the escalation of diplomatic and military tensions. In the most ideal scenario, the successful implementation of joint development agreements creates a conducive atmosphere for dialogue and boundary delimitation. Since the 1958 Bahrain-Saudi Arabia joint development agreement, about twenty bilateral joint development agreements have been signed to explore for and exploit hydrocarbon resources in disputed areas. However, only a few joint development agreements have proceeded to the implementation phase, let alone commercialization.

Many international legal scholars argue that the failure to implement such joint agreements is often not related to the legal frameworks of those agreements. Rather, the fault lies in factors outside the domain of international law, such as lack of economic incentives, the intervention of third parties or other claimant states, the emergence of domestic opposition, or the deterioration of relations between the signatory states. These aforementioned factors are sometimes subsumed under the category of "political will". William Stormont and Ian Townsend-Gault, for instance, have argued that political will is "the single most important ingredient in the successful conclusion and continuation" of any joint development arrangement. (1) However, the definition of "political will" in the literature is often, in the words of Clive Schofield, "somewhat nebulous". (2)

Despite the consensus over the importance of political will in determining the outcome of joint development agreements, the analyses and conclusions are largely based on meticulous case-bycase analysis, whereas no systematic comparative analysis of all the cases has been conducted to unravel the causal links behind the failure of joint development agreements. This article is designed to fill this literature gap.

This study uses the qualitative comparative analysis (QCA) method to examine six causal variables that are often cited to explain the failure of joint development agreements. They are: (i) low oil prices; (ii) energy independence; (iii) domestic opposition; (iv) deterioration of bilateral relations; (v) third-party intervention; and (vi) bilateral disagreements over the details of the joint development agreement. These were tested against nineteen joint development ventures between 1958 and 2008 in Europe, Africa, the Asia Pacific and Latin America.

The article concludes that a deterioration in bilateral relations is the only consistent causal condition associated with the failure of joint development agreements. The precipitating cause of worsening bilateral relations varies in each case, but is generally the result of ongoing territorial or maritime boundary disputes, such as when the signatory states try to secretively consolidate their claims, or to confirm the status of a "dispute" (3) while ostensibly moving forward with joint development. Meanwhile, the other factors under consideration--economic disincentives, domestic opposition, thirdparty intervention, energy independence and legal disagreements--do not provide a causal relationship with the failure to implement joint development.

The resource-abundant South China Sea is host to many territorial and maritime boundary disputes, making it a suitable area to test the viability of joint development projects. Against the background of increasing energy demand and declining domestic energy production, eight joint development agreements have been signed involving at least one Southeast Asian country (with varying outcomes), and further cooperation is being explored. Although a few Southeast Asian countries have experience in conducting joint development, their cooperation with China in the South China Sea has failed to achieve much progress. Two findings of this article are pertinent to the prospect of joint development projects in the South China Sea. First, since joint development and delimitation are mutually exclusive strategies in managing disputes, claimant states should not enter into joint development agreements as a false pretext to advance their territorial and maritime boundary claims. Second, since friendly relations between signatory states are crucial for the implementation of joint development agreements, committing to a set of binding rules (such as a Code of Conduct) that will regulate the actions of all disputing claimant countries in the South China Sea is critically important. This will help to maintain peace and stability in the region and create a conducive environment for joint development ventures to be carried out, especially against the backdrop of escalating US-China competition.

This article is divided into four sections. After the Introduction, the article provides a literature review of the various factors that could lead to the failure to implement joint development agreements. After that, it explains the methodology, hypotheses, case selection and calibration, followed by a comparative analysis of the selected cases. The next section discusses the implications for the South China Sea dispute, followed by a short conclusion.

Four Possible Factors Placing Joint Development in Peril

There are several definitions of joint development. Most notable are those advanced by Townsend-Gault, Masahiro Miyoshi, Bernard Taverne and the British Institute of International and Comparative Law. (4) This article adopts the following definition:

Joint development is an inter-governmental arrangement of a provisional nature between two or more countries, designed for the functional purposes of joint exploration for and/or exploitation of hydrocarbon resources, whether onshore or offshore, in overlapping or disputed areas, or in areas where countries have not achieved agreement on delimitation. This definition is primarily based on Miyoshi's, (5) but with some minor amendments relating to the issue of boundary delimitations. It is important to emphasize four points. First, this definition excludes arrangements involving states and private entities entering into contracts to jointly develop resources. However, exceptions are made for agreements between state-owned enterprises (SOEs). Such agreements can be considered inter-governmental since the SOEs usually act on behalf of their respective states. Second, the definition confines the scope of joint development agreements only to those located in disputed waters or territories. (6) Third, the definition emphasizes the provisional nature of joint development agreements, which implies that the arrangement is subject to revision, cancellation or termination in the event that the delimitation of the disputed area is finalized. Fourth, the definition excludes the joint development of living resources (such as fish) and non-resource-related activities. In recent years, some states have begun to approach the management of disputed waters in a holistic manner, which includes the comanagement of living resources and security issues. (7) However, as the joint development of living resources and security in disputed areas require very different conditions to be met for their effective implementation, this article confines itself to discussing the joint development of hydrocarbon resources.

Joint development has been explored by many countries for the various benefits it offers. From the perspective of international law, it enables countries to generate revenue from offshore hydrocarbon resources in contested areas with more legitimacy. Articles 74(3) and 83(3) of the United Nations Convention on the Law of the Sea (UNCLOS) allow states to enter into provisional arrangements of a practical nature to deal with issues pertaining to the delimitation of exclusive economic zones (EEZs) and the continental shelf. More importantly, these provisional arrangements (which include joint development) will "be without prejudice to the final delimitation". (8)

From the regional and national security aspect, the successful implementation of joint development ventures helps to ease tensions between claimant states and prevent conflicts arising from boundary disputes. Moreover, given the huge costs involved, the participation of international petroleum companies is required to undertake the exploitation projects. Joint development agreements provide juridical and political certainty, reduce investment risks and prevent reputational damage for the petroleum companies investing in the contested area. As argued by Nguyen Hong Thao, joint development offers a way for littoral states to share the costs and benefits of exploiting hydrocarbon resources in contested areas without sacrificing their territorial claims, guaranteeing at least a "no gain no loss" solution. (9)

Between the 1970s and 1990s, a number of joint development arrangements were signed. However, actual implementation of joint development agreements remains relatively rare. Among all the joint development agreements that have been signed, including those in disputed and non-disputed areas, fewer than half have been successfully implemented, while the majority were either cancelled or terminated. (10) The total number of agreements that have been effectively implemented is very small when compared to the number of boundary disputes that are fuelled by competition over mineral resources. (11)

Factors that cause joint development agreements to stall are complex and often overlapping. In general, they can be categorized into four categories: domestic factors (involving politics, law and security); foreign relations; economic incentives; and factors inherent in the joint development arrangements themselves.

Domestic Politics, Law and Security

In terms of domestic politics, three kinds of phenomena frequently pose a challenge to the success of joint development agreements. The first is exclusivist...