All Exploration and Extraction of Hydrocarbons contracts in Mexico must have an approved exploration plan (EP), appraisal program (AP) or development plan (DP) to be able to perform activities. Oil and gas projects are normally subject to change due to better information and new geological discoveries. However, the National Hydrocarbons Commission (CNH)’s regulations establish a process for approving any change in these plans, which translates in operational delays. In this one pager, we present what government can do to increase efficiency in compliance and what operators shall do in order to minimize the need to modify their plans.
One of the main flaws of CNH’s Plan Guidelines is considering exploration, appraisal and development activities as a sequence, not allowing a simultaneous planning exercise. The most significative case is the one of exploration and appraisal activities where both are normally part of one exploration phase with one single planning process. However, in Mexico, regulation is incompatible with some operative practices:
1.The Operational side. Activities in E&P start with the exploration phase where operators drill exploratory wells looking for an oil discovery. Discoveries shall be evaluated in order to define their commerciality mainly through characterization and delimitation activities that require, among others, the drilling of appraisal wells. Even though there is a clear sequence of these activities, it is common that, for a matter of efficiency, operators want to start appraisal activities before the confirmation of a geological discovery through well drilling.
2.The administrative side. CNH’s regulation of exploration and appraisal activities follows a sequential logic (exploration-discovery-appraisal-commerciality-development) that does not allow operators to start appraisal activities before presenting the appraisal program, which requires a discovery statement, for which the drilling of an exploratory well is needed, which should have an exploration plan approved.
This low regulatory flexibility can cost millions to operators and to the Mexican government as the industry cannot take advantage of a more agile operation were exploration and appraisal activities are executed simultaneously. However, CNH can solve this regulatory mismatch by modifying its Plan Guidelines to allow the approval of appraisal activities within the EP process to increase operational efficiency.
Additionally, to minimize the cost of compliance, operators shall consider a strategic planning approach according to the contract model: Production Sharing (PSC) or License (LIC), in which we recommend:
PSC: Using decision trees as they represent the operational sequence of the activities to be executed. Decision trees are a better alternative for the regulator as they can keep track of investments for cost recovery purposes.
LIC: Operator may present two scenarios a minimum (base) and a maximum with the flexibility to perform any possible scenario in between. This methodology is more suitable for LIC as government does not approve a cost recovery program and gives more flexibility to operators.
CNH’s Plan Guidelines shall be a more flexible instrument that allows AP within the EP that allows operators to start appraisal activities at any moment saving millions of dollars to both, the operators and the government. In addition, operators shall reduce the Plan-modification likelihood using decision trees (PSC) and Base and maximum scenario (LIC) to avoid delays and minimize regulatory compliance cost.
As the map shows, investment in exploration areas has a nationwide scale and therefore there are important efficiency gains from increasing regulatory flexibility in exploration and appraisal phases.
Mr. Cota is the founder and CEO of TALANZA where he assists international energy companies in the design and implementation of tailor-suited strategies for their regulatory compliance adjusted to the applicable geopolitical context, considering current and upcoming regulations.
As an international team player Mr. Paulino Guerrero, provides to our clients a specialized assessment of their exploration plans, deciphering contractual edges and technical aspects, as well as technical advice in geological and geophysical activities focused on the exploration strategy.