Talanza Energy Consulting

September, 2019

Efficiency gains in E&P Plan Regulations

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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.

REGULATORY MISMATCH

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.

WHAT CAN OPERATORS DO?

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.

THE COST OF INFLEXIBILITY

CNH’s Plan Guidelines shall be a more flexible instrument that includes AP approval within the EP process allowing 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.

REGULATORY COMPLIANCE TERMS FOR  CONTRACTS OF ROUNDS 1.4, 2.4 AND 3.1

Sequential regulations and long terms for  complying both EP and AP (assuming one  modification for each one) can take up to 669 days.

  • After signing the contract, operators have  up to 180 days to present an EP and CNH  may take up to 85 days for approval.
  • After drilling (which may take several  months after EP approval) and notifying  CNH a geological discovery, operators have  up to 180 days to present an AP and CNH  would take 40 business days for its  approval.

  • EP and AP modifications can be triggered  for the following reasons  at any time: If  there is a variation in the number of wells to  be drilled with respect to those contained in  the approved EP or AP. If there is any change  of exploratory objectives  resulting  from   new knowledge of the subsoil. And, for PSC,  when there is a variation in absolute terms  of 20% or more of the investment approved.  Modification can take up to  35 business days for EP and 40 business days for AP.

REGULATORY MISMATCH

  • 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.

In Talanza, we have successfully advised Operators in  the documentation of their EP and AP and their  preparation under a strategic perspective aiming to  minimizing both the likelihood of plan modification  and the cost of compliance.

 

Analysts

Marco Cota

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.