Talanza Energy Consulting

February, 2021

Extensions for Exploration and Appraisal periods

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The pandemic has provoked delays in operations as services and materials providers all along the value chain have  not been able to fulfill their commitments on time, and lockdown measures have limited the development of  activities. Additionally, regulators have been operating irregularly since March 2020 with interrupted procedures,  closure of offices, common failures in the electronic systems to submit information, and suspension of  authorization procedures. According to the National Hydrocarbons Commission (CNH), there were 25 force  majeure and 13 extension requests between March and July 2020. To grant some relief, CNH published Agreement  CNH.E.29.001/2020, where it: i) recognized a limited force majeure, and ii) rejected the requests for extensions. In  this pager we will focus on the latter: that is, the Operators’ right to request an extension to Exploration and  Appraisal Periods, which becomes more relevant at these times, considering not all operational delays due to  COVID-19 qualify as Force Majeure.

HOW IT WORKS?

Contracts establish that at least 60 calendar days before the conclusion of the Exploration or Appraisal periods,  Operators may request an extension to conclude ongoing activities that, for reasons not attributable to the  Operator, are impossible to conclude within the period. Given that it can only be granted for approved activities, no  new activities are allowed. In their request, Operators shall propose the required timeframe to conclude the  pending activities.

APPROVAL PROCESS

Exploration Period extensions: Since there is no specific term for answering requests for Exploration Periods extensions,  CNH may resolve in up to three months (article 17 of the Federal Law of Administrative Procedure). This means that the  contractual term for filing with at least 60 days in advance, may not be sufficient for obtaining the approval in time.

Appraisal Period extensions: There is a 15-business day term for resolution, according to article 51 of CNH’s Plan  Guidelines.

There is neither a defined process nor evaluation criteria to approve extensions. The following is a compilation of  what has been observed in the 14 processes that CNH has resolved up to date.

Based on past approvals, CNH evaluates the extension request based on: (i) Current status of the Contract and  Plan/Program; (ii) Cause of the extension; and (iii) Extension characteristics. The evaluation process is carried out  by the Unit of Technical Administration for Entitlements and Contracts (UATAC in Spanish), supported by CNH’s  legal and technical areas. According to the above, Operators should structure their requests based on the following:

 

 

 

  • Activities progress:
    • Executed vs programmed activities.
    • ·MinimumWorkProgramprogress:itsincrementandadditionalcommitments  (if any).
    • Analysis of permits and authorization procedures for the approved activities.

 

 

 

  • Extension request: At least 60 calendar days before the period ends.
  • Causes/Reasons of delay:
    • Technical, economic, social, and other reasons out of Operator’s control.
    • ·Analysisandcomparisonwithperiodicreportsand/orpreviousOperator’s  notifications of any delay or problem.
    • ·AnalysisofreasonsnotbeingattributabletotheOperator(supportedbythe  legal area of CNH).

 

 

 

  • Activities to be executed during the extension: Shall be activities approved in the  Plan/Program (supported with exploration technical area of CNH).
  • Schedule: Shall be consistent with the one in the Plan/Program approved.
  • Extension time: Justification that the extension corresponds to the programmed  activities.

 

RECOMMENDATIONS

· Considering COVID’s current restrictions, and  the fact that several regulators are increasingly  defining more non-business days, procedures  tend to be inconsistent and may take longer. It is recommended to request the extension  more than 60 days before the conclusion of  the period.

· CNH has denied requests due to  inconsistencies in activities’ timelines. Thus,  remember to deliver the updated timeline in  the format that was approved in the  Plan/Program.

· Include any delays or operational problems in  the monthly reports to CNH, to have additional  support in case of an extension request.

· Extension request shall always include  documental support for its causes.

· Agile communication with CNH is key to clarify  and submit additional information requests.

EXTENSIONS VS OTHER  CONTRACTUAL FIGURES

 

Analysts

Ricardo Alcudia

Mr. Alcudia provides specialized advice to our clients in terms of development stage obligations, focusing in aligning our client’s objectives to the national requirements in order to achieve a successful compliance of their contractual and regulatory requirements.

María Serna

María Serna advises on the design of the regulatory compliance strategies where she oversees that each of our suggestions is both legally viable and enforceable as well as representing the minimum government relationships wear. She has experience in advocating before high-level public servants of the energy regulators in favour of our clients often integrating diverse stakeholders’ points of view.