Efficiency gains in E&P Plan Regulations
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.
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.
- 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.