Important efficiencies for operators and government could be obtained if the Plan Guidelines would allow starting appraisal activities before obtaining the exploratory well drilling results. Experience has shown that with the current Plan Guidelines regulations, Operators struggle with the back-and-forth of modifications to their Exploration Plans, resulting in operational delays, costs and burdensome regulatory compliance. This could be avoided with an adequate strategy. In this pager, we share some recommendations that could reduce the struggle.

1. ANALYSTS
september 2019
EfficiencygainsinE&PPlanRegulations
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
oneofexplorationandappraisalactivitieswherebotharenormallypartofoneexplorationphasewithone
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
commercialitymainlythroughcharacterizationanddelimitationactivitiesthatrequire,amongothers,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
operatorstostartappraisalactivitiesbeforepresentingtheappraisalprogram,whichrequiresadiscovery
statement, for which the drilling of an exploratory well is needed, which should have an exploration plan
approved.
ThislowregulatoryflexibilitycancostmillionstooperatorsandtotheMexicangovernmentasthe
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:
Paseo de la Reforma 483, 06500, Mexico City.
T. +52 (55) 7316 2228
1200 Smith St, 77002, Houston, Texas.
T. +1 (713) 353 3952
www.talanza.energy
paulino guerreroassists
and advises in the implementation
of exploration strategies for
International Energy Companies.
Mr. Guerrero elaborates and
adapts each strategy to the needs
of the client for the
technical-regulatory fulfillment in
function to the exploratory
objectives.
paulino.guerrero@talanza.energy
CONTACT
Weareauniquefirmintegratedby expertsinenergy
regulationand publicadministration,conformedby a
professionalteamwithvast experienceintheevolution
ofthe energysectorduringthelast10years.
REGULATORY COMPLIANCE TERMS FOR
CONTRACTS OF ROUNDS 1.4, 2.4AND 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
bedrilledwithrespecttothosecontainedin
theapprovedEPorAP.Ifthereisanychange
of exploratory objectives resulting from
newknowledgeofthesubsoil.And, forPSC,
when there is a variation in absolute terms
of20%ormoreoftheinvestmentapproved.
Modification can take up to 35 business
days for EP and 40 business days for AP.
REGULATORY MISMATCH
As the map shows, investment in
explorationareashasanationwidescaleand
therefore there are important efficiency
gains from increasing regulatory flexibility
in exploration and appraisal phases.
InTalanza,wehavesuccessfullyadvisedOperatorsin
the documentation of their EP and AP and their
preparation under a strategic perspective aiming to
minimizing both the likelihood of plan modification
andthecostofcompliance.
PSC: Using decision trees as they represent the
operational sequence of the activities to be
executed.Decisiontreesareabetteralternativefor
the regulator as they can keep track of investments
for cost recovery purposes.
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.
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.
Base Scenario
(minimum work
commitment)
5G&G Studies
100km2SeismicProcessing
1ExploratoryWell (drilling)
Scenario1
2 G&G Studies
50km2AVO
100km2SeismicAcquisition
Scenario2
3G&G Studies
100km2AVO
1ExploratoryWell (drilling)
Scenario3
4 G&G Studies
100km2AVO
100km2SeismicAcquisition
2ExploratoryWells (drilling)
Maximum
Scenario
1SedimentaryStudy
1StructuralStudy
1Plays Study
1GeochemicalStudy
50 km2 AVO
100km2 AVO
100km2 SeismicAcquisition
1ExploratoryWellA(drilling)
1ExploratoryWellB(drilling)
or +
or +
+
CNH approves the base and maximum scenarios
Operator can choose any
scenario in between
marco 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.
marco.cota@talanza.energy
base scenario
5 G&GStudies
100km2Seismic
Processing
1ExploratoryWell
(drilling 1st)
2G&G Studies
Re-evaluationoftheoil
Potential
Updateof G&G models.
Re-evaluationoftheoil
Potential
Re-evaluationoftheoil
Potential.
SeismicReprocessing
+
+
-
-
+
-
Updateof G&G models
Re-evaluationoftheoil
Potential.
Updateof modelsand
Considertoreturnthearea
+
-
positive
results
(+)
negative
results
(-)