By Gaspar Franco & Yolanda Villegas
Nowadays, governments use regulations to drive public policies that promote social welfare, by setting restrictions or otherwise creating incentives to encourage various activities and conducts in society. Hence, within the Mexican exploration and production sector, certain regulations have been issued, to strengthen the planning and development of this industry.
The regulations issued by the Mexican regulatory institutions to engage hydrocarbon exploration and production activities, allow companies to comply with several technical, financial, safety and environmental protection elements, as well as topics related to society and compliance with tax liabilities. With this in mind, the government entities with authority to monitor such compliance are: the Ministry of Energy (SENER), the Ministry of Finance and Public Credit (SHCP) and the Ministry of Economy (SE), as well as the Agency of Industrial Safety and Environmental Protection for the Hydrocarbons Sector (ASEA) and, certainly, the National Hydrocarbons Commission (CNH).
In this vein, with regard to the technical regulations in exploration and production matters, this sector used to be self-regulated by the sole E&P operator in Mexico: Petróleos Mexicanos (PEMEX). However, since the creation of CNH in November 2008, and its formal establishment in May 2009, several regulations that were previously applicable only to PEMEX have now been issued. To date, these are applicable to each and every E&P operator engaging onshore or offshore activities in our country.
Until this date, CNH has issued technical regulations in the following areas:
- Technical provisions to reduce natural gas venting and flaring (now related to natural gas utilization).
- Technical guidelines to design hydrocarbons exploration and production projects.
- Guidelines that govern the reporting procedure of hydrocarbon reservoirs.
- Administrative provisions on industrial safety issues for deepwater exploration and production.
- Technical guidelines for hydrocarbons measurement matters.
- Guidelines for granting and rescinding contracts for Superficial Recognition and Exploration Areas (ARES).
- Methodology to classify, assess and monitor prospective and contingent resources.
- Legal framework and procedures to sign awarded contracts won in the exploration and production licensing rounds.
- Guidelines to authorize well drilling and its monitoring mechanisms.
- Regulation of the requirements and procedures to authorize the execution of partnerships and associations and guidelines to supervise each internal committee, e.g. financial, operational or corporate.
- Requirements and procedures to use geological, geophysical, petrophysical, petrochemical and geochemical data obtained from ARES contracts and from exploration and production activities.
In addition, CNH issued regulations that were used in isolated and single occasions (for sui generis cases). This included regulation to fix the rules and procedures by which PEMEX, its subsidiary entities and affiliate companies, as well as the Mexican Institute of Petroleum (IMP), executed the migration of their technical information to the National Centre of Hydrocarbons Information (CNIH).
Moreover, all regulations issued by CNH, are made under a procedure in which a team of specialists and experts prepares an agreement proposal according to the best practices of the industry. This proposal is later submitted for review by an external advisory board composed by specialists from different associations, universities and institutions related to the topics of the regulation, in order to disseminate their perspectives and points of view on the regulation proposal. Once the recommendations of the external advisory board are taken into account, the regulations are adjusted and submitted to the Federal Commission for Regulatory Improvement (COFECE), where any interested person or third party can provide relevant recommendations that could contribute to a more efficient and integral regulation.
Like any activity in life, regulations also have areas of opportunity that, most of the time, are detected during their implementation. This is why a continuous monitoring is needed to make regulations even more effective. In Mexico, most of the oil and gas regulations and legal provisions have been amended during the Energy Reform implementation. This creates a more efficient and consolidated market, therefore making sure that private investment escalates rapidly so the industry can undergo a prompt recovery. After the last international oil price collapse in 2014 created austerity and budgetary reductions, not only in Mexico, but worldwide, oil and gas-related activities were drastically reduced.
Conversely, E&P operators are seeking to improve their administrative and operational efficiencies and therefore, improve their profit margins that will allow them to continue investing in such capital-intensive projects. But it is important to recognize that Mexican regulators are also working to support and incentivize more efficient and appropriate oil and gas-related activities, by monitoring and comparing each compliance process with best international practices, primarily regarding safety and environmental issues for the country, which will allow a sustainable oil and gas industry for Mexico.
Without a doubt, regulators are implementing international best practices and continuously detecting areas of opportunity for these practices. Together they are able to create the success story that Mexico deserves in terms of its oil and gas industry. It is to be noted that the regulatory duties pertain to the Mexican regulation agencies, but the responsibility for the regulation itself must be shared and contributed to by every player of the industry, not only the regulators.
There is no question that E&P operators need to demonstrate that they respect the regulations of the countries in which they operate and, therefore, ensure that they are working for the benefit of all parties involved in their projects. But it is also true that they require regulations that allow them to engage in oil and gas-related activities in a more efficient manner.
Accordingly, as part of the regulation adjustment and amendment procedure, it is clear that all comments from the industry should be analyzed and the rationality of each of those comments should be assessed and verified. Mexican regulatory entities are open to hear and review proposals to amend the existing regulations, as well as issuing additional regulations to contribute to the development of the oil and gas industry, from the technical, operational, environmental, social and economic perspectives. Let’s get involved together in this process of change, safeguarding the sustainability and maintainability of this strategic industry for Mexico.
About the authors:
Gaspar Franco: Commissioner at CNH. Petroleum Engineer from the Autonomous University of Mexico with a Master’s in Administration Abilities from Del Carmen Autonomous University.
Yolanda Villegas: Lawyer specialized in the Energy Industry. Holds a Bachelor’s degree in Law, a Master’s of International Law, and she is currently a PhD Candidate on Humanistic Studies with focus in Science and Technology from the Monterrey Institute of Technology and Higher Education.