Huge Discovery Highlights Mexican Unitization Policy Requirements
Tuesday, May 29, 2018
development and poor reservoir management. It can also lead to unnecessary duplication of facilities. The result tends to be lower resource recovery, higher overall costs, and lower overall profits. This means less revenue for government – lower royalties and smaller tax take.
In contrast, unitization encourages more considered development of resources and efficient use of infrastructure. Participants operate in a predictable system that delivers a fair and equitable share of resources. Governments attract more investment and receive better returns. There are also environmental benefits – fewer wells, pipelines, producing centers and operating bases are needed to develop the same resources, which reduces emissions and project footprints.
According to the Mexican regulations recently published, when evidence of a shared reservoir exists operators must notify SENER and propose a preliminary unitization agreement with an initial duration of up to 2 years. The preliminary agreement must be consistent with development plans approved by the CNH for the subject field/reservoir. Subsequently, the operator will need to provide a final unitization proposal on behalf of all engaged parties for managing the shared reservoir.
As arbiter, SENER will be responsible for settling disputes. Operators, at their own expense, can request the use of an independent arbiter too. If an agreement between operators cannot be reached, SENER or the independent arbiter would determine the terms and conditions of the final unitization proposal based on “principles of economics, competition, efficiency, legality, transparency, industry best practices and best use of the hydrocarbons,” according to regulation.
Sproule can see several reasons why Mexico supports unitization
- In Mexico, undeveloped resources belong to the nation’s citizens, rather than the individual landowner, thus increasing the government’s incentive to maximize returns.
- The country’s oil and gas reforms have been subject to intense political dialogue. Voters will want to know that the returns on oil and gas projects are being delivered back to the nation and are being maximized.
- The first case for unitization will be Zama – a huge discovery where the national oil company has a stake in the outcome.
- Opening up Mexico’s Gulf of Mexico waters could lead to discoveries that straddle the US-Mexico boundary. Mexico will want to demonstrate its strong and clear unitization rules to support international negotiations with respects to developing such resources.
The Zama discovery has confirmed Mexico’s rich oil and gas potential. Many oil and gas companies are excited by Mexico’s potential, so it is beneficial that Mexico has released their unitization framework, which now offers greater predictability to investors.