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As E&Ps Coordinate Discoveries, Mexico Issues Unitization Rules

In a first for the Mexican upstream sector, the Energy Ministry (Sener) has issued unitization rules for hydrocarbons reservoirs that span blocks owned by different operators.

The rules, published last month, fill a regulatory gap in the oil and gas industry framework that has emerged since the historic energy reform of 2013-2014 allowed private and foreign companies to explore and develop Mexico's hydrocarbons resources.

Prior the reform, state-run Petroleos Mexicanos (Pemex) was the sole operator in the upstream sector and did not compete with other exploration and production (E&P) companies when developing a discovery.

"It's a completely new issue for Mexico," Pulso Energetico director Pablo Zarate told NGI's Mexico GPI. He heads a think tank that is supported by Amexhi, Mexico's private-sector association of oil and gas companies. "Our only precedent is the Transboundary Hydrocarbon Agreement" for reservoirs on the U.S.-Mexico maritime boundary in the Gulf of Mexico (GOM).

In the nine auctions held since the reforms got underway, the Mexican government has awarded around 90 contracts to about 70 different companies. Most of those new operators have yet to start drilling, and Pemex still accounts for most of Mexico's E&P activity.

However, early progress by new operators already underscores the need for clear rules on unitization. Houston-based Talos Energy LLC and its partners are already in talks with Pemex to unitize the Zama discovery in Block 7, off the coast of Tabasco state in the Sureste basin.

Announced last year, Zama reportedly extends into a neighboring block operated by Pemex. It is estimated to hold in place 1.4-2 billion bbl of mostly light oil.

Another discovery on Pemex's M-Okom-4 offshore exploration area could also be in contact with an adjacent block owned by Houston-based Fieldwood Energy LLC and Mexico's Petrobal, according to a presentation at an October meeting of the upstream regulator, the Comision Nacional de Hidrocarburos (CNH).

"The industry is going to be examining these initial cases with a magnifying glass to see how the rules are applied and how the process is carried out," Zarate said. "They are pilot projects, but I think it goes beyond that. These are cases that will set precedents for how the different actors involved -- Sener, CNH, Pemex of course, as well as the different private parties -- behave" in these new scenarios.

The unitization rules proposed by Sener appear to follow international best practices and should be familiar for oil and gas operators active in other countries, according to industry observers. Unitization used by U.S. E&Ps in the Gulf of Mexico has allowed separate discoveries to be jointly coordinated.

"Although this may be new for Mexico, it's one of those situations where there's no need to reinvent the wheel," Zarate says. "This happens all the time in other countries."

The rules may also evolve as the Mexican oil and gas industry and its regulators gain experience and there are more opportunities to apply them.

"This is a first step, one which I do not believe will be final," GMEC Managing Director Gonzalo Monroy told NGI's Mexico GPI. GMEC is a Mexico City-based consultancy. "In fact, the authorities state in the rules themselves that they reserve the right, further down the road and obviously with more experience and know-how, to issue a contract model for the unification" of shared reservoirs.

Under the rules as published, operators must notify the Energy Ministry when they detect evidence of a shared reservoir within Mexican territory. Working with companies in adjacent areas, the operator must also propose a preliminary unitization agreement.

The preliminary agreement, which can last for up to two years, would include information sharing and conflict resolution mechanisms. It must also outline the joint E&P work the operators would undertake to delimit the discovery.

Sener, with technical assistance from the CNH, would review and approve the preliminary agreements, as well as the final unitization proposals that the operators must present for the shared reservoir.

Per the rules, Sener would act as arbiter when there are disputes between companies, although operators may also request the appointment of a third-party arbiter at their own expense.

If operators cannot agree on a final unitization proposal, Sener or the third-party arbiter would establish the terms and conditions for the agreement based on "principles of economics, competition, efficiency, legality, transparency, industry best practices and best use of the hydrocarbons," according to the text of the rules.

The final unitization agreement would be a binding contract for all parties involved and include a dispute resolution mechanism, outline the joint operation and management of the shared reservoir and incorporate redetermination procedures. Per the rules, the final unitization contract would not create a joint venture or any financial association between the operators, nor would it exempt them from payment obligations under their individual contracts.

"There are still a lot of things that we still have to figure up, things will come up as soon as there are projects that unify reservoirs," Monroy added. "For example, how the agreements handle things like shared infrastructure. As an example, Pemex may already have infrastructure in an area, and it could be counted against future investment commitments, or it could go into a separate contract.

"Sener did very well, I think, to leave these sorts of things to be determined in the unitization agreements that the operators come up with."

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