Luis Vielma
President and General Director
View from the Top

Avoid the Danger of Over-Regulating

Wed, 01/18/2017 - 07:18

Q: What issues could arise as Mexico implements new oil and gas regulations?

A: One concern is over-regulation, which must be avoided. Remember what happened with the Deepwater Horizon rig explosion: after the accident, regulations were tightened by the Obama administration. The tighter rules forbid the burning of gas during the testing phase of a well. This forced companies to have ships at the ready to collect gas from the first day onward. Renting a ship can cost up to US$50,000 a day and tests usually take up to 45 days to know whether the well is economically viable. Spending approximately US$2.7 million extra does not make any economic sense. This is a perfect example of an extreme situation leading to over- regulation. Normal practices in the sector allow the burning of gas for up to 60 days in what is known as short tests, which allow the company to correctly diagnose production capacity, define critical flow and fluid quality and to get to know the reservoir’s conditions and dimensions.

Q: What adverse effects could over-regulation cause in Mexico?

A: Mexico must be careful when handling these situations and must avoid over-regulating on its side of the Gulf. If that were to happen, wells might run into problems due to a lack of information, news of which would immediately spread to Houston and be shared worldwide with every major company. This in turn would create a bad impression with investors looking for opportunities in Mexico. Under-regulation, however, is not as worrying because most companies have internal best practices that tend to be aligned with worldwide industry standards.

Q: Talking about the possible need for under-regulating compared with the US, how should CNH handle this?

A: Although experts will look favorably on under-regulation, public opinion could create political pressure, which must be a consideration. Mexico must inform its people so they can see how regulations align with worldwide standards. Mexico must also avoid lagging behind. It cannot wait for US regulations to be implemented. For guidance, Mexico can turn to regulations being implemented in the North Sea, the Persian Gulf or Brazil, to name a few.

Q: What should be CNH’s next focus now that the regulations have been published?

A: CNH needs experienced and talented people as it administrates contracts and works to ensure companies take appropriate risks as well as safety measures. The agency is working hard to manage priorities and is on a learning curve as the rounds progress. Round One went well, everybody recognizes that, and now it is preparing for Round Two. But stating the regulations and making sure they are implemented are two completely different things and CNH is not yet ready to do that.

It is hard to imagine CNH effectively making sure that companies follow the regulations if it is not close to the companies’ operations. Decisions need to be taken and answers given in less than 24 hours. CNH also cannot allow the process to be centralized in Mexico City. The agency will therefore need offices in Villahermosa, Ciudad del Carmen, Reynosa and other cities where the action is. If CNH’s overall structure is well-organized and the proper regulations are in place, then making sure the regulations are followed should be easy.

CNH needs to slim down as an organization, with skilled talent that has a deep and structured knowledge of regulations. It does not need to have specific technical knowledge because having such departments would create a slow and inefficient organization. The talent should therefore have general technical knowledge about their regulatory area while working with neutral organizations, whether public or private, that can offer highly specialized and independent consulting services. This would allow CNH to be more efficient and faster.

Q: How can a company like CBM help both CNH and private companies be successful?

A: International private companies such as BHP Billiton, which will work with PEMEX on the Trion project, have been successful in other countries and have plenty of knowledge in their areas of expertise but they lack experience with Mexico’s regional geography and culture. We can help and support incoming companies with their integration process.

Another area of opportunity for CBM is project management. PEMEX and BHP are just getting to know each other and they could run into problems over which activities will be developed by which partner. In these cases, CBM can play a project management role. We can rely on our experience working with PEMEX and international companies to foster a smooth and productive interaction between companies by creating effective communication and decision-making.

Q: As a supplier and operator, what does CBM expect from the Energy Reform?

A: With regulations, implementation is as important as the rules themselves. How a country implements its regulations will determine their success. It is essential, for example, to know how a company will be held accountable in the aftermath of the bidding process. Here is another example: CBM helped CNH develop rules involving areas such as drilling, well integrity and product shipment but the government agency has yet to develop an integrated reservoir management system, which should be the base for the whole E&P regulation.

As for Mexico, the government must stick to the current pace of the Reform’s implementation while recognizing that any errors can be corrected along the way. Mexico’s institutions and agencies also need to understand they cannot work with newly arriving companies in the same way they worked with PEMEX because that could affect the country’s image and future. Having said that, companies also have the opportunity to help build Mexico’s future in the oil and gas industry by working closely with institutions like CNH. CBM would like to be on the front lines of support for developing the regulations that will benefit both Mexico and the private sector.

Q: What are your goals and how do they align with Mexico’s ambitions?

A: Thanks to the price of oil plummeting to around US$40 a barrel, private companies have been forced to tighten their budget belts. This is the world they now live in and our business reality must align with theirs. It is our goal, therefore, to stay competitive and attractive. To do that we are reviewing our practices to further lower costs and diversify the range of services we offer. We already are leaders in the upstream area, doing reservoir analysis, well design and production optimization, but we also want to start operations in the midstream and downstream segments too, amplifying our services portfolio. CBM also has a new training center that will allow our customers to lower their capital needs while offering their employees the opportunity to boost their knowledge and skillset.