/
Analysis

Policy Mandate of the CNH

Wed, 01/25/2012 - 14:06

The Comisión Nacional de Hidrocarburos (CNH), or National Hydrocarbons Commission, was established by Congress following Mexico’s 2008 Energy Reform legislation as a decentralized agency from the Energy Ministry with the mandate to strengthen the position of the Mexican State as the highest and only authority in the oil industry. Under this new institutional arrangement, the CNH has the technical and operational autonomy to regulate and supervise the exploration and exploitation of the Nation’s hydrocarbons. The CNH was formally installed on May 20, 2009, and began its activities in July 2009.

The government took the decision to create the CNH after many years of self-regulation of the industry, a mixture of Pemex self-regulation and Energy Ministry influence that often led to conflicts and questions about the transparency and eciency of the industry. Before the 2008 Energy Reform, Pemex was operating under a legal framework that had not been revised since the late 1970s. The CNH was introduced partly in order to stimulate ‘innovative decision making’ that Pemex needed to help it overcome its challenges.

The legal mandate of the CNH has four dierent aspects: policy, operations, supervision, and information. In the area of policy, the CNH is tasked with contributing to the technical aspects of Mexico’s energy discussion, playing a part in developing a reserves policy for the country, and is responsible for the assessment, quantification and verification of Mexico’s hydrocarbon reserves. On the operations side, the CNH must establish technical guidelines for projects, sanction and establish project limits, identify the technical proposals that will optimize oil recovery, issue and establish ocial standards, and oer a technical opinion on land assignation and the cancellation of exploration and production activities. The CNH must furthermore supervise, check, monitor and verify the fulfilment of blocks assigned, and establish evaluation processes related to operational eciency. The final task of the CNH is to provide information: obtain, analyse and keep up-to-date statistics on the industry, and establish a comprehensive public petroleum registry. The registry should contain records of adopted resolutions, blocks and areas assigned, and oil reserve zones, among other key data.

A governing body composed of the president commissioner and four other commissioners runs the CNH. The president can renew his term once and serve a total of two five-year terms. Under the commissioners is an executive secretary and an auditing unit, and below these there will be five director generals, each responsible for a specific unit: legal, hydrocarbons, supervision and control, standardization, and operation.

So far, the CNH has worked on a number of projects according to its mandate. These include an eort to force Pemex to avoid and reduce gas flaring and venting, creating an outline for correct approval of reserves, bringing in third parties to evaluate Pemex’s reports, writing a technical paper regarding oil and gas recovery factors, and compiling a first review of tertiary Gulf of Mexico oil. In October 2010, the CNH introduced the first package of guidelines for deepwater projects.

In March 2010, following an in-depth evaluation, the CNH published a report that called on Pemex to focus on improving production at its existing wells at Chicontepec before it drills new wells. CNH re-evaluated the Chicontepec project after Pemex missed output targets at the field and faced drilling delays in 2009. The report concluded that the design phase at Chicontepec had not been completed to the required level, and therefore the technological alternatives for production had not been fully and thoroughly analysed. As a result of its inquiry, the CNH recommended the redefinition of Pemex’s strategy, and called for more studies to find appropriate technologies for Chicontepec. The subsequent public outrage forced Pemex to implement so-called field labs administered by international oilfield service companies to test new technologies on a small scale.

E&P regulatory systems are generally broken down into two dierent approaches. The prescriptive model, used in Brazil, the US, China, Indonesia and Malaysia, directs oil and gas activities through detailed regulations and requirements, and it is up to the regulators to impose technical standards. This model requires detailed regulation for oil and gas activities, and a high level of compulsory technical standards. It implies less flexibility in operations. Under this system, operating plans and environmental impact assessments must be submitted, but predominantly to establish regulatory compliance. As a result, approvals are granted relatively quickly. Regulators in these systems play an active role in setting the requirements for the operators and enforcing technical standards.

In the second model, which is performance-based and used in Norway, the UK, Australia and Canada, regulators get fully involved in each project, and each is examined on a case-by-case basis. In this model, operators must be more proactive in the design of their projects. The design and strategy of the performance-based system is based on government and industry objectives, demands extensive participation from both the industry and the regulator in terms of expertise, management and flexibility, and emphasizes eciency rather than maximum oversight. Approvals are slower under this system, as operators must show that they have identified the methods, technology, risks and equipment needed to meet their specified objectives. In turn, regulators must set the industry objectives and keep up to date with industry standards.

On the regulatory front, the CNH works as a hybrid of these two systems, with a tendency to lean towards the performance-based approach. However, where the CNH diers from other regulatory agencies around the world is its relative lack of independence from the state operator, Pemex. Although projects such as Pemex and the CNH working together to improve Pemex’s internal standards and procedures are necessary, Pemex’s close relationship with the state has a detrimental impact on the transparency and eciency of the Mexican oil and gas industry. This raises the question of how eective the CNH can be in regulating the NOC.

In Brazil, where the ANP works as the country’s regulatory agency in tandem with Petrobras, the national oil company, the regulatory agency is not only responsible for analysing and approving exploration and production plans, but also for drafting PSAs and bid tender protocols. Brazil still has rules to make sure that Petrobras has a minimum stake of 30% in its most strategic national projects, and has a right to take projects without a tender in certain situations. Unlike in Mexico, though, this procedure is laid out transparently, and companies can participate as operator in even the country’s lucrative pre-salt projects. The CNH does not currently fulfil this role of bid writer and overseer of tenders, and Pemex operates all areas in the country by default. Only recently have we seen some of these blocks tendered to companies under integrated service contracts, but Pemex is still ultimately responsible for such tenders, rather than the CNH operating as an independent and transparent agency. Until this changes, Mexico will still lag behind its international counterparts.

OBJECTIVES OF THE NATIONAL HYDROCARBONS COMMISSION:

  • Increasing the recovery factor and obtaining the maximum volume of crude oil and natural gas in the long term, in economically viable conditions for wells, fields and abandoned reservoirs, or in process of abandonment or exploitation.
  • Optimizing the replacement of hydrocarbon reserves based on available technology and in line with the economic viability of projects.
  • Driving use of appropriate technology for exploration and extraction of hydrocarbons, in terms of production and economic results.
  • Monitoring environmental performance during hydrocarbon exploration and exploitation.
  • Ensuring that the necessary conditions for industrial safety are in place for the exploration and extraction of hydrocarbons.
  • Minimizing flaring and venting of gas and hydrocarbons during the extraction.