Mexico O&G firms play a risky game with force majeure

In light of the historic slump in oil prices, Mexican E&P operators, particularly those with production contracts, should move to invoke force majeure clauses or submit plan modifications to the regulator immediately.

Fausto Álvarez, who headed hydrocarbons regulator CNH's technical administration and compliance unit for E&P contracts and leases, told BNamericas that operators are not necessarily aware of an interpretation of exploration and production guidelines issued January 23 for articles 41 and 62 (available here). Under the interpretation, the regulator can impose fines of up to around US$5mn in case of important deviations from approved plans.

“For example, for Eni, Hokchi and Fieldwood, which are the big ones that have already submitted production contracts for the whole plan and yearly basis, the law establishes that if [they] show a deviation of plus-or-minus 30%, [they] are subject to a fine,” Álvarez said.

If operators “say they will be producing 10,000 barrels, and because of [the crisis] they only produce 6,800, that would also be non-compliant of the plan,” Álvarez said, adding similar guidelines apply to drilling (for exploration contracts) and investment.

As oil and gas companies are scaling back production because around one-third of global demand evaporated in April due to the COVID-19 emergency, big operators could resort only to get force majeure and modifications approved to avoid the fine, Álvarez said. He recommended operators try both approaches to increase the possibility of taking regulatory hurdles and avoid political or deadline complications.

Under last month's OPEC+ deal, Mexico will scale back less than other parties. Pemex’s E&P unit (PEP) and private producers are still operating, despite maxed out storage and oil tankers waiting to unload at ports around the world.

The regulator is required by law to conduct evaluations that could trigger fines for every company, including PEP. Álvarez believes such analyses are already underway, even though the suspension of energy contract terms and deadlines has been extended to May 30.

Yet, these suspensions focus more on the legal aspect of contracts, according to Álvarez. Companies would still be expected to comply with well drilling, production targets and investment.

“I don’t think big companies are looking at this, because my close contacts at CNH are not telling us that they are submitting [either type of request],” Álvarez said.

“Pemex will have a major deviation in production for some fields. Pemex will have major deviation in investment. Pemex will have major deviation in drilling, both in exploration and development, and this [regulation] also applies to them,” he said.

“So, this is a major disruption factor in the upstream...if companies don’t start asking for force majeure or start submitting the modification of plans, I think there will be major trouble” when the 2020 contracts are being fully evaluated next year.