Acorn Ideas

Issue No. 28, December 2014

Why Non-Technical Risks Matter to the Mexican Apertura

Last week Mexico's Secretary of Energy released the first round of blocks for international companies to participate in exploration and production of the country's long-guarded oil reserves. The 14 blocks - located in near-shore marine waters off the base of the Yucatan - represent an intriguing first opportunity for foreign oil companies to participate in the opening of Mexico's important oil and gas reservoirs to advanced development. More will come as on-shore and deep water fields are offered for bidding in 2015.

International oil and gas companies face plenty of challenges in evaluating and preparing bids. Front of mind will be evaluating the financial, geologic, operational and logistical/infrastructure integrity risks of successfully operating in the available fields. But it is the non-technical risks - those posed by social, environmental and labor considerations - that could prove more influential in determining the success of the new ventures in these and subsequent acreage.

Why?

  • International investors and operators are finding that project failures increasingly have less to do with reservoir, design or financial conflicts than with misunderstanding and mismanagement of non-technical risks 1
  • The industry has well-established and reliable tools in place to quantify and manage technical risks, but those tools are only recently being applied and tested on the non-technical risk front
  • While technical risks can be understood and managed to a large extent following standardized corporate decision-making processes, non-technical risks are extremely sensitive to local knowledge and require local solutions.

These factors are frequently exacerbated in “new” oil/gas frontiers that don’t have a long history of IOC/NOC production and collaboration.

Bidders will find environmental, social and other non-technical considerations to be critical in evaluating their potential to succeed in exploring and developing the 14 near-shore fields. A few of many examples include:

  • Internationally-recognized (IUCN Category I - VI) protected coastal areas facing the blocks, including RAMSAR wetlands and coral communities
  • Early indications of opposition from local stakeholders who feel their grievances have yet to be fully considered
  • Strict local content requirements crossed with strong labor unions, transparency and human rights challenges
  • A talent pool that is in high demand yet lacks some important safety and environmental risk management competencies that are required by international offshore operators
  • Emerging regulations and regulators 2that are still building the foundation to govern reliably and predictably
  • Signals that social impact assessment will be a critical prerequisite for permit approvals

Understanding and successfully managing these risks will require substantial investment of time and talent, blended with a mastery of how to do business in Mexico while ensuring international business standards are applied. Underestimating the complexity and importance of managing NTRs will undercut the success of any venture in the immediate near-shore blocks and future offerings.

Specifically what can potential operators do to address this challenge?

  • Start early to study and understand NTR - Some NTR related requirements have short timeframes (for example, the requirement to submit a Social Impact Assessment within 90 days of contract signature), and others are still unclear. Dedication of resources to understand NTR requirements will be paramount to minimize costly delays.
  • Track emerging regulations and governance - Regulatory authorities and legislation needed to govern international participation in Mexico’s oil & gas industry are very much a “work in progress” and will likely be revised / supplemented as gaps and challenges emerge. Building relationships with key government stakeholders and tracking regulatory changes will provide a deeper understanding of NTR management in Mexico and strengthen company reputation with regulators.
  • Work with trusted NTR consultants with access to in-country talent and knowledgebases - Mexico has extensive local knowledge necessary for NTR risk management, but lacks traditional consultancies that specialize in NTR for oil and gas - a result of a 75 year old oil monopoly. Efficiently and reliably tapping this local knowledge will require engaging international experts partnered with local institutions and dedicated to building local capacity in NTR management.

Mexico’s energy reforms may open important opportunities for global oil and gas companies. But in this arena, mastering the geologic, engineering, operational and other technical risks will not be enough to support successful ventures. Perhaps now more than ever before, mastering knowledge and management of non-technical risks in new E&P ventures will matter.

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1 For example, a Goldman Sachs analysis of its top 190 global oil & gas projects found that 73% of delays were political or stakeholder related vs 63% for cost/contract vs 21% for technical reasons.

2 Mexico’s Agency for Safety, Energy and Environment (ASEA) is scheduled to be launched in early March 2015 to facilitate, regulate and enforce requirements for oil and gas activities.

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Issue 27 -Equator Principles:Drivers of Sustainability in the Oil and Gas Industry?
Issue 26 -The Transparency Tightrope: Examining UNEP’s New Access to Information Policy
Issue 25 -July 2014: Bouston
Issue 24 - July 2014: Land Tenure and Property Rights - Where Legal Compliance May Not Be Enough
Issue 23 - May 2014: 3 Things I Learned in Mexico - Non-technical Risks in the Oil Industry
Issue 22 - April 2014: Capacity Building on Stakeholder Engagement
Issue 21 - March 2014: Above-ground Facilities and Stakeholder Engagement: Deploying the 'CAC'
Issue 20 - March 2014: A Starting Point for Shared Equity
Issue 19 - March 2014: What It Takes to Run a Great Consulting Firm
Issue 18 - February 2014: Considering Human Rights - Trends and Lessons in Oil and Gas Impact Assessments
Issue 17 - June 2013: Managing Environmental Health in International Development Projects
Issue 16 - January 2013: Integrating Environmental and Social Performance throughout the Project Lifecycle
Issue 15 - January 2013: The State of Shale Play in 2013
Issue 14 - August 2012: Building Environmental and Social Governance in Host Countries
Issue 13 - May 2012: Human Rights and Business: A New Era
Issue 12 - February 2012: Extractive Industries Confront Pressure for Greater Transparency
Issue 11 - January 2012: Key Updates to the IFC Sustainability Policy and Performance Standards
Issue 10 - June 2011: Oil & Gas and NGOs: New Rules of Engagement?
Issue 9 - February 2010: Annual Study of Sustainable Development Priorities
Issue 8 - January 2009: Annual Study of Sustainable Development Priorities
Issue 7 - May 2008: Top Ten Lessons Learned About Health Impact Assessment
Issue 6 - January 2008: Annual Study of Sustainable Development Priorities
Issue 5 - September 2007: Results of web forum with our International Partners
Issue 4 - January 2007: Annual Study of Sustainable Development Priorities
Issue 3 - May 2006: Suggestions and tips for safe international travel
Issue 2 - January 2006: Annual Study of Sustainable Development Priorities
Issue 1 - November 2005: The Top 10 “unspoken" criteria for determining the success of EIAs

 

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