Nicolas Borda
Haynes and Boone
View from the Top

Learn from Previous Mistakes to Ensure a Positive Change

Tue, 10/17/2017 - 08:42

Q: What have been the key lessons from the licensing rounds regarding the regulatory process and for CNH?

A: Right now, there is a perception of over-regulation and most operators seem to feel that this is in fact the case. However, we expect to see a deregulation down the road where the operator will be regulated more by objectives rather than through prescriptive regulation. ASEA is asking for high-level thresholds on the insurance side. One main reason is that unlike the US, Mexico lacks a catastrophic fund for offshore accidents. Almost 30 years ago, when the Exxon Valdez hit a reef off the coast of Alaska, the US government triggered a law that created such a fund. A certain percentage of the sales of each barrel of oil extracted offshore goes to the fund. With the exception of gross negligence, in the case of an accident, the fund will kick in and those resources would be deployed.

Unfortunately, in Mexico if we have an incident such as Macondo, the deployment of resources will not be as efficient or swift. Of course, the company responsible for Macondo was a large multinational. If a catastrophe occurs involving a medium-sized company, the company will go bankrupt and most likely there will be no financial compensation for the damage. Having a catastrophic fund might make the regulatory burden less onerous. 

Also, I think it would help to have a dedicated capping stack in Mexico, in a place such as Altamira, for well control if an accident occurs. When there is a major oil spill, camera-equipped ROVs are brought in to monitor what is happening, but in the meantime a capping stack could be deployed. Currently, there is no capping stack in Mexico. There are companies that have capping stacks but they are in Aberdeen or in Singapore, and I think Mexico would greatly benefit from having its own.

In the US, 10 major oil companies formed an alliance and each put up US$100 million and that US$1 billion was invested in two capping stacks. But by law these cannot leave the US. CNH has been receptive to the comments from the industry, such as from AMEXHI, which has about 50 members. 

Q: What are going to be the main drivers of change in the Mexican upstream sector?

A: The acceleration of certain processes such as farmouts and CIEPs will drive an increase in production. Enhanced oil recovery from mature fields also will be important as well as developing unconventional resources. Most likely, major infrastructure will be required in the offshore Gulf of Mexico since we do not yet have any deepwater production. Exploration is going to require a lot of very expensive infrastructure but the price of oil is naturally going to play a role in which projects get developed and which do not.

Take Lakach, for example, which is a non-associated deepwater field that was going to be developed until prices dropped. Currently, it makes no sense to invest so many billions of dollars in bringing dry gas from deepwater production when it can be obtained more cheaply right next door in the US. Mexico imports more than 4Bcf/d. We have huge amounts of unconventional resources, probably placing Mexico No. 6 in the world, which means that eventually the country will have to develop these resources and reduce imports of natural gas from the US. For that to happen, we will need to develop a logistics platform similar to that in the US. 

Q: What do you think CNH needs to do to prepare to offer blocks of unconventional gas fields?

A: The No. 1 priority is to have the right legal framework in place. This framework must come from CNH, CRE, ASEA and CONAGUA. Mexico needs to make a thorough evaluation of its unconventional resources. Finally, the Ministry of Finance needs to offer tax incentives to get the ball rolling. The finance minister was the CEO of PEMEX so he will most likely change the short-term view on revenues to develop unconventional resources in Mexico because it is always better to have a 5 percent tax on US$1 billion than a 50 percent tax on nothing.