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News Article

Ambitions and Objectives, Mexico’s New and Prospective Operators

Thu, 06/16/2016 - 12:06

Moderator: David Enríquez, Partner at Goodrich, Riquelme y Asociados
Panelist: Iván Sandrea, Director General of Sierra Oil & Gas
Panelist: Vicente González Dávila, CEO of Geo Estratos
Panelist: Matt McCarroll, President & CEO of Fieldwood Energy

Companies have been waiting decades for Mexico’s oil and energy markets to open and with the levers of change now turning, there is both excitement and caution in the air, panelists told the 2016 Mexico Oil & Gas Summit audience at Mexico City’s Sheraton Maria Isabel Hotel.

David Enríquez, Partner at Goodrich, Riquelme y Asociados, moderated the panel, “Ambitions and Objectives of Mexico’s New and Prospective Operators,” with participants Iván Sandrea, Director General of Sierra Oil & Gas, Vicente González Dávila, CEO of Geo Estratos, and Matt McCarroll, President and CEO of Fieldwood Energy.

Despite a backdrop of economic restructuring amid an oil price downturn, the panelists agreed that Mexico held many advantages for investment compared to other countries. Fieldwood Energy’s McCarrol said the shallow-water rounds made sense for the company, which successfully bid in Round 1.2. “The company feels fortunate to have found a Mexican partner that can offer local knowledge that complements its expertise. We hope to continue to bid in future rounds,” he said, adding that he is aware that Mexico is going through changes that are completely new to the government, regulatory agencies and to PEMEX. While McCarrol’s company has experience in the US, he said it was exciting to be breaking new ground with every move due to the Energy Reform. The company is one of the first four operators in shallow waters.

Sandrea of Sierra Oil & Gas concurred but added that any form of change needs a business plan with a high probability of success. “Although the interaction is intense, involving frequent meetings and analysis, the risk is surprisingly low,” he said. The Director General has been waiting for the market opening for many years. Constitutional changes and implementation were feared, he said, but the process has been efficient. “True risks are only found in the formation of new institutions but the application has been done well.”

Enriquez highlighted that the bidding results from Round 1.3 were substantially larger than expected. The market anticipated a success rate of 40-45 percent but al bocks were awarded.

The market’s opening also holds benefits for businesses in the tech realm, particularly domestic firms. “Free markets are a dream for Mexican technology companies like Geo Estratos,” said Gonzalez Davila of Geo Estratos. The opening of the energy sector guarantees the progress of technology development and application , he added but warned that Mexican companies need to prioritize added value to take advantage of the Energy Reform’s impact.

As a lawyer, Enriquez was also concerned about the legal implications of the Energy Reform. Many oil and gas producing countries only have one or two regulatory agencies and there is a lack of coordination laws, he suggested. McCarrol responded by emphasizing that agencies are jumping at the new opportunities to improve regulation. The issue in Mexico is that operators must deal with various different agencies and institutions that do not communicate with each other in an optimized manner and force companies to duplicate information supply. Fortunately, the President Commissioner of CNH wants to speed up the process, McCarrol said. “It is normal for the government to want to be involved but a practical balance needs to be found.”

Enriquez said it was important to analyze the design of the system and its interaction with the operators. “The industry is at an ideal moment to crystallize the role of these agencies,” he said.

For his part, Sandrea said his company’s experience with the government had been positive. “The process is solid, transparent and progressive. Without a doubt, the process in Mexico has a quality that meets, and in certain cases, exceeds benchmarks.”

Among the challenges will be recovery, said Gonzalez Davila. PEMEX must create contracts that integrate companies that are willing to share risks and benefits in a transparent manner. “The oil industry is declining due to lack of investment. Without drilling, there is no production,” he said. “The only way PEMEX can grow is if it allows the entrance of new players and under technical and objective requirements that are reasonable,” he said.

McCarrol also said that the migration of contracts through PEMEX farm-outs were difficult and that the NOC’s terms and conditions would take a long time to adopt. New players want to be more efficient than PEMEX and perceive collaboration with the state-owned company to be counterproductive. PEMEX could potentially be a financial partner but not an operational one, he said.