Assessing Risk in a New MarketWed, 01/18/2017 - 12:54
Q: What aspects of the licensing round process still require improvement?
A: The major issues the government must resolve are national content and cost-recovery procedures. At the moment we are asking our contractors to quantify the national content of their goods and services. They cannot produce the documentation because they are not accustomed to the paperwork. Unfortunately, this prevents us from hiring them. We need the paperwork before we can pay them. and this is turning into a very big administrative challenge.
I also worry about the commercial terms of the contracts and the possibility they might become so unreasonable that they are not economically attractive. In the US, events such as an increase in oil prices or a field with double the amount of oil than was expected lead companies to a clear economic benefit after paying royalties and bonuses. Mexico is indeed more interesting geologically and development-wise but contracts are written in such a way that if an event like that takes place, we end up with almost the same returns. The resulting benefits all go to the government.
Q: What are the political risks for the Mexican market?
A: We are concerned about the upcoming political situation in Mexico. The new president will bring in new political appointees and we are not sure how long it will take us to get to know them and establish relationships or even how the new administration will view current contracts.
Also, the audit for cost recovery will happen in two or three years when we finally start having revenues. What will happen if, at that time, the government says this bill is not auditable because of the lack of a certain permit? We cannot go back in time and solve that but we also do not have the proper information now to ensure that such a scenario will not happen. That is certainly concerning and the Mexican government needs to be proactive to ensure the proper procedures are in place.
Q: How do you gauge the progress of the Energy Reform so far?
A: The Energy Reform stated that thousands of jobs would be created, which is clearly not going to happen in the short run. Indeed, we are creating jobs with our project but most of those originate with their operations base, which is the US. Workers’ unions are calling us and saying they want to work with us but we have to tell them that for the moment there are no jobs. Once we get development, production and maintenance started there will be more opportunities, but that will take time.
For now we are in the drilling phase and will begin testing thereafter. After those phases we will take some time to produce our development strategy. I am concerned that in two years Mexico will look back and ask itself where the new jobs and revenues are and not find them because it certainly takes longer to achieve those results.
Promises were extremely optimistic, stating that by 2017 production would increase by 500,000b/d and create thousands of jobs but that is just not possible. Mexico’s Energy Reform is going faster and better compared with Colombia’s and Brazil’s but goals need to be realistic. Results will come, we are working on that but people need to be patient.
Q: What are your short and long-term goals for Mexico?
A: The more we work on our fields, the more we like them. We see plenty of potential. We expect the first well to be drilled by the summer of 2017. It will take a while to drill because we have to go deeper than 18,000 feet. We have talked about eventually drilling 15 to 25 wells but to do that access to infrastructure will be crucial because we are 60 miles offshore. PEMEX has an existing pipeline system running underneath our block and if we get access to it at good terms, that could decrease time to first production. Our long-term goal is to become the second largest producer in Mexico and we do believe that it is achievable.