The Bright Side of the Chicontepec ISCs

Wed, 01/22/2014 - 09:38

Few would venture to guess what PEMEX’s expectations were for its third round of ISC contracts, but it is not unreasonable to assume it was disappointed by the results, as PEMEX officials were quoted referring to the outcome as an “unforeseen scenario.” Of the six blocks offered, only three were successfully awarded in the original auction in July. These were Humapa, Miquetla, and Soledad, which were awarded respectively to Halliburton, Grupo Diavaz’s Operadora de Campos DWF, and Baker Hughes’ Petrolite. The other three, Miahuapan, Pitepec, and Amatitlán were declared void. However, certain details surrounding this third round of ISC contracts would seem to suggest that the result was not only predictable, but also not an entirely negative development.

The first thing to consider is the nature of Chicontepec’s fields. These mature fields have large unconventional reserves, making them low investment, low risk, and low profit endeavors. Unfortunately, the low investment part of the equation has been under question since Chicontepec’s exploitation projects began. Only five years ago, significantly increased production in Chicontepec was considered to be the best opportunity to offset the Cantarell production decline. Chicontepec fields are notoriously troublesome and hard to work with. The bidding round attracted the interest from the majority of larger oil service companies and operators instead of independent, flexible and technologically adaptable operators that might be able to better respond to the challenges of Chicontepec’s geology. As the shale gas revolution in the US has shown, it is usually the smaller, independent and entrepreneurial operators that can solve difficult geological challenges through operative flexibility to unlock the potential of difficult reservoirs.

The second aspect to highlight is the fee per barrel at which the successful contracts were awarded. At the time of the Humapa auction, Halliburton caused puzzled and bewildered reactions with its low but successful bid of US$0.01 per barrel and an investment factor of 1.25. However, as the auction continued, it became obvious that Halliburton had not radically deviated from the norm but merely started a trend. Miquetla was awarded to Grupo Diavaz’s subsidiary, Operadora de Campos DWF for US$0.98 per barrel and an investment factor of 1.1, while Soledad was awarded to Baker Hughes’ Petrolite for US$0.49 per barrel and an investment factor of 1.001. Industry experts echoed the questionable financial soundness of these bids, and the speculation as to the origin of this unusual bidding round brought up various possible explanations which are not mutually exclusive. Either these companies have a technological strategy that allows them to see value in these fields that PEMEX does not, or they are using their technological development capabilities to strengthen both their relationship with PEMEX and their understanding of the challenges of operatorship in Mexico as preparation for the post-Energy Reform business climate. A third interpretation is that these companies were not looking to make much of a profit on crude oil extraction at Chicontepec, but on the inevitable peripheral service contracts they will be asking PEMEX to sign off on as part of their strategies to increase production: as the exclusive subcontracted developers in each block, these businesses are in a unique position to offer themselves as the best (and perhaps only) possible recipient for all the related contracts that PEMEX will pay for in order to benefit its Chicontepec development plan.

José Pablo Rinkenbach, Director of Ainda Consultores, summarizes the results of the Chicontepec round based on three elements. “First of all, the contracting model was not adequate for the blocks awarded. Chicontepec’s fields are not really mature fields, but economically marginal fields with a certain geological risk; and the ISC contracting model was designed for mature fields,” he explains. “The second factor that led to failure was the fact that PEMEX allowed awarded service providers to get back 100% of the cost incurred, which eliminated the financial risk of the contracts. The third element that steered the Chicontepec round to being unsuccessful was that only service providers participated.” David Enríquez, Partner at Goodrich, Riquelme y Asociados, hints that these types of companies were not looking at the incentives per barrel produced. “The companies that participated were highly structured and showed willingness to take a gamble. But the economic value of that gamble was not in the fee per barrel to be obtained, it was reflected in the prices submitted by the winning bidders. These companies were only interested in securing contracts for their integrated services,” says Enríquez. “De facto, PEMEX awarded 30-year long drilling contracts. The companies that won such contracts will only produce enough to make their operation sustainable and be able to move to the next well, their business is to drill wells, sell registry lines, acquire seismic data, and other types of geological information,” says Rinkenbach. “PEMEX basically handed over drilling contracts to these companies, which is completely different from what happened in the South Region’s ISCs, where companies such as Petrofac won the blocks.” In the end, regardless of winners’ intentions or notable absentees, all of this could spell out great things for PEMEX. After all, it has acquired world-class assistance in the development of one of its most burdensome assets, and it has done so at great rates. Considering Chicontepec was a hard sell, the current perception of the Chicontepec auction as a failure might just be an incomplete picture of the entire ISC panorama, especially after noting the low prices at which PEMEX awarded the three successful contracts. Calling the glass half-empty represents a simultaneously correct and limited portrayal of the auction’s results. While certain mistakes were made and certain expectations went unfulfilled, it was not the complete failure that has been portrayed by some. However, SENER and CNH should focus on those areas where the auction could have been improved, as the future organization of such bids now falls to them.