Juan Carlos Zepeda
President Comissioner
CNH
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View from the Top

Building on Round One to Speed up, Scale up

Wed, 01/18/2017 - 10:57

Q: How is CNH building on the results from the bidding rounds and preparing to move forward?

A: At the moment CNH is right in the middle of the transition from innovation to standardization of its bidding rounds. We finished Round One, which was successful, and now we want to build upon that experience. From what we have learned through this round and from industry feedback, we believe we can speed up and scale up the investment process and make it more efficient. So far, CNH has put 55 contracts up for bidding and we have awarded 39. We have 49 companies involved, including PEMEX, from 14 countries. CNH is now working on 2017’s shallow-water Round 2.1, to be held on June 19, 2017. The blocks involved are not all in very shallow waters, with some reaching more than 300m in depth, which requires submersible rigs rather than jackups. There is a lot of interest, with 27 companies already signed up. On July 12 we will hold two onshore bidding rounds and we are also running three farm-outs for PEMEX, one in shallow water and two onshore. PEMEX has already announced another deepwater farm-out, which we will also begin working on.

Q: What role did multiclient seismic studies play in the success of Round One?

A: CNH, the Ministry of Finance and the Ministry of Energy were on a learning curve through Round One and the industry itself also developed. One of the key success factors has been the development of the information industry, or the G&G industry. Before any company can decide to bid, they require information, as in any business project. The oil and gas industry relies especially heavily on technical information in the decision-making process. The reform did not just open the market for oil and gas companies but also for information G&G companies. Before that, PEMEX was the only company legally allowed to run seismic surveys in Mexico. More than half of the macrobasin of the Gulf of Mexico was closed to the world for more than eight decades. Suddenly, it was opened, and any company could apply to CNH for a permit to carry out a survey. In the past two years, US$2 billion has already been spent on acquiring and reprocessing information through multiclient seismic studies. We received more than 50 permit requests and 34 projects have been developed. This is the biggest indicator of the oil industry’s progress in Mexico because it is the first step toward the development of new projects and shows long-term commitment. This was absolutely instrumental for the success of deepwater Round 1.4. We started granting permits at the beginning of 2015 but the results of these surveys were available a few months before the bidding in December. A wide-azimuth 3D survey in the Salina Basin was critical for the competitiveness of Round 1.4.

Q: What has been learned through Round One regarding the royalty rate and investment plan balance in bids?

A: It is the Ministry of Finance’s responsibility to define the weighting given to royalty rates and proposed workplan. Through the four stages of Round One, the Ministry of Finance has tipped the weight towards weight commitment and away from royalties. That was a very smart move because the biddings are not for a fixed object but for different future projects. A company may bid a low royalty rate so it can develop a huge project, while another could bid a high royalty rate and just take advantage of the most profitable part of the field. As the government arm responsible for the state’s fields, we want them to be developed fully and to maximize the recovery factor. We do not only want the maximum royalty possible but also the biggest projects. Finding the correct weighting between these two variables is an ongoing process but we are heading in the right direction. In Round 1.4 more emphasis was on the number of proposed exploration wells. The result was successful, ending with four promised deepwater exploration wells in addition to the Trion farm-out.

Q: What is the industry’s main suggestion for increasing the competitiveness of the bidding rounds?

A: Through different conferences, seminars and panels, we have received industry feedback centered on one suggestion: that CNH could and should scale-up the bidding process. This means that we should offer more rounds and especially include more blocks in each round. Our goal now is to implement that advice, mainly through two elements. Firstly, we want to increase the acreage we offer through the licensing rounds. Through Round One, CNH offered an acreage amounting to 30,000km2. Brazil offered more than four times this in its last bidding round, although it is a much larger country than Mexico. Colombia, on the other hand, is much smaller and has less hydrocarbon potential than Mexico but it offered six times what Mexico did in its last round. Looking at the US, comparing the Gulf of Mexico on both sides, it is offering more than nine times the amount we are.

Until 2016 the US divided its side of the Gulf of Mexico into three segments. One is closed to the industry but the other two were open for bidding once a year each. Now, they have changed this by offering both areas twice a year, doubling the opportunities for private companies. This is a reaction to Mexico’s Energy Reform, due to the competition it is creating south of the border. This is another argument why Mexico should scale-up its bidding processes. In Round Zero, CNH awarded PEMEX over 90 percent of Mexico’s 1P oil reserves but only 22 percent of the country’s prospective resources, the majority of which was kept by the state to be auctioned off through licensing rounds. The prospective resources represent Mexico’s oil and gas future but only 5 percent of the 78 percent the state kept has been awarded to bidders. It is clear that we can speed up the process.

Q: How will the standardization for prequalification impact companies interested in bidding on the licensing rounds?

A: Another comment we received from the industry and from AMEXHI, was that CNH needs to make the prequalification process more efficient. Compared to other countries, our prequalification process is very thorough. We check financial strength, net worth, balance sheets, technical capabilities, contracts held in other countries, safety and environment standards and even ask for a special file to assess the lawful origin of the resources they intend to invest in Mexico. Up to now, companies have gone through this prequalification process every time they wanted to bid. We are going to untangle the prequalification from the bidding process itself. At any point in the year, companies will be able to approach CNH and request prequalification for one of the four categories: onshore conventional, onshore unconventional, shallow water and deepwater. After prequalifying, the companies will receive a certification confirming they have certain capabilities, valid for five years. They will only need to update CNH with their financial statements and any other relevant updates.

We are also standardizing the timing of the biddings. Until now, the industry did not know when to expect from the various licensing rounds. We want to be predictable, so together with the Ministry of Energy we have announced that we will hold onshore conventional and shallow-water bidding rounds in the first half of the year, with deepwater and unconventionals in the second half.