CNH Fielding Questions from Foreign InvestorsWed, 01/21/2015 - 09:50
Q: What are the main questions you are getting asked by potential foreign investors?
A: CNH is mostly being congratulated because we are moving ahead quickly and everything is going well. However, potential investors ask us about whether the drop in the oil price is having a negative effect on Round One, but my answer is always the same. This is a longterm business. If a company is performing economic evaluations of Mexican opportunities based on current oil prices, perhaps it is not a good fit for Mexico. As a matter of fact, I think the current oil prices are good for Round One as this scenario helps to clear out all the less serious companies. The companies that are entering the Data Room, submitting their documentation to prequalify, and participating in the bidding process are the serious ones with long-term stability. Oil prices will bounce back sooner or later. We will not see a return to triple digits for a long time but prices will rise. We will award the contracts that are part of Round One in the second half of 2015 and early 2016. Companies awarded with blocks will conduct their own analysis by shooting new seismic, analyzing the current information, and deciding on drilling locations. For instance, in shallow waters, wells might cost US$50 million so companies must be sure about the potential of the blocks before they invest. Between when they sign the contract and spud time, companies will have a period of at least two years to make decisions by which time oil prices should have improved. Therefore, serious companies that understand this is a cyclical process are the ones planning to establish themselves in Mexico for the next 20-30 years. A long-term vision must guide their economic evaluations. Some of our oil is produced at less than US$10 per barrel, so there is still money to be made at US$50 per barrel. Our shallow water fields stand at US$20 per barrel so they remain attractive. However, for more challenging processes in deepwater and unconventionals, the price per barrel remains high. This low price environment has pushed companies to look carefully at their efficiency as high oil prices were generating high costs and high inefficiency.
Another area we get asked about a lot is the contracts. These are adjustable so we will keep making positive adjustments, based on the feedback we receive, and we will use various contract models for different opportunities.
We have already covered contract models and fiscal terms, leaving only the matter of materiality. We are talking about 3.8-4 billion barrels of certified reserves. The largest global discoveries in 2014 were smaller than the largest fields for extraction included in Round One, which shows how attractive Mexico really is. Some of the fields included in the second call for bids, covering extraction in shallow waters, include certified reserves close to 400- 500 million boe.
Q: With the timeline for part of Round One being delayed, what processes will CNH improve during this extra time?
A: CNH never has any free time but it will work hard on its two main mandates. The first is related to its regulatory duties per se, referring to well integrity, reserves, development plans, and many other aspects that we have developed over the years. The other mandate covers the bidding rounds and the management of the contracts. Currently, this is our main activity but it is only one of many CNH attributions. While everyone is discussing the bidding rounds and the foreign investment Mexico will bring in, CNH is also making progress on other fronts. We will soon establish new guidelines as to how reserves will be certified by PEMEX and new companies. We will also issue the guidelines for companies to present their exploration and development plans. The adjustment in the Round One calendar will allow us to do a lot of fine-tuning in terms of the number, size, and shape of the blocks that will be included in the coming stages of the round.
Q: What steps is CNH taking to ensure it will have sufficient human capital to overcome the challenges ahead?
A: This is another area of interest for the industry, as CNH is frequently asked about its human resources. We are moving rapidly in that direction. We now have new facilities and we have been authorized to recruit 100 new people, which is a huge development. Several companies are losing a lot of people, either as retirees or layoffs, which provides a big opportunity for us to hire very experienced people. These companies have early retirement programs for their employees but most of them are very good professionals. The truth is that Mexico has lived with one oil company and one petroleum institute for a long time. The specialists have naturally gathered there. CNH is now striking a good balance in its hiring policies as it attracts people from PEMEX, IMP, service companies, and academia. We need to keep moving in that direction, perhaps even including foreigners.
We have to admit that deepwater experts are not present in Mexico. Norway and Colombia receive lots of benefits from hiring foreigners. Statoil even hired an experienced American as its CEO. This triggered a lot of discussion as Norwegians are patriotic, but the company is doing well today with many foreigners on its books. We need to change our mindset and bring in the best people available, wherever they come from. However, we must also strike a balance and remind Mexican talent that working for CNH means serving their country.