CNH’s Zepeda: Mexico’s Licensing Rounds and What Should Come Next

Juan Carlos Zepeda, President Commissioner of CNH, opened Mexico Oil & Gas Summit 2018 on Wednesday at the Hotel Sheraton Maria Isabel, sharing relevant indicators from the past bidding processes and the opportunities the new administration could tackle, while also highlighting the upstream process.

Mexico has concluded 14 E&P bidding processes: nine licensing rounds and five farmouts. From these processes, CNH has allocated 107 contracts: 31 production sharing contracts (PSCs) and 76 licenses. Likewise, during Round Zero, the Ministry of Energy granted 21 percent of Mexico’s prospective resources (23,447 Mmboe in 66,000km2) to PEMEX and 93 percent of the country’s 1P reserves (12,448 Mmboe). Overall, PEMEX has 390 E&P assignations in an area of more than 100,000 km2. So far, operators have committed 138 exploration wells, 74 onshore, 64 offshore. From 2018 to 2021, Mexico will drill 26 offshore exploration wells and 50 percent of these will be drilled by new operators.

In terms of superficial recognition contracts or ARES, Zepeda said that “seismic companies have invested US$2 billion in the last three years. The Gulf of Mexico used to have a seismic coverage of 35 percent, but that coverage is now 100 percent. All this seismic data belongs to Mexico but the legal framework allows companies to market their products and services to promote better data that will allow operators to make informed decisions.” CNH enacted the regulation of the ARES contracts in 2015. Zepeda stressed that CNH had created an oil and gas information industry in Mexico from which CNH receives a royalty from each activity. “Since the Energy Reform was enacted, CNH has granted more than 40 ARES contracts and PEMEX has transferred all its data to CNH (87,096km2 of 3D-WAZ). Overall, Mexico has tripled its seismic activities in the past three years,” he said.

Zepeda also highlighted Mexico’s government take related to E&P contracts and compared it with the country’s major regional competition. Mexico’s government take from license contracts is 63 percent and 75 percent from PSCs, on average. In the US, the take is 55 percent for license contracts and in Brazil it is 59 percent from concessions and 75 percent from PSCs. Zepeda also said that “it is impossible to renegotiate the allocated contracts with CNH. If an operator does not fulfill its obligations, CNH will charge them the financial guarantees presented in the bidding process.”

After dissecting the E&P process and relevant indicators, Zepeda stressed the focal point for PEMEX’s future success: capital and reinvestment. “Today, if the NOC wants to raise capital for E&P investments, it needs to associate with other operators, but these operators will ask PEMEX to operate the assignations. Why? Because PEMEX has a specific fiscal regime that does not allow the company to raise capital in the financial markets.”

Zepeda also said that the change in the federal administration is a chance to capitalize on opportunities, particularly regarding PEMEX. Andrés Manuel López Obrador was elected Mexico’s next president on July 1. “PEMEX needs to be outside the budget’s control and must not be made responsible for the debt obligations of the Mexican government. PEMEX should not be obligated to give any more money to the federal budget beyond the taxes it pays.” Zepeda offered a simple resolution for PEMEX’s fiscal regime. “The NOC should reduce its fiscal regime to incentivize investment for strategic projects,” he said.

The President Commissioner also mentioned that natural gas is a priority for Mexico’s energy security. “Today, Mexico consumes around 8Bcf/d, from which PEMEX itself consumes 2Bcf/d with the nation consuming the rest.” According to Zepeda, Mexico is importing 85 percent of its national consumption. Ninety percent of these imports comes from the US. “This is an operational vulnerability for the country. Mexico needs to produce more natural gas. PEMEX needs to create competitive and attractive farmouts in this regard to boost Mexico’s natural gas production,” he said.

Zepeda also mentioned that “royalties from natural gas should be zero, because it is really difficult to compete against the US. Mexico needs to incentive the fiscal regime for natural gas and allow operators to deduct drilling costs.” Moving forward, Zepeda also shared with the audience CENAGAS’ strategic storage plan which, he said, should be revised and oblige big users to have a daily minimum level of storage.