Edgar Rangel
View from the Top

Contract Choices Designed to Attract Experienced Companies

Wed, 01/21/2015 - 12:07

Q: There have been concerns about the types of contracts awarded and their conditions. What is your perspective on how attractive these contracts are for companies?

A: It depends on what company you ask, since some companies are used to such contracts in other parts of the world. The concerns we have heard are largely related to the prequalification criteria. These criteria for participation in Mexico’s shallow water bidding round are strict since there have been discussions about accidents, spills, and legal processes in the US and other parts of the world in recent years. These represent billions of dollars in terms of damages and penalties. We cannot risk having even minor incidents, such as spills or fires, in Mexico. Therefore, the Mexican government is setting strict prequalification criteria to make sure only the most capable companies participate in the bidding process, namely those that have well-implemented internal systems. When we look at the list of all important oil and gas companies in the world and filter them using our prequalification criteria, we are still left with dozens of highly reputable companies. This is not a coincidence. We performed that study before defining the criteria. Furthermore, the prequalification criteria for shallow waters will not necessarily be the same as those for deepwater or onshore projects. There will be a continuous curve on which onshore mature fields will have the easiest to comply with criteria, followed by onshore unconventionals, shallow waters, extra-heavy oil, and finally the toughest prequalifying criteria for deepwater. That is why it depends on who you ask. I am sure some companies will prequalify with no problems and will be comfortable dealing with these production-sharing contracts and eventually with license contracts. Speaking of the fiscal terms in the recently announced productionsharing contracts, some people have mentioned that ours are tougher than other contracts in the world. However, they are being reviewed and improved, like the recently fixed adjusting mechanism for the exploration contracts. The idea is to receive input from companies so we can make the necessary improvements.

Q: Are the blocks included in the shallow water portion of Round One attractive enough for the companies that are able to prequalify?

A: When we look at companies that could meet these criteria, which of course include super-major, major, and independent companies, we see that more than 60 have a focus on shallow waters. Any of them would be able to participate on their own or as part of a consortium in the bidding process for the shallow water exploration blocks. Furthermore, the extraction blocks included in the second phase of Round One cover nine highly attractive fields consolidated in five contracts. These are truly good fields, with high quality crude oil and large volumes of certified reserves.

Q: What outcome is required for CNH to see the first two shallow water rounds as a success?

A: How to measure the success of Round One is a major topic. Some consider that the number of blocks awarded should be used to determine this but I disagree. If we look at bidding rounds in other countries, the average percentage of blocks awarded is 40%. In the US, this falls to below 10%. This metric only tells you how many projects are available around the world. The real metric in my opinion should be the volume of prospective resources and reserves that is awarded and the commitment obtained from companies. Currently, PEMEX drills around 20 exploratory wells a year, counting only those that are relevant for this discussion. If we establish a minimum work commitment for each of the 14 blocks involved in Round One, we will see more than 20 exploratory wells being drilled a year just from the first call for bids. This means that Round One will lead to a fixed number of exploration wells to be drilled. This does not include the delineation wells, geological and geophysical studies, and other engineering studies that will be carried out in the next stages of Round One. All these committed investments will increase reserves and ultimately production as well. This is a real metric, as it covers the knowledge needed to assess prospective resources, helps with geological de-risking in the exploratory stage, and brings oil and gas to the surface during the extraction stage. After that, the next important factor is production, namely how soon we will see the first barrels being produced coming from these blocks.

Q: What is your feedback on the concern that political interests might have a negative influence on the design and implementation of the licensing rounds?

A: One of the advantages of the Energy Reform is that we did not marry any single contract model. We left this open so that we could choose between production-sharing, profitsharing, licenses, and any other type of contract, allowing for the best model to be deployed for each opportunity. For quickness, efficiency, and practicality, I would use license contracts for everything. That is my personal opinion as I like licenses, but I prefer the idea of flexibility. It is also important to remember that CNH does not decide the contract model, as that is SENER’s role. For the specific case of shallow water contracts in exploration and extraction, SENER has established a production-sharing contract and there are many well-established rules governing how these production-sharing contracts will work. After that, we will see license contracts issued for other opportunities. Another advantage of the Reform is its checks and balances model, in which SENER decides the type of contract, the Treasury oversees the fiscal terms, CNH handles the tender and contract administration, and the Mexican Petroleum Fund is in charge of managing revenue. An agreement is designed between all these entities, in which all of us will operate in a completely transparent way. Essentially, the process we have in place is strong enough to avoid suspicions about alternative agendas.

Q: How were the particular fields to be awarded in Round One selected?

A: SENER decides the volume of reserves that CNH is putting on the table while the Commission provides technical assistance. This means that SENER hands us the technical criteria and we suggest what fields match these criteria. We then send our recommendations to SENER and it decides which fields and areas will be included. SENER’s technical criteria almost always involve materiality and net present value, identifying fields that represent the most benefit for the country. In choosing the current fields, we focused on reservoirs with good volumes, good economics, and with proximity to existing infrastructure to enable the easy evacuation of hydrocarbons.

In terms of extra-heavy oil, we are currently looking at medium to long-term opportunities. These include great fields with huge volumes, for which we do not have the technology or the necessary infrastructure to recover the resources. For example, the Akal field in Canterell has an original volume estimation of close to 30 billion barrels, making it one of the largest fields in the planet. Akal has reached a 50% recovery factor, or around 15 billion barrels. If we add up all the extra-heavy oil opportunities in Mexico, some of which will be included in Round One, we reach a figure of close to 30 billion barrels. However, we do not have the technology or the ability to produce this extra-heavy oil through PEMEX alone. Companies that know how to produce in such conditions will take a serious look at these fields.