Drilling Sector Reactivated

Both offshore and onshore drilling economics were confounded in the last half-decade by the environment created when oil prices dropped from over US$100 a barrel in January 2014 to almost US$25 a barrel in January 2016. The implications of the radically reduced pricing applied with more force to offshore markets due to their higher rig day rates and drilling expenses. Consequently, Mexico’s drilling services economy in Villahermosa and Ciudad del Carmen suffered a significant slowdown, particularly during 2017 and 2018.

Ricardo Arce, CEO of Grupo Mexico’s prominent oil and gas drilling venture, Perforadora Mexico, details this economic impact: “Peak oil prices were reached basically at the same time that the Energy Reform was launched. Since then, day rates have been dramatically reduced. For us, as it was for the rest of the industry, it was very difficult to survive during this period. The most important reason why we were able to do so was thanks to the support of our prominent parent company, Grupo Mexico, from whom we received a great deal of assistance in terms of equity. During these years, most of our units were suspended. The smart decisions we made during this time greatly helped us during our comeback in 2019. Another important factor behind our endurance during this time was that, unlike other major players in the industry, we were able to negotiate better terms for the suspensions of our contracts with PEMEX. This is a great example of one of these smart decisions: when we contemplated the approaching conclusion of a number of our contracts, we were able to negotiate with PEMEX so that these contracts would be suspended rather than just left to end or expire. As soon as the sector’s turnaround began to be reflected in PEMEX’s activities in 2019, we were able to quickly renew the contracts. It was a lot easier to make an extension for an existing contract than to wait for a completely new contract to be drawn up, offered, negotiated and agreed upon”.

TURNAROUND

The turnaround came in 2019, as the slowdown reversed course to mark the beginning of the region’s financial recovery. Contracts that were put on hold are now taking precedence and there are new contracts being offered. Rigs, ships and crews are once again in business. “We began this new administration with our Tabasco, Chihuahua and Zacatecas rigs inactive because they were involved in suspended contracts. They have all been reactivated since then. The last one to be reactivated was the Zacatecas rig in April 2019. We have only two contracts expiring early into 2020, specifically in January, which are those tied to the Chihuahua and Zacatecas rigs. Nevertheless, we are in close conversation with PEMEX to have these contracts renewed. We proposed the Zacatecas rig for work recently tendered by PEMEX and we believe we have a good chance of being awarded this contract shortly, which would extend its work schedule by a year and a half. In general, PEMEX is experiencing high rig demand and we expect the Chihuahua rig to address this demand, thus also extending its work schedule approximately an additional year and a half,” says Arce.

STRATEGIES

Emmanuel Montaño, General Director of Consorcio EMCRO, credits López Obrador for the revival. “President López Obrador’s PEMEX strategy has already resulted in a significant increase in drilling activity, which has benefited us directly. We have ongoing contracts with oilfield services giants such as Baker Hughes and Dowell Schlumberger. This applies to both foreign and national operators; for example, Mexican drilling company Perforadora Latina received three of six jack-up rigs ordered from Singapore this year, all meant for Mexican work.” Patricio Álvarez Morphy, Vice President of flagship Mexican driller Perforadora Central, echoes Montaño. “President López Obrador wants to revamp production and the government will be injecting sufficient funds into PEMEX to help make that happen. To truly boost the industry, everything will have to originate in Mexico because the costs of importing will be way too high. It makes sense to mobilize local firms. We will be ready with two rigs: Tuxpan and Panuco. We need two to three months per rig to get them operational and ready to compete in Clusters 3 and 4. PEMEX will also continue to rent rigs as it did before through day rates, with its staff operating the rigs and taking all of the risks.”

RISK MANAGEMENT

Morphy says a comprehensive risk management strategy is essential for PEMEX to make this reactivation sustainable. In this sense, it is possible that it might be able to view private operators as a reference. “With the Energy Reform, many blocks were awarded to experienced companies like Fieldwood and Talos Energy, which take on all the risk. They contract jack-ups but they crew, maintain and operate them. With one good well, the sky is the limit and all the risk would be rewarded.” Morphy highlights this risk is taken on by private operators under the assumption that many possible outcomes make it worthwhile: there can be an enormous success like Eni has had in some of its assignments or a degree of failure like Hokchi faced in one of its blocks. They also manage this risk by increasing technological and safety standards. For example, they demand that driller rigs contain hydraulics and BOP equipment that can withstand pressures above 15,000PSI when 10,000PSI tends to be the baseline in Mexico.

EFFICIENCY

Technology and safety are important issues to consider in best risk-management strategies, and also the best way to guarantee that the industry’s reactivation is successful in the long-term by making the Mexican drilling sector adopt measures and global industry best practices for extreme efficiency. Julio Loreto, former Mexico Country Manager of oil field services firm Weatherford, details some of the ways in which his company revolutionized its internal structures and processes to adopt these measures. “We chose to look at the processes to find out how to make our procurement more efficient, how we could improve our inventory management and how we could put the right people in the right places, among many other factors. Now, 90 percent of management discussions are based on these types of questions.” Loreto, however, is quick to clarify that a big part of this efficiency is making sure that its services and technologies are particularly aligned with the specific needs of each project. “We look at what we are good at: managed pressure drilling, tubular running, drilling fluids, cementing accessories and integrated solutions, to name a few. Then we start matching opportunities. If we see a perfect match, we check the profitability of the project and go from there.” According to figures from the Ministry of Energy’s National Energy Information System, PEMEX reported a total increase in drilling units from 39 in January 2018 to 55 in September 2019. During that same period, wells drilled per month increased from 17 to 26, while well completions rose from nine to 26, all clear indicators of positive growth.

This general upward trend in drilling activity also creates a new environment for drilling companies that is more favorable towards innovation and the researching of new business lines; companies have more additional resources available for investment that can create the integration of services and products necessary to make their operations truly ultra-efficient. For national players, this can be particularly beneficial on their road towards contributing to Mexico’s growth and homegrown expertise. It can also be decisive in their competition against larger foreign entities. As Arce concludes, one of their goals for next year “is to increase the vertical integration of our services. In the past, we had additional contracts covering other types of services within the drilling category, such as cementing, directional drilling and supply of drilling fluids. Of these, we currently only have active contracts for cementing services, but we want to go back to providing the full range of services for both offshore and onshore operations. Thankfully, with all of our rigs working, we can plan for a better tomorrow, rather than simply survival, which was the case in previous years.”