Economic Considerations before New Investments

Wood Mackenzie’s annual survey named BG Group one of the best exploration firms in the world, a likely well-deserved title considering that the company has made 15 large discoveries in 15 years. “We are good at easing risks in frontier plays, resource discovery drilling, and executing fast track developments,” says Wajih Effendi, Principal Commercial Consultant of BG Group’s Houston chapter. The company draws its experience from the extensive work it has done in the US’ Haynesville Shale and the Marcellus Formation. Most of the company’s experience in North America has been in shale gas and LNG. “We were able to ramp up production in Haynesville to 1.2bcf/d in less than two years using 24 rigs.” Effendi believes that resource availability is not an issue in Mexico, a market the company is currently looking at. In fact, the expected abundance in the country’s deepwater and shale sectors has some players excited, including BG. When studying a new market, BG Group assesses the possible risks a country presents. Metrics include variables such as rule of law, juridical system strength, crime rates, business transparency, and business practices. When compared to other countries in the firm’s portfolio, Mexico ranks well. Additionally, Effendi compliments the country’s entrepreneurial spirit, a trait that he believes will foster competitiveness in the sector. “I have come across many domestic companies in cities such as Monterrey and Villahermosa. The commercial attitude and transparency is great, which encourages us to do business in Mexico.” Effendi expresses his company’s desire to work with PEMEX, CNH, SENER, and private parties in this country and BG Group is now just waiting for the right chance to enter a bidding round.

BG Group has the experience of a profit-sharing contract in Bolivia, which has proven to be fruitful so far, but believes that Mexico’s current contracting models do raise a few red flags once the pertinent calculations are done. “Because of taxation and limited cost recovery in old contracting models, the company gets a third of the expected returns compared with equivalent deepwater projects,” says Effendi. He believes the mechanics of profit-sharing contracts become a little messy, which dissuades companies. BG Group would still be willing to work under these agreements, but Effendi does not think this is the most suitable model for the Mexican oil and gas sector, and is concerned that there is no clear image of what the reformed oil and gas industry will look like. The company, along with most of the private sector, raises many questions about the responsibilities, capabilities, authority, and independence of the regulators, which entities will be involved in the licensing rounds, or if PEMEX will be treated like the other operators, among others. “What I find interesting is that, for the first time, everyone is agreeing with the fact that the oil and gas industry has to take a different approach,” says Effendi. As BG Group potentially plans to invest billions of dollars in Mexico, the company is anxious to see the economic consequences of the 2013 Energy Reform. For instance, Effendi wonders if the Mexican oil and gas market will be competitive on a global scale, and if the incoming changes will stack up against the company’s portfolio of opportunities. “The resources are there, but the economic aspects are key.”

Effendi highlights that the company is considering making a splash in Mexico given its proven deepwater exploration and development capabilities. These include seismic monitoring, processing seismic data, and lowering geological risk. “Our exploration team uses leading technology to model and characterize fields. BG Group has a very experienced team looking at basins around the globe. Our technicians screen basins by analyzing seismic, and add the geological locations with high potential into our portfolio of possible projects.” For Effendi, the key to success is to understand the basins. “I have heard that there is plenty of seismic data on the Mexican side of the Gulf of Mexico. However, there have been a lot of failed drilling attempts as well. It is crucial to leverage the information to place the wells in the right position.” Another important factor for a successful project is the financial approach, for which Effendi recommends that companies scale up their operations. “It is pointless to drill a few exploration wells on a large field, such as the ones in the Gulf of Mexico. For an endeavor to be profitable, at least ten wells need to be drilled across the entire basin. This financial constraint makes it an almost impossible task for a single company to face. In other words, the involvement of several players facilitates the development of an asset, which translates into higher profits.”

Unconventional resources present a different scenario, especially since the US has a low cost base. “No country other than the US has been able to succeed in this market,” tells Effendi, who acknowledges that creating a shale gas industry in Mexico while importing gas from the US is going to be challenging. However, there are obvious benefits from exploiting domestic shale gas. Northern Mexico would benefit from increased commercial activity, which would help offset security concerns and build a stronger economy with more jobs that would drive growth.