Energy Adaptability: Mexican Oil & Gas Evolution

Q: How would you define XWELLS’ core mission and value proposition in the oil and gas sector?

A: XWELLS was founded in 2015 by specialists in the deepwater industry, drawing expertise from both drilling and subsea operations. Our core mission is to transfer the invaluable knowledge and best practices acquired from leading international oil companies, such as BP, Total, and Chevron, to markets that had yet to benefit from such advanced capabilities.

Mexico was identified as a prime target market at the time, coinciding with the nascent stages of its energy reform. Despite significant potential, Mexico has not yet produced crude oil from deepwater reserves. Our initial value proposition was to introduce specialized deepwater expertise, assisting local companies and providers in understanding Deepwater’s unique complexities compared to shallow water operations. Much like padel and tennis, while seemingly similar, deepwater and shallow water are fundamentally distinct, with deepwater demanding significantly more intricate subsea processes. We successfully initiated this by training the first PEMEX team for the Lakach deepwater project.

However, the energy reform's progress was curtailed, particularly after 2018, when the administration redirected PEMEX's and the industry's focus towards existing shallow water fields. This demanded a strategic pivot for XWELLS. We subsequently undertook various oil and gas projects in Mexico, many directly leveraging our specialized know-how. Notably, we prepared, enhanced, and operated the "Frida" drilling rig, which successfully drilled five wells for PEMEX between 2020 and 2022.

Our scope has since broadened. Beyond our core deepwater services, we have also managed the decommissioning of two idle drilling rigs in the Panuco River. Globally, we continue to explore new opportunities, including supporting field auctions in other Latin American nations. Our current strategic focus is firmly on introducing cutting-edge technologies to the Mexican oil and gas sector.

Q: How would you describe your adaptation strategy given these changes in the industry over the past few years?

A: Our strategy is tailored to address the distinct needs of three primary operator categories. First, we have PEMEX, a unique entity managing its own set of critical sites and expensive projects. Second, there are IOCs, which, over the last decade, have consolidated into a select few key players such as Harbour, Talos, Repsol, and Woodside (developing Trion), along with Hokchi. Some international entities have exited the Mexican market, opting instead for opportunities in regions like Guyana. These remaining international companies generally represent mid-sized operations within the global oil and gas sector. Finally, a crucial segment comprises domestic operators that emerged post-energy reform. Many of these companies, previously service providers to PEMEX, are now learning to manage long-term projects spanning three to four decades, a significant shift from their historical two-year project cycles. They are demonstrating remarkable adaptability in navigating the dynamic policy and political environment.

Our current focus is precisely on these domestic operators. We aim to empower them by identifying and introducing innovative technologies and solutions that enhance their operational efficiency. Leveraging our extensive history and global network, XWELLS has unparalleled access to advances in oil and gas plays worldwide. We facilitate the transfer of these proven technologies and solutions, enabling Mexican companies to benefit from global progress without needing to reinvent solutions from scratch. This approach ensures they remain competitive and efficient in a rapidly changing industry.

Q: How is XWELLS positioned to support the Mexican industry, given its focus on mature fields and shallow waters?

A: For the time being, we have set aside deepwater projects, as activity in that segment is limited beyond initiatives like Trion and, potentially, Lakach.

Over the past five to six years, we have adapted our approach significantly. While deepwater and shallow water operations are distinct, many of our former colleagues have transitioned to companies operating in these mature shallow water fields. We recognize that while major International Oil Companies (IOCs) focus on large-scale, greenfield developments that they may operate for 15-20 years before divesting, a second tier of companies specializes in extracting additional value from these mature assets using different techniques.

We have extensive knowledge of these companies and their advanced techniques across Africa, Asia, and South America. Our value proposition now centers on bringing these proven technologies and solutions to the Mexican market. We are currently introducing a Canadian-developed pump technology that has demonstrated significant success in the Canadian oil patch. This simple, compressed-gas-operated pump can increase production from existing wells by 40-60%. We are actively engaging with domestic companies, encouraging them to test this technology on a few wells to validate its effectiveness before broader implementation.

Another example is our collaboration with a Texas-based partner specializing in electrification technologies. Initially focused on decarbonization by reducing diesel consumption and generator reliance in drilling operations, the company also discovered significant cost savings. This dual benefit of decarbonization and cost reduction makes electrification highly attractive.

Q: What opportunities do you see for Mexico to accelerate the implementation of technology and training?

A: Opportunities are substantial, rooted in Mexico's highly diverse resource portfolio. The country possesses mature onshore fields, with some remaining exploration potential. A significant public discourse is underway regarding non-conventional resources like shale gas and oil. Should this debate conclude with a decision to open these areas to exploration, this would require the development of an entirely new industry segment. There is much to learn from developments in places like Texas and Argentina in this regard. Furthermore, there are still ongoing discoveries in shallow water, and considerable deepwater offshore exploration remains to be done.

The perception of a stalled industry was largely a consequence of disagreements between previous administrations, which undeniably slowed progress. However, the inherent potential is undeniable: the necessary technologies exist, and the fields, having been present for millions of years, will continue to be so. Under the current administration, there appears to be a more conciliatory conversation around oil and gas. I perceive them as pragmatic individuals keen on embracing better technologies and enhancing the training of Mexican professionals for increased efficiency. It is also important to remember the many highly talented Mexican oil and gas professionals currently working overseas.

Overall, I see a promising convergence of factors to revitalize this industry, deliver value to the country, and do so in a manner that aligns with current global requirements for HSE, climate change mitigation, and pollution control. These aspects are now critically important and subject to intense scrutiny, including through advanced monitoring like satellite technology, as PEMEX is well aware.

Q: How would you advise clients to compete effectively and enter successful partnerships with PEMEX?

A: We are observing mixed contracts and initiatives for well reactivation. International companies already possess a deep understanding of Mexico and the inherent challenges, as well as where true value lies. At this moment, they are meticulously examining contractual conditions. I am hopeful we will see some of them engage with these mixed contracts.

For the other category of contracts, focused on well reactivation, it is a very recent development, having been announced just two weeks ago. Consequently, companies are awaiting the specifics. Some will undoubtedly be interested, as these are typically structured as straightforward service contracts where you receive a share of the production you generate. We are aware that many service contracts in Mexico's past have been impacted by shifts in administration and political dynamics. Therefore, what we hope for now is certainty and a clear vision that allows companies several years to operate and deliver results. I am sure they are actively engaging with the administration and PEMEX to secure that certainty. Crucially, on the government's side, particularly within PEMEX, there is a strong recognition that these partnerships are essential, and that all parties must bring significant contributions to the table.

In terms of production goals, even with mixed contracts and well reactivation initiatives currently being discussed, it is highly unlikely we will return to the 1.8MMb/d target set by the government for this administration. These specific contracts are not designed to achieve that overarching production goal. The details of execution are always paramount; everyone seeks clear written terms that preclude loopholes. The industry has been in a "wait and see" mode regarding the new administration's approach to PEMEX. Now, with recent changes in the management of exploration and production, we are beginning to see a clearer direction. However, much work remains to be done, and I believe everyone recognizes this.

Q: What are the main opportunities you identify for both national and international private companies in this regard, considering the focus on national involvement?

A: Historically, deepwater has been a significant area for us, and we would be delighted to see that sector revitalized. Perhaps these new partnerships with PEMEX, which holds numerous deepwater fields currently underutilized, will open new avenues there.

For existing production, we are concentrating on three key areas:

• Production increase, which involves enhancing output through advanced technologies, such as the Canadian solution I mentioned previously.

• Electrification, which presents a very strong opportunity. Instead of drawing electricity from the national grid, local generation using associated gas is highly advantageous.

• Flared Gas Reduction, as we recognize that an excessive amount of gas is currently being flared across the country. 

Nearly every well requires a unique approach given its distinct flow, geography, surrounding infrastructure, and potential customers. Therefore, we are actively developing solutions in this space. By combining these efforts, increasing production while decarbonizing Scope 1 and Scope 2 emissions, companies hold a winning hand.

Q: What potential do you see for natural gas and all its related activities?

A: We are actively exploring these areas. Currently, very large, well-known global players are involved in the major pipeline projects recently announced, and they typically do not require support from companies like ours. Our focus is on "last-mile" solutions.

Specifically, small-scale LNG and compressed natural gas (CNG) offer viable solutions. We are particularly focused on small-scale LNG. As I noted previously regarding geography, you can often recover gas that would otherwise be flared and generate local power. However, many oil and gas assets, in Mexico and globally, are in remote areas lacking nearby clients. Small-scale LNG addresses this by making the gas transportable, allowing it to be loaded onto a truck and delivered to clients, whether they are utilities, residential areas, or industrial facilities. This creates intriguing opportunities.

There's currently much public discussion in Mexico about the country's dependency on US natural gas, a fact underscored by 70% of consumed gas and 54% of power generation relying on American imports. Diversifying gas supplies and prioritizing domestic sources is always the most secure approach. While some domestic projects may not always be economically attractive, from a perspective of national sovereignty, they can make significant sense. We need to identify mechanisms for government support of these projects. In a rapidly changing world, developing even small supplies of Mexican natural gas could be a strategic imperative.

Q: How would you assess the progress of decarbonization in Mexico?

A: To be honest, decarbonization in Mexico is slow and probably requires more public education. It is progressing at a slower pace than elsewhere, and it was not a consistent priority of the previous government, at least not in terms of market implementation. However, being somewhat "late" to the game means Mexico can now access potentially better technologies than if it had started five years ago.

The opportunities in this country are truly amazing. Mexico benefits from a vast array of renewable energy sources, including solar, geothermal, and biomass. There is immense potential for development in these areas. I understand the president is highly committed to these topics and desires to see significant progress. As I noted, decarbonization and energy sovereignty go together in Mexico, which should make it even easier to persuade Mexicans and the government of this path's necessity.

I believe decarbonization has become a more prominent part of the public debate recently, partly because the financial sector is exerting greater pressure on players, particularly in the energy industry. We are now seeing timelines and even threats of financing withdrawal for companies that do not comply. While the current US administration may not be as keen on decarbonization as its predecessor, I have the distinct feeling that for the rest of the world, decarbonization and climate change remain a priority. The potential for decarbonization in Mexico is enormous, and crucially, these environmental gains often come with significant economic benefits. We must make the most of this opportunity.

XWELLS is a strategic consulting firm specializing in the oil and gas sector, offering services in investment partnerships, technical assistance, and international business development.