Enhanced Oil Recovery: Incentives to PromoteBy Gaspar Franco | Thu, 10/15/2020 - 13:07
Within the context of national oil and gas production that has been in a continuous decline since 2004 (sustained by mostly mature fields), and with its reserves demonstrating a similar trend, Mexico is at a crucial point to assert foresight and promote the rejuvenation of its oil industry. Improvements are required in many of the activities of its value chain, starting with a paradigm shift on the methodology related to the development of its new fields, which must reflect the constant improvement of the regulatory framework advocated by the 2013 Energy Reform.
In this sense, Enhanced Oil Recovery (EOR) has proven its worth as an important tool in numerous countries around the world, where its application has been essential for the optimum development of oil fields, leveraging higher production and recovery factors despite higher investments and risks involved.
One of the proven mechanisms to allay the additional risks and investments that EOR demands of operating companies is the granting of fiscal incentives, providing flexibility to regulatory frameworks, thereby generating win-win scenarios, under the premise that for the state to win, companies must win as well.
The use of incentives has boosted the application of Enhanced Oil Recovery projects, leading nations to significant benefits such as greater incorporation of reserves, larger local investments that benefit communities and their economy, increased production and improved recovery factors, adding attractiveness to investments, which result in better credit ratings as the oil income grows begetting an overall higher tax collection.
Mexico practically does not have any EOR projects. Consequently, its average recovery factor barely reaches 20 percent, which is almost half of the worldwide average. The granting of incentives for the application of EOR methods is still incipient and scant.
A recent thesis, "Comparative analysis of regulatory schemes for promoting Enhanced Oil Recovery processes in Mexico," published by the Universidad Nacional Autónoma de México, authored by Carlos Alberto Arrieta Pimentel and directed by José Luis Bashbush Bauza, presents an extensive analysis of the benefits for countries and the relevance of granting incentives for the application of Enhanced Oil Recovery.
The thesis demonstrates with real examples the favorable impact of granting incentives for the application of EOR throughout the world, highlighting a few outstanding cases in Norway, Canada (provinces of Alberta and Saskatchewan), Brazil and Colombia.
In the case of Norway, through contractual restructuring and the search for profitability before and after taxes, the government has promoted the extended use of EOR, despite the fact that its oil fields are mostly mature fields. Recovery factors for some of the fields exceed 60 percent. Ekofisk, one of the main and most famous examples, began its productive life in the 1970s. Production increased and declined but due to the judicious application of an Enhanced Oil Recovery process, it generated a second peak of productivity. This effect had a positive impact on its profitability, contributing to an increase in the value of its Government Pension Global Fund to about US$1 trillion (2020), making it one of the most valuable funds in the world.
Another case is the Canadian province of Alberta, known for having large accumulations of unconventional resources that must leverage Enhanced Oil Recovery processes and which in winter conditions can reach temperatures of -40°C.
These conditions demand large investments and represent greater risks. However, through attractive contracts that contemplate a decrease in the royalties paid to the province for the application of EOR processes, the Alberta oil industry has become so attractive that the government organizes bidding rounds every two weeks on average, holding about 24 per year.
These are just a couple of examples of the potential benefits to state entities attainable through the granting of incentives to the oil industry if EOR methods are timely applied.
It is essential for Mexico to emulate those experiences to accelerate the modernization and increase the efficiency of its oil industry, and in that way promote greater well-being for the country.
Incentives for the application of Enhanced Oil Recovery have barely been mentioned in the Mexican regulation. A necessary paradigm shift is required to boost the production and recovery factors in Mexico’s mature fields.