Gustavo Hernández
Acting Director General
PEMEX E&P
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View from the Top

Finding the Right Strategy for Each Mature Field

Wed, 01/22/2014 - 16:02

Q: Which mature fields would you consider farming out to private companies through joint ventures?

A: PEMEX has been the only operator in Mexico for decades while other companies could only participate on a service contract basis to help solve technological challenges. With the opening of the industry, those same companies will come up with different perspectives and objectives, and will cease to look at PEMEX as the only operator. We may be the most important operator on the list now, but certainly not the only one. However, when the Energy Reform legislation is finally ready to be implemented, we will stand ready as well. We are working on how to best select the right partner for every one of our fields, basins, or hydrocarbon types. We are looking at characteristics such as technical capabilities, execution capacity, and previous experience. This allows us to develop a very robust procedure to verify whether a given company will pre-qualify to participate in each of our fields, basins, and hydrocarbon types. Once the secondary legislation is finished, we would like to move on to farmout some of the areas that we requested in Round Zero. Our Round Zero request included certain areas that we would like to keep, based on the assumption of a partnership with another company. We are considering partnerships in deepwater field development and frontier exploration, as well as in extra-heavy shallow water oil fields and some mature fields in shallow water. We are also considering partners in unconventionals, in both dry and wet shale gas as well as shale oil.

Q: Would you consider inviting a joint venture partner in Cantarell?

A: Considering our current production cost per barrel, I would say no, because we have the experience to keep extracting this easy oil at US$6-7 per barrel. Of course, we would like to incorporate EOR methods that would shift the production cost between US$30 and US$60 per barrel, if we have the chance. Many companies have come to PEMEX offering solutions for Cantarell, but at the moment we do not need help extracting easy oil. We would need help from partners for the technology and capital to execute advanced EOR processes, such as injecting large volumes of surfactants into Cantarell. In this case, we would accept a partner that proved able to provide the technology and a foam plant, possibly offshore. At the same time, dehydration of flowing oil could increase the production cost to US$30 per barrel, where we would also need help.

Q: What do the administrators of mature fields think about welcoming private companies to their assets?

A: We have been talking with them about how the Reform will impact them, since they need to adjust their mindset. They will now have companies operating and competing in a field right next to theirs. That is a huge difference in perspective from the last three generations of managers and workers that have been used to a oneoperator environment. We are explaining them that the constitutional change also implies that PEMEX salaries will no longer be the same as public servant salaries, because we will be working according to international markets forces. Salaries will improve responsibly, given the competitive labor market. At the same time, they will have to focus on operating costs, as another player operating the neighboring field might do so at a 10% lower production cost. It represents quite a challenge, but the administrators understand this. They already participated in our Round Zero analysis and provided information. At first, they wanted to keep all their existing fields in Round Zero. We emphasized that the Reform states that PEMEX must focus on those fields where it can operate with its current capabilities in a competitive environment, based on the number of engineers, geologists, and our budget. It took time to analyze this, but we had already started preparing for Round Zero in September 2013, without any guidelines since the Energy Reform had not been approved yet.

We are now preparing to enter into partnerships through a joint venture round after Round Zero. Our teams are getting ready to negotiate with prospective partners for various types of partnership agreements. The details of this process will be defined in the secondary legislation, as potential partners need to have legal certainty on how the contracts will be awarded and managed, as well as certainty on the fiscal regimes that will be used for each project. In the meantime, we need to prepare our data rooms to negotiate on a commercial basis in the same way as we handled the three licensing rounds of ISCs for mature fields.

Q: Is PEMEX planning to hold this joint venture round before the first contracting round to be managed by SENER and CNH?

A: This is part of the secondary legislation discussions between SHCP, SENER, and CNH. We are calling the joint venture round dedicated to the farming out of fields by PEMEX Round 0.5, while Round One will provide all players, including PEMEX, with equal opportunities. We expect Round 0.5 to take place before Round One does in the first quarter of 2015.

We could attract foreign investment in the joint venture round rather than waiting for Round One, since that will take place during the first quarter of 2015, the fields will be assigned by mid-2015, and the first significant investments will most likely be made in 2016. Conversely, the joint venture round could enable us to receive foreign investment in the next three or four months. We would like to move ahead rapidly with joint ventures and we are assessing the execution capacity of the key players in Round Zero, Round One, and the joint ventures round. Each entails a lot of work, so we are communicating with CNH and SENER to ensure we are moving at the same pace. As we told CNH, this is a win-win situation for Mexico, the operators, policymakers, and the regulator as all of us will gain a lot of experience. The regulators will have to be ready to regulate all the players, which they have not done in the past. We have to work hard, but they have to work even harder. While SENER awards the assignments, CNH will provide technical assistance and I do not foresee these organisms asking for external help. In order for the Energy Reform to yield the expected results, we need to strengthen our regulators and policymakers as well as PEMEX’s capabilities. Other jurisdictions, such as Norway, Brazil and Colombia, strengthened their regulators by transferring people from their national oil companies. Regulators already have PEMEX lawyers, but there are also specialists at the end of their working careers after 35 years in PEMEX who could help regulators overcome challenges with their technical experience. We are eager to assist them in any way we can. This is the only way the Energy Reform can be successful.