Guillermo García Alcocer
Former Chief of the Unit of Exploration and Production Policies
Ministry of Energy
View from the Top

Government Prepares the Industry for Round Two

Wed, 01/20/2016 - 16:19

Q: What initiatives does the government use to push the development of local operators in Mexico’s upstream segment?

A: The Ministry of Economy has created a fund in order to promote the Mexican oil industry. Nevertheless, the strategy that has been most successful is the design of attractive tenders for the national industry, as in the case of the third phase of Round One. This tender was designed to become the entry point by which new operators can begin working in Mexico and learn about the market as a whole. There will be more opportunities to participate in further phases of the bidding rounds.

Q: How does the Ministry of Energy anticipate the role of onshore fields in meeting the national production targets?

A: These fields are extremely attractive, and there are several companies that are shifting their focus from shale gas areas in the US to onshore conventional oil in Mexico. We believe that they can bring their experience in lowcost production techniques, knowledge, infrastructure, and drilling equipment to establish a solid business in Mexico’s onshore fields. Given the market conditions at the moment, an opportunity to move into conventionals is interesting for these companies, and when prices rise once again, unconventionals will again be an option.

Q: What is the Ministry of Energy’s perspective on including tight oil formations in the unconventional resources round to counter the impact low oil and gas prices have on shale developments?

A: The unconventionals tender is still a work in progress, but we have heard from the industry that it would be attractive for them if we tender different resources that share the same area within this bidding round, such as tight oil, conventional, and unconventional oil. It would be a matter of testing the entire stratographic geological column and obtaining the right to produce, and depending on the market situation, the different stages of the project could be initiated. When the market is fully recovered, we could then capitalize on unconventionals, or this can be kept as a reserve while we capitalize on conventionals.

These onshore projects have significantly lower costs due to the fact that the reservoirs are onshore, enabling them to benefit from existing infrastructure, and it would only be necessary to carry out drilling before connecting production to a system based on a tariff that would be set by CRE. We believe that the unconventional round will take place, but we are still measuring the most appropriate areas that are to be offered in the tenders. Chicontepec is still an option, but it must be tendered along with other fields. Regarding unconventionals, in addition to the market conditions, we need ASEA and CNH to have established relevant regulations in order for the bid to be launched.

Q: How much of a direct impact do you expect the deepwater round to have on the Mexican economy?

A: There is a great need for ports to support these activities, and the closest port to the Perdido deepwater area is Matamoros, located adjacent to Brownsville, which is currently being developed to serve as a supplier hub for the area. The local content that we require in deepwater bids is slightly low in comparison to the first three bids, but could be demanding according to the oil industry. Nevertheless, we think that the 4% local content goal that must increase to 10% over the course of the projects is attainable, and the time schedule is designed to allow the local industry to build the capacity and capability that is needed for deepwater projects.

Q: Which role will the Ministry of Energy play in evaluating the potential fields that could be tendered as part of PEMEX farm-outs?

A: We have a small role in defining the areas that are to be farmed out. PEMEX is evaluating its portfolio with a clearly-defined strategy of carrying out the least costly independent activities and looking for partners to provide technology, CAPEX, and expertise for the more complex areas. In this process, the Ministry of Energy receives the proposals for the areas in which PEMEX intends to carry out farm-outs, and when authorized, CNH is in charge of the bidding process for the partner companies. There has been a significant amount of learning in this process, and the external market effects have been an additional factor to contend with. We began the farm-out process with an oil price of US$80. The drop in oil prices means that the areas identified may not be as attractive to potential investors. For instance, Chicontepec at US$18/b is not attractive. Internally, the difficulty lies in the fact that Mexico has never conducted farm-outs before, and the main issue is the way in which costs and assets are distributed within the PEMEX areas to be farmed-out. PEMEX is an integrated company, and the whole southeast region is managed as if it were an all-inclusive project. When farming out a subset of fields from this region, its current accounting methods make it difficult to allocate the corresponding fraction of the service contracts, the assets in the region, and the maintenance expenditures for each field. Therefore, PEMEX must adjust its accounting so that the relevant economic and legal elements are allocated within a given asset. This is something PEMEX is still working on, and although it is trying to speed up the process, there are complex variables at work.

Q: What will the Ministry of Energy’s E&P unit be focusing on for the remainder of 2016?

A: We will be carrying out R1-L05 and have started planning for the first phase of Round Two, which will probably be carried out at the same time as the aforementioned unconventionals phase. R1-L04 will be awarded on December 5, and we intend to launch R1- L05, R2-L01, and R2-L02 in order to retain the interest of industry in Mexico’s upstream activities. We stipulated in the Five Year Plan that R2-L01 would again include shallow water blocks. These tenders continue to provide new opportunities for the industry, and that message has been heard by the private sector. For this reason, many interested parties, even those who have so far failed to obtain contracts, are establishing offices in Mexico. They are beginning to understand and trust the process and realize that if they do not win in the first bids, there are further opportunities for which to prepare. At the Ministry of Energy, we are open to understanding the industry’s concerns and receiving its feedback. The Federal Government is committed to creating a win-win scenario both for companies and for the state.