/
Analysis

Impact of the Old Multiple Service Contracts

Wed, 01/25/2012 - 14:23

A change in the Mexican natural gas market’s demand dynamics meant that, in the early 2000s, Pemex had to import natural gas into Mexico in order to meet demand. It was clear that something was needed to draw investment and capital into the sector and improve the exploitation of the country’s non-associated gas reserves, as a means to cut back on imports. Pemex was not treating gas as a priority at the time, because the NOC was fighting to stem a drop in productivity of its giant Cantarell oilfield.

As a result, in 2001 Pemex announced a new funding mechanism to fuel interest in natural gas exploration and production, known as the Multiple Service Contract (MSC). These contracts, based on Mexico’s standard public works contracts, consolidate a number of dierent services into one contract, all of which are linked to the production rates, development activities and maintenance of natural gas fields. Under these contracts, the contractor would provide services such as seismic acquisition, processing and interpretation, geological modelling, field and production engineering, drilling, facility design, construction and maintenance, and gas transportation. In return, the contractor would receive cash payments based on fixed prices for the finished project.

As conditions of the MSCs, contracted companies would be unable to book any discoveries, and Pemex would own not only the hydrocarbons discovered and produced but also the infrastructure put in place. Obligations would last for between 10 and 20 years based on the expected production life of the field on oer. As an incentive, Pemex would pay the VAT on projects rather than the contractor. As well as receiving training in the use of new technologies, Pemex would also have equal rights to any new technologies developed during the projects.

At the time, even MSCs were criticized by some commentators as a breach of constitutional requirements regarding the ownership of hydrocarbons and the ways in which contractors could be rewarded for work on any reserves. This was the first time since the 1938 nationalization that private companies had been allowed to operate hydrocarbon fields.

MSCs were oered exclusively in the Burgos basin for non-associated gas fields, and served as a first step to incentivize investment from third parties, both domestic and international. Pemex hoped at the time to introduce MSCs for more fields after the test run on the Burgos basin. However, the NOC soon realized that it would be necessary to provide more incentive to the companies for areas that featured greater risk.

There were, however, positive elements that came out of the contract modality. For example, Pemex succeeded in drawing big-name international oilfield service companies to the country for the first time, and furthermore generated joint ventures between international and Mexican companies.

When Pemex created its integrated service contracts five years later, it was clear that they had learned from the promotion of the MSCs. One of the most important changes between the contracts was that the blocks oered under the newer contracts were closer to existing infrastructure such as production sites and oil terminals, so that investment in the area could be minimized while still gaining access to producing assets quickly. Eduardo Camero Godínez, Director General of Exploration and Exploitation at Mexico’s Energy Ministry, says that “Pemex learnt that it would have to make a new contracting regime for oil that was more flexible in the rewards it oered to its partners, in order to compensate for the risk involved in the contracted areas. Having learnt from the MSCs, Pemex ensured that its new integrated service contracts provided incentives to contractors that were as closely aligned with its own wishes and plans. With the new contracting model, contractors have more flexibility and responsibility to use their previous experience in technology to propose development plans to Pemex that might be better suited.”

LUÍS VÁZQUEZ SENTÍES, PRESIDENT OF GRUPO DIAVAZ, ON THE MULTIPLE SERVICE CONTRACTS:

LUÍS VÁZQUEZ SENTÍES, PRESIDENT OF GRUPO DIAVAZ, ON THE MULTIPLE SERVICE CONTRACTS: “Gas production historically has come second to oil production. Any gas development requires many dierent services, from drilling to pipe laying, and putting them together under one contract made a lot of sense. As such, Pemex hoped to attract larger global players to invest in Mexican gas projects with its multiple service contracts, and largely it was a successful venture; the country now has much more gas reserves and production than it did before the introduction of this contract modality.

“However, the contracts should have been made more flexible. Under the old system, the only thing that the service providers learnt was how to increase production at any cost in order to get paid. More flexibility would have meant more room to be creative and innovate, and even to look to the idea of sustainably developing projects with a long-term vision. Because of the short-term and goal oriented nature of the projects, this did not happen."