Importance of the ISCs for PEMEX's Production Strategy

The integrated service contracts, or ISCs, implemented in Mexico following the 2008 Energy Reform, have both supporters and detractors in the national oil and gas industry. Arguments over whether they are the best way to outsource services have gone back and forth. As Carlos Rafael Murrieta Cummings, Chief Operating O·cer of Pemex, describes before the ISCs were introduced life in the Mexican oil and gas industry was complicated. Pemex believed itself to be extremely powerful, as its mandate was to carry out all upstream and downstream activities within the Mexican oil and gas industry, with a limited budget. Over time, it became clear that Pemex’s objectives throughout the value chain were not being reached: production started to decline, and questions about the availability of resources for Mexico’s future started to be raised. “When I first stepped in as COO in 2009, the headlines of news articles were: ‘Pemex is running out of crude!’” Murrieta Cummings recalls.

At that time, the company was adapting to the 2008 Energy Reform and the Pemex Law was at its early implementation stage. “For 20 years, Pemex believed it did not need any help in advancing projects from early exploration stages to production,” he says. As a result, Pemex is experiencing the pressures of not having focused on its long-term goals as well as it should have done, being burdened with so many tasks and such a small budget to complete them. “The strategy of investing in the present rather than in the future does not pay o† in the long run, so whatever task you leave unfinished now will have consequences in around 10 years,” he adds.

However, the Pemex Law and the 2008 Energy Reform allowed Pemex to contract private companies to produce oil in designated fields at the lowest cost on fee per barrel basis. The ISCs serve as a platform from which to obtain more production from existing fields, by enabling Pemex to choose which fields it should develop, and which field should be awarded to private sector operators. This decision is based on the technological capabilities required, Pemex’s execution capacity, and a field’s priority level in Pemex’s budget allocation process. By inviting private operators, Pemex e†ectively attracts new technology and obtains additional production without having to invest itself from Pemex, allowing the company to concentrate its budget and e†orts in the business areas where it can create the most value.

After awarding eight of the nine blocks tendered within the first two ISC rounds, Pemex is enjoying a slight increase in production in mature fields – total average production expected from the blocks licensed in the first and second rounds should add up to 34,000 b/d this year, and increase up to 73,000 b/d during 2014, according to Gustavo Hernández García, Subdirector of Planning and Evaluation at Pemex E&P. This is due to the focused technologies and international best practices that private companies bring to projects. The expertise from those companies is also expected to result in the transfer of technology and knowledge that will benefit Pemex and the Mexican oil and gas industry more widely

“Pemex can still do everything – in spite of the debate over whether it would excel at or have the adequate technology for each activity,” Murrieta Cummings claims. “The problem has more to do with the restrictions that forced us to perform all of those activities at the same time. Pemex does not have the budget, time, or human resources to execute all that is needed to optimize production of Mexico’s hydrocarbon reserves.”

THE FUTURE OF ISCS: CHICONTEPEC AND DEEPWATER

Six blocks in Chicontepec are to be awarded to the highest qualified bidder in the third round of ISCs on July 11th 2013: Pitepec, Soledad, Amatitlán, Miquetla, Humapa, and Miahuapan. Located in the Tampico-Misantla basin, these six blocks have 3P reserves close to 3.2 billion boe and prospective resources of up to an additional 0.9 billion boe.

A future fourth round of ISC blocks is expected to be tendered sometime in 2014. “Deepwater represents a highrisk, high-profitability area for Pemex,” explains Carlos Morales Gil, Director of Pemex Exploration and Production. “Those are the kinds of projects that Pemex wants to concentrate on. Whether integrated service contracts are the best way to approach this segment is a question that the energy reform should address.”