Limits, Opportunities in Mexico’s Secondary MarketBy Pedro Alcalá | Mon, 09/07/2020 - 10:22
Q: What do you consider to be the most important milestones that led to the founding of Muvoil Consulting?
A: Before founding Muvoil in 2018, I worked as the Director General for Contracting at SENER. I was in charge of designing and drafting the terms and conditions of the two main contracting models currently in use: licensing contracts and production sharing agreements. I also participated in designing strategies for PEMEX’s farmouts, the fields of Trion, Ogarrio and Cárdenas Mora. After I left SENER, it became obvious that this change in Mexico’s energy model had created a need for available expertise. This is what led me and a number of former colleagues from SENER to develop this boutique consultancy.
Before the Energy Reform, large-scale involvement of the private sector in Mexico’s oil and gas sector was really limited to service providers. Its involvement increased in 2003 with financed public works contracts in the Burgos field. These were followed by the Integrated Service Contracts (ISCs) in Chicontepec. Since then, the firm has grown and our experience in the industry has become increasingly relevant. We are a multidisciplinary team and not just a group of lawyers. Our team is made up of economists, oil engineers and even an expert in geomatics. Many of our team members previously worked at SENER and CNH. We want our service portfolio to cover the entirety of a project’s requirements and implications; we want to provide services beyond the legal variables. Our main project right now is assisting a company with the return of a contractual area. We also designed the regulatory and corporate strategy of exploration and appraisal contracts.
Q: How has your strategy been influenced by the growth of the secondary market?
A: Operators must comply with approximately 500 procedures as part of the contracting process, so there is an extent to which the secondary market will always be defined by those limitations. We are also seeing a change in the amount of resources that regulators have available. Their budgets are being cut and they have to perform with the same or less financing. Their workloads were already incredibly heavy to begin with. Having fewer operators, as well as dealing with delays and other issues, represents additional costs and expenses for operators. A big part of our service portfolio is focused on expediting these procedures to lessen the impact from setbacks. We have a great deal of experience in dealing with the intersection between regulation and contractual obligations. We can set a course of strategies for our clients through which delays can be prevented or avoided. This secondary market became an important factor last year as more operators realized they needed more options to manage the risk in their global portfolios, and for many it meant selling part or all of their contracts in Mexico.
Unfortunately, those most affected by all of these changes will be the larger and much more independent Mexican operators created as a result of the Energy Reform. Many of these operators do not have the access to additional revenue streams available to the large majors like BP, Shell and ENI. This, coupled with the industry’s current crises and the fact that many of the companies were originally service providers for PEMEX and depend on contracts whose payments are suspended, means we can expect many changes from these smaller blocks. Most of these blocks will be returned and consolidated under the ownership of larger, more stable operators.
With that being said, it is worth noting that returning a block or contractual area is not a simple process. These procedures take approximately a year and a half to complete. During this time, operators and regulators can take a second look at the incentive scheme related to the bloc to see if it can be modified. This is done to meet the needs of both parties before the operator confirms that they will need to finalize the return of the block. In all of these processes, special consideration is given to the extenuating circumstances brought about by the COVID-19 pandemic and low oil prices.
Q: How will these realities affect PEMEX in particular?
A: Last year, PEMEX was granted all kinds of special considerations from both SENER and CNH so that the NOC would not have to return one of its Round Zero blocks. However, this notion is bound to clash with reality. There are too many blocks assigned to PEMEX, meaning there is a limited budget distributed across too many fields. This becomes a larger problem when considering PEMEX’s legal, regulatory and contractual context. Of the 300 fields that have been assigned to PEMEX, over 20 are truly productive, most of which can be found in shallow waters.
What this means, ultimately, is that we need a change in the vision and strategy for energy and hydrocarbons. This gives PEMEX the opportunity to focus on what will be profitable for its future, such as taking on deepwater developments, unconventional fields and natural gas investments in areas like Burgos and Tampico-Misantla. PEMEX can accomplish a great deal through farmouts and associations. This is one of the advantages created by the Energy Reform. I say this to emphasize that the Energy Reform is not an ideology. It is a package of tools that can help PEMEX and the country capitalize on its own resources. These tools have demonstrated their effectiveness. For example, PEMEX is learning from its operational cooperation with BHP Billiton in deepwater fields. The political moment that Mexico is going through needs to be reconciled with the fact that the Energy Reform can help PEMEX. Merely strengthening the NOC directly and indefinitely will always have its limitations.
Muvoil is a Mexican consultancy focused on legal, contractual, and regulatory strategy for upstream players getting involved in upstream oil and gas activities in Mexico. Its team was involved in the drafting of the current regulatory landscape as defined by the Energy Reform.