Low Oil Prices Pose a Stumbling Block for Tenders

“The competitiveness of Mexico’s resources is going to depend on how the government groups together the resources and fiscal terms for each bid round. In each one of the phases, companies’ assessment of the resource possibilities vis-à-vis other global options will be critical.” The words of Carlos Pascual, Senior Vice President of IHS Energy, highlight the tremendous resources Mexico can offer in the wake of the Energy Reform, which will be decisive in the development of the investor base in the country.

R1-L02 and R1-L03 place a strong emphasis on attracting Mexican companies to bid, a relatively untested market because, to this day, Mexican companies have typically been service providers, but may now have reestablish themselves as operators. Internationally, the critical test will be R1-L04, which concerns deepwater blocks. “The Mexican government understands that it has to put sufficient resources on offer, together with attractive fiscal terms, and evaluation criteria that will make its deepwater offerings competitive in comparison to investment opportunities elsewhere,” according to Pascual. R1-L01 indicated that the competitiveness of Mexico’s resource base will heavily depend on the quality of resources being offered, Pascual argues. In R1-L01, only two blocks were awarded, affecting the further development of the supply chain that will provide those companies with services and equipment, and potentially prompting the biggest test of Mexico’s supply chain through several other mechanisms. One of these will be the migration of technical service contracts to productionsharing contracts, whereby Mexican companies, such as Grupo Diavaz and Perforadora Mexico, are seeking to become operators in the hydrocarbons sector. R1-L03 may result in a number of other service companies establishing themselves as operators too.

A critical challenge in Mexico, and everywhere in the world, is to understand the dynamic and challenging international cost environment, and to accordingly develop a combination of competitive resources and fiscal offerings. “We are going through a period of tremendous stress in the energy industry with low prices, relatively weak demand, and extremely high supply, driven by improvements in productivity in the US and aggressive marketing strategies from Saudi Arabia and other OPEC members,” Pascual laments. “There has been downward pressure on prices, forcing companies to cut costs and make difficult decisions concerning capital expenditure.” As a result, he concludes that these companies must carefully select the areas that will receive capital expenditure, basing their choice on expected rates of return. If Mexico determines it is not willing or ready to offer attractive terms, it should do so in a conscious and strategic way by structuring bid rounds intelligently and proceeding when it is able to offer bidding terms that will secure the serious investors the country expects.

“If the oil price were US$100/b today, I suspect that the outcome of Mexico’s Round One would be different,” claims Pascual. “There would be more clients operating here and, consequently, there would be a wider range of companies with which we could work.” Those are realities to which the company must adapt. One of the key parts of IHS’s business is to help companies understand and adapt to a low-cost environment. As such, part of the challenge faced is in helping companies understand how they can increase efficiency in the current environment.

There is significant hope that the unconventional resources development across the border in the US could extend into Mexico in the northern and central parts of the country, as well as the coastal zones near Tabasco and in Veracruz. Those resources have not been extensively developed at this stage as they are generally expensive and, considering the current cost environment and other potential investments in the country, have not been the highest priority for companies. In the US, unconventional and shale resources continue to be developed because the history of investment and cost-effective management allows for lower costs. Drilling rigs, other services and infrastructure support are widely available. Through the use of data management on each well developed, it is possible over time to target investments to the most productive fields and reduce the investment required to develop shale resources. “In Mexico, the initial costs will be higher because companies will have to create the entire industry, first drilling numerous wells to gauge the quality of the resource base,” Pascual explains. IHS expects the exploitation of shale and unconventional oil and gas to come at a later point in the development of Mexico’s resources, when market prices begin to recover.