Low Prices and Elections Help Government Get Round One Right

Q: Given the information released about Round One, what result do you think could be deemed a successful outcome?

A: The market expected that low oil prices and a rethinking of the sector would delay Round One. What eventually came out is somewhat more restrictive than anticipated but it is still a draft, not the final model. Hopefully, we will move closer to a true production-sharing contract (PSC), as the current proposal is an amalgamation of different elements that do not really work when combined. However, this situation is not unworkable given the learning curve that Mexico is going to embark on. The largest part of this learning curve will be the government needing to define what a successful outcome of Round One will look like. For my part, if the country does not receive bids in the double-digits, Round One would be seen as a failure. An acceptable outcome would entail getting the same number of bids as was obtained in the past for the multiple service contracts and the integrated service contracts. From a technical perspective, there is no reason why the Mexican government should not receive dozens of bids for each viable block. Whether this happens will all depend on the commercial terms put in place.

Q: Just as Mexico finally liberalizes its oil and gas sector might the drop in oil prices actually be a positive factor?

A: Every company, whether big or small, has a finite amount of resources. Due to the low oil prices, CAPEX has been widely cut across the board and some companies have already begun slashing personnel. The industry must recognize that Mexico presents a fantastic opportunity but the country must also take steps to keep people engaged. To do so, it must keep sending the right messages. Managing this process can be very tricky, and we have seen a number of stops and starts throughout the history of Mexico. For example, IPD Latin America entered the country in 2001 on the heels of the euphoria that overtook Mexico after Vicente Fox won the presidency. Back then, everyone was convinced that an energy reform was a done deal. This means that companies have been listening to the same message for over a decade. This makes it all the more important for Mexico to send the right, convincing message to IOCs and specialized firms alike. There are many significant companies that are highly specialized and that could greatly improve Mexico’s oil and gas sector. However, they will have lower tolerance for things that are not done according to international industry standards. The price for entering the Data Room is high, so firms investing US$400,000 will not tolerate being exposed to opaque contracts that they do not recognize as adhering to international standards.

Q: Do you think that IOCs will be interested in pursuing joint ventures with PEMEX in shallow water?

A: Shallow waters are PEMEX’s home turf as it pioneered many of the techniques that have ultimately become standard worldwide. If a company is going into shallow waters, it should by definition consider partnering up with PEMEX. However, the restriction on the number of blocks that companies can bid on does nothing to increase competition. The industry’s view is that this clause was included because of PEMEX. The government was fearful that PEMEX would continue to dominate the shallow water segment, which would in turn drive away new players. Whether this is true or not, the restriction does not do what it set out to do, which could have been achieved through other means. At the onset of the Energy Reform, the government touted the need for diversity. The problem is that any time restrictions are imposed, these most frequently do the opposite of what was intended.

Q: Do you think that the legislative elections in June 2015 could further affect the timing of Round One?

A: The fact that bids have been delayed until after the elections gives the government some breathing room. After all, what Mexico is trying to accomplish with the Energy Reform is unprecedented. Trying to put everything together and create an institutional framework in one year is beyond daunting. By our calculation, all the related government entities, excluding SENER, will need over 500 new people this year. The impact of the elections is hard to predict given the situation in the country. At the local level, people are not happy and distrust the political system. However, the most important factor is to create a scenario that will attract bids and benefit the whole country. The postponing of the bidding rounds may help to achieve that.