Ricardo Arce
CEO
Perforadora México
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View from the Top

Mexican Mainstay's Ambitions to Become E&P Major

Wed, 01/20/2016 - 11:01

Q: How did Perforadora Mexico perform so impressively in the last 12 months, with five of its seven rigs under contract?

A: We had a positive year compared to our expectations at the beginning of the year. We were able to grow in comparison to 2014 and finished the year with all our equipment under contract, mainly due to the fact that we were able to negotiate with PEMEX. We gave the NOC the rate reductions it requested, but in return we were able to obtain an extension of all our current equipment contracts. In terms of numbers, we were forced to cut some costs and we reduced our staffing levels to become more efficient, which is always an important action to take at the beginning of a turbulent period.

Depending on the kind of equipment, we offered a discounted rate of between 15-22% to PEMEX, in return for a one-year extension in all of our contracts. The most important ones were those that were due to expire in the next few months, which were the Chihuahua and Zacatecas rigs, and now both will be operating for at least another year. All the rigs are currently active with the only exception of our older Sonora rig, which finished operations in March. Since then, we provided maintenance to the rig to prepare it for new contracts, and we have recently tendered it to one of the Round One winners. I believe there is a great deal of opportunities for the Sonora rig, and even though its depth capacity is much lower than that of other rigs, it is ideal for work-overs. At this point in time, we are preparing to participate in some of the bidding processes with the new operators that are going to enter the shallow water fields. Campeche, Chihuahua, Veracruz, Tabasco, and Zacatecas are all drilling, and Tamaulipas is ready but PEMEX has not yet given us a location to install our equipment.

Q: How do you manage a situation where you must simultaneously make people redundant and make the remaining workforce more efficient?

A: For me, it is clear that everything we do is ultimately for the benefit of the entire company and we will never forget that employees are an important part of it. If we need to create redundancies due to downtimes for the company, we find it important to explain the motivations and the bigger picture to the workers. We follow all the legal requirements, we pay the required salaries and bonuses without negotiation, and we help them find a new job. This is the most ethical way to carry out the optimization of the company. In some cases, I speak to employees personally, and in the remainder of cases the human resources department helps them through the process and explains the situation. Last year, we reduced the workforce by 10%, but we have been cutting costs for the last three years, and the most significant redundancy was made when our onshore drilling contract expired for the northern region, and we lost around 400 people.

Q: Who are your main partners, and what are the additional services that they help add to your portfolio?

A: Confirming partnerships would be premature at the moment, as we are still evaluating all our options due to PEMEX’s current situation. With these kinds of cuts, we expect PEMEX to seek more projects, so we are unable to align ourselves to only one company. We are drillers, so any contract works better for us if it is a mixedREMI (Equipment Lease with Integrated Maintenance), including drilling operations. We also have a great deal of expertise in cements, meaning there is a significant amount of room for partnerships with companies that can provide the remaining services to complement our offering. Although we have the capabilities to carry out many of these operations independently, we are able to recognize the fact that other companies have more expertise in certain areas than we do, especially in terms of fluids, directional drilling, and well completion. Some companies are integrated and provide all of these services, but we would not rule out the possibility of contracting different companies that specialize in these individual areas. Normally, we would not seek to work with large service providers, as these companies tend to want to serve as the owners of the contract and subcontract tenders to companies like ours, whereas our aim is to own the contract, or in some cases, to form alliances with equal power and responsibility.

Q: What were Perforadora Mexico’s intentions in the three phases of Round One so far, and how did you participate?

A: In the first phase, R1-L01, we did not evaluate the opportunities because the risk profile of these fields was too pronounced for a company like us, which would essentially be a newcomer in this sector. In R1-L02, we evaluated two fields in depth, we entered into negotiations, and even signed with an operator. We delivered the prequalification documents, but we ultimately decided not to proceed due to the discovery of certain elements of risk. However, after having processed the numbers, I am confident that we would not have won any fields because the numbers were far too high. In R1-L03, we prequalified independently through one of our companies called Controladora de Infraestructura Petrolera Mexico, a company that is the owner of all the assets in the oil and gas sector. We evaluated around seven fields through a high-level screening process, ultimately focusing our efforts on three of the four larger fields, and we delivered these three proposals.

Although we did not win, we are sure the reason behind this was price, because we know that the prices proposed by the winners were too high and this was confirmed when six contracts were not signed by the winners. We created strong business cases for each field, and we were planning to invest between US$50-75 million in each, increasing production from around 240b/d to aproximately 3,000b/d or more. In some cases, we may have been slightly conservative due to individual field characteristics, but ultimately our assumptions were realistic. We were not requesting a significant ROI on each of the fields and when we delivered the proposals, the numbers were within the average. We are not worried at the moment because, although we want to become an E&P player, we would rather wait than win a project while losing money, and this strategy is the reason why Grupo Mexico is a wellestablished company in the Mexican market.

Q: What would be your ideal type of E&P project, and what characteristics would these fields hold?

A: First of all, we are interested in PEMEX’s farm-outs, and we know that one of PEMEX’s priorities is to promote the farm-outs as soon as possible. We still need a solid operator to partner with in the endeavor, but we can provide all the equipment to work there. Subsequently, we will be evaluating more onshore projects and lower risk shallow water fields with proven reserves rather than exploration blocks. We will need to enter the farm-outs in partnership with an operator because I am certain that CNH’s prequalification criteria will not only be related to size and financial capabilities, but also to a breadth of expertise in specific processes and technology.

The Bolontiku and Sinan shallow waters fields are two promising fields that will be included in the farm-outs, although they will be difficult to drill and develop due to the levels of pressure and the high temperatures. However, our performance has been solid in a considerable number of wells in this area, and we know the region well. In the Ayatsil-Tekel field, we currently have the Veracruz drilling rig, and hopefully soon the Tamaulipas rig will also be positioned in this field, so due to the level of investment we have already placed in this field, we will be evaluating it carefully. Ayatsil-Tekel is difficult due to the heavy oil it produces, so we will need to seek the correct partner to ensure success in this field. We also still believe that in onshore, there are a significant amount of opportunities to continue growing, or at least to maintain PEMEX’s current level of production.