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Analysis

Mexico Operators Enter New Phase

By Pedro Alcalá | Tue, 01/21/2020 - 23:27

Private operators both national and foreign have become an integral part of Mexico’s oil and gas industry. In total, 113 companies that include IOCs, NOCs, independents and juniors were awarded 111 blocks that are managed by 73 operators. Currently, only a minority of fields and blocks have entered the production stage, with the remaining blocks moving toward that goal. 

Average production from all contracted areas accounted for 80,981 b/d of 2019’s 1.668MMb/d production average. However, CNH’s forecast predicts that it is this source of production that will grow the most until it turns into the country’s largest, averaging 866Mb/d of the predicted 2.733MMb/d production average for 2032. Although it could be said that the biggest step taken in this direction during 2019 was the one accomplished by Eni in July when it became the first private operator in Mexico to bring a new discovery into production. 

Additional reserves have been incorporated through the execution of workplans and exploratory drilling, some of which generated results that surpassed expectations. A great iteration of that was the way in which Fieldwood Energy’s estimate for reserves in Block 4 increased from 68MMb to 455MMb. Matt McCaroll, CEO of the company, says this “is a result of drilling, completing and testing on only two wells in Pokoch and Ichalkil; there will be more to come. We have both Jurassic and Cretaceous reservoirs and we think the field will be huge. The company is on schedule to hit first production in 2020 while maximum production, which CNH estimates at 104Mb/d, should occur in 2026. At the same time, we expect gas production to hit 140MMcf/d.”

Another outstanding success story is Talos, the Houston-based E&P operator whose 2017 discovery of the Zama field ranked amongst the world’s largest discoveries of the last 20 years. Timothy Duncan, the company’s CEO, details the company’s strategy as expressed by its 2019 drilling of three appraisal wells in Zama: “We are attempting to open up and develop an Upper Miocene play on Zama. This is the same type of geology that is resonant in the US Gulf of Mexico and offers superior rock properties on both sides of the border. These prolific rock properties, combined with the water depth and well depth we have, will ensure the smooth and more robust development and deliverability of this asset as we are able to use fixed structures, dry trees and a future platform rig.” 

Amongst these 2019 success stories one can also find the case of Murphy Oil’s discovery in Block 5 through its Cholula-1 well. Gabriel Gómez, the company’s Mexico Country Manager, gets into the specifics of how this affected their strategy: “The seismic data we acquired on the block has allowed us to perform an overall assessment of the area and we have identified significant potential across multiple plays. We have identified upwards of 30 prospects and, with our Cholula-1 well proving the existence of a working hydrocarbons system, we are positive about the area’s overall potential. The drilling of the block’s Miocene amplitude play has de-risked a number of nearby prospects with similar characteristics. We will now calibrate our seismic data to further prove this play.”

The federal government has been clear in stating that it will respect and defend the contracts and contractors’ rights. The uncertainty that prevailed in the market during the transitionary period has made it clear to operators that a pathway of communication between them and the government is extremely necessary. This is where the Mexican Association of Hydrocarbon Companies (AMEXHI) plays a significant role in advocating for operators. Talos is amongst those to have served on its board, and Duncan points out the role it plays: “The post-election, pre-inauguration meeting we were able to have with the administration to talk about the private sector’s goals and the expectations of the incoming government illustrates AMEXHI’s indispensability and that it is now more important than ever.” AMEXHI believes in maintaining as essentially and pronouncedly cooperative a relationship as possible between the government and private operators. “The private sector is more than an ally to the government for its new production target,” says Merlin Cochran, Director General at AMEXHI. “Private companies in Mexico are partners of the government and this partnership is accompanied by a dual obligation to deliver production.”

Some of the awarded blocks were offered as legacy developed fields, with the infrastructure to prove it. This was the case with the onshore blocks in the Burgos basin, which became valuable as their short-term potential became evident to operators. Abraham Zepeda, Commercial Director of Grupo Hosto, which participated in a consortium as Constructora Hostotipaquillo, an entity later awarded one of the contract packages for the construction of the Dos Bocas refinery, explains: “We benefited from unproblematic production and profit from day one. You do not have to worry about business development or commercial responsibilities because you only have one client, PEMEX, and they are roped in from the start. You arrive at a field with between 20 to 40 producing wells and you simply build a maintenance and development plan for these existing wells and for the future drilling of new ones. With a small degree of investment and maintenance, 3Mb/d wells turned into 7Mb/d wells easily.” 

This is also why this particular block and field became an example of how some bidding-round awardees made the choice to rearrange their stake or ownership of a block, or sold the entire deed altogether, which is exactly what happened to Constructora Hostotipaquillo’s participation in its Burgos basin project. “Six months was all the time that passed from when we began work on a mature field in the Burgos basin to when we completely sold our participation after accepting a lucrative offer from our partners,” Zepeda says. “This was the result of a process that began when we started making offers to each other after everybody involved in the consortium realized that they each wanted total control over the block.” This creates a fascinating new dynamic for operators and potential new investors: even if bidding rounds are temporarily suspended right now, the bidding rounds that have taken place and their previously awarded blocks have already generated a marketplace of their own.  

Throughout all of these processes, CNH has been a valuable asset by making its regulatory procedures agile and adaptable. Consequently, in every bidding round, CNH’s response times have shortened and its activities have been self-sufficiently funded through its data licensing fees. “The payments that came in through these information-leasing frameworks accumulated into a US$350 million fund that made us fully self-sufficient and independent from the national budget. Taxpayers did not pay a single peso of our salaries, the cost of our operations or even our new building,” says Oscar Roldán, former Director General of the CNH-affiliated National Hydrocarbons Information Center (CNIH). 

Pedro Alcalá Pedro Alcalá Senior Journalist & Industry Analyst