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News Article

Obstacles in Contracting Offshore Infrastructure

Tue, 01/22/2013 - 12:04

One of the main objectives of the development strategy that Pemex presented in 2010 was to acquire 60 additional drilling platforms by the end of 2017. This meant that over a six-year period, Pemex would acquire 12 platforms per year. In the first two years, Pemex was unable to achieve its targets, falling short of the 24 platforms the company planned to contract during this period. Benjamín Torres- Barrón, a lawyer from Baker & McKenzie Mexico specialized in rig contracting, explains the main issues that Pemex has faced to try to reach these targets, and the reasons they have not been able to do it.

“The rig market is not easy,” Torres-Barrón explains. “Platforms are a scarce resource for all players in the global oil and gas markets,” Torres-Barrón adds. “This enables platform owners to compare the different conditions in the prospective markets they face before choosing where to send their rigs.”

Even though Mexico might not have the most competitive conditions, Torres-Barrón believes that the country is a good market for platform operators to work in. “Some countries might have better financial conditions for platform contracting, but it is not only about the monetary aspects of the business. Those countries offering better commercial value might not have the political stability that Mexico has or the big demand for rigs that exists in the country. This mid-term stability that the country has provides companies within the sector enough security to move their businesses to the country.”

According to Torres-Barrón, the problem with establishing in Mexico has to do more with the logistic and legal sides of the process: “In both exploration and production, Pemex has the operational need to increase the number of both drilling rigs and production platforms in order to reach its targets. However, on the legal side, the company has to follow internal procedures and policies that came into force with the 2009 Pemex Law, which slows down the contracting process, leaving the operational side short- handed, particularly in terms of offshore infrastructure.” While all of this happens, drilling platforms are out there on the free market, waiting for the highest bidder to contract them. “If Pemex does not proceed immediately to secure a contract, some other private company is going to contract the platform,” he explains. “Pemex might offer good incentives for rig owners, but often, logistical hurdles and bottlenecks mean that they miss out on the rigs they need.”

The problem does not stem from the Pemex Law in itself, according to Torres-Barrón, but at least partially from

the inertia of adapting to new contracting methods. “The new set of reforms that began with the 2009 Pemex Law provide more transparency and more flexibility to contract service providers, including the possibility to award contracts directly,” Torres-Barrón explains. “But, in the end, the practical application of these new set of regulations is not moving at the pace it should, which might be the consequence of not having the necessary alignment within the company’s internal structure towards the same corporate goals.”

More conservative rig owners avoid the Mexican market altogether because of the liability clauses in Pemex contracts: “Liability clauses within Pemex contracts continue to be a concern,” Torres-Barrón says. “Even though there is typically a capped limit on the level of liability that will stop it from exceeding the total amount of the contract price for the platform, there are certain exceptions, such as with environmental responsibility. Companies are therefore exposed to joint liability, when environmental regulations are infringed, ending in penalties for both the operator responsible for causing the environmental fault and also the owner of the equipment.” This creates additional uncertainty for companies trying to enter the Mexican rig market.

Pemex is trying to improve its efficiency in contracting offshore infrastructure, and is attempting to do this through awarding contracts directly. “The Pemex Law allowed Pemex to offer direct awards where they can be justified, and the lack of supply in the offshore infrastructure market is a good example of when these direct awards can be applied,” Torres-Barrón says. “Pemex has also been adapting some of the economic conditions in the agreement template in order to make it more efficient. The business terms for the contract – legal terms and conditions, day rates, and so on, can be improved slightly to offer more competitive conditions in this type of market.”

In the end, Torres-Barrón believes that, even with the restrictive conditions that Pemex offers, the players in the Mexican platform market might be content with just having a clear set of rules. “I think the industry needs to work on more explicit language covering the aspects of the contracts that are not transparent enough.” This might improve transparency for international platform owners deciding to work in Mexico, and might even encourage national companies to try and take a piece of the market, with their experience of doing business in Mexico and contracting with Pemex.