Hugo Espinoza
Vice-President Mexico and Central America Geomarket
Baker Hughes
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View from the Top

Oilfield Services Leader Making Careful Observations

Wed, 01/21/2015 - 12:40

Q: In 2014, Baker Hughes was awarded integrated service contracts (ICSs) for the Soledad and Corralillo fields in Chicontepec. How have these projects evolved during the last year?

A: Operating in Soledad has been an enriching experience for Baker Hughes while it has also been beneficial for our neighboring communities. Our capabilities have progressed through our work in Soledad, as has our ability to successfully manage such fields in Mexico. Baker Hughes has also been very successful in operating the field at Corralillo where production surpassed our expectations. Our approach consisted of developing a deep understanding of the field, which encompassed an evaluation of its geology, determining drilling targets, and deciding on the right technology to be used. At Soledad and Corralillo, we have improved production and have operated the fields at an optimal level. However, while other operators have begun the migration process for ISCs since the Energy Reform, Baker Hughes has not yet begun this process. This means we still have much to learn from PEMEX and other operators. We are completing our understanding of how the migration is going to take place. We are obviously maintaining a close conversation with PEMEX, but since it is focused on the migration of Round One, our exchange covers exclusively informational processes. We have not yet started the negotiations. Nevertheless, becoming a partner of PEMEX implies a broader context. What we can offer PEMEX in Chicontepec is actually not that different from what we can offer it elsewhere, or even from what we provide to any of our clients. Our cutting-edge technologies and our high level of performance sets us apart from the rest of the operators. An added advantage is that Baker Hughes stays focused on operation, paying special attention to the particularities of each field and tailoring its efforts to that. However, our relationship with PEMEX will not change simply because it has become a productive enterprise of the state. It will remain our customer and the importance of this relationship will not change. While in Venezuela, I saw many companies which began paying less attention to the national oil company, PDVSA, when other companies were entering the market. In my opinion, an oil and gas operator should never neglect the national oil company.

Q: What are the main similarities and differences between energy reforms in other countries and the Mexican Energy Reform?

A: It is probably too early in the game to say what the major differences are, since only time will tell if the Mexican Energy Reform was successfully implemented. SENER and CNH are making adjustments based on the lessons they have accumulated and on the variations of oil prices in the global market. One of the advantages the Energy Reform has over other reforms, though, is the chance to learn from what was done in Brazil, Venezuela, Colombia, and other countries. The Mexican authorities did their homework. A lot of time was invested in analyzing how things were done elsewhere and learning from other countries’ achievements as well as from their mistakes. However, the wheel is not being reinvented. Certain modifications may have been made to tailor the Energy Reform to the Mexican legal framework, but that was to be expected.

Q: What opportunities do you see for Baker Hughes as a result of Round One?

A: I am impressed by the fact that, so far, the timeline for the bidding rounds is being met. When the timelines were announced, we all felt they were a little too ambitious so it is commendable that the authorities have managed to keep up with their commitments. Considering that many governmental organizations were recently created or revamped to carry out the Energy Reform, they really stepped up to the plate. However, our take on the blocks available for Round One does not come from a point of view where we would consider participating. We are examining them as blocks that could bring opportunities and increase our customer base in Mexico. We are more concerned with the companies that are going to be interested in these blocks, in understanding what they gain from it, and deciding which operators could be a good fit for Baker Hughes to collaborate with. Our optimal partnership would be with an operator that places value on performance, on technologies, and on their application rather than just focusing on low prices. We are not low- price providers and we intend to stay that way. Our goal is to be a high-performance organization with the best levels of technological field execution. The relationships we have in different countries all over the world are usually with companies that place a high value on execution and technology, which increases the value of the reservoir, instead of just offering low prices. To our mind, a successful result for Round One would be seeing a diverse group of Mexican operators doing research and drilling in Mexico. At the end of the day, its success will depend on the quantity of oil being produced.

Q: Do you think the drop in the oil prices is affecting the evolution of the Energy Reform?

A: It certainly has an effect on the way the financial aspects will be calculated from the point of view of the IOCs. However, we must understand that many of the IOCs interested in the blocks are not necessarily looking for a short-term gain. They have been around for many years, some are even over a century old, which tends to give them a far longer time horizon. We understand there are cycles in this industry and we also recognize the geographical advantages Mexico has, especially as it is so close to the US, unlike Libya or Nigeria. On top of that, Mexico’s legal framework is beneficial to foreign investment.

Q: What are your plans to introduce in Mexico shale technologies the company already relies on in the US?

A: The implementation of any technology has to be fit for a specific purpose. Each technology is introduced in response to a need that must be met, or an investment to be made for a certain field. This certainly applies to technologies like fracpoints or shadow plugs. I had the opportunity to manage the southern US region for Baker Hughes from 2008 to 2012 so I lived the shale boom from start to finish. Technology is constantly evolving and the implementation of specific technologies in Mexico will depend on when investments in unconventional oil and gas happen and in what timeframe projects in those fields take place. We have already used fracpoint systems in Corralillo very successfully. However, the introduction of such technologies in a specific field is always based on need.

Q: What are your expectations for the development of unconventionals in Mexico over the long term?

A: I certainly see that happening in the long term since Mexico has a lot to offer on that front. I am a big fan of unconventionals and Mexico is in a very enviable position to develop them. After all, the implementation of unconventional projects is about mass drilling, with a large volume of wells, because of the natural decline curve of shale production. Baker Hughes has the knowhow to help start up unconventional production in Mexico. We are close to the US so we can bring in lessons we have learned from Eagle Ford and the Permian Basin. There are other jurisdictions doing well on tapping up shale reserves, such as China and Argentina, but in terms of implementing technologies and achieving production on a mass scale, Mexico is going to be a very natural fit for Baker Hughes. One of the lessons learned from Corralillo is that once we decided to move ahead with fracpoints or plug and perf, it was very quick to move equipment and technology across the border. We did not have to put our equipment in a container and ship it by sea as we did for Argentina. NAFTA means the movement of goods is very fast and Baker Hughes can count on close support from Corpus Christi and Houston. In the long term, the flow of oil and gas is going to be determined by the evolution of the economic situation. Currently, oil flows north and gas flows south but that could change depending on production. As gas production in South Texas declines, or if Mexico begins being serious about shale gas drilling and production, the direction of these flows may change. Being a neighbor to the US creates a very enviable opportunity for Mexico.

Q: Which role will Mexico play in your global strategy?

A: The Energy Reform should turn the tide in Mexico. Its advantages include an increased level of investment and its privileged geographical position. If an operator, such as a Houston-based IOC, decides to operate in Mexico, its adaptation process will be relatively smooth as communication can be conducted easily. Technical support and project design can be exchanged between the two bases of operation, something that cannot be done when operating in China and Malaysia.