Onshore and Unconventionals Beckon for Mexican Veteran

Q: Grupo Diavaz has had a long history in Mexico. How do you think 2018 will play out in Mexico’s oil and gas sector?

A: The Energy Reform has not been developing as fast as we thought it would. The price of oil dropped and activity followed suit. On the other hand, the licensing rounds have been an international success and there has been more participation than we expected. Mexico held presidential elections in July 2018, which of course is significant, but I do not think that the outcome will have a negative impact on the fundamentals of the Energy Reform. In 2018, the Mexican energy market will be consolidated. People are starting to invest, although at a slow pace.

In the onshore arena there has been little activity and only two or three wells have been drilled in the last year and half. Bureaucracy has slowed processes and getting a drilling permit can take as much as a year. Of the Round 1.3 winners, the only company that has drilled onshore is us. We drilled a well in Tamaulipas and another in Chiapas. Those are the only two wells that have been drilled onshore so far. Offshore has been a little better and about 10 wells have been drilled by different companies.

We think it is going to be an important year, given the presidential elections and the consolidation of the Energy Reform. Companies will be drilling more, investing more and generating more jobs for Mexicans. It is important that Mexicans see the benefits of the Energy Reform since the main effect for consumers has been higher gasoline and LPG prices.

Q: Diavaz has traditionally partnered with many foreign companies. What do you look for in a partner? A: We have met companies from all over the world. We would like to operate offshore and are looking for a partner that has offshore experience. We are also interested in a partnership for the development of unconventional resources. We will be looking for a partner to work with and from whom we can learn how to properly produce from unconventional plays. We have a good reputation globally. International companies know we are serious, that we like to accomplish things and that we like to learn. We offer them in-depth knowledge of Mexico. We have a great deal of data and have been working with PEMEX for 45 years. At one point we had a partnership on seismic studies with CGG and we have geological information from that period.

Q: How would you describe your experience with the migration of your CIEPs contracts?

A: The migration of our contracts should have taken place three years ago. The reasons we have been given for the delays include regulation, misplaced commas and other minor details that can take weeks to resolve. Three years ago, there were 22 contracts that were eligible for migration. If those 22 had been migrated three years ago or two and a half years ago, they would be producing around 100,000-120,000b/d from 20 wells. But right now, of 22 wells, only two are producing under the new contract scheme, and those were migrated at the beginning of 2018, not three years ago. We think the authorities are learning to be more flexible about regulation and to consider what the purpose of regulation is. When our migration process was delayed, we stopped investing. Three years ago, we produced about 12,000-13,000b/d from our Ebano field. Now we produce 9,000b/d. We will not drill a single well before the migration of this contract is finalized because investing in it beforehand is a waste of money.

Q: Do you see Diavaz becoming a publicly listed company at some point?

A: I think our exploration and production arm, DEP Petróleo y Gas, might become a publicly listed company because of the financing required for those activities. DEP Petróleo y Gas could become a public company in two or three years, in all likelihood on the TSX, but that is a decision that we have not made yet. Our only reason for an IPO would be to have access to more capital. We need to encounter new forms of financing to optimally develop the fields we have.