Edgar René Rangel Germán
Former Commissioner
View from the Top

Paving the Path for PEMEX's New Association Schemes

Wed, 01/20/2016 - 16:19

Q: Which role do you expect the farm-outs to play in the development the Mexican oil and gas industry?

A: I would like to highlight the huge importance of farmouts, as the silver bullet for PEMEX. I have been saying this for many months, and now people are starting to agree, but we left too much in PEMEX’s hands during Round Zero. Everyone wanted a smooth process, but now realize that PEMEX cannot handle this volume. We do not want to take this from PEMEX, but this year’s announcement of stringent budget cuts will imply a reduction in production and reserves. Therefore, the investment capital, expertise, and technology must be provided by partners. PEMEX has to come up with an aggressive farm-out strategy because, despite the fact that the hydrocarbons volumes are there, they cannot be exploited for decades without the necessary investment. Mexico has reserves until 2100, and it would be beneficial for the country to accelerate the exploitation of those reserves, which will require an increase the country’s execution capacity. This is why farm-outs are the key. PEMEX must decide which fields it can exploit independently and where it requires partners. The fields that PEMEX does not need should be returned to the state to be included in the tenders, but this is PEMEX’s decision. In my opinion, it would be prudent for PEMEX to farm out the EOR of Cantarell or KuMaloob-Zaap, because these reserves would go untapped in either case without the help of private investment, meaning that it can only create a value for PEMEX.

Q: Why has it taken so long for PEMEX to launch its farmouts, and how do you see this being resolved?

A: I attribute this to lack of capabilities and timidity. There was the flurry of the reforms, after which PEMEX announced it would carry out 12 farm-outs, but this was over a year and a half ago and we still have not seen any progress. There was also no explanation of why these blocks were chosen, and I was surprised that so few were offered when there was the opportunity to farm out 50 fields, meaning the NOC would still have another 300 that it could operate independently. I suspect that this decision lay in the fear of managing so many contracts concurrently, and the lack of knowledge and experience regarding the entire farm-out process. The reform was met with a lot of resistance and, at some point in those discussions, PEMEX suggested following the Malaysian-Indonesian model that would allow the NOC full control over the tenders, farm-outs, and all other factors. Thankfully, the legislator separated this responsibility and allocated it to CNH. Although this is purely speculation, I believe that PEMEX resents the fact that CNH is overseeing the bidding for the farm-outs.

Q: What would be your recommendation for the new Director General of PEMEX in order to rectify these issues and get the farm-out process back on track?

A: I would advise the new Director General to allow CNH to support PEMEX. It is unthinkable that anyone from the government side would not want more reserves and higher production levels. Why would we not help PEMEX? It does not make sense that there is a lack of trust over this issue, and it bothers me that some people criticize the Ministry of Energy and CNH for the fact that the farmouts have not advanced. We have the technical expertise necessary to manage the farm-outs, although PEMEX has more accurate information due to the fact that the information transfer has not been completed. Therefore, I would like 2016 to see PEMEX and CNH collaborating to finally launch a large number of farm-outs.

This is mere speculation, but I have seen that the old school establishment in PEMEX see the Minister of Energy, the Undersecretaries, and the Director General of PEMEX itself as temporary players within the sector. They are the owners, they are the petroleum engineers, and they have been working at PEMEX for many years. They know that we are leaving at the end of an administration, and this is one of the more pronounced problems. Changes must be made, and the new Director General seems to intend to make considerable modifications. On the other hand, PEMEX is extremely militarized, which could be used to González Anaya’s favor by ensuring that this segment is on board with the reform process. I have been in the industry for 20 years, and I am witnessing a low level of motivation in PEMEX employees, with people losing their jobs and investment being reduced.

It is necessary to convert PEMEX into a more robust, compact, efficient, productive state-owned company. The public needs to realize is that the NOC is not a branch of the government or an employer, but a machine to generate money for the country. For some reason, this is viewed as a negative aspect, despite the fact that we have all received something from the NOC, whether that is scholarships, infrastructure, or health care. I believe it will be necessary for PEMEX to cut between one third and 50% of its workforce in order to remain a viable company. Examples can be drawn from the number of employees retained by similar oil companies, such as Saudi Aramco or Iran’s NOC, as well as those of IOCs like Exxon, Shell, and Statoil.

Q: As opposed to the farm-out process, PEMEX does controls the migration of the COPS and the CIEPS and progress is slow in this area as well. How would you explain this?

A: In my opinion, the economic benefits that could be brought by the contract migrations remain unclear, and this reduces the urgency to implement the CIEPS. For PEMEX, the fiscal terms are more favorable, and new operators will be able to contribute to new technology, but for me, the added value in terms of production is not substantial enough to create an incentive for PEMEX. There is also uncertainty regarding the preferred operator, and in a recent presentation, it was suggested that the NOC is considering switching operators, since companies that can see the benefits the CIEPS present have since approached PEMEX with more favorable terms. I believe PEMEX is still assessing its options for the migrations, but I agree that the process should have moved slightly faster.

Q: What do you consider to be the main successes and failures of Energy Reform to date, and why?

A: In terms of successes, I would pinpoint R1-L02, not only because I was in charge of recommending the fields to the Ministry of Energy. This round showed the world that we listened to the industry’s feedback, making adjustments from R1-L01. We sent the message that we listened, and we attracted the operators that Mexico wanted for R1-L02. The winners are professional companies with solid reputations. This is extremely important, especially since they can introduce new technologies and create a benchmark for PEMEX. The tender was competitive, the bids were solid, and R1-L02’s winners are already working with CNH to prepare their plans. R1-L03 was a fantastic demonstration of the presence of an appetite among Mexican industry to operate in the Mexican landscape. Eventually we will see these companies get their feet wet in shallow water.

I believe that Round One in general has been extremely successful, and it sends the message that Mexico is truly a ripe environment for investment. Large companies will be coming to the country, with supermajors expected to participate in R1-L04, and smaller companies who recently established a presence in the country. Another major success of the energy reform is the boom in seismic surveys. So many companies are investing their own money in multi-client seismic surveys because they believe they will be able to sell this information. One of these companies has disclosed to us that they have 60 potential clients. The geographic location of Mexico is privileged. This is one of the most prolific, privileged geological basins, yet it is largely unexplored. A reservoir in Mexico can have exactly the same geological conditions, volumes, and API gravity as a reservoir in a more hostile country, and Mexico’s environment could make the difference between investors deciding to devote their attention to the country. In general, these factors are accurate metrics of the commitment to invest. As of yet, I have not witnessed many failures, but the lack of speed of the farm-outs is certainly a negative aspect of the reform. In R1-L01, there was a lot of room for improvement, but I would not call it a failure. However, I am glad we started in this way, and that the fields from R1-L02 were tendered in a more effective way and were not used as a learning experience. Ultimately, the reason for the success of R1-L02 was because we made changes based on the feedback received from R1-L01.

Q: Bids were won for 25 blocks in R1-L03. How many contracts from this round do you expect to be signed?

A: I believe that almost all of them will be signed, because we are in contact with the companies and most have their files almost complete in terms of the required paperwork. It may be the case that, eventually, the companies will try to negotiate a pass into the second place of the tenders, but from what we see, the companies are all extremely willing to participate. We have been running some seminars to pass on information regarding the baseline and environmental studies, as well as other potentially complicated aspects, so I predict that the majority of the companies will ultimately sign those contracts.