Perspectives on Integrated Service ContractsWed, 01/25/2012 - 14:41
I see the first round as an undeniable success, as we were able to bring money to Mexico and partners to work with Pemex...
Juan Carlos Zepeda
I see the first round as an undeniable success, as we were able to bring money to Mexico and partners to work with Pemex. It was a success because it was the first round in a new legal framework, which will always entail a learning curve. I am sure the second round will be easier and some things will be improved, and we will be able to attract other kinds of players. It was also successful given the relatively small size of the fields. It is understandable that Pemex didn’t want to try with larger fields, but now for the second round, we have more attractive fields, some in shallow water, and some larger onshore areas. Because these fields are more attractive, I expect to see a different profile of company interested in them. My hope is that for the second round, we will start to see mid-size independent oil companies showing interest in operating the contracts.
I feel that the integrated service contracts are a good system, but they need a little bit more polishing and tuning in order to make them more interesting to companies. One key strategy for achieving this is talking to the companies that won contracts in the first round and asking how to improve them. Pemex is beset by legal limitations regarding its contracts, but there are options for working within the existing framework to make it more attractive for the partners that the NOC needs. One option is to make the areas available bigger, in order to create economies of scale; another is to adjust the taxation system in order to help companies recover their money faster. The changes between the first and second rounds show that Pemex is learning, and with experience the company knows, for example, that it should avoid a situation where a company that cannot meet the terms of the contracts should not be allowed to win.
The business case for deepwater involves a lot of uncertainty and very long lead times. When companies start to invest, they only see production after eight or nine years, depending on water depth. Companies that operate oshore will take most of the risk, since the contracts, by design, cannot give price upsides to companies due to legal restrictions. So Pemex needs to find a way to balance risks. Since reward is restricted, as our Constitution doesn’t allow us to go any further, Pemex needs to consider the downside. That will be the main issue. On the other hand, I think that these contracts are very well suited for shale gas, Chicontepec and mature fields where the logical risk is lower than in deepwater.
Mexico has already taken steps to modernize its oil and gas legislation, and the national debate to determine where they want to go in the future is likely to continue. We will evaluate the opportunities as they are presented and participate in these projects if they are globally competitive. A service contract has specific challenges as a vehicle for investment in oil and gas development, namely the challenge of obtaining the proper balance of risks and rewards and a natural alignment between the parties in the presence of risk. It is something that a concession agreement or a PSA do much better inherently
The introduction of the integrated service contracts will inevitably mean the arrival of more and more international players to Mexico, but one of the biggest challenges they must face is learning to communicate in the Mexican market, particularly with Pemex. Pemex is unlike most other major oil companies in the world, and even for us, learning to deal with their processes and best work with them has taken more than 38 years. Therefore, the companies that come to Mexico as a result of these service contracts will very quickly have to learn how to mexicanize their business, in order to improve relations with their partners, providers and with the community.