Positioning to be a Pure Mexico PlayTue, 11/07/2017 - 13:43
Q: What are Renaissance Oil’s strengths in the Mexican market?
A: I believe Renaissance Oil is the only publicly listed oil company that is solely focused on Mexico. As a result, one of our strengths is that our whole budget is focused on Mexico. We are not distracted with operations in other countries competing for a part of that budget. One result, and this frankly is by design, is that Renaissance has become the flagship Mexican-Canadian oil and gas company for Mexico, particularly for the financial community. Many of these fund managers prefer to invest in a company that is solely focused on Mexico.
Typically, if they want a real solid exposure to the country and its underdeveloped hydrocarbons base, they are not going to buy stocks in an oil and gas major because whatever success it has is not going to move the needle. Therefore, they have to buy stocks in a smaller company, where they prefer to see focus. As a result, being a pure Mexico play is one of our strengths and it has evolved the way we designed it to evolve.
Q: Are those strengths reflected in the company’s human capital?
A: From the beginning, we did a study of where the opportunity base lies in onshore Mexico. We deduced that the greatest opportunities were in the mature fields and then in unconventionals. Among the unconventionals we feel that the upper Jurassic shales comprise a world-class play. I have been involved in the unconventionals side of the business since 2002, when we started producing natural gas from coal. That evolved into shale and I have been an unconventional player for about 15 years now. With that in mind, we saw that this is a potentially worldclass opportunity and we needed a world-class technical team to help us develop it. That is why we focused on the former Mitchell Energy team who are the people who first really cracked the code to liberating natural gas in the Barnett shale. Nick Steinsberger, the drilling engineer who invented the slick water fracturing that is now used all over the world, is part of our team. We were able to convey to Nick and his team the opportunity in Mexico with regard to unconventional resources and mature fields. They became very excited about being part of what could be potentially the next world-class shale play and as a result they joined Renaissance.
Q: How do you rate the potential of unconventional resources in Mexico and how can this potential be unlocked?
A: We are convinced that the upper Jurassic shales in the Tampico-Misantla basin will be a commercial play that will rank up there with the Eagle Ford, the Permian and other world-class plays. We have done over two years of work on this play, including core analysis, in-depth SCN imaging and microscopic imaging of the rock.
We have enough knowledge and a track record of success to know that the Tampico-Misantla basin has all the characteristics of a world-class shale play. But commercially, to launch an aggressive development of a shale play, the right fiscal terms are necessary, and these must be different for unconventionals and conventional resources. Renaissance has been very much involved on behalf of AMEXHI in talking with the Ministry of Energy and the Ministry of Finance regarding the design of the right fiscal terms. Beyond that, the right contract terms are required. A contract for unconventional resources needs to be different from a regular contract if it is to facilitate a proper and aggressive development of shale.
Another issue is that many wells have to be drilled for unconventional resources as they are tight reservoirs. Therefore, a streamlined drilling permitting process is very important as well as sensible water regulations. We understand this is a new oil and gas regime and the authorities are trying to do things right, but the present permitting process is designed primarily for offshore wells where it is too comprehensive and too cumbersome for onshore because onshore production requires many more wells.
Q: Can you outline the bidding process for the Chiapas blocks you won by very thin margins on additional royalties?
A: We have a brilliant technical team and I think we have a very good idea of what the performance of the new wells is going to look like on these Chiapas blocks. We are a small, lean operator. We do not overspend and as result we feel we can make a small profit on these areas. We know we are not going to make a lot of money because we bid fairly high royalties to win them. Back in December 2015 when we won the Chiapas blocks in the licensing round we had another priority, to be an early operator which was initially more important than making a lot of money.
We are in Mexico for the long term and there is a whole new regime with new regulations and new laws. There is a very steep learning curve and we knew we needed to become a competent operator with small blocks like the ones we won in Chiapas. We acquired those blocks as our learning ground, knowing that bigger deals were yet to come. Our goal was to be an efficient operator in Mexico before we took on the big deals. These acquisitions led to the deal with Lukoil. The Amatitlán field in our view is in the sweet spot of the unconventional play in the TampicoMisantla basin. It was always high on our list of priorities. Lukoil was looking for three characteristics in a partner; it needed a Mexico-focused operator, it needed somebody with unconventionals expertise and it needed a company that is a lean operator and that can make decisions quickly. We tick those boxes, but it all started with Chiapas.
We are looking for deal flow and expect to expand our operations significantly. Our goal is to be the dominant onshore operator in Mexico aside from PEMEX over the next five years.