Merlin Cochran
Director General
AMEXHI
/
View from the Top

Private Players Prove Their Worth With 100Mb/d Milestone

By Conal Quinn | Thu, 07/21/2022 - 11:46

Q: How is AMEXHI’s role in the oil and gas industry evolving in the wake of the pandemic and the return to business as usual as Mexico looks to meet ambitious production targets?

A: AMEXHI’s role, from its inception, has been to serve as the voice of the industry. Our vision and mission have been to promote the oil and gas industry as a development pillar for Mexico, to maximize the potential that is there under our fingertips. In this sense, our role did not change over the course of the pandemic. Rather, in this new situation, our role as the industry’s go-between with the government solidified given the many uncertainties. One issue we became aware of is that the industry needs to be more integrated going forward. Throughout the pandemic, we helped the industry navigate the challenges and changing context for what business as usual entails.

Q: How can the federal government better align the interests of the private sector with its own goal of energy sovereignty?

A: Through gas production. Today, we have a dependency of 72 percent on gas imports from the US. This creates a somewhat contradictory scenario in terms of the push for energy sovereignty because we are dependent on a single import from one source. The US is liquifying its gas and exporting more, specifically to countries looking to diversify their energy inputs considering the recent upheaval in Eastern Europe. For Mexico, this means the price of liquefied natural gas (LNG) is getting closer to that of natural gas, as per Houston Ship Channel and Henry Hub pricing, the gas markers we use to import gas here through pipelines to Mexico.

To put this in perspective, the spot price of natural gas that we pay in Mexico has tripled while the margin between LNG and natural gas has shortened. This is a major concern for us since, as a major manufacturing country, a big part of our energy consumption for manufacturing comes from gas. Therefore, gas prices have a knock-on effect on Mexico’s GDP. Producing more natural gas is therefore not a nice-to-have but a matter of national interest. In 2021, Texas had a winter blackout, which halted gas imports to Mexico. Banxico was able to show the effect on GDP from just a couple of days of gas shortages. This was just a couple of days’ worth of supply disruptions but it had a massively negative effect, especially on the northern states of Mexico. Now, we have a 300 percent increase on the price of gas and there are no other means to diversify consumption, so one can imagine the impact.

Q: With the success of Eagle Ford just across the border, how could unconventional resources become a big opportunity to improve the natural gas production that Mexico is missing out on?

A: Unconventional resources are absolutely a major opportunity. I do not want to sugarcoat it: this is a completely missed opportunity. To put this into perspective, the US produces around 20 times more gas than what Mexico produces, if we could just increase our production 4 times considering the joint reservoirs you mention, we would be completely gas independent. Geology is not determined as the Río Bravo does to the border. We are sitting on a gold mine and we are not doing anything about it.

Q: How could the recent success of IOCs like Eni in Mexican waters influence the government to rescind the suspension of new bids?

A: The industry reached a milestone when CNH reported that private operators are now producing 101Mb/d from different types of contracts. I hope that the 101Mb/d is enough to show the Mexican government that this methodology makes sense, as it also includes knock-on effects, such as royalties. Under our law, the more the price of oil increases, the more royalties private operators have to pay to the government. Today, the government takes an average of 74 percent from every barrel produced, which is by no measure an insignificant figure and goes to show that bidding rounds make sense. Twenty-one companies make up the current private oil production, coming from 32 contracts handed out in 2015. Moreover, they include small, medium-sized and big companies. We need them all to capitalize on all the opportunities out there, from unconventional plays to shallow water and deepwater.

If any company is looking after some part of the value chain, we are in a good place. This is what we need the bidding rounds for. Mexico will not be able to attract all the different players if the industry only focuses on one type of contract. Following its election, the government stated it would review the contract to ensure there was no corruption. The government then said it would decide what further steps to take depending on production results. This was a prudent start, one that AMEXHI applauds: it is much better to work with a government that takes measures to ensure the industry’s integrity and uses production results as a barometer. However, now that these requirements have been met, let us turn the page to see what else the private sector can do.

Q: Given major successes on the American side, what does AMEXHI make of the prospect of PEMEX expanding into deepwater exploration in the Gulf of Mexico?

A: There is a prevalent perception that PEMEX is not a deepwater player. However, I do not agree with this. PEMEX has drilled more than 50 deepwater wells in Mexico. Therefore, by order of magnitude, if there is anyone with experience in Mexican deepwater, it is PEMEX. The reason why consortiums are so common in deepwater is the sheer amount of capital investment required to drill wells. If we could have different players working together and making joint decisions based on international experience to determine how best to develop a field, that would be the best outcome we could ask for.

Q: What would you say represents the current biggest opportunity for the industry?

A: The government is sitting on hundreds blocks that are not being developed by anybody, and can be seen on a document called “the five-year plan”. Blocks that require secondary recovery (EOR), conventional development, exploration, you name it, there’s a block for every different type of expertise. Having said that, EOR is another short-term opportunity for Mexico since we already have proven reserves there and we know where the production zones are. It is just a matter of transitioning.

Natural gas can be produced by conventional or unconventional means. While data is primarily indicative, 53 percent of Mexico’s prospective resources lie in unconventional developments. If the country says no to unconventional resources, it is saying no to over half of its oil and gas future.

Q: A recent BBVA report indicated that efforts to rapidly up production rates were causing Mexico’s 1P reserves to quickly deplete. How can this be ameliorated?

A: 1P reserves are the ones currently producing, so the faster you produce the faster you reduce reserves. The first milestone that a field has after being granted and drilling the first well is the declaration of reserves, which goes beyond the exploration phase and shows an understanding of the true potential of a discovery. This indicates the possibility of extracting the gas or crude below. Examining the graphs of reserve replacement, the reserves are dwindling because the rate of reserve replacement has not been maintained. This is crucial, since if the industry does not explore and seek new discoveries, the country will deplete its reserves. What reserves actually mean, as well as their impact, is an issue that is not discussed nearly enough. To return to the figure of 100Mb/d, this is merely the tip of the iceberg; there is so much more underneath.

Q: What message does AMEXHI wish to give out to operators active in the Mexican market for the year ahead?

A: This industry has proven its worth and the industry is committed to Mexico for the long term. We hope that there are many opportunities in the future, otherwise Mexico will enter a phase of consolidation that is in nobody’s best interests. AMEXHI hopes that the results in terms of production, royalties and even social license have proven this. For example, private oil and gas companies have worked with 120 different communities and such engagement is not a contractual obligation. After seven years working in Mexico, we have created +50,000 jobs directly and indirectly, in addition to the opportunities created for local suppliers, which have increased substantially. Our goals remain firm, and we will continue making the oil and gas industry a key pillar for Mexico’s development.

 

The Mexican Association of Hydrocarbon Companies (AMEXHI) is a non-profit civil association founded in the wake of the Energy Reform and CNH’s bidding rounds, which brings together the main oil and gas investors and operators in Mexico.

Conal Quinn Conal Quinn Journalist & Industry Analyst