/
Analysis

Productivity Increase Creates Urgency for Renovation

Tue, 01/21/2020 - 16:38

The economic impact from PEMEX’s production decline led the NOC to forego infrastructural maintenance to a certain degree. As a result, existing platforms, production pipelines, and other upstream infrastructure are often not in optimal conditions. Coupled with the limited investment in new infrastructure facilities in recent years, infrastructure investment will be crucial to meet the vastly higher production target laid out by the López Obrador administration. 
The government’s goal to increase production levels means infrastructure deficiencies must be addressed, and urgently. Leaving them unattended could create obstacles down the road. PEMEX will have to guarantee much of the investment for development, especially since most of the infrastructure depends on the NOC. The operator is putting its efforts into the development of 23 strategic fields and future development of another 22 new fields. 
Work plans being evaluated by CNH focus on shallow water and onshore regions. In addition to these fields, SENER’s reassignment of Round Zero blocks to PEMEX after CNH guidelines originally dictated that they be removed from the NOC’s portfolio creates an additional focal point for necessary investment. 
National companies are also taking on the challenge, and they have the capabilities to compete with international entities. Perhaps the most notable example of this took place in January 2019, when PEMEX awarded a majority of what they called their “Package A” and “Package B” contracts for the construction and installation of shallow water drilling platforms to Permaducto and other companies belonging to the prominent Mexican conglomerate of Grupo Protexa. Another prominent example is the fact that PEMEX awarded Carlos Slim’s Grupo Carso, through its oil and gas subsidiary Operadora Cicsa, a contract worth over US$318 million in October 2019. The agreement covers the EPC work and delivery of two marine infrastructure units, MALOOB-E and MALOOB-I, which will be part of the infrastructure growth and development of the shallow water field that for the last decade has come to replace Cantarell in strategic importance: Ku-Maloob-Zaap. 
In October 2019, McDermott delivered Abkatun-A2, the largest oil platform built in Mexico in the last 10 years. It is destined to be a part of what is also an essential shallowwater asset whose present value is outmatched only by its future potential: Abkatun- Pol-Chuc. Alfredo Carvallo, McDermott's Director General for Mexico, goes into detail regarding the company's commitment to Mexico. “McDermott manufactured Abkatun-A2 completely in Mexico and only the concept was engineered by a group outside the country. One of the major challenges was to ensure that all packages arrived in a timely fashion so that the sequence of fabrication remained on track. When materials do not arrive on time, our building process must be rearranged and this can cause problems. The fact that McDermott has the largest welding school in Mexico, located in Altamira, meant we could control much of the process. Some 2,500 employees were involved in Abkatun-A2 alone and we far exceeded local content requirements. One of our major achievements during this build was the zero-count accident rate.”
Other infrastructure developers, such as Malaysia's Sapura Energy, share a positive outlook for the near future. “Mexico has fantastic knowledge of the shallowwater supply chain,” says Bruno Picozzi, Sapura Energy’s Area Manager for North and Central America. “There are several local building yards with capacity to cover shallow water requirements and there are several service providers that have worked on these developments for a long time. Mexico has great professionals who have been working in the industry for many, many years. It is one of the largest shallow-water oil producers in the world. The human resources basis in the sector is there.”
Despite the suspension of bidding rounds, private operators will require infrastructure projects to develop their existing fields and new discoveries. These projects are expected to take center stage throughout the end of 2019 and the entirety of 2020. For example, Eni’s landmark entry into production, the first of its kind in Mexico by a private operator, has proven the viability of  growth for the industry despite the administration’s skepticism. Picozzi and Carvallo are well aware of this situation, since their activities and projects now include significant work for private operators in Mexico: McDermott worked on platforms for Eni and BP, and Sapura has an offshore supply ship also working for Eni. 
One of the valuable elements that private operators have introduced and will continue to introduce to Mexico’s infrastructure development is technological variety. Eni’s use of an FPSO and the increasing interest in drillships, subsea field development and floating productions systems will ensure that the most efficient options are being incorporated to make incoming upstream growth as cost-efficient as possible. 
There is no doubt, then, that private operators will continue to be an extremely relevant part of the dialogue regarding the industry’s infrastructure projects. Carvallo says the suspension of bidding rounds will not halt activity. “If activity continues and discoveries are confirmed, then Mexico will remain an attractive market, not only offshore but also in the midstream. If there is little interference, risk to private companies remains small. The attractiveness of the market can be seen in the level of investment and the size of the development plans that have been approved.” 
While the role of private operators in field development is decisive, public sector contracts will dominate the short term landscape given this administration's ongoing desire to jumpstart oil and gas activity. Although the government has an interest in promoting entrepreneurship and new ventures through its infrastructural tendering processes, it is also true that offshore upstream infrastructure is too nationally strategic to experiment with. As a result of this, long standing experience working with PEMEX will play a key role for Mexican private players looking to secure one or more of these larger field development contracts, perhaps an even more important role than traditionally prioritized characteristics such as broadly available access to equity or financing. The aforementioned contracts awarded, through private invitation, to Grupo Protexa are a prime example of this principle. Originally founded in 1945 and involved in the oil and gas sector since 1955, Protexa has played a fundamental role in the development of the entire Mexican offshore sector; as Rodrigo Lobo, its CEO, points out: "most of the leading Mexican offshore service companies were either spinoffs from Grupo Protexa, were created by former Grupo Protexa employees, or were started in partnership with Grupo Protexa. We brought the first pipelaying vessel, the first jack-up drilling rig and the first dynamic positioning vessel to Mexico. We conducted the first offshore platform installation in Mexico and constructed the largest platforms in the country. We were the first company to build computers for use in Mexico’s oil and gas sector, which we started doing in 1974. We were also the first company in Mexico, besides Telmex, to establish our own cellular phone network in the country’s northeastern region.”