Luis Vázquez
Chairman of the Board of Diavaz and President
Mexican Natural Gas Association (AMGN)
View from the Top

Results Needed to Reopen Block Rounds

Mon, 04/01/2019 - 18:23

Q: What role will Diavaz and the private sector play in increasing the country’s production?
A: Mexico produces 1.7 million b/d. The goal is to bring Mexico’s production to 2.4 million b/d. Those numbers represent the same production level as previous years. Mexico should produce a minimum of 2.8 million b/d by 2024. PEMEX and the government say that by October 2019 the new fields starting production will start to increase their oil output.
The private sector has committed to producing 280,000 b/d. The president has said that there will be no further block rounds until the government sees a positive result from the previous rounds. There have been 120 contracts awarded since the Energy Reform was enacted and so far, production only increased 20,000 b/d. We expect that the private sector will increase production in the following months, which will open the possibility to discuss new rounds with the government. We expect this to happen within 10 months. In the meantime, PEMEX will invite the private sector to participate in service-field contracts called CSIEEs. Diavaz will be involved in these projects and we hope to be awarded some contracts. There is a large appetite for investing in the Mexican oil and gas sector and Diavaz wants to be a player in the country’s future energy development. Diavaz will also look at taking its E&P division public in a couple of years.
Q: What is Diavaz’s experience participating in previous PEMEX projects and what were the main characteristics PEMEX was looking for in a partner like you?  
A: We bid for the engineering and construction of marine infrastructure contract for PEMEX. When tendering a contract, PEMEX looks for several characteristics among participants. First, the company needs to be Mexican or have a great amount of local content. We bid on the A and B clusters of marine infrastructure, placing second in both. Unfortunately, the times stipulated to carry out the work were too tight and there was a huge LD penalty for any delays. We put part of the LD into the price tag, which resulted in a higher cost.
Q: What is the status of Diavaz’s fields and what strategies will provide the government with the desired results?
A: In our services division we are developing interconnections at a number of marine platforms and we are providing reliability and integrity maintenance to PEMEX’s Dos Bocas terminal, which is one of the largest in the world. Approximately 1.3 million b/d go through the terminal. In our E&P division, we have four fields assigned to us and the company is producing 18,000 b/d. We are second only to PEMEX in petroleum production in Mexico, followed by Petrofac and Renaissance. We operate four fields under contracts awarded by CNH: Catedral in Chiapas, Barcordon in Tamaulipas, Ebano in San Luis Potosi and Miquetla in Veracruz. Diavaz believes that in three to four years we will be producing 50,000 b/d from those fields. Another two fields, Cuervito and Fronterizo, are service contracts with PEMEX. At our E&P fields, part of the production goes to the government as Mexican crude and we keep the other part, which is shared with our partners.
Q: What types of contracts are most profitable for the federal government when incorporating the private sector in E&P?
A: From 2006-2012, operations in the Ebano field were carried out under a transactional service contract with PEMEX. From 2012-2018, PEMEX switched the contract model to an incentivized contract, which means that Diavaz will recover 75 percent of all expenses and receive US$8 per barrel. In the last stage, the contract migrated to a 30-year production-sharing contract with CNH in partnership with PEMEX under the scheme developed through the Energy Reform.
We studied which of the three models was the most profitable for the government. Our analysis proved that the last scheme developed during the Energy Reform was by far the most profitable as the government would receive the greatest profitability from the income plus a percentage in income taxes, while taking zero risk and making no investment. In the end, this scheme is not only profitable for the government but also for the private sector. It is a win-win situation.