Pablo Medina
Analyst for Latin America Upstream
Wood Mackenzie
View from the Top

Review of Mexico's Road to Exploration

Wed, 01/22/2014 - 10:25

Q: What are the advantages Mexico has against other markets in terms of attracting international companies?

A: Mexico has an incredible range of hydrocarbon opportunities. Besides the shallow water and the large onshore fields, it has tight oil in Chicontepec, deepwater potential in Perdido, and EOR possibilities in marginal assets, among others. This diversity will allow companies of differing skillsets to enter the country and thrive in their areas of expertise. The key factor for IOCs will be the economic terms offered by the new fiscal regime and the materiality of the opportunities. Thanks to the Energy Reform, regulators are now able to offer fiscal regimes such as profit-sharing, production-sharing, and licenses. As such, they have the flexibility to pick the most appropriate fiscal regime on a round-by-round basis. We believe that Mexican officials are well-aware of the need to compete for capital on a global scale through attractive fiscal terms.

Q: What are the roles of Round Zero and licensing rounds in maximizing short, medium, and long-term production?

A: Round Zero will build a new paradigm for the oil industry in Mexico. The short-term licensing strategy should achieve two main objectives: accelerating activities in deepwater and increasing production in the short-term. According to our experience, deepwater projects have an average lead time of seven to ten years. Using this average, discoveries such as Trion or Maximino could start producing early in the next decade. The clock is ticking and there is no time to waste for Mexico in terms of deepwater exploration. PEMEX has done a great job in stabilizing the oil production over the last four years despite the mature condition of most of its producing assets. In order to increase production in the short-term, the focus will need to be on EOR in marginal assets, extra-heavy shallow water oil fields, and horizontal drilling in Chicontepec. All these factors should dictate the opportunities made available in the first licensing rounds.

Q: What will be the impact of allowing PEMEX to share costs and risks in deepwater exploration activity on the company’s budget availability for other activities?

A: PEMEX’s 2014 budget allocates close to US$1.2 billion to deepwater exploration, from which US$800 million will go to Perdido. Deepwater exploration represents 5% of PEMEX’s E&P CAPEX, which is not enough to explore one of the most promising hydrocarbon regions in Mexico. The ability to share risks and costs is an industry standard in deepwater projects and the oil company will benefit from it. PEMEX will be able to direct this freed up capital to the assets that can deliver better returns, such as development drilling in Litoral de Tabasco and applying EOR in its large mature assets. This might also imply an increase in deepwater exploration.

Q: At which stage of shale gas development is Mexico?

A: There is vast potential in terms of the shale resources in Mexico and PEMEX estimates prospective resources at 150tcf. Nevertheless, Mexico is still in the infancy of shale exploration with fewer than 24 wells drilled throughout the country. Of those, one produces oil and two produce condensates. There will be a particular focus in appraising the areas with liquids-rich prospectivity, given their better economic outlook. Challenges such as security, access to water, and infrastructure will need to be addressed before any full-scale shale development takes place. Increasing the country’s gas production is of strategic interest for Mexico given that it currently imports more than 2bcf/d. It will be interesting to see if PEMEX will keep its unprofitable non-associated gas projects in order to contribute to Mexico’s overall gas balance.

Q: What is the importance of transparency in terms of geological information after the implementation of the Energy Reform?

A: Having transparency is a mandatory trait if we want to have a competitive market with IOC participation. Access to subsurface information will be critical for companies to assess the prospectivity of Mexico’s hydrocarbon regions. CNH will be responsible for providing access to this information. As a result, it will be very important for the regulators, both SENER and CNH, to have the necessary amount of human resources with the adequate experience to support the implementation of the Energy Reform.

Q: What tangible changes could be expected in the Mexican oil and gas industry in the aftermath of the Energy Reform?

A: The key story for 2014 will be the implementation of the Energy Reform. As part of the process, the secondary legislation will determine how attractive the opportunities are for investors. It will be a busy year in which many moving parts will need to be adjusted to work in concert as part of the larger learning process. In our view, Mexico has an enormous growth potential and it has a once-in-alifetime opportunity to attract the top companies in the world. There will be growing pains but as long as Mexico follows international standards and offers competitive fiscal terms, investors will turn their heads towards the country