Alberto de la Fuente
President and Director General
Shell Mexico
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View from the Top

Shell Founds its Black Pearl

Wed, 01/20/2016 - 15:22

Q: Many people would blame the results of R1-L01 on poor terms and conditions. What contributions has Shell made to the improvement of this process since then?

A: Mexico lacks the breadth of knowledge required to develop the oil and gas industry, which is why I am surprised by the government’s ability to learn so quickly, adapt to best practices, and continuously reshape the contracts and bidding guidelines to match the industry’s needs. I believe the authorities’ rapid reaction time has had a positive impact on the number of companies submitting bids, as well as the quality of those bids. Ultimately, the government has benefited from that, because as a more competitive environment is being fostered, more companies are interested in participating and placing high bids. Shell contributes a small share like everyone else, and does so through industry bodies such as AMEXHI or COPARMEX. We share our views on local content and on how these regulations were developed elsewhere, attempting to share our experience through the various channels established by the Energy Reform.

Q: What are the predominant concerns regarding the terms and conditions established by the authorities for the deepwater bidding round that still need to be resolved today?

A: The quality of the contracts has evolved significantly since the initial production-sharing agreements were released in December 2014. Having said that, we believe that some adjustments are still necessary in order to generate a much more effective product, ultimately allowing for more participants in the rounds. One of the areas that I believe could be reviewed relates to the administrative simplicity of the contracts. We think that there is still considerable room to make them easier to administer, which would translate into lower costs for us and greater benefits for the government. Although the contract is a license, there are still some elements that might be read as a PSC. In my mind, there is an opportunity to polish the contract and to confer to it a greater resemblance to a license contract. Another area that could be reviewed is the abandonment of the fields, and whether that should be done from day one or later on. The latter option would allow companies to invest where it is needed today, instead of obliging them to create a fund for the long term. There are also issues around corporate guarantees and ensuring that all companies can participate on an equal basis. I think there is also room for certain fiscal improvements to be made, as the industry would like to guarantee its long-term stability and companies need to be made to feel more comfortable with the new regime.

Q: To what extent do you believe that the timeline is realistic at present?

A: More than decades can be spent analyzing opportunities, but we are comfortable with a nine-month window. In the end, we will have just a little over that, and we believe that is the right amount of time to come to solid conclusions. The industry cannot wait for the oil prices to recover, and in fact, it is not a factor that will ultimately affect the amount and quality of bids. Recent bidding rounds in Ireland, Canada, and Norway have been extremely successful despite the low oil prices, demonstrating that success does not really depend on much more than the competitiveness of the contract’s terms and conditions. It is important that the Mexican government continue with the rounds, despite disparate results. Had Mexico not begun the bidding rounds last year, the country would have fewer companies interested in it, and it is critical that the industry attract investment. For this reason, we are supportive of continuing the bid rounds process and instead of focusing on the oil prices, we want to focus on the factors that we can control. I am sure that if companies find materiality and competitive terms and conditions, Round One will be successful.