Edgar Rangel Germán
View from the Top

Strengthened Regulator within the New Contracting Framework

Mon, 09/01/2014 - 15:31

Q: What have you identified as the critical success factors for CNH in its new regulatory role?

A: The three most important factors are stability, transparency, and fairness. We want to provide the right stability to attract possible investors, including PEMEX. The rules establish that agreements signed with CNH after bidding rounds will be fully respected. Transparency is a huge challenge for Mexico but ideally everyone, including the government, businesses, and academia, will feel comfortable if an institution like CNH has very transparent and clearly defined rules. We want people to access our online database and easily understand why a certain block was selected for a bidding round or why PEMEX was allowed to keep certain exploration areas. For Round Zero, we are looking to provide this information and the reasoning behind decisions very clearly and effectively. In terms of Round One, we will provide our reasoning behind selecting specific exploration areas, perhaps in Perdido, Cordilleras Mexicanas, or Tampico-Misantla. We also plan to be very transparent in the methods and criteria used to select the companies for the bidding. It is certain we will face bidding by joint ventures, perhaps from combined partners from Asia, Europe, the US, or Latin America. Additionally, we hope that PEMEX will also participate in consortia during Round One. We will look at the journey undergone by Norway where companies came to the country and brought their own practices with them, to help create a fair framework for the national oil and gas industry.

Q: What will be CNH’s new role in the contracting process during the bidding rounds?

A: CNH’s new role will be defined by the presence of different contracting models. Mexico could have followed the American model with concessions or licenses, or the model of West African or Malaysian PSAs, but we decided to open up to every single model to increase our possibilities. Having every single internationally known model present is very good, as it allows us to tailor the one that fits best to the unique specifications of various areas and blocks, such as shale gas, deepwater, shallow water, or extra-heavy oil regions. The idea is to have a significant number of blocks tendered during Round One, both in exploration and development. Additionally, what we put on the table during the information stage of the rounds has to be already very transparent. Companies will know exactly what is being tendered, whether a block is out there as a PSA or as a license, as well as all the fiscal conditions of each block’s contracting model.

Q: What could be the consequences of PEMEX asking for more in Round Zero than it could ever put into production?

A: My guess is that it could farm out those fields. PEMEX should try to take as much as it can. It is a negotiation, PEMEX has the constitutional right to request whatever fields it wants, and it is up to the federal government to decide whether to grant these. It is important to keep in mind that Petrobras requested too much in the same situation. After six years, it had relinquished close to 80% of what it had originally requested. For PEMEX, we must remember that it must provide results after the three years, plus a potential two year extension, agreed in the clauses. PEMEX will have to return the fields that are not productive enough.

Q: How can farmouts help PEMEX establish relations with key partners in order to exploit assets where it lacks the technological expertise?

A: There will be a round where PEMEX expresses its intentions to develop fields with partners, perhaps under a farmout to develop certain difficult fields, such as ultra- deepwater, shale, and extra-heavy oil fields. It is possible that PEMEX will tell us that it wants to farmout a certain percentage of a heavy-oil field or an ultra-deepwater field. In that case we would do a bidding round to select a winner and tell PEMEX who its new partner is. Similarly, PEMEX could propose three different types of configurations or combinations for different partners and different percentages. When this happens, the government would determine if the partnerships are feasible. For this, PEMEX would have to propose which companies it would like to partner with and why, while also describing the configuration percentage-wise. Once PEMEX has a contract which states it is an operator or owner in whichever percentage of the contract, then it would have the right to do a farmout, where CNH would only participate as the regulator. Then, PEMEX can act as any other company in the world, even to the point of farming out a large share  of its contracts. In this line, CNH should lay out very simple rules, minimum standards a company must comply with to be a suitable partner for PEMEX to farmout its contracts to. As bidding rounds proceed, this will ensure PEMEX is receiving technology and knowledge that can help it build up its capabilities, processes, and personnel training when establishing partnerships. We do not want PEMEX to farm out its contracts to just anybody. If PEMEX farms out its contracts in the right way, it will learn from experts in geosciences, exploration, drilling, and subsea production facilities, while it also might have available investment capabilities to use on other prospects that can yield faster production or higher value. This is a business; we should not forget that. Even though many lawyers and experts say that this process would have to undergo another bidding round, we need to wait on what the new laws will establish.

Q: Which special conditions have to be included in the upcoming licensing rounds to ensure that PEMEX does not lose out on the exploration areas?

A: There are two different matters to be considered. The first is what PEMEX will keep after Round Zero through leases. Then, if it wants to translate these to PSAs, profit- sharing, or license models, the Constitution says it can be done through a bidding process managed by CNH. The reasoning behind my assumption that PEMEX will hold onto more than 50% of the share in production, income, and incorporation of reserves lies in the fact that PEMEX will keep the best fields. In terms of exploration, it also plans to keep the most feasible areas in order to do farmouts later; where partnering with companies that have the expertise will allow the proper exploitation of such fields with the necessary technology. The best partner when migrating into these for PEMEX must have access to geological knowledge, technology, operational, and financial capabilities.

SHCP has always had a big say in this matter and this will remain the case. I am convinced that the right balance will be established between all of us. Choosing the right contract and fiscal models for a given geological opportunity will see SHCP receive the appropriate government take while ensuring the opportunity remains attractive. In this new era, everything will be treated as business. If SHCP, SENER, PEMEX and/or the private sector is satisfied with a given contract, and all parties receive what they want, then a positive synergy will have been created. We hope that SHCP will be open to listen to CNH as we all want the same things: to maximize tax collection for the government, to increase direct foreign investment, and for profits to increase for companies that invest in Mexico, including PEMEX.

Q: What do you expect will be the match between the country’s assets and the targets of operators entering the Mexican market?

A: By compiling data, I plotted the largest 100 companies in the world according to their CAPEX. This showed a very smooth CAPEX curve, without pronounced jumps between the oil majors and the rest of the companies. The second half of the chart consists of the 300 largest reservoirs in Mexico and the curve is even smoother. This proves there is always a ring fitted to the right finger. Every company is different but each will find a Mexican reservoir that fits it perfectly. The idea is to allocate opportunities that emerge either through PEMEX’s farm outs as I mentioned earlier or through the federal government’s Rounds 1 to N to the best operators or joint ventures. These could include PEMEX in a role from 10% to 90% or even no participation from PEMEX.

My conclusion is that Mexico is so diverse in terms of geology, rock types, fluid types, offshore and onshore fields, shallow waters, deepwaters, and ultra-deepwaters, shale oil and gas, and hydrocarbons ranging from condensates and gas to light oil, heavy oil, and extra-heavy oil that you can pretty much think about a company size for each reservoir. Therefore, if you think about it in terms of diversity and size, there will be good opportunities that the largest companies – PEMEX’s size or above – can afford, and there will also be interesting opportunities that are probably too small for large companies, and will be best suited for smaller, independent companies, which could be where Mexican companies fit in the equation.