Success Factors of L-03 and Hopes for L-04

Q: What factors led to a 100% success rate in R1-L03, and what challenges will the operators face?

A: Baker & McKenzie believes that the authorities’ concern over the relatively disappointing response in previous phases led to them to increase the attractiveness of R1- L03. Firstly, the license model adopted in this tender was extremely helpful in generating renewed interest, as it entailed much less burdensome administrative processes than the previous production-sharing models and a modification in the requirements relating to guarantees and collaterals. The latter created greater flexibility in the new contracts, a characteristic we believe to be one of the reasons for the success of R1-L03. Also, the release of the minimum bidding requirements in advance simplified the task for the participating companies, in contrast to R1-L01, in which the bidders were only informed of the minimum values after delivering their submissions.

The projects present a number of challenges for operators, including real estate regulations in Mexico and the intricacies of rights of way. This is made even more difficult due to the Social Impact Assessment, which now includes a new component that must be addressed before the commencement of work. Compliance with these regulations will require time and money, and possibly investment in infrastructure in order to transport and store the hydrocarbons that will be produced.

Q: What are your expectations for Mexico’s deepwater development?

A: Mexico is currently undergoing a difficult situation due to the low oil prices causing a decline in market growth. In the case of the deepwater sector, the crisis is not particularly relevant since projects will not be producing oil for at least six years, and by the time the exploitation activities begin, we expect the prices to have begun to recover. As a result, investors are focusing on strategically placing themselves in areas that will provide them with a competitive advantage in the future. Current conditions are allowing companies interested in deepwater projects to secure more competitive prices for services and goods from subcontractors, suppliers, and vendors. This increases the competitiveness of oil companies. One example of this situation can be seen in oil rig leases, since day rates have dropped to almost half of what they were two years ago and only the most technically advanced rigs may be contracted at higher rates. Access to low-cost equipment for long-term projects is one of the reasons there is still a great deal of potential and interest in deepwater projects. Be this as it may, it is too early to make predictions on how the sector will develop in Mexico.

Q: What factors exist intrinsically within PEMEX and are exacerbating the unfavorable oil-price situation for the NOC?

A: Despite the many challenges, PEMEX remains an intrinsic part of the oil and gas sector in Mexico. A market without any public players to offset private companies would lead to an imbalance within the sector. PEMEX has a long payment history and the NOC has never defaulted. Given current conditions, the new contract requirements are understandable, meaning the parastatal is still a viable partner for collaboration. As long as a project is sound and cash flows are based on viable financial models, working together will generate savings. Nonetheless, the impact of PEMEX’s struggles on the general industry cannot be ignored. There are many solutions that could be implemented. The parastatal has downgraded its payment obligations and is currently renegotiating certain contract terms while terminating others. For new contracts, it is requesting a 120-180 day payment term and is offering factoring opportunities to its contractors to help them finance their work. Another solution for companies in the industry has been to rely on redundancies to cut costs. PEMEX has sought alternative ways of cutting costs and contractual obligations by delaying or suspending new projects. In addition, the NOC is using its affiliate companies to diversify and enter into the power generation business, especially in terms of cogeneration since it has 5,000MW of potential for this energy source, but this is evolving slowly. The lack of proposals for shallow water projects could be capitalized on by PEMEX through CEIP contract migrations, an alternative that could increase its production and efficiency.