Miriam Grunstein
View from the Top

Time to Address Cross-Border Field Concerns

Wed, 01/25/2012 - 15:06

Q: When we talk about transboundary reservoirs in the Gulf of Mexico, their existence is commonly assumed. Should we be so sure that such fields exist?

A: It would be a cruel trick of nature if the political boundaries were at the same place as where reserves stopped. The thing is that we have no exploratory data confirming the existence of continuous hydrocarbon reservoirs into the Mexican side of the Gulf of Mexico, and we also do not have any evidence that those reserves would be commercially viable for Mexico. They might be commercially viable for Shell or another major, because they have the technology and the experience. They can afford the cost of deepwater drilling in such areas. For Mexico, those areas might be there, but they might not be commercially viable for us because we cannot extract them at a reasonable cost without partnerships.

If there are substantial and commercially viable reserves, the question is can we extract them? And can we negotiate a unitization agreement that is viable for Mexico? If you talk to any number of attorneys, engineers and financiers that have been involved in the negotiation of unitization agreements, they will tell you that it is quite a feat.

Q: To what can corporate resistance to unitization be attributed?

A: Nature is forcing you to take on a partner that perhaps you wouldn’t have chosen. It is a marriage of convenience. The question at the Perdido area - Mexico’s most likely chance of a trans-border reservoir - is whether any of the licensees there want Pemex as a partner, because in any partnership both parties have to be completely comfortable. Unitization would make Mexico become a passive partner in the venture, providing capital, reserves, and staying quiet. Just imagine the transition from state monopoly to sitting, observing, listening and complying.

I am not saying that the US licensees would be abusive, but Pemex cannot enter a partnership in that state of vulnerability. It is not convenient, especially as the reserves do not belong to the company, but rather to the Mexican people. So, even though your partner might be acting in good faith, you have to be very cautious and be a good negotiator in such a venture, and I fear that Pemex lacks the most fundamental experience to undertake such a task. And there are tremendous interests at stake here: we are talking about the economic future of a country.

Q: How would you judge the merits of the Transboundary Hydrocarbon Agreement that was signed in February 2012?

A: The agreement was important for Mexico as it completed a process that was initiated in the 2008 Energy Reform when the transboundary reservoir issue first garnered public attention. President Calderón needed to prove that his administration had taken proper steps towards the protection of Mexico’s resources, although there is no evidence that such transboundary resources do exist. For the United States, it was convenient to reciprocate Mexico’s protective gesture in case there should be an opening for private participation in the Mexican hydrocarbon industry. Thus, in my opinion, the merits of such agreement are merely political rather than of an economic or technical nature.

Q: How does the agreement affect the potential for developing cross-border fields?

A: The agreement is still very broad in its implementation mechanisms. Although unitization agreements are mentioned in the agreement, many years - decades perhaps - may elapse before transboundary reservoirs could be found. Such a broad agreement only sets some very general steps by which cross border fields may be developed, if found.

Q: Do you think such fields can be developed under the current legislative framework?

A: There are people who say you can start developing transboundary fields without a constitutional amendment. My feeling, though, is that you would have a multi-billion dollar project hanging from a thread, because if you don’t amend the Constitution, the next administration might decide to constitutionally challenge the contract or agreement on which that is based. So you have to make a national decision to embark on a project such as this, and the only legal instrument that is strong enough to protect such a project is the Mexican Constitution.