Investors watch with interest as Mexican energy reforms unfold
Mexico is implementing key aspects of its energy reform more quickly than some observers had expected. So far this year, the country has passed 21 new and amended laws relating to the sector and selected the oil and gas fields that will be placed on the block in the country’s first competitive upstream bid round, set for mid-2015.
“Energy reform is the most significant economic and political event in Mexico’s recent history,” said Andres Ochoa-Bunsow, national managing partner, Mexico, Baker & McKenzie.
Mexican state regulators and representatives from potential future investors gathered Sept. 23 in Houston to learn about the legal and regulatory framework for participation at the Energy Forum 2014, hosted by Baker & McKenzie.
Attendees included representatives from major integrated oil companies such as ExxonMobil Corp., Royal Dutch Shell PLC, and BP PLC, as well as independent producer Anadarko Petroleum Corp. Several oil field service companies specializing in offshore work were also present, namely Oceaneering International Inc. and Transocean Ltd.
Mexico expects to publish draft technical bidding requirements for its first competitive upstream oil and gas bid round in November, Daniel Guerrero Rodriguez, general director of oil industrial transformation, Mexico Ministry of Energy, told a panel discussion. A finalized set of rules will be released in March 2015, and the first bid round is set to follow midyear.
Round One is expected to offer 109 exploration blocks and 60 producing blocks covering 28,500 sq km. The majority of acreage, 91%, will be for exploration areas and the remaining 9% will be for extraction projects, Rodriguez said. The areas contain 3,782 million boe in proved and probable reserves, and 14,606 million boe in prospective resources.
Mexico expects these areas will require investment of $8.5 billion/year during 2015-18.
The government has selected four contract types for Round One bidders. These are: licenses, production-sharing agreements, profit-sharing agreements, and service contracts. Only licenses and PSAs would allow winning bidders to own a portion of production at the wellhead.
Pemex keeps prime acreage
A noncompetitive bid round was completed earlier this year. In Round Zero, Petroleos Mexicanos (Pemex) was granted more than 90% of the country’s proved and probable reserves, totaling 21 billion boe, and 83% of its prospective resources, totaling 23 billion boe—including 4 billion boe in unconventional reserves.
“We wanted to have a strong public enterprise in order to be competitive,” Rodriguez said of the decision to allow Pemex to retain the bulk of reserves. Pemex provides one third of the revenue of Mexico’s federal government.
Ben H. Welmaker, managing director, Ben H. Welmaker Jr. PC, said the Round Zero assets provide Pemex a foundation for future growth. Once the reforms are finalized, he said, the state-owned entity will become a free-standing enterprise with an eye on its bottom line. Welmaker was formerly a partner with Baker & McKenzie in Houston.
Luis Ramos Martinez, subdirector for planning and evaluation, Pemex Exploration & Production, said the company has identified 50 fields that it would like to develop with partners and is tentatively seeking to forge 10 joint ventures.
Five types of fields are being considered for the joint ventures. These include: mature onshore fields, mature shallow-water fields, extra-heavy oil projects, deepwater gas fields, and two fields in the ultradeepwater Perdido area in the Gulf of Mexico, near Shell’s Perdido hub.
Pemex is working with the federal government to define terms and conditions of the proposed joint ventures. The bidding process will be overseen by the National Hydrocarbons Commission (CNH), Rodriguez said.
Secondary laws
Ochoa-Bunsow noted that “a very complex and technical regulatory environment is being enacted to carry out the constitutional mandate” for energy reform.
Mexico has passed 9 new laws and amended provisions related to 12 existing laws that provide a framework for private participation in the energy sector which has, for 75 years, been the exclusive domain of Pemex.
Energy reform is expected to stabilize oil and gas production. Mexico appeared poised to become one of the largest oil producers in the world in 2004, when crude production peaked at 3.4 million b/d. Output has since fallen to 2.5 million b/d as offshore production from the massive Cantarell field decreased and rising output from Ku-Maloob-Zapp and other fields failed to offset declines. Natural gas production has declined to 5.6 bcfd from a peak of 8 bcfd in 2013.
The country is now a net importer of gas and refined products, bringing in roughly 1.4 bcfd of gas, 80,000 b/d of liquefied petroleum gas, and 400,000 b/d of gasoline.
Raul Millares, energy director, Alfa Group, said the legal framework for the reforms is “very sound.” The big question is how it will be implemented. Now, a lot of things must happen to deliver reform. The key, he said, is ensuring the first competitive bid round is attractive to international investors. “A lot of things have to happen to really deliver it,” Millares said.
Many exploration and production companies are focused on developing unconventional onshore resources in the US. US crude production soared to a 28-year high of 8.8 million b/d in September boosted by rising production from the Eagle Ford shale, Permian basin, and Bakken tight oil play.
“Mexico is not the only pretty lady around,” Millares said.
Contact Rachael Seeley at [email protected].